MAY 2015 BAD FAITH CASES: TERMINATING POLICY WITH KNOWLEDGE THAT PROPER NOTICES WERE NOT SENT STATED AN ACTIONABLE BAD FAITH CLAIM; STATUTE OF LIMITATIONS WAS TRIGGERED UPON CLEAR NOTICE OF DENIAL WHICH BARRED POLICY HOLDER CLAIMS, BUT NOT BENEFICIARY CLAIMS, UNDER THE DISCOVERY RULE (Philadelphia Federal)

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In Hilston v. American General Life Insurance Company, the plaintiff brought breach of contract and bad faith claims against her late father’s life insurer, the policy being held in a trust.  The court found that her claim as substitute trustee was barred by the two year statute of limitations, in light of notice to earlier trustees; but her bad faith claim as an individual beneficiary was not.

The pertinent facts are that the prior trustee paid the premiums every year for 12 years (1996-2008). The policy required the insurer to provide written notice at the beginning of each year, setting out that year’s  premium.  The complaint alleged that the proper notice was not provided in the 13th year, and the trustee did not make the premium payment.

After not receiving payment, the insurer decided to “lapse the Policy” for failure to pay premiums due. The plaintiff alleged the insurer sent no notice of the lapse, grace period, termination, or reinstatement of rights, and that neither she, her father, nor the trustee knew the policy had lapsed until years later. The policy could not be reinstated due to the insured’s poor health, and he died in July 2012.

Plaintiff sued the trustee in 2013, during which case she issued a subpoena to discover any notices the insurer had provided.  There was no response, and she demanded payment of death benefits in April 2012.  This demand was rejected later in April 2014, and plaintiff filed suit in December 2014.

In addressing the trustee’s claim, the court observed that “an action for bad faith denial of coverage accrues when the insured first learned that the insurance company was denying coverage.” This trigger does not always require an actual formal denial, as “[w]hile it is an unfounded refusal to pay proceeds of policy that is at the heart of a bad faith claim, at some point, the failure of the insurer to . . . provide coverage puts the insured on notice that the insurer has denied coverage.”  The court then cited a litany of cases for the idea that bad faith can be found for conduct other than denial of a benefit.

[Note:  As stated on this blog previously, there is an issue as to whether “bad faith” conduct that does not involve denial of a benefit, can, in and of itself, constitute section 8371 bad faith; or whether that conduct is an indicia or evidence of bad faith supporting that the delay or denial of a benefit is actionable under section 8371.  In a footnote, the court stated that: “We follow the federal courts within this Circuit and find that violations of the [Unfair Insurance Practices Act] cannot support a statutory bad faith claim.”]

In this case, the allegations indicated that the trustee did not actually learn the policy was not in effect for over two years, stating the trustee and insured were surprised when they learned that fact; especially in the absence of any notice from the insurer.  In ensuing correspondence in 2011, it was unambiguous to the trustee and the insured that the insurer took the position the policy lapsed.  The court was willing to apply the discovery rule to extend the trigger for the statute of limitations, but the statute was triggered in 2011 when the insurer made clear in writing that it was going to deny any benefits under the policy. “The subsequent denial of benefits in 2014 can simply be classified as a ‘continuing refusal’ to provide benefits under the policy and is not actionable.” Thus, the statute of limitations ran on the trust in 2013, over a year before suit was filed.

The analysis for the plaintiff as beneficiary had a different result.  A beneficiary does not have standing to sue until the death of the insured.  Although more than two years passed after she gained standing, before suit was filed, plaintiff pleaded that “she did not become aware of [the insurer’s] deficient notices until 2014.” Thus, for pleading purposes, the allegations were accepted as true and the claim could not be dismissed, applying the discovery rule.

The court further found that plaintiff had stated a bad faith claim, in alleging the insurer knowingly “failed to provide notices of premium due, grace period, lapse, reinstatement, or termination to [the trustee] or [the insured],” and still terminated the policy. She also alleged that the insurer had failed to investigate the propriety of letting the policy lapse, and whether the requisite notices were sent.  The court ruled that if the insurer “did in fact lapse the Policy with knowledge that it had not sent the required notices, then it arguably lacked a reasonable basis to terminate the Policy. Further, if [the insurer] had that knowledge and still terminated the Policy, it disregarded its lack of a reasonable basis.”

Date of Decision:  May 12, 2015

Hilston v. Am. Gen. Life Ins. Co., CIVIL ACTION NO. 14-7269, 2015 U.S. Dist. LEXIS 61804 (E.D. Pa. May 12, 2015) (Kearney, J.)

 

MAY 2015 BAD FAITH CASES – DIETZ & WATSON PART III: ATTORNEY CLIENT PRIVILEGE WAIVED IN BAD FAITH CASE WHERE IT WAS NOT TIMELY ASSERTED, AND WHERE OTHER CONDUCT CONSTITUTED WAIVER (Philadelphia Federal)

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In Dietz & Watson v. Liberty Mutual Insurance Company, Magistrate Judge Rueter continued to address the numerous discovery issues in the context of third party insurance bad faith litigation.  The first case is summarized as to mediation privileges issues here, and as to depositions of attorneys here.

The current discovery disputes involved the insured’s response to document requests, as well as the response of its former counsel to document requests.  The court had previously ordered the insured’s counsel “to review their productions and send a letter to defendants and the court confirming their complete compliance with the discovery requests.” In response, counsel stated that it did not have to produce certain documents, based on the theory that once the underlying case settled, and new counsel was hired by the insured, the date of settlement “marked the conclusion of the underlying lawsuit and the beginning of a new representation regarding this current [breach of contract and bad faith] action.” Any communications with new counsel were alleged to be both privileged and beyond the scope of requests for documents concerning the underlying action.

The court rejected the scope of discovery argument, i.e., that the discovery was strictly limited to what occurred in the underlying case. For example, the insurer defendants sought documents relating to “any other contemplated action(s) relating to the Underlying Lawsuit”, communications regarding the decision to file the bad faith case, and those with knowledge concerning the bad faith suit. This clearly went beyond the underlying action as such.

Thus, the more pertinent issue involved the claims related to the attorney client privilege, concerning a smaller subset of the documents requested. The insured and counsel asserted that any communications between them regarding prosecuting the bad faith action were privileged.  The insurers asserted that the attorney-client privilege was waived because the insured failed to assert it “at any time during this protracted discovery process, and/or when [the insured] disclosed other allegedly privileged documents.”  The party asserting waiver bears the burden of proof.

The court ruled in favor of waiver. First, on numerous occasions the insured “intentionally waived any claim of attorney-client privilege with respect to the documents at issue”: No objections were asserted in responses to the document requests; nor was the privilege asserted in response to the motion to compel production. “Third, after defendants’ Motion to Compel was filed, [the insured’s] Counsel produced the documents allegedly subject to the privilege, but never objected on the grounds of the attorney-client privilege as to any other documents intentionally withheld that clearly were responsive to the Requests for Production.” The court gave that counsel a final opportunity to review their production and confirm compliance with the Requests for Production, and “for the first time, identified documents that were being withheld on the grounds of scope and attorney-client privilege.” Again, however, the insured did not file a privilege log.

Further even after the court’s ruling over three months earlier, giving the insured and counsel opportunity for further review, they “never properly claimed the privilege by describing the nature of the withheld documents [on a document by document basis] as required by Fed. R. Civ. P. 26(b)(5)(A), 45(e)(2).”  The court continued on with a history that showed some allegedly privileged documents were produced, no privilege was asserted or privilege log produced, and there were no supplemental responses under Rule 26(e).

For all of the foregoing reasons, it found repeated waiver as to improperly withheld documents. The court further cited a litany of case law focused on the untimeliness of asserting the privilege.  It also found that at least some of the conduct at issue was calculated and deliberate.

Date of Decision:  May 5, 2015

Dietz & Watson v. Liberty Mut. Ins. Co., No. 14-4082, 2015 U.S. Dist. LEXIS 58827 (E.D. Pa. May 5, 2015) (Rueter, U.S.M.J.)

SUPREME COURT CHANGES DIRECTION ON EMPLOYERS’ LIABILITY EXCLUSION AFTER 48 YEARS

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The Supreme Court of Pennsylvania has effectively overruled its 48 year old decision in Pennsylvania Manufacturers’ Association Insurance Co. v. AETNA Casualty & Surety Insurance Co., 426 Pa. 453, 233 A.2d 548 (1967) (PMA), at least in the context of commercial insurance policies.  Mutual Benefit Insurance Company v. Politsopoulos, No. 60 MAP 2014 (May 26, 2015).

PMA had concluded that an employers’ liability exclusion limiting claims brought by an employee of “the” insured applied to every insured, even where an insured did not employ the claimant.  In Politsopoulos, the Supreme Court overruled this decision, at least in certain contexts: “Upon consideration of the broader range of authorities and the reasoning which they provide — which were not overtly considered in PMA — we decline to extend PMA’s expansive construction of the term ‘the insured’ to an instance in which a commercial general liability policy variously makes use of the terms ‘the insured’ and ‘any insured.’”  Further, “we are persuaded that, at least where a commercial general liability policy makes varied use of the definite and indefinite articles, this, as a general rule, creates an ambiguity relative to the former, such that ‘the insured’ may be reasonably taken as signifying the particular insured against whom a claim is asserted.”

The Court concludes: “In summary, we conclude that the employer’s liability exclusion in the umbrella policy is ambiguous. Application of governing principles of insurance policy construction yields the understanding that the ambiguous exclusionary language pertains only to claims asserted by employees of ‘the insured’ against whom the claim is directed, which understanding gains further support by reference to the policy’s separation-of-insureds provision.” Despite the last reference to the separation-of-insureds provision, the majority earlier made clear that its ruling was based upon its interpretation of the employers’ liability exclusion language alone.  Thus, the separation of insureds provisions plays the role of supporting actor, but not co-star.

Further, while the Court did not have the issue in front of it, it did comment on the language of those employers’ liability exclusions that exclude claims brought by the employee of “any” insured, rather than “the” insured.  It noted:  “Parenthetically, in terms of ‘any insured’ exclusions, the main controversy appears to center, not on whether the term unambiguously implicates any or all insureds, but upon whether such meaning should be narrowed to the insured against whom a claim is asserted in light of a separation-of-insureds clause. See, e.g., Allan D. Windt, 3 Ins. Claims and Disputes §11:8 (6th ed. 2014) (framing the different lines of authority). The great majority of courts, however, merely apply the rule that a separation-of-insureds clause does not negate the effect of a plainly worded exclusion. Accord id. (citing cases and explaining that, ‘as applied even independently to each insured, an ‘any insured’ exclusion unambiguously eliminates coverage for each and every insured’).”  Thus, using the methodology of interpreting the plain language of the employers’ liability exclusion itself in the first instance, independent of the separation of insureds provision, the Court indicates that an exclusion as to the employee of “any” insured will apply to all insureds, whether they are the actual employer or not.

MAY 2015 BAD FAITH CASES: REMOVAL UNTIMELY EVEN AFTER PLAINTIFF SOUGHT TO AMEND COMPLAINT TO ADD A BAD FAITH CLAIM, TWO WEEKS PRIOR TO ONE YEAR REMOVAL PERIOD EXPIRING (Philadelphia Federal)

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In Lare v. State Farm Fire & Casualty Company, the federal court remanded this breach of contract and bad faith action on the basis that the removal was filed more than one year after the original suit was filed.

The insured brought a breach of insurance contract claim, seeking less than $50,000, in the Court of Common Pleas.  The case went to mandatory arbitration, and there was an award of over $30,000 in the insured’s favor.  The insurer appealed, seeking a trial de novo.  The insured retained counsel and moved to amend the complaint to add a bad faith claim, chiefly focusing on bad faith conduct in perpetuating the litigation.

The motion to amend was filed two weeks before the one year removal period ran; but the insurer did not seek removal until after the one year period ran.  Under these circumstances, the court would not exercise its discretion to allow removal beyond the one year period, and the case was remanded.

Date of Decision:  April 21, 2015 (Report and Recommendation), adopted by District Court on May 6, 2015

Lare v. State Farm Fire & Cas. Co., CIVIL ACTION NO. 15-1231, 2015 U.S. Dist. LEXIS 59898 (E.D. PA. April 21, 2015) (Rueter, M.J.), adopted, 2015 U.S. Dist. LEXIS 59129 (E.D. Pa. May 6, 2015) (Robreno, J.)

MAY 2015 BAD FAITH CASES: THERE CAN BE NO BAD FAITH WITHOUT THE DENIAL OF A BENEFIT; STATUTE OF LIMITATIONS APPLIED; DISCOVERY CONDUCT NOT A BASIS OF BAD FAITH CLAIM (Philadelphia Federal)

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In Duda v. Standard Insurance Company, the court found the statutory bad faith claimed barred by the 2 year statute of limitations.  The statute of limitations begins to run when “an insurer clearly and unequivocally puts an insured on notice that he or she will not be covered under a particular policy for a particular occurrence.” Thus, for “purposes of applying Section 8371, one must look to the date on which the defendant insurance company first denied the insured’s claim in bad faith.”

The court would have ruled for the insurer on the merits, even if the claim were not time barred.  Among other things, “discovery misconduct cannot, as a matter of law, establish bad faith.” The court found that reliance on Hollock v. Erie Ins. Exchange, 842 A.2d 409 (Pa. Super. Ct. 2004), was misplaced because Hollock permits a claim under § 8371 in connection with bad-faith conduct at trial, not during discovery.”  If an insured wants a sanction for bad faith during discovery, that should be pursued as a sanction under the Rules of Civil Procedure.

On another part of the claim, the court found that there was never actually the denial of the insured’s claim.

The court stated: “Pennsylvania law makes clear that claim denial is essential to a bad faith claim.” Thus,  “’the essence of a bad faith claim must be the unreasonable and intentional (or reckless) denial of benefits’ and there is no bad faith under 42 Pa. C.S. § 8371 without a denial of benefits.’” In this case, there was no actual denial, rather the insured stated: “’We are unable to approve Residual Disability benefits at this time due to our concerns outlined above about the medical certification and there does not appear to be a loss of income or duties at this time.’” (emphasis added in original). Thus, the court ruled, “given the implicit invitation to supplement the submission by way of additional information, and the insurer’s acknowledgement of those possibilities, the undisputed evidence in the record shows that [the insurer] never made a final claim decision regarding … eligibility for residual disability benefits and it cannot be the case that his claim was denied in bad faith.”

Date of Decision:  April 30, 2015

Duda v. Std. Ins. Co., No. 12-1082, 2015 U.S. Dist. LEXIS 56606 (E.D. Pa. April 30, 2015) (Pratter, J.)

MAY 2015 BAD FAITH CASES: SUMMARY JUDGMENT GRANTED BECAUSE PRIOR WORKERS’ COMPENSATION DECISION ESTABLISHED REASONABLE BASIS FOR INSURER’S APPLICATION OF EXCLUSION (Philadelphia Federal)

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In Gibble v. Cincinnati Insurance Companies, the court found that the plaintiff did not produce sufficient evidence from which a reasonable jury could find in his favor on a bad faith claim, and granted the insurer summary judgment.

In this case, the policy exclusion relied upon by the carrier to exclude coverage was that the person driving the insured’s truck, i.e., the employee-plaintiff in this case, was “without a reasonable belief that they have authority to do so.” The court found that the insurer had a reasonable basis to exclude payment to the an employee of the insured, even if that basis ultimately proves incorrect.

There had been a prior workers’ compensation decision, finding that the plaintiff-employee of the insured was not acting in the scope of employment at the time he was injured, while driving his employer’s truck. The testimony and evidence in that matter provided a reasonable basis for insurer to believe that unless the injured employee was acting within the scope of his employment, he was not permitted to drive the truck; and that the employee knew that to be the case. This provided the insurer with a reasonable basis to deny coverage, because the employee arguably appeared to lack a reasonable belief that he was entitled to be driving the truck at the time of the accident. Thus, the statutory bad faith claim could not get beyond Terletsky’s reasonableness prong.  Nor was there any evidence in the record of reckless disregard, to meet the second prong.  The court’s finding was further bolstered the plaintiff’s need to meet the clear and convincing evidence standard, if the case were to proceed.

Date of Decision:  April 30, 2015

Gibble v. Cincinnati Ins. Cos., CIVIL ACTION No. 14-0739, 2015 U.S. Dist. LEXIS 57190 (E.D. Pa. April 30, 2015) (Pratter, J.)

MAY 2015 BAD FAITH CASES: ATTORNEY’S FEES ONLY AVAILABLE IF THERE IS BAD FAITH; NO SEPARATE CLAIM FOR BREACH OF DUTY OF GOOD FAITH AND FAIR DEALING; FACTS PLEADED MET PLAUSIBILITY STANDARD; COMPENSATORY AND CONSEQUENTIAL DAMAGES NOT AVAILABLE UNDER BAD FAITH STATUTE; AND PUNITIVE DAMAGES NOT AVAILABLE IN ACTION TO COMPEL SPECIFIC PERFORMANCE OF AN APPRAISAL (Philadelphia Federal)

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In St. Clair v. State Farm Fire & Casualty Company, the court stated the following principles and legal conclusions:

 

  1. A plaintiff can recover attorney’s fees under the bad faith statute for a bad faith breach of an insurance contract, but cannot recover attorney’s fees for the simple breach of contract claim in the absence of bad faith, and claims for attorneys’ fees in such counts will be stricken.

 

  1. There is no claim for violation of a duty of good faith and fair dealing that can be pleaded outside a breach of contract claim, rather it is part of the breach of contract claim.

 

  1. Where an insured supports her breach of implied duty of good faith claim with the same allegations that she uses to support her statutory bad faith claim “the Third Circuit has held that ‘a party is not entitled to maintain an implied duty of good faith claim where the allegations of bad faith are “identical to” a claim for “relief under an established cause of action.”’” Because the insured supported her implied duty of good faith claim with allegations of bad faith that were identical to those used to support the statutory bad faith claim, the dismissed the action on this ground as well. [Note:  It is clear that statutory bad faith and contractual bad faith may provide different remedies for the same conduct, so it is not clear if the court is stating that a breach of good faith claim untethered to a contract claim cannot stand because there is another cause of action to address that; or whether the court is stating that a breach of the contractual duty of good faith and fair dealing cannot stand if based on the same conduct as a statutory bad faith claim.]

 

  1. The Twombly Iqbal plausibility standard was met where the insured pleaded (i) she obtained a policy from the insurer that covered fire damages, (ii) she had a fire resulting in fire damage during the policy period, (iii) the insurer refused to pay the entire loss, (iv) that the insurer told her the loss was not covered but produced no evidence supporting that position, (v) that the insurer denied full payment while refusing to participate in the contractually required appraisal process on the basis that it did not have to participate in the appraisal process prior to agreeing to the scope of damage, contrary to the contract, (vi) that the insurer “fraudulently created values and assigned them to the covered losses to increase its own profitability, (vii) that the insurer accepted premiums intending not to pay out on covered losses; (viii) that the insurer denied the claim without proper investigation; and (ix) that the insurer “falsely misrepresented its responsibilities under the policy.”

 

  1. Compensatory and consequential damages are not available under the bad faith statute.

 

  1. Punitive damages are not available for a claim seeking to compel specific performance of the appraisal process under an insurance contract.

 

Date of Decision: May 6, 2015

St. Clair v. State Farm Fire & Cas. Co., CIVIL ACTION No. 15-0538, 2015 U.S. Dist. LEXIS 59117 (E.D. Pa. May 6, 2015) (Yohn, J.)

MAY 2015 BAD FAITH CASES: NO BAD FAITH WHERE NO BREACH OF OBLIGATION TO PAY BENEFITS; FEGLI PRE-EMPTS STATE BAD FAITH LAW (Western District)

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In Hajdu v. Metropolitan Life Insurance Company, the court found: “Since, as a matter of law, [the insurer] did not breach the FEGLI contract by not paying benefits under [the] annuitant policy, no claim for bad faith can be established.”  Further, the court found the FEGLI pre-empted state bad faith law.

Date of Decision:  May 6, 2015

Hajdu v. Metro. Life Ins. Co., Civil Action No. 15-195, 2015 U.S. Dist. LEXIS 59318 (W.D. Pa. May 6, 2015)(Conti, C.J.)

MAY 2015 BAD FAITH CASES: INSURED PLEADS PLAUSIBLE CLAIM FOR BAD FAITH CLAIMS HANDLING AND LOW SETTLEMENT OFFER AS TO BOTH STATUTORY AND CONTRACTUAL BAD FAITH; CONSEQUENTIAL DAMAGES THEORETICALLY AVAILABLE ON CONTRACTUAL BAD FAITH CLAIM (Middle District)

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In Lane v. State Farm Mutual Automobile Insurance Company, the insured was injured in an accident with an uninsured motorist. The insured sought the $100,000 limit from his carrier, and the carrier offered well below that figure.  The insured brought breach of contract, contractual bad faith, and statutory bad faith claims.  The carrier moved to dismiss the bad faith claims.

On the statutory bad faith claim, there were some boilerplate allegations, but there were also specific factual allegations supporting plaintiff’s claim to make it plausible under Twombly/Iqbal, and the motion to dismiss was denied. The court recited the 7 month period before any offer was made, which supported the claim of delay; that an offer was made only after being threatened with bad faith, and even then was unreasonably low; that the carrier did not act on medical information provided to it for months; and the allegation that the insurer subjected the plaintiff to what may be interpreted as needlessly duplicative procedures that did not further advance the disposition of the insurance claim.  The court rejected the insurer’s argument that its investigation methods fell within those generally permitted under the insurance policy, as an abstraction that did not provide an absolute defense; as the implementation of those methods in fact could still have been carried out through a dishonest purpose or breach of a known duty.

The court refused to dismiss the contractual bad faith claims for similar reasons, and it cited the Pennsylvania Supreme Court’s Birth Center decision for the proposition that contractual bad faith can exist “where an insurer refuses to settle a claim without a good faith basis to do so.”  The court further cited to Birth Center in rejecting the insurer’s motion to strike plaintiff’s claim for consequential damages as a matter of law: “the insurer is liable for the known and/or foreseeable compensatory damages of its insured that reasonably flow from the insurer’s bad faith conduct.”

Date of Decision:  May 7, 2015

Lane v. State Farm Mut. Auto. Ins. Co., 3:14-CV-01045, 2015 U.S. Dist. LEXIS 60064 (M.D. Pa. May 7, 2015) (Mariani, J.)

MAY 2015 BAD FAITH CASES: COURT REFUSES TO REMAND CASE, EVEN WHERE PLAINTIFF PLEADS RELIEF IN A SUM “NOT IN EXCESS OF $50,000”, WHERE PUNITIVE DAMAGES AND ATTORNEYS FEES UNDER BAD FAITH STATUTE WERE CONSIDERED AS ALLOWING THE PLAINTIFF TO GO ABOVE THE $50,000 FIGURE (Philadelphia Federal)

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In Sloan v. Liberty Insurance Corporation, the court denied a motion to remand the case to the Court of Common Pleas based on a disputed amount in controversy. Plaintiff had filed suit against her insurer, alleging breach of contract and bad faith with regards to a loss covered under her insurance policy. The insurer removed the case to federal court and the insured filed a motion to remand, claiming that the “defendant could not carry its burden of establishing that the minimum jurisdictional requirements had been met.” As the parties were both from different states, the real dispute was the amount in controversy.

In determining whether the amount in controversy could potentially exceed $75,000, the court began its analysis with a review of the complaint originally filed in state court. The court ultimately found that it was impossible to decide with legal certainty that the plaintiff could not recover more than $75,000. Plaintiff sought an award in an amount not in excess of $50,000, plus interest and costs, for her breach of contract claim. As for the bad faith claim, Plaintiff asked for “compensatory damages, punitive damages, counsel fees and costs, together with interest on plaintiff’s claim in an amount equal to the prime rate of interest plus three percent, in an amount not in excess of $50,000.”

The court observed that punitive damages are considered part of the amount in controversy, and that an award of punitive damages just over twice the amount of compensatory damages would place the plaintiff’s claim above the $75,000 threshold.

The court also reasoned that potential attorney’s fees should be considered in calculating the amount in controversy. Ultimately, the court determined that after combining the potential attorney’s fees, punitive damages, compensatory damages, and statutory interest, Plaintiff could ultimately recover over $75,000, and consequently denied the motion to remand.

Date of Decision: April 29, 2015

Sloan v. Liberty Ins. Corp., CIVIL ACTION NO. 15-1025, 2015 U.S. Dist. LEXIS 56666 (E.D. Pa. April 29, 2015) (Stengel, J.)