Monthly Archive for January, 2006

JANUARY 2006 BAD FAITH CASES

CLAIMS ADJUSTER PERMITTED TO TESTIFY AS BAD FAITH EXPERT FOR PLAINTIFF SUBJECT TO CERTAIN LIMITATIONS (Western District)

In Gallatin Fuels, Inc. v. Westchester Fire Ins. Co., a loss payee sought payment for mining equipment that was destroyed or rendered unrecoverable when the mine in which it was being used returned to its natural water level because the power to the mine was shut off after the insured failed to pay outstanding utility bills.

Plaintiff, who was a named loss payee under the policy, also alleged bad faith against the insurer.  The Court was presented with the issue of whether to allow a claims adjuster to testify as an expert on bad faith for the plaintiff.

The Court ruled that the adjuster could testify concerning: insurance claims procedures; whether or not the insurer had a reasonable basis for denying the loss payee’s claim; and as to whether or not the carrier had complied with various insurance statutes (which were not directly at issue in this case), and other industry customs and standards.

The expert could not: testify as to whether the loss payee’s loss was actually covered by the policy; give his opinion as to the insurer’s subjective intent; nor could he give his opinion as to the ultimate issue in the case — the insurer’s bad faith.  The Court reasoned that these impermissible areas of testimony would involve the offering of legal conclusions which would not assist the jury, because purely legal questions would be outside the expert’s area of expertise, and would concern subjective intent (“An expert simply is not in any better position than the jury to assess another’s subjective intent”).

The remainder of the testimony would be within the specialized knowledge of the adjuster and helpful to the jury, and therefore it was allowed.

Date of Decision: January 18, 2006

Gallatin Fuels, Inc. v. Westchester Fire Ins. Co., United States District Court for the Western District of PA, No. 03-cv-1552, 410 F. Supp. 2d 417, 2006 U.S. Dist. LEXIS 1538 (W.D. Pa. January 18, 2006) (Ambrose, J.)

This case was affirmed in part and reversed in part by the Third Circuit.

JANUARY 2006 BAD FAITH CASES
DEFENSE EXPERT QUALIFIED TO TESTIFY ON MATTERS THAT GO TO PRESENCE OR ABSENCE OF BAD FAITH, THOUGH NOT ON ULTIMATE LEGAL ISSUE OF BAD FAITH (Western District)

In Gallatin Fuels, Inc. v. Westchester Fire Insurance Company, the U.S. District Court for the Western District of Pennsylvania denied in part and granted in part Plaintiff’s Motion in Limine seeking to exclude an expert’s testimony at trial on various grounds.  Plaintiff argued that the expert was not qualified to testify as to bad faith practices in the industry because he lacked sufficient claims handling or claims adjusting experience.

However, the Court cited the liberal policy of Federal Rule of Evidence 702, as well as U.S. Supreme Court case law, broadly granting expert qualification.  Because of the expert’s formal education, experience and knowledge in the field, the Court denied the Motion.

The Court also denied Plaintiff’s motion with regards to expert testimony on bad faith, noting that although expert testimony with respect to the ultimate legal issue of bad faith is inadmissible as a matter of law, it is permitted if it is helpful to the trier of fact and is otherwise admissible.

Nonetheless, the Court precluded the expert from testifying at trial that the cause of Plaintiff’s loss was not external as a matter of law, or that the risk was otherwise per se uninsurable, whether as a matter of economics, public policy, or under the specific terms of the insurance policy.

Date of Decision:  January 19, 2006

Gallatin Fuels, Inc. v. Westchester Fire Ins. Co., U.S. District Court, W. D. Pa, No. 02-2116, 2006 U.S. Dist. LEXIS 1717 (W.D. Pa. Jan. 19, 2006) (Ambrose, C.J.)

This case was affirmed in part and reversed in part by the Third Circuit.

JANUARY 2006 BAD FAITH CASES
NO BAD FAITH WHERE AGENT HONESTLY MISTAKEN, NO ILL WILL, CARRIER INVESTIGATED & “BOARDED” CLAIM & NEGOTIATED WITHIN REASONABLE INSURANCE PRACTICES (Western District)

In Hartman v. Motorists’ Mutual Insurance Company, the insured suffered property damages from a leaking furnace.  The carrier agreed to cover some property losses, but not all, on the basis of a pollution exclusion.  The insured refused to accept any sum to settle the claim, less than the cost of repairing all damages.

The Court found the policy ambiguous as to how heating oil would be classified, found the loss fully covered.  Alternatively, the Court found coverage due under the “reasonable expectations doctrine,”  even if the policy otherwise precluded coverage, because of the representations made by the carrier’s agent concerning coverage for precisely such incidents. However, the Court found that plaintiff did not put on clear and convincing evidence of bad faith.

First, the interpretation of the pollution exclusion clause advanced by the carrier was reasonable, even if the Court did not agree with that interpretation.  Further, the carrier began its investigation promptly, made known its position on the pollution exclusion clause after doing a site inspection and research on the interpretation of that provision by other carriers, obtained its own estimate of damages, and convened a board to review and discuss the coverage (“Boarded”), consisting of the claims representative, a branch manager and two supervisors.

There was no evidence of ill-will, and “it is not bad faith to investigate and litigate legitimate issues of coverage.”  Even the agent’s alleged carelessness in representing coverage to the insured was found not to have been done in bad faith, but rather appeared to the Judge, as finder of fact, to have been honest mistakes (though somewhat negligent or careless).

The failure to honor its agents mistaken representations was not bad faith as (a) they were not necessarily known to the carrier’s employee and (b) the legal issue of whether those representations were binding was unclear.   Nor was the compromise settlement offer a sign of bad faith, as “it is common practice in the insurance industry to attempt to resolve disputed claims by compromise rather than subjecting each and every claim to litigation.”  Such a compromise did not evidence bad faith, nor concede coverage.

Date of decision:  January 19, 2006

Hartman v. Motorists’ Mutual Ins. Co., United States District Court for the Western District of PA,  No. 2:02cv1038, 2006 U.S. Dist. LEXIS 1719 (W.D.Pa. Jan. 19, 2006) (McVerry, J.)

JANUARY 2006 BAD FAITH CASES
POST DENIAL-OF-COVERAGE INVESTIGATION CAN NOT BE USED TO DEFEND AGAINST INSURED’S BAD FAITH CLAIM (Philadelphia Federal)

The insurer filed a breach of contract and fraud action against a policy holder arising out of a fire.  The United States District Court for the Eastern District of Pennsylvania was presented with several Motions in Limine regarding the admissibility of evidence gathered after the alleged denial of coverage.

The policy holder sought to exclude evidence gathered from post-denial-of-coverage investigations conducted by the insurer, law enforcement agencies, and third parties at the insurer’s request.  The carrier wanted to use the evidence to show that the policy holder was responsible for the fire, thereby demonstrating that there was a sufficient and reasonable basis to deny coverage.

The Court ruled that the evidence could be used to establish that the insured was responsible for the fire to support the insurer’s breach of contract, fraud and material misrepresentation claims only.

That evidence could not be used to defend against the insured’s statutory bad faith counterclaim.  The Court reasoned that only the information which was part of the insurer’s investigation prior to its denial of coverage may factor in the jury’s determination of the statutory bad faith counterclaim.

To implement the Court’s Order, the jury charge would contain a limiting instruction.

Date of Decision:  January 31, 2006

Selective Way Ins. Co. v. Servpro of King of Prussia, United States District Court, Eastern District of PA, Civil Action No. 99-CV-956, 2006 U.S. Dist. LEXIS 4028  (E.D. Pa. Jan. 31, 2006) (Pollak, J.)

JANUARY 2006 BAD FAITH CASES
RETAINING VALUATION EXPERT IN CASE IS NOT EVIDENCE OF POST-LITIGATION BAD FAITH CONDUCT (Western District)

In Gallatin Fuels, Inc. v. Westchester Fire Insurance Company, plaintiff loss payee sued its insurer, seeking payment under an insurance policy issued to a mining company, and alleging bad faith.

In ruling on various Motions in Limine filed by both parties, the U.S. District Court for the Western District of Pennsylvania held that plaintiff was not entitled to an order that it was up to the jury whether attorney’s fees should be awarded under Pennsylvania’s bad faith statute; this was a question for the court to decide only if the jury found in plaintiff’s favor on its bad faith claim.

Plaintiff also asserted that defendant’s retention of a valuation expert was evidence of bad faith; however, the court found that though an insurer’s conduct during the pendency of litigation may be considered as evidence of bad faith under Pennsylvania’s bad faith statute, it is only relevant where the conduct shows the insurer’s intent to evade its obligations under a policy.

Date of Decision:  January 13, 2006

Gallatin Fuels, Inc. v. Westchester Fire Ins. Co., United States District Court for the Western District of PA, Civil Action No. 02-2116, 2006 U.S. Dist. LEXIS 1327 (W.D. Pa. Jan. 13, 2006) (Ambrose, C.J.)

This case was ultimately affirmed in part and reversed in part by the Third Circuit.

JANUARY 2006 BAD FAITH CASES
ISSUING RESERVATION OF RIGHTS LETTER DID NOT ESTABLISH BASIS FOR POST-LITIGATION BAD FAITH CLAIM (Philadelphia Federal)

Plaintiff sought leave to amend the complaint to add various averments of material fact, as well as claims for post-litigation bad faith conduct.

Specifically, plaintiff sought to add a post-litigation bad faith claim based upon the fact that defendants paid his benefits but continued to “maintain a reservation of rights until Saldi’s death, even after defendants knew and/or recklessly disregarded that they lacked any medically supported reasonable basis for reservation of rights.”

The U.S. District Court for the Eastern District of Pennsylvania would not allow the additional post-litigation bad faith claims, noting that the reservation of rights is itself a means of preventing a bad faith claim by the insured, as it allows an insurer to make payments to an insured while maintaining the right to seek reimbursement if it later becomes clear that the insured was not entitled to the payments.

The court also found defendants presented a reasonable basis for making such reservation of rights, on the grounds that defendants reviewed new documentation from plaintiff’s medical providers in making their decision.

Date of Decision:  January 13, 2006

Saldi v. Paul Revere Life, United States District Court of the Eastern District of PA, Civil Action No. 99-CV-6563, 2006 U.S. Dist. LEXIS 1315 (D. Pa. 2006) (Surrick, J.)

JANUARY 2006 BAD FAITH CASES
BAD FAITH CLAIM NOT BARRED BY “INTENTIONAL DISCRIMINATION” EXCLUSION, WHICH DOES NOT APPLY TO CLAIMS FOR VICARIOUS LIABILITY (Middle District)

The issue was whether an insurer breached a policy by failing to provide a defense in a lawsuit alleging that the agents and employees of a hotel operated by the insured instituted racially discriminatory polices and procedures during an event known as “Black Bike Week.”  The event, sponsored by the town of Atlantic Beach, South Carolina, was an annual gathering of predominantly African American motorcycle enthusiasts.

The NAACP filed suit against the hotel operators, alleging that the hotel instituted racially disparate practices during the week of the event, which included requiring guests to sign a 34 rule guest contract (the breach of which results in forfeiture of all deposits and half the remaining balance due), higher room rates than at any other time of the year, and requiring guests to pay all three nights plus a three night deposit up front.

The carrier refused to provide a defense to the insured because the policy: (1) only covered the rendering of professional services; and, (2) did not apply to “discrimination…committed intentionally against any other person.” (emphasis added).

The Court first ruled that the injury arose from the hotel’s providing of guest accommodations, which is covered under the professional services endorsement.

The Court then ruled that the discrimination exclusion did not apply to the claims asserted against the hotel operators.  The Court articulated that the hotel operators were only being sued under a theory of vicarious liability (liable for the conduct of their agents or employees), which does not require a showing that the hotel operators intended to racially discriminate.

The exclusion only applied to intentional discrimination.  Therefore, the Court allowed the bad faith claim against the insurer to proceed to trial.

Date of Decision: January 19, 2006

General Direct Mktg., Inc. v. Lexington Ins. Co., United States District Court for the Middle District of PA, No. 3:05cv140, 410 F. Supp. 2d 387 (M.D. Pa. 2006) (Munley, J.)

JANUARY 2006 BAD FAITH CASES
DISPUTING CAUSATION IN CONNECTION WITH UIM THIRD PARTY CLAIM, WHILE PAYING BENEFITS UNDER FIRST PARTY CLAIM, NOT PER SE EVIDENCE OF BAD FAITH (Superior Court)

In Pantelis v. Erie Insurance Exchange, plaintiff was injured in a single-vehicle accident, resulting in her insurance paying first-party medical benefits to her.  Three months later, she was involved in a second accident, yet reported no physical injury; however, she later filed a claim for first-party medical benefits caused by the second accident, which the insurer also paid.  Plaintiff then filed an additional claim for uninsured motorist benefits under the same policy, after which the insurer denied third party coverage.

The Superior Court of Pennsylvania expressly rejected plaintiff’s argument that disputing causation in connection with a third party claim while paying benefits under a first party claim constitutes per se evidence of bad faith.  Instead, the court held that payment of first-party benefits does not preclude an insurer from later denying third-party uninsured motorist/underinsured motorist benefits.  Furthermore, the court found that plaintiff’s cited case law only stood for the well accepted rule that where an insurer’s payment of first-party benefits is followed by denial of third-party coverage, this can support a claim for bad faith where the denial is ultimately found to be for frivolous or unfounded reasons.

Date of Decision:  January 4, 2006

Pantelis v. Erie Ins. Exch., Superior Court of Pennsylvania, No. 187 WDA 2005, 2006 PA Super 1 (Pa. Super. Jan. 4, 2006) (Lally-Green, J.)

JANUARY 2006 BAD FAITH CASES
COURT DETERMINES AWARD OF ATTORNEYS’ FEES, NOT JURY (Western District)

In Gallatin Fuels, Inc. v. Westchester Fire Insurance Company, plaintiff loss payee sued its insurer, seeking payment under an insurance policy issued to a mining company, and alleging bad faith.

In ruling on various Motions in Limine filed by both parties, the U.S. District Court for the Western District of Pennsylvania held that plaintiff was not entitled to an order that it was up to the jury whether attorney’s fees should be awarded under Pennsylvania’s bad faith statute; this was a question for the court to decide only if the jury found in plaintiff’s favor on its bad faith claim.

Plaintiff also asserted that defendant’s retention of a valuation expert was evidence of bad faith, however, the court found that though an insurer’s conduct during the pendency of litigation may be considered as evidence of bad faith under Pennsylvania’s bad faith statute, it is only relevant where the conduct shows the insurer’s intent to evade its obligations under a policy.

Date of Decision:  January 13, 2006

Gallatin Fuels, Inc. v. Westchester Fire Ins. Co., United States District Court for the Western District of PA, Civil Action No. 02-2116, 2006 U.S. Dist. LEXIS 1327 (W.D. Pa. Jan. 13, 2006) (Ambrose, C.J.)

This case was affirmed in part and reversed in part by the Third Circuit.

JANUARY 2006 BAD FAITH CASES
BAD FAITH STATUTE PRE-EMPTED BY CLAIM FOR FIRST-PARTY BENEFITS CLAIM UNDER MVFRL, BUT NOT PREEMPTED BY CLAIM FOR LOST WAGES UNDER THE MVFRL (Philadelphia Federal)

An injured motorist sought first-party medical benefits and lost wages from her automobile insurance carrier.  The Federal District Court was presented with a Motion to Dismiss from the defendant/carrier, based on the assertion that the bad faith statute, 42 Pa. C.S.A. § 8371, and the Motor Vehicle Financial Responsibility Law (“MVFRL”), 75 Pa. C.S.A. §§ 1716, 1797, are in conflict as to the remedies available, and the MVFRL, the more specific statute, preempts the bad faith statute.

The Court granted the Motion as to the motorist’s claim for first-party medical benefits, and denied the motion with respect to the claim for lost wages.  The Federal Court reasoned that since both statutes punish similar conduct for denial of first-party medical benefits (i.e., wanton conduct under the MVFRL and bad faith conduct under the bad faith statute), yet provide different remedies, the MVFRL, as the more specific statute, preempts the bad faith statute.

The Court therefore dismissed the motorist’s bad faith claim for denial of first-party medical benefits.

Conversely, the statutory bad faith claim was not preempted by the lost wages claim since the bad faith statute imposes different remedies for different degrees of culpable conduct (i.e., unreasonable conduct under the MVFRL and bad faith conduct under the bad faith statute).

The statutes are not in conflict and effect may be given to both.  This result is consistent with other courts’ interpretations of the MVFRL prior to recent amendments.

Date of Decision: January 23, 2006

Harris v. Lumberman’s Mut. Cas. Co., United States District Court for the Eastern District of PA, No. 05-CV-5228, 409 F. Supp. 2d 618 (Robreno, J.)

This Opinion also relied upon the Superior Court’s decision in Barnum v. State Farm Mut. Auto. Ins. Co., 430 Pa. Super. 488, 635 A.2d 155 (Pa. Super. Ct. 1993), reversed on other grounds by, 539 Pa. 673, 652 A.2d 1319 (Pa. 1994)(where the Supreme Court reversed and remanded the Superior Court’s decision only due to recent changes in procedure under the MVFRL), and Gemini Physical Therapy & Rehabilitation v. State Farm Mut. Auto. Ins. Co., 40 F.3d 63 (3d Cir. 1994).