MARCH 2015 BAD FAITH CASES – DIETZ & WATSON PART II: COURT PERMITS DEPOSITIONS OF INSURED’S COUNSEL IN CONNECTION WITH AFFIRMATIVE DEFENSES OF: SETTLEMENT WITHOUT CONSENT, AND ALLEGED UNCLEAN HANDS AND COLLUSION; BUT DENIES DEPOSITION OF INSURER’S COUNSEL WHOSE DECISIONS WERE MADE AFTER NOTICE OF BAD FAITH CLAIM, AND SOME OF THE DISPUTES WERE IN THE NATURE OF DISCOVERY DISPUTES WHICH ARE NOT THE BASIS OF A BAD FAITH CLAIM (Philadelphia Federal)

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In Dietz & Watson v. Liberty Mutual Insurance Company, Magistrate Judge Rueter addressed numerous discovery issues in the context of third party insurance bad faith litigation.  The insurer asserted that documents the insured sought were protected by the mediation privilege and/or the attorney-client privilege or work product doctrine. (This is addressed in a separate blog entry).  Further, the insurer sought the deposition of the insured’s counsel in connection with its affirmative defenses, and the insured sought to depose one of the insurer’s attorneys, discussed below.

The basic factual background involved a third party personal injury claim against the insured.  The insurer had provided a defense under a reservation of rights, reserving the right to disclaim coverage for punitive damages. The case settled for $2.5 Million with the insurer paying $1,750,000 and the insured paying $750,000. In addition, at the time of settlement, the third party’s counsel and the insured’s counsel reached an agreement that the third party’s counsel would represent the insured in a bad faith claim against the insurer; and that the injured third party would receive the first $250,000 of any recovery in that bad faith action.  In addition, at that time, the injured third party withdrew his punitive damages claim against the insured.

During the underlying case, the insurer had assigned defense counsel, and the insured’s corporate counsel had also entered an appearance for the insured in that action.

The primary basis of the bad faith claim was the insurer’s alleged failure to engage in good faith settlement negotiations, by refusing to pay more than $1,750,000, and thus forcing the insured to pay the additional funds out of its own pocket to achieve the settlement.  The insured also asserted bad faith on the alleged basis that the insurer obstructed the insured from investigating and pursuing the bad faith claim, after the settlement had occurred.

  1. Depositions of Insured’s Attorneys

The insurer sought to depose the insured’s current attorney, who was the injured third party’s attorney in the underlying action (as well as two of his partners); and also sought to depose the insured’s corporate counsel.  The insurer argued that these depositions were necessary and permitted to support its affirmative defenses, which alleged that: (1) the policy prohibited the insured from making a voluntary settlement payment without the insurer’s consent; and (2) the insured had “unclean hands” and had colluded with the underlying plaintiff and his attorney.

The court recognized that the insured, as well as the insurer, had a duty of good faith; and that “Pennsylvania law requires that a settlement entered without the insurers’ knowledge or consent must be reasonable and in good faith and non-collusive, even if the insurer breached its duty to defend.” “Indicators” that may be considered in evaluating the insured’s alleged bad faith and alleged collusion “’are unreasonableness, misrepresentation, concealment, secretiveness, lack of serious negotiations on damages, attempts to affect the insurance coverage, profit to the insured, and attempts to harm the interest of the insurer.’” In this case, the insurer alleged that “at the time of the settlement, [the underlying plaintiff] withdrew his claim for punitive damages, so that it would not appear that [the insured] was paying money … to settle a claim not covered by the terms of the … insurance policy.” The insurer further claimed it was relevant that the insured was now represented by the underlying plaintiff’s former attorney, and it alleged that the insured “had secretly agreed to pay [the underlying plaintiff] a large portion, i.e., $250,000.00, of any monies received by [the insured] from its bad faith action….”

The court found that if these two defenses could be proven, they would be valid defenses, and that the facts the insurer alleged were “sufficient for it to take discovery into the areas of [the insured’s] alleged voluntary payment made without the consent of [the insurer] and [the insured’s] bad faith.” Thus the court permitted the deposition of counsel who formerly represented the underlying plaintiff “who negotiated the challenged settlement”. The court further allowed the deposition of the insured’s corporate counsel.  The court did limit the depositions of the two partners, to the extent that if the insurer believed it still needed their depositions after these other depositions occurred, it could apply to the court for such relief.

  1. Deposition of Insurer’s Attorney/Discovery Disputes not Bad Faith

The insured sought the deposition of one of the insurer’s attorneys, concerning her decisions in relation to disclosing litigation and claims files. The insurer had been put on notice of the bad faith claim prior to this attorney’s involvement, and the insurer’s attorney referred the matter to other counsel to evaluate disclosure of the files in light of the bad faith claim, to consider the propriety of their production.  The court stated that such conduct was reasonable.

The insured further claimed that there was bad faith obstruction in producing these files.  However, the insured had eventually obtained the underlying defense litigation files, and had later obtained the claims file with certain redactions for privileged materials. The court denied the motion to compel the deposition of the same attorney on this issue, again observing this all occurred after the bad faith claim had been threatened.

Further, to the extent this was a discovery dispute, the court stated that “Pennsylvania courts have made it clear that an insured may not recover under Pennsylvania’s bad faith statute ‘for discovery abuses by an insurer or its lawyer in defending a claim predicated on its alleged prior bad faith handling of an insurance claim.’” The insured’s “only claim alleged of post settlement bad faith conduct is [the insurer’s] refusal to turn over its claim file after it was notified it may be sued for bad faith. This is the nature of a discovery violation, which does not constitute bad faith under Pennsylvania law.”

Date of Decision:  January 28, 2015

Dietz & Watson v. Liberty Mut. Ins. Co., No. 14-4082, 2015 U.S. Dist. LEXIS 9815 (E.D. Pa. January 28, 2015) (Rueter, U.S.M.J.)

MARCH 2015 BAD FAITH CASES – DIETZ & WATSON PART I: STATUTORY MEDIATION PRIVILEGE APPLIES TO MEDIATIONS IN UNDERLYING TORT ACTION WHERE DISCOVERY IS SOUGHT FOR SUBSEQUENT BAD FAITH CASE; MEDIATION PRIVILEGE APPLIES TO NON-LAWYER INSURER REPRESENTATIVES; AND COURT INSTRUCTS INSURER TO PROVIDE A MORE DETAILED PRIVILEGE LOG FOR DOCUMENTS OUTSIDE THE MEDIATION PRIVILEGE WHERE THE INSURER SEEKS TO ASSERT THE ATTORNEY CLIENT PRIVILEGE OR WORK PRODUCT DOCTRINE (Philadelphia Federal)

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In Dietz & Watson v. Liberty Mutual Insurance Company, Magistrate Judge Rueter addressed numerous discovery issues in the context of third party insurance bad faith litigation.  The insurer asserted that documents the insured sought were protected by the mediation privilege and/or the attorney-client privilege or work product doctrine.  Further, the insurer had objected to producing one of its attorneys for deposition in connection with producing its litigation and claims files and sought to depose the insured’s attorneys relating to the defense of the Underlying Action  (which are discussed in a separate blog entry).

The basic factual background involved a third party personal injury claim against the insured.  The insurer had provided a defense under a reservation of rights, reserving the right to disclaim coverage for punitive damages. The case settled for $2.5 Million with the insurer paying $1,750,000 and the insured paying $750,000. In addition, at the time of settlement, the third party’s counsel and the insured’s counsel reached an agreement that the third party’s counsel would represent the insured in a bad faith claim against the insurer; and that the injured third party would receive the first $250,000 of any recovery in that bad faith action.  In addition, at that time, the injured third party withdrew his punitive damages claim against the insured.

During the underlying case, the insurer had assigned defense counsel, and the insured’s corporate counsel had also entered an appearance for the insured in that action.

The primary basis of the bad faith claim was the insurer’s alleged failure to engage in good faith settlement negotiations, by refusing to pay more than $1,750,000, and thus forcing the insured to pay the additional funds out of its own pocket to achieve the settlement.  The insured also asserted bad faith on the alleged basis that the insurer obstructed the insured from investigating and pursuing the bad faith claim, after the settlement had occurred.

  1. The Mediation Privilege

The parties agreed that Pennsylvania statutory law on the mediation privilege governed, 42 Pa.C.S. § 5949.  The party asserting the privilege has the burden of establishing its application. In this matter, there had been 5 mediation sessions, with 5 different mediators.  All but one session was covered by the privilege because those sessions “involved ‘[t]he deliberate and knowing use of a third person by disputing parties to help them reach a resolution of their dispute.’”  It did not apply to the other mediation because the insurer did not participate in that session, which only involved the injured third party’s claim against the insured’s co-defendant.

The court rejected the proposition “that the mediation privilege does not apply in a bad faith action alleging an insurer’s failure to engage in good faith settlement negotiations,” and would not allow discovery of the insurer’s “correspondence and claim notes reflecting communications made” during the mediation.

The court stated that the “mediation privilege extends not only to mediation communications of parties, but also to communications ‘by, between or among’ representatives of insurance companies present at the mediation.” The court observed applying the privilege “to participating insurance companies’ representatives is essential to the success of the mediation sessions [because,] [f]requently, adjustors or representatives of insurance companies attend mediation sessions. Indeed, many mediators require their presence, either in person or by telephone.”  Thus, “[f]or mediation sessions to be fruitful, insurance adjustors and representatives must be free to discuss candidly any offers and proposals without fear that such communications may be used against them in future litigation.”

The court specifically rejected the notion that the language of the mediation statute should not apply to mediation over the underlying claim when those communications are being used to support a later bad faith case. The court rejected this argument as both outside the statute’s plain language, and contrary to the public policy behind the mediation privilege.

Lastly, the court noted that the privilege “is limited to communications ‘by, between or among’ the mediator, parties and participants made during the mediation session, or communications made to the mediator or from the mediator outside a session,” and that “’discussions among parties outside the presence of the mediator and not occurring at a mediation proceeding are not privileged.” Thus, “[w]here the mediator has no direct involvement in the discussions and where the discussions were not designated by the parties to be a part of an ongoing mediation process, the rationale underlying the mediation privilege (i.e., that confidentiality will make the mediation more effective) is not implicated.’”

  1. Attorney-Client Privilege/Work Product

First, under Pennsylvania law, appointed defense counsel is the insured’s attorney, and may be, but is not always, the insurer’s attorney. Thus, when appointed counsel communicated with the insurer on the insured’s defense, the insurer could not assert the attorney-client privilege as against the insured. However, the insurer in this case was seeking to protect communications from in-house counsel to the insurer’s employees regarding issues of coverage, issuing a reservation of rights letter, and bad faith, in connection with the underlying action.  The court appeared to recognize this distinction in its evaluation.

The court then re-stated the federal work product doctrine in this context: (i) ordinarily a party “’may not discover documents and tangible things that are prepared in anticipation of litigation or for trial by or for another party or its representative (including the other party’s attorney, consultant, surety, indemnitor, insurer, or agent).’”; (ii) “[a] document is prepared in anticipation of litigation when ‘in light of the nature of the document and the factual situation in the particular case, the document can fairly be said to have been prepared or obtained because of the prospect of litigation.’”; (iii) “It has generally been held that the work product doctrine applies to insurance companies confronted with a bad faith claim brought by an insured.”; (iv) “A ‘mere claim of bad faith is not enough to shatter the work-product privilege.’”; and (v) “Courts recognize that ‘[a]t some point in its investigation, . . . an insurance company’s activity shifts from mere claims evaluation to an anticipation of litigation.’”

The court then applied the potential application of these two privileges to documents that were outside the mediation privilege.  The insurer was instructed to “review its privilege log .… and [i]f necessary, [the insurer] shall make a further production and/or amend its privilege log.”  Further, “[t]o the  extent, [the insurer] asserts the attorney-client privilege, or the work product doctrine to exclude production of documents created prior to the settlement of the Underlying Action … [the insurer] shall produce those documents to this court for in camera review ….”

Date of Decision:  January 28, 2015

Dietz & Watson v. Liberty Mut. Ins. Co., No. 14-4082, 2015 U.S. Dist. LEXIS 9815 (E.D. Pa. January 28, 2015) (Rueter, U.S.M.J.)

MARCH 2015 BAD FAITH CASES: SUPERIOR COURT UPHOLDS BAD FAITH PUNITIVE DAMAGES AWARD, AND PERMITS INCLUSION OF ATTORNEY’S FEES AS PART OF BASE NUMBER UPON WHICH TO CALCULATE PUNITIVE DAMAGES (Superior Court of Pennsylvania, non-precedential)

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In Davis v. Fidelity National Title Insurance Company, a non-precedential decision of the Superior Court, the insured brought breach of contract and bad faith claims against its title insurer.  After a lengthy process from the time the claim was made to the time the insurer paid another party claiming an ownership interest to clear title, the insured alleged it suffered lost profits, and that the insured acted in bad faith by not addressing the claim promptly.  It was almost 5 years between the date the claim was made to the carrier, and the date payment was made to the third party to clear title.

The trial court awarded $224,760 in compensatory damages (combining increased buildings costs on the project and lost profits), which the Superior Court affirmed, agreeing that the future damages were not so speculative as to preclude recovery.  On the bad faith claim, the trial court further awarded $158,450 in attorney’s fees and $1,572,909.24 in punitive damages.  The insurer did not challenge the bad faith claim as such, but challenged the amount of the punitive damages award based upon (1) that it was excessive under U.S. Supreme Court standards as set forth in State Farm Mutual Automobile Insurance Company v. Campbell and its progeny; and (2) that the attorney’s fee award should not have been included in the compensatory damage base number on which to calculate punitive damages.  The Superior Court rejected both arguments.

The court cited a number of cases that included attorney’s fees in the compensatory damage base upon which punitive damages could be determined, rejecting the insurer’s argument on that point.  Further, including the attorney’s fees with the compensatory damages, the punitive damages award was a 4:1 ratio with the compensatory damages, well within Campbell’s constitutional parameters.  Moreover, the court reviewed the factors Campbell considered in determining punitive damages, focusing on the time delays as falling within the degree of reprehensibility factor (the most important factor to consider), and citing Pennsylvania’s Unfair Insurance Practices Act and Unfair Claims Settlement Practices Act regulatory standards in evaluating this factor.  The court stated that “it is difficult to find an area in which [the insurer] acted in conformance with accepted statutory, regulatory or internal standards.” It affirmed the bad faith award of punitive damages given by the trial court.

Date of Decision:  March 18, 2015

Davis v. Fidelity National Title Insurance Company, Superior Court of Pennsylvania, No. 672 MDA 2014 (Pa. Super. Ct. March 18, 2015) (Ott, Bowes, Stabile, JJ).

MARCH 2015 BAD FAITH CASES: NEW JERSEY APPELLATE DIVISION MAKES CLEAR THAT PROPER PRACTICE REQUIRES SEVERING BAD FAITH CLAIM FROM UNINSURED MOTORIST CLAIM, AND STAYING DISCOVERY OF THE BAD FAITH CLAIM UNTIL THE UNDERLYING CLAIM IS DETERMINED (New Jersey Appellate Division)

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In Wacker-Ciocco v. GEICO, the court addressed the applicability of its earlier decision in Procopio v. Government Employees Insurance Company, 433 N.J. Super. 377, 80 A.3d 749 (App. Div. 2013), on the issue of discovery and severance of bad faith claims.  In the earlier case, the appellate court had ruled that where an uninsured motorist and bad faith claim are bifurcated for trial, it was an abuse of discretion for the trial court to order that discovery on both claims proceed simultaneously.

In Wacker-Ciocco, some bad faith materials had been produced prior to the motion to sever, and the trial court found the cat was therefore out of the bag, and the motion to sever was denied.  The appellate court found that this was a misinterpretation of its prior case law on the severance of bad faith claims from the uninsured motorist claim, and the stay of bad faith discovery pending the outcome of the uninsured motorist claim.

In Procopio, the Court had stated: “[It] promotes judicial economy and efficiency by holding in abeyance expensive, time-consuming, and potentially wasteful discovery on a bad faith claim that may be rendered moot by a favorable ruling for the insurer in the UM or UIM litigation. This procedure also avoids the premature disclosure of arguably privileged materials to the prejudice of the insurer’s defense while, at the same time, preserving the insured’s pursuit of its bad faith claim.”  The court observed that an insured cannot reach the bad faith claim until it proves its entitlement to coverage, and the court further observed the higher standard placed on an insured in proving bad faith claims (and that the plaintiff’s complaint only pleaded bad faith in a conclusory manner, and failed to plead wrongful intent).

The judicial efficiency arguments set out in Procopio did not disappear “simply because some discovery relevant to the bad faith claim was produced,” and it was clear discovery on that issue was not complete.  Thus, “the competing interests implicated by ordering simultaneous discovery on both the coverage and bad faith claims remained in play.” The court reversed the trial court orders, and granted the motions “to sever and stay the bad faith claim and related discovery until the underlying UIM claim was decided.”

Date of Decision: March 16, 2015

Wacker-Ciocco v. GEICO, DOCKET NO. A-2547-13T4, 2015 N.J. Super. LEXIS 38   (App. Div. March 16, 2015) (Espinosa, Lihotz, St. John, JJ.)

MARCH 2015 BAD FAITH CASES: PLEADING FACTS ABOUT AN INSURER’S CONDUCT, WITHOUT PLEADING ADDITIONAL FACTS AS TO WHY THAT CONDUCT WAS UNREASONABLE, INTENTIONAL AND/OR RECKLESS, COULD NOT SET OUT A PLAUSIBLE BAD FAITH CLAIM UNDER TWOMBLY/IQBAL (Philadelphia Federal)

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In Allen v. State Farm Mutual Automobile Insurance Company, the insured brought breach of contract and bad faith claims arising out of an uninsured motorist case.  The insured had promptly filed an uninsured motorist claim after the accident, and alleged that she and the insurer “’failed to agree on the amount of uninsured motorist benefits’ that she is entitled to recover[, that the insurer], has not requested a defense medical examination … and has failed to ‘negotiate’ regarding the claim.”

The court dismissed the insured’s bad faith claim without prejudice.  It applied the Third Circuit rule in Fowler to evaluate the motion to dismiss that claim, using a two-step approach that separates out the facts and legal theories: (1) look at the well-pleaded facts as true; and (2) then rule whether these facts set out a plausible claim for relief. A plaintiff needs to pleads facts that show an entitlement to relief, a plausible claim, vs. a possible claim. After stripping out the legal conclusions and recitation of the bad faith claims elements, the court found there the facts pleaded did not set a plausible claim.  There were no facts pleaded shedding light of the insurer’s reasonableness in not negotiating or conducting a medical examination,   and there were no facts pleaded that it “knew or recklessly disregarded its lack of a reasonable basis in denying the claim.” Plaintiff was given leave to amend to meet the pleading standards in an amended complaint, if she could.

Date of Decision:  March 12, 2015

Allen v. State Farm Mutual Automobile Insurance Company, CIVIL ACTION NO. 14-7367, 2015 U.S. Dist. LEXIS 30339 (E.D. Pa.  March 12, 2015) (Baylson, J.)

MARCH 2015 BAD FAITH CASES: INSURER ENTITLED TO ATTORNEY’S FEES AGAINST OTHER INSURER IN DECLARATORY JUDGMENT ACTION; CLAIM OF UNCLEAN HANDS REJECTED (New Jersey Federal)

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In Carolina Casualty Insurance Company v. Travelers Property Casualty Company, the plaintiff insurer brought a declaratory judgment action against two other insurers.  It sought a judgment that it owed no defense or coverage obligations in connection with an underlying claim.  The defendant insurers were successful in finding plaintiff owed coverage.  The plaintiff insurer was required to pay reimbursement toward a prior settlement, paid fully by defendant insurers.

The defendant insurers sought attorney’s fees and costs under R. 4:42(9)(a)(6), as the prevailing parties in the coverage action.  The parties agreed a successful carrier could recover under the rule, however, the plaintiff insurer argued the defendant insurers should not be allowed to recover, under the doctrine of unclean hands.  It claimed that the defendant insurers were precluded from recovery for deliberate delays and failures to settle, and by bringing a claim against another insurer which they later abandoned; all of which allegedly increased the legal fees.

The court rejected this argument, finding that there was “no conduct so inequitable as to bar an otherwise appropriate recovery.” Rather, the defendant insurers had a “right to assert their case against a potentially liable insurer…, [and] [t]hat they subsequently chose to release their claims (which turned out to be worth $15,000) is not blameworthy.”  Thus, they could still recover fees and costs under Rule 4:42-9(a)(6).

Moreover, even if these carriers were somehow “dilatory, these acts are not ‘directly related’ in the sense that they are inconsistent with the basic entitlement to costs.” The court analogized this to the recovery of attorney’s fees in insurance bad faith cases, such as breaching a fiduciary duty to settle claims, noting that the mere failure to settle a debatable claim does not give rise to bad faith.  In this case, the defendant insurer’s position was not only debatable, it was correct; and its failure to accept the plaintiff insurer’s settlement offer was not inequitable.

Date of Decision: February 25, 2015

Carolina Casualty Insurance Company v. Travelers Property Casualty Company, Civ. No. 09-4871, 2015 U.S. Dist. LEXIS 22674 (D.N.J. February 25, 2015) (McNulty, J.)

MARCH 2015 BAD FAITH CASES: WHERE MATERIAL ISSUES OF FACT EXIST OVER ALLEGED MISREPRESENTATIONS BY INSURED, COURT WOULD NEITHER DISMISS THE INSURED’S BREACH OF CONTRACT CLAIM OR THE INSURER’S STATUTORY FRAUD CLAIM; HOWEVER, STATUTORY BAD FAITH CLAIM COULD BE DISMISSED (Philadelphia Federal)

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In Henriquez-Disla v. Allstate Property & Casualty Insurance Company, the court addressed a battle of bad faith claims, the insured alleging breach of contract and bad faith for claim denials; and the insurer alleging insurance fraud in seeking dismissal of the insureds’ claims, and in pursuing affirmative relief under the insurance fraud statute, 18 Pa. C.S.A. § 4117(a)(2).  The insured and his wife made certain misstatements in applying for insurance and in seeking coverage for losses from a fire and earlier theft.  The insured disputed the materiality of these misstatements and raised issues as to intent, focusing on either a language barrier issue or that the misstatements were explicable, or de minimis in nature.  The court went through each alleged misrepresentation in detail, and concluded that the insurer’s motion for summary judgment would be granted on the bad faith claim, but that the breach of contract claim could proceed.  On the other end, the court denied the plaintiffs’ summary judgment on the insurance fraud claim, and allowed that claim to proceed as well.

As to the bad faith claim, this was “premised on the denial of benefits, the investigatory methods utilized, and [the carrier’s] alleged use of [the insured’s] language barrier as a pretext to deny coverage.” The insurer countered that the insureds did not produce any evidence that the carrier acted unreasonably or in bad faith.  The insureds attempted to counter this, by arguing that the carrier had admitted the insureds were not responsible for the theft or fire for which they were making claims.

Observing that an insurer’s investigation need not be flawless, and that negligence is not enough to show bad faith, the court agreed that the plaintiff failed to meet the burden of showing that the insurer lacked a reasonable basis for denying the claims. The court focused on the inconsistencies in the insureds’ statements, and that “there were sufficient contradictions in the testimony to justify [the insurer’s] decision. The court cited the principle that: “An insurer ‘may defeat a bad faith claim “by showing that it conducted a review or investigation sufficiently thorough to yield a reasonable foundation for its action.”’”

As to the contract claim, the insurer sought summary judgment on the basis that the policy should be found void for material misrepresentation. The court, however, refused to find the record so clear on material misrepresentation that this count could be dismissed. The court found “that it would be inappropriate on the current record to find as a matter of law that the inconsistencies … are material misrepresentations. As previously stated, innocent mistakes are insufficient to warrant summary judgment. …. As explained, many of the inconsistencies may be the product of miscommunication, misunderstanding, or a language barrier.”

However, this same lack of clarity also preserved the insurer’s fraud claim against the insured.  To make out a claim under section 4117, the alleged false claimant must “knowingly or with the intent to defraud the insurer present false, incomplete or misleading information regarding a material fact.” The court had ruled earlier a jury could find that the “inconsistencies in Plaintiffs’ statements may be the product of miscommunication, misunderstanding, a language barrier, or an attempt to mislead the insurer.”  Thus, summary judgment was inappropriate.

The court did go on to make some significant observations on the insurance fraud statute.  The court found the fact that the insureds themselves had no connection to the theft or fire for which they sought coverage insufficient to escape the fraud statute’s scope. Rather, the statute does not require them to be responsible for the loss itself.  Rather, if an insured makes a false statement concerning a subject relevant and germane to the insurer’s investigation as it was proceeding, that could be a material misrepresentation under the statute, which could afford the insurer relief. Thus, in this case, “[s]tatements regarding the [insureds’] whereabouts at the time of the losses, how they learned of the losses, and resultant damages, among others, are clearly germane to the insurer’s investigation.”

Next, the court refused to grant the insureds summary judgment on the basis that the insurer failed to allege damages. The court recognized that the damages would not be known until after the trial had concluded, if the insurer were successful, and that such a damages determination “is routinely left for the court after a verdict has been returned in favor of the insurer. At that point, the counter-claimant presents the court with a request for expenses, costs and fees.”

Finally, the court observed that the parties disputed the insurer’s burden of proof under the fraud statute, i.e., preponderance of the evidence vs. clear and convincing evidence. The court stated the statute was silent on this issue, and courts were split on the issue.  The court instructed the parties to do further briefing, as this would be an issue at trial. The court specifically directed the parties to address a Pennsylvania Superior Court case applying the clear and convincing evidence standard when an insurer is seeking to void a policy ab initio for fraud, and a 1998 district court case which had applied the preponderance of the evidence standard to section 4117, observing “that the legislature could have adopted a clear and convincing standard but did not….”

Date of Decision: February 10, 2015

Henriquez-Disla v. Allstate Property & Casualty Insurance Company, CIVIL ACTION NO. 13-284, 2015 U.S. Dist. LEXIS 15699 (E.D. Pa. February 10, 2015) (Hey, U.S.M.J.)

MARCH 2015 BAD FAITH CASES: COURT REITERATES NO SEPARATE CAUSE OF ACTION FOR BREACH OF IMPLIED DUTY OF GOOD FAITH AND FAIR DEALING OUTSIDE OF BREACH OF CONTRACT CLAIM (Middle District)

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In Cicon v. State Farm Mutual Automobile Insurance Company, the Court reiterated the long-standing proposition: “Pennsylvania law does not recognize a separate breach of the contractual duty of good faith and fair dealing where said claim is subsumed by a separately pled breach of contract claim.” The court then dismissed that separate claim.

Date of Decision:  March 4, 2015

Cicon v. State Farm Mutual Automobile Insurance Company, Case No. 3:14-CV-2187, 2015 U.S. Dist. LEXIS 25780 (M.D. Pa. March 4, 2015) (Conaboy, J.)

MARCH 2015 BAD FAITH CASES: PLAINTIFF STATED BAD FAITH CLAIM WHEN ALLEGING THAT INSURER’S ADJUSTER ADMITTED A BASIS FOR LOSS AS TO WHICH COVERAGE WAS DUE, BUT INSURER LATER DENIED COVERAGE (New Jersey Federal)

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In Bannon v. Allstate Insurance Company, a Hurricane Sandy case, the policy provided “that coverage for dwellings or other structures did not include loss caused by ‘flood, including, but not limited to, surface water, waves, tidal water or overflow of any body of water or spray from any of these things, whether or not driven by wind.’” The insurer denied coverage.  However, in the Complaint, the insured alleged that the insurer’s adjuster had conceded that the home was destroyed by wind.  She further alleged “that other evidence, including statements from witnesses, photographic evidence, and professional opinions, support a finding that Plaintiff’s home was destroyed as a result of wind damage.” The insurer allegedly had called in an engineer to review the claim after the adjuster’s initial position.

The insured brought claims for breach of the implied duty of good faith and fair dealing, as well as breach of contract and under the Consumer Fraud Act (“CFA”).  The insured asserted that the insurer, through its “agents, servants, and employees, improperly adjusted and denied her claims, failed to properly investigate the damage, and unjustifiably refused to perform its obligations.”  The insurer moved to dismiss. The issue was whether the insurer’s position was “fairly debatable.”

The Court stated: “The question of whether the claim is ‘fairly debatable’ is, clearly, a fact-specific question. Moreover, it is not obvious from the face of the … Complaint, including the alleged facts that [the insurer’s] adjuster initially opined that the damage to Plaintiff’s home was cause by wind, and that [the insurer] sent an engineer to inspect the property after its denial of coverage, that the denial of coverage for alleged wind damages was ‘fairly debatable.’ While this claim may be subject to dismissal on a summary judgment motion, following discovery, the … Complaint states sufficient facts to permit the claim to go forward.”

The Court further followed “the Third Circuit’s lead by predicting that the New Jersey Supreme Court would find that the New Jersey CFA applies to the payment of insurance benefits.”

The Court did dismiss the punitive damages claim: “Even if Plaintiff can show that Defendant acted in bad faith, Plaintiff has not pleaded facts that rise to the level of egregiousness necessary for punitive damages in an insurance contract case. Certainly the facts as alleged do not show actual malice, or a wanton and willful disregard of persons who might be harmed.”

Finally, the court dismissed the claim for attorneys’ fees, on the basis that Rule 4:42-9(a)(6) does not apply to first party claims, an issue which has been opened for review by New Jersey’s Supreme Court.

Date of Decision:  February 24, 2015

Bannon v. Allstate Insurance Company, Civil Action No. 14-1229 (FLW)(LHG), 2015 U.S. Dist. LEXIS 21591 (D.N.J. February 24, 2015) (Wolfson, J.)

 

MARCH 2015 BAD FAITH CASES: NEW JERSEY SUPREME COURT FINDS NO BAD FAITH WHERE INSURER RELIED UPON UNPUBLISHED APPELLATE DIVISION OPINION IN TAKING ACTION, AND WHERE POLICY LANGUAGE MADE INSURER’S POSITION FAIRLY DEBATABLE; COURT RESTATES NEW JERSEY LAW ON FIRST PARTY BAD FAITH CLAIMS (New Jersey Supreme Court)

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In Badiali v. New Jersey Manufacturers Insurance Group, the New Jersey Supreme Court issued its second opinion in a single day involving first party insurance bad faith claims.  The insured was injured by an uninsured motorist.  The insured had two insurers.  The matter went to arbitration on the uninsured motorist claim, and the insured was awarded $29,148.62.  One of the insurers paid its half of the award, $14,574.31, but the other insurer appealed.  The policy provided that awards under $15,000 were binding, but awards over $15,000 could be appealed.  The insured brought a bad faith claim, on the basis that the award was less than $15,000 and was binding.

Based upon an unpublished Appellate Division opinion, the appealing insurer took the position that the number used to determine the appeal was the total award, i.e., $29,148.62, not the amount actually due from the particular insurer.  The court found that this made the insurer’s position fairly debatable, and there was no bad faith.  The issue was not whether the Appellate Division’s decision was legally correct, but whether the insurer could reasonably rely upon that decision in taking the appeal. Alternatively, the Court held that the insurer’s reading of the policy language was reasonable, and thus its position was fairly debatable for this reason as well.

That being said, the Court then went on to clarify the law for future cases. It held that “any reference in a policy of insurance to the statutory $15,000 policy limit as the basis for rejecting an arbitration award applies only to the amount that the insurance company is required to pay, not to the total amount of the award.”

Finally, we will quote the Court’s summary of the law on the duty of good faith and fair dealing, including statutory references, for the value of having the Supreme Court’s recent restatement of that law.

“All contracts impose an implied obligation of good faith and fair dealing in their performance and enforcement. …. The New Jersey Legislature has attempted to codify these principles, particularly in the insurance industry, by defining what is considered to be unfair or deceptive business practices in the area of insurance claims settlement. See N.J.S.A. 17:29B-4(9). Such practices include: ‘[r]efusing to pay claims without conducting a reasonable investigation based upon all available information[,]’ N.J.S.A. 17:29B-4(9)(d); ‘[f]ailing to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed[,]’ N.J.S.A. 17:29B-4(9)(e); ‘[c]ompelling insureds to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by such insureds[,]’ N.J.S.A. 17:29B-4(9)(g); and, finally, ‘[n]ot attempting to negotiate in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear[,]’ N.J.S.A. 17:29B-4(9)(f) (emphasis added).”

“Good faith is generally defined as ‘honesty in fact in the conduct or transaction concerned.’ N.J.S.A. 12A:1-201(19). The good faith obligations of an insurer to its insured run deeper than those in a typical commercial contract. Unlike with a typical commercial contract, in which ‘[p]roof of bad motive or intention” is vital to an action for breach of good faith, … an insurer’s breach of good faith may be found upon a showing that it has breached its fiduciary obligations, regardless of any malice or will….’”

“One inherent fiduciary obligation of every insurer is the duty to settle claims. …. Whether an insurer has acted in bad faith and thereby breached its fiduciary obligation in connection with the settlement of claims ‘must depend upon the circumstances of the particular case.’” “A finding of bad faith against an insurer in denying an insurance claim cannot be established through simple negligence. …. Moreover, mere failure to settle a debatable claim does not constitute bad faith. …. Rather, to establish a first-party bad faith claim for denial of benefits in New Jersey, a plaintiff must show “that no debatable reasons existed for denial of the benefits.”’”

“Under the salutary ‘fairly debatable’ standard enunciated in Pickett, ‘a claimant who could not have established as a matter of law a right to summary judgment on the substantive claim would not be entitled to assert a claim for an insurer’s bad faith refusal to pay the claim.’”

Date of Decision:  February 18, 2015

Badiali v. New Jersey Mfrs. Ins. Group, A-48 September Term 2012, 071931, 2015 N.J. LEXIS 133 (N.J. February 18, 2015) (Fernadez-Vina)