SEPTEMBER 2014 BAD FAITH CASES: AFTER JURY VERDICT FOR DISABILITY INSURER IN BAD FAITH CASE, COURT FOUND THAT (1) LIMITED DISCLOSURE OF EVIDENCE ON REGULATORY HISTORY WAS WITHIN THE COURT’S DISCRETION; (2) ALLOWING WIDE LATITUDE ON CROSS OF EXPERT MET DAUBERT; AND (3) JURY HAD SUFFICIENT EVIDENCE, TAKEN IN LIGHT MOST FAVORABLE TO THE VERDICT WINNER, TO RULE AS IT DID (Philadelphia Federal)

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In Leporace v. New York Life and Annuity Corp., involving a disability policy, the jury found for the insurer on the contractual and statutory bad faith claims.  In summarizing the law on both causes of action, Judge Baylson looked to Judge McLaughlin’s Dewalt opinion in addressing the different standards of proof, and the type of knowledge required to make out these claims.

The court issued prior opinions on the statute of limitations, expert testimony and the admissibility of evidence.  The court found no reason to reconsider the statute of limitations argument, and then addressed plaintiff’s claims of trial errors, chiefly concerning new evidentiary issues.

The insured focused on the court’s precluding evidence, but failed to show prejudice.  Moreover, wide latitude was given in permitting plaintiff’s evidence, and the court’s rulings on the evidence were within a trial judge’s discretion.  The insured alleged that he was barred from introducing evidence on Market Conduct Examinations and the Regulatory Settlement Agreements and amendments thereto, but this was not the case. The court had allowed “testimony about these adverse regulatory actions regarding defendant, when they pertained to issues directly affecting the plaintiff, and/or were not already subsumed within [the insurer’s] own standards for reviewing disability claims.” But the court “ruled that admitting evidence as to the origin of these regulatory materials was not relevant to plaintiff’s claim and would have been unduly prejudicial to the defendants….”  It did not exclude, however, “reference to these regulatory standards in total….” Further, the insured “was given significant and wide latitude in introducing both factual testimony and expert testimony supporting his claims, with adequate reference to the regulatory proceedings….”

The court found that the “jury had a full picture of the plaintiff’s claims and the reasons for [the insurer]’s conduct.” There was evidence that both sides causing delays in claims handling; and that the insured received benefits due for a significant period of time. The jury had these facts, and resolved in favor of the defendant; the court observing that the facts are taken in the light most favorable to the verdict winner when moving to set aside the verdict.

Finally, the insured attempted to argue trial error in connection with allowing the defense’s expert testimony.  The court observed that “plaintiff was given wide latitude to cross examine [the expert] about his qualifications before he was allowed to testify as an expert,” meeting Daubert’s requirements.

Date of Decision:  August 7, 2014

Leporace v. N.Y. Life & Annuity Corp., CIVIL ACTION NO. 11-2000, 2014 U.S. Dist. LEXIS 108804 (E.D. Pa. August 7, 2014) (Baylson, J.)

SEPTEMBER 2014 BAD FAITH CASES: COURT GIVES PARTIES 60 DAYS TO DO DISCOVERY TO DETERMINE IF POLICY FALLS WITHIN SAFE HARBOR TO ERISA PREEMPTION (Philadelphia Federal)

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In Van Arsdel v. Liberty Mutual Insurance Company, the insurer sought dismissal of state law claims, including bad faith, based upon ERISA pre-emption.  The insured responded that there were questions of fact as to whether ERISA covered the insurance at issue or whether it fell under ERISA’s Safe Harbor Provisions.  To qualify for the Safe Harbor provision, an employee welfare benefit plan must satisfy each of the following criteria:

(1) No contributions are made by the employer or employee organization; (2) Participation in the program is completely voluntary for employees or members; (3) The sole functions of the employer or employee organization with respect to the program are, without endorsing the program, to permit the insurer to publicize the program to employees or members, to collect premiums through payroll deductions or dues checkoffs and to remit them to the insurer; and (4) The employer or employee organization receives no consideration in the form of cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions or dues checkoffs.

The court gave the parties 60 days to conduct discovery on the issue, and to then submit summary judgment motions if appropriate.

Date of Decision:  September 5, 2014

Van Arsdel v. Liberty Mut. Ins. Co., CIVIL ACTION NO. 14-2579,  2014 U.S. Dist. LEXIS 123856 (E.D. Pa. September 5, 2014) (Smith, J.)

SEPTEMBER 2014 BAD FAITH CASES: WHERE INSURED GAVE MATERIALLY INACCURATE WRITTEN INFORMATION IN INSURANCE APPLICATION, EVEN IF SHE GAVE CORRECT INFORMATION ORALLY TO INSURER’S AGENT, INSURER HAD A REASONABLE BASIS TO DECLINE COVERAGE, AND SO THERE COULD BE NO VIABLE BAD FAITH CLAIM (Western District)

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In Jones v. State Farm Fire & Casualty Company, the insured suffered a fire to a home.  At the time, the home was not her primary residence, and it was being renovated.  The insured claimed that prior to obtaining the insurance policy at issue, she informed the insurer’s agent of this fact, and further that she had a previous fire.  However, her insurance application expressly stated that this home was her primary residence and that she had not suffered any previous losses in the last five years.  The carrier sought rescission of the policy based on these alleged misrepresentations.  The insured brought a bad faith claim, among other causes of action.

The court stated that the existence of a reasonable basis for denial will defeat a bad faith claim.  Further, “[i]n the specific context of a plaintiff challenging the denial of a claim, the insurer can demonstrate its reasonableness by highlighting material misrepresentations on a plaintiff’s application.”  The court also stated: “Because insurers are permitted under Pennsylvania law to rescind insurance contracts that contain material misrepresentations, denial on that basis is inherently ‘reasonable’ for purposes of the § 8371 cause of action.”

The court found that even if the insured had made oral representations to the insurer’s agent about the fact that she was not living in the home and that there had been an earlier fire loss, her stating contrary facts in the application contradicted those statements, and gave the insurer a reasonable basis for its decision to deny the claim.  “As [the insurer] correctly argues, even accepting as true that [the insured] told [the insurer’s agent’s] employee she had previously had a fire and that the dwelling was not her primary residence, and accepting that [the insurer] knew or should have learned of those statements, [the insurer] nonetheless was confronted with conflicting information. [The insured] intentionally or unintentionally provided untrue information on the rate quote and insurance application forms on which [the insurer] relied.” This provided a reasonable basis for the insurer’s decision, and the bad faith claim was dismissed.

Date of Decision:  September 9, 2014

Jones v. State Farm Fire & Casualty Co., Civil No. JFM-14-00185, 2014 U.S. Dist. LEXIS 125601 (W.D. Pa. September 9, 2014) (Motz, J.) (Judge Motz is a Senior Judge of the United States District Court for the District of Maryland)

SEPTEMBER 2014 BAD FAITH CASES: COURT DETERMINES TIME WHEN INSURER REASONABLY ANTICIPATED IN LITIGATION IN DECIDING DISCOVERY DISPUTES OVER WORK PRODUCT PROTECTION VS. DISCOVERABLE ORDINARY BUSINESS RECORDS; SIDES WITH THOSE DISTRICT COURTS IN THE THIRD CIRCUIT ALLOWING FOR DISCOVERY OF RESERVES; AND REFUSES TO ALLOW MERE ALLEGATION OF BAD FAITH TO BLOW UP WORK PRODUCT PROTECTIONS (Philadelphia Federal)

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In Borgia v. State Farm Mutual Automobile Insurance Co., the court addressed discovery disputes in the context of UIM breach of contract and bad faith claims, based on refusal to pay the $750,000 policy limits and alleged unreasonable delays in claim processing.  The insured had sustained serious physical and cognitive injuries, and was unable to care for his wife who suffered from multiple sclerosis.

The insurer had produced a redacted claims file, and withheld other documents based upon the attorney-client privilege and the work product doctrine. Some material was also redacted or withheld on the basis of relevance.  The insured sought to compel the carrier to produce a subset of the material referenced in its privilege log. Prior to making its ruling, the court reviewed the disputed documents in camera. The insured ultimately did not challenge the assertion of the attorney-client privilege over communications between outside counsel and claims personnel, including redactions of such material; nor the redaction or withholding of information on unrelated matters on the basis of relevance.

Well prior to suit, the parties exchanged communications and demands after the accident, and the point came where the insureds demanded policy limits, and stated that in the absence of an expeditious resolution they would proceed to litigation.  The carrier responded that it needed more time to evaluate medical records.  Two months later, the carrier retained a law firm. That counsel began to play the lead role in discussing settlement with the insured’s counsel in short order.  The same firm eventually represented the insurer after suit was filed five months later.

Prior to suit, the insurer requested statements under oath (“SUOs”), which were taken 2-3 months after the carrier retained counsel.  Shortly before taking the SUOs, the insurer offered $300,000 to settle, and then $350,000 after the SUOs. The insureds rejected the offers, and the insurer thereafter requested an independent medical examination of the injured insured.

A complaint was eventually filed for breach of contract, bad faith, and loss of consortium. After removal, a motion to dismiss the bad faith claim was denied.

The documents sought included: (1) entries in electronic claims logs regarding the  assessment of liability for the accident and available coverage, valuation of the claim, settlement authority, reserve amounts, and updates made to various categories of information; (2) evaluations of the claim prepared by claims personnel in two different months prior to suit; (3) emails among claims personnel regarding settlement authority; and (4) an asset report for the driver of the other car involved in the accident.  The insurer invoked the work product doctrine as to all of these documents, most of which reflected the mental impressions of the company’s claims personnel regarding the claim.

The work product doctrine protects certain material prepared in anticipation of litigation, but not those prepared in the ordinary course of business.  The court observed that: “As numerous courts have recognized, ‘[a]n insurance company cannot reasonably argue that the entirety of its claims files are accumulated in anticipation of litigation when it has a duty to investigate, evaluate[,] and make a decision with respect to claims made on it by its insureds.’”  On the other hand, this did not mean “that the work product doctrine is wholly inapplicable to insurers’ claims files,” or that the “’mere claim of bad faith is enough to shatter the work-produce privilege.’” “Rather, ‘[a]t some point in its investigation, . . . an insurance company’s activity shifts from mere claims evaluation to an anticipation of litigation.’”

Thus, the first step is to determine when the insurer reasonably anticipated litigation, which includes both an objective and subjective component.  Courts initially focus on the state of mind of the party preparing, or ordering preparation, of the document, and that person’s anticipation of litigation must be objectively reasonable for the work product protection to apply. “A party’s anticipation of litigation is objectively reasonable if ‘there existed an identifiable specific claim or impending litigation when the materials were prepared.’”

The court concluded that the insurer reasonably anticipated litigation by the time it hired counsel to handle the claim, in light of the policy limit demand, the threat of litigation, and its own knowledge that it was not prepared to pay policy limits.  The fact that the insureds had hired their own counsel earlier, who made demands, were not facts, standing alone, that objectively created anticipation of litigation.  The fact that the insurer did not hire counsel for months after the initial demands supported that conclusion.

Thus, all document prepared prior to the date of counsel’s retention had to be produced, unredacted. This included reserve information.  The court recognized that district courts in the Third Circuit are divided over whether reserve information is discoverable.  However, it followed the district courts which conclude that “the establishment of reserves would serve little, if any, purpose unless the reserves ‘have some relationship to the insurer’s estimation of the insured’s potential liability, and the amount set aside for reserves is therefore germane to any analysis [the defendant-insurer] made of the claim’s value and is relevant to the determination of whether the defendant-insurer acted in bad faith in processing the claim.” The court looked to Judge Rambo’s recent Shaffer opinion on this point; though in finding reserve information relevant, the court expressed “no opinion regarding the admissibility of such information as that issue is not before the Court at this time.”

The court next addressed whether documents created after hiring counsel still lacked work product protection because they would have been created in the ordinary course of business in any event. The court stated, again citing Shaffer: “This argument has some force since … an insurance company ‘has a duty to investigate, evaluate[,] and make a decision with respect to claims made on it by its insureds.’” Again, however, the court also recognized that at some point there is a shift from claims evaluation to defending against objectively anticipated prospective litigation, citing Judge Rambo’s recent Keefer decision. After an in camera review, and for the reasons given as to when the insurer first reasonably anticipated litigation, the court found that activity “shifted from mere claims evaluation to defending against the prospect of litigation on an objectively reasonable basis” when it retained outside counsel.

Lastly, the court addressed plaintiff’s substantial need argument under Rule 26(b), for overcoming the work product doctrine, even if applicable, i.e., where a party “shows that it has substantial need for the materials to prepare its case and cannot, without undue hardship, obtain their substantial equivalent by other means.” The court then reiterated that “a mere allegation of bad faith is insufficient to overcome the work product privilege,” and then stated the insureds failed to make the showing necessary to obtain disclosure of work-product-protected materials, particularly where they could depose the claims personnel as a viable means of obtaining at least some of the information they wanted. The insureds motion was, however, denied without prejudice.  The court noted that there had been no true address of whether any of this included opinion work product, which would be entitle to the highest level of protection.

Date of Decision: September 3, 2014

Borgia v. State Farm Mut. Auto. Ins. Co., CIVIL ACTION No. 14-3149, 2014 U.S. Dist. LEXIS 123180, (E.D. Pa. September 3, 2014) (Sanchez, J.)

SEPTEMBER 2014 BAD FAITH CASES: INSURED’S FAILURE TO RESPOND TO A RENEWAL QUOTE IS NOT A NON-RENEWAL REQUIRING 60 DAYS NOTICE, AND THE INSURED’S CLAIM FOR BAD FAITH FAILED (Philadelphia Commerce Court)

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In Get Busy Living Solutions, LLC v. Main Line Insurance Office, LLC, the carrier, through its agent, sent a renewal quotation to the insured about one month prior to the policy’s end date. The insured never replied prior to the policy’s end time and date, but texted his agent 7 hours after the policy period ended that he wanted to renew. Unfortunately, the insured suffered a fire 6 hours later. The insured’s agent only asked for renewal two days later, after learning of the fire, and the insurer required that the insured go through a process that would have revealed the fire loss. The policy was not renewed. The insured brought breach of contract and bad faith claims.

The insured argued that under Pennsylvania law, a mid-term cancellation or a now-renewal required 60 days’ notice from the carrier. The court agreed with the insurer that this was not a non-renewal situation. The insurer quoted a renewal price and it was the insured that chose not to renew; thus, this was not a non-renewal. Summary Judgment was granted for the insurer.

Date of Decision: August 22, 2014

Get Busy Living Solutions, LLC v. Main Line Ins. Office, LLC, NO. COMMON PLEAS COURT OF PHILADELPHIA COUNTY, 2014 Phila. Ct. Com. Pl. LEXIS 271, (C.C.P. Phila. Commerce Court August 22, 2014) (McInerney, J.)

 

UPDATE ON INDALEX: SUPREME COURT DENIES PETITION FOR ALLOWANCE OF APPEAL

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For those who have been following the fate of the Superior Court’s Indalex Opinion, and its discussion of “occurrence” under Kvaerner, as well as the gist of the action doctrine, on September 18, 2014, the Supreme Court denied the Petition for Allowance of Appeal.

SEPTEMBER 2014 BAD FAITH CASES: INSUREDS LIABLE FOR OVER $800,000 UNDER NEW JERSEY’S INSURANCE FRAUD PROTECTION ACT; INSURER NOT REQUIRED TO RETURN PREMIUMS AS PREDICATE FOR RECOVERY IN CASE WHERE FRAUD IS ALLEGED IN MAKING A CLAIM ON THE POLICY, NOT IN PROCURING THE POLICY (New Jersey Appellate Division)

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In Masaitis v. Allstate New Jersey Insurance Company, the jury not only ruled that the insureds were not entitled to compensation from the insurer for a fire loss to their home, but there was a judgment awarding more than $800,000 against them under N.J.S.A. 17:33A-7(a), a provision of the Insurance Fraud Protection Act (IFPA), N.J.S.A. 17:33A-1 to -30.

The county prosecutor did not find arson, but the carrier continued to investigate the claim after it was originally made, ultimately denying it on the basis of “misrepresentation, fraud or concealment,” including specific reasons with the denial.  The carrier eventually paid mortgagees $675,000. The insured filed suit against the insurers and the mortgagees, and the insurer filed a counterclaim under the IFPA.

A jury found “that plaintiffs had knowingly misrepresented material facts concerning their claim for payments under their insurance policy, but it also found that [the insurer] had not proven that plaintiffs committed arson.”  The final judgment was for over $800,000, which also included interest, attorney’s fees, and costs per the IFPA.

On appeal, the court rejected the arguments that the trial court erred in permitting the insurer to argue arson, and that the insurer was estopped from denying the claim because it did not refund the premium.  The court found no error in the trial court’s ruling that the carrier had “produced sufficient circumstantial evidence of plaintiffs’ involvement in the cause of the fire to present a jury question.”The court did instruct the jury that the insurer bore the burden of proving arson as an affirmative defense, along with the burden to prove its counterclaims. Moreover, “the jury found insufficient proof that plaintiffs were guilty of arson. Its verdict in favor of [the insurer] was based on its finding that plaintiffs had misrepresented their losses in making their claims on personal property damaged by the fire.” The jury answered special interrogatories on this point, in finding an IFPA violation.

As to the estoppel argument, the requirement to return premiums is found in cases where the policy was obtained by fraud at its inception; whereas, in this case the insurer was alleging that a fraudulent claim was being made on the policy itself, not that the policy was procured through fraud.

Date of Decision:  August 26, 2014

Masaitis v. Allstate New Jersey Insurance Company, DOCKET NO. A-4435-12T1, SUPERIOR COURT OF NEW JERSEY (App. Div. August 26, 2014) (Ashrafi and Haas, JJ.) (Per curiam) (not approved for publication).

SEPTEMBER 2014 BAD FAITH CASES: BAD FAITH CLAIM NOT TIME BARRED BASED ON DATE OF DENIAL TRIGGERING CAUSE OF ACTION; COMMON LAW BAD FAITH CLAIM SUBSUMED IN BREACH OF CONTRACT CLAIM, WHICH HAD BEEN DISMISSED ON BASIS OF CONTRACTUAL LIMITATIONS PERIOD (Philadelphia Federal)

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In Blackwell v. Allstate Insurance Company, the court found that the contractual one year period for bringing a claim under a homeowners policy barred the insureds breach of contract claim; however, the statutory bad faith claim was not barred by that contractual term, nor, on the face of the complaint, was it barred by the applicable two year statute of limitations.

Pennsylvania courts apply a two-year statute of limitations to insurance statutory bad faith claims. In general, courts must look to the date on which the insurer allegedly first denied the insured’s claim in bad faith when determining that the statute began to run.  In this case, the insured alleged that the insurer denied his claim for the replacement value of his damaged furnace, in November 2012.  Suit was filed one year later. Even though the insured alleged that “some bad-faith conduct occurred more than two years before the Complaint was filed (e.g. [the insurer’s] failure to properly investigate the claim),” the court refused to dismiss the claim as time barred.  The denial was without prejudice to the insurer if facts were developed that would permit asserting the defense at a later stage in the case. [Compare to a recent state trial court decision breaking out investigation claims for statute of limitations purposes.]

Finally, the court dismissed the common law claim for breach of the duty of good faith, as this is an implied duty arising out of a contract, and except in exceptional circumstances is subsumed in the breach of contract claim.  The insured did not plead any such circumstances, “such as conduct separate and apart from the conduct underlying the breach of contract claim…,” and the common law bad faith claim was dismissed as a separate claim.

Date of Decision:  September 3, 2014

Blackwell v. Allstate Ins. Co., CASE NO. 14-878, 2014 U.S. Dist. LEXIS 123067 (E.D. Pa. September 3, 2014) (Rufe, J.)

SEPTEMBER 2014 BAD FAITH CASES: CLAIM FOR BREACH OF THE IMPLED COVENANT OF GOOD FAITH AND FAIR DEALING SUBSUMED IN BREACH OF CONTRACT CLAIM; ECONOMIC LOSS DOCTRINE BARS UTPCPL CLAIM (Middle District)

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In Zeglen v. Northwestern Mutual Life Insurance Company, the case involved a disability insurance policy, and the insured brought action for breach of contract, breach of the implied duty of good faith and fair dealing, statutory bad faith, and under Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (UTPCPL).

The court found that the contractual duty of good faith and fair dealing is subsumed in the breach of contract claim, and dismissed that claims, finding it could not stand separately from the breach of contract claim.  The statutory bad faith claim remained.

The court also found that the economic loss doctrine barred the UTPCPL claim under the Third Circuit’s Werwinski case, observing that while this is a subject of dispute since the Pennsylvania Supreme Court has not ruled on it, federal district courts are bound by Third Circuit precedent.

Date of Decision: August 25, 2014

Zeglen v. Northwestern Mut. Life Ins. Co., 3:14-CV-00173, 2014 U.S. Dist. LEXIS 118147 (M.D. Pa. August 25, 2014) (Mariani, J.)

SEPTEMBER 2014 BAD FAITH CASES: IN THIS SUPERSTORM SANDY CASE, INSURED ALLOWED TO PROCEED ON BAD FAITH CLAIM WHERE INSURER REFUSED TO ENGAGE IN APPRAISAL PROCESS, BUT COURT DISMISSES BAD FAITH CLAIM BASED UPON ALLEGED UNDUE INFLUENCE ON INSURED’S ROOFING CONTRACTOR (Philadelphia Federal)

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Currie v. State Farm Fire & Casualty Co., involved damage to the insured’s home from Superstorm Sandy, and a dispute over the homeowner insurer’s payment obligation. The matter was before the court on summary judgment. After finding summary judgment could not be granted on the breach of contract claim, the court then addressed the carrier’s motion for summary judgment on the insured’s two bad faith claims.

First, the insured claimed bad faith for the insurer’s failure to engage in the appraisal process. The insurer’s position was that appraisal was only required where the coverage obligation was agreed upon, but the amount of loss was not; and that the carrier disputed coverage. The court found that the carrier’s position was not actually over coverage differences but over the loss sustained, and allowed the bad faith claim to proceed on that basis.

It granted summary judgment on the second bad faith claim, however. The insured claimed that the carrier had unduly influenced the insured’s roofer to lower its repair estimate. However, the evidence presented on the motion did not support that position. The court also stated that the insureds did not submit “any support for their claim that negotiations regarding the amount of construction repair costs and services to be provided constitutes bad faith conduct on the part of an insurer.”

Date of Decision: August 19, 2014

Currie v. State Farm Fire & Cas. Co., CIVIL ACTION No. 13-6713, 2014 U.S. Dist. LEXIS 117970 (E.D. Pa. August 19, 2014) (Kelly, J.)