Monthly Archive for September, 2006

SEPTEMBER 2006 BAD FAITH CASES
BAD FAITH CLAIMS PREEMPTED BY ERISA (Philadelphia Federal)

Plaintiff alleged, among other things, that Defendant acted in bad faith in failing to pay disability benefits due him under designated insurance plans (the “Plans”), with premiums that had been reduced, through Plaintiff’s employer, as a part of a agreement with the insurer.  Plaintiff sought relief pursuant to the Employee Retirement Income Security Act of 1974 (“ERISA”) and under state law.  Defendant insurer sought dismissal of the state law claims on the basis that they were preempted by ERISA.

The United States District Court for the Eastern District of Pennsylvania granted Defendant’s request for dismissal of the state law claims.

The Court determined that because the Plans were employee benefit programs that were established and/or maintained by an employer engaged in commerce, they qualified as ERISA plans.  Then, the Court examined the record further, to ascertain whether the Plans satisfied the four prongs of the “safe harbor” provisions of ERISA, and therefore fell outside of ERISA’s governance.

Based on decisions rendered by Courts in the Third Circuit which have concluded that a discount on an insurance policy premium through an employer constitutes an employer contribution,  the Court held that the Plans did not meet the first prong of the “safe harbor” provisions of ERISA. Therefore, ERISA applied and Plaintiff’s state claims, including those asserting bad faith, were preempted.

Date of Decision:  September 15, 2006

Tannenbaum v. Unum Life Ins. Co. of Am., United States District Court for the Eastern District of Pennsylvania, No. 03-CV-1410, 2006 U.S. Dist. LEXIS 66623 (E.D. Pa. Sept. 15, 2006) (Surrick, J.)

SEPTEMBER 2006 BAD FAITH CASES
NO BAD FAITH WHERE LEGAL POSITION WAS REASONABLE, INVESTIGATION WAS PROMPT AND THOROUGH AND DEFENSE, WHILE VIGOROUS, WAS REASONABLE (Western District)

Plaintiff claimed her home was damaged by vibrations from heavy construction work.  The carrier engaged an engineer to investigate the damage, who concluded it had different origins. A portion of the claim was denied on a structural and earth movement exclusion, based upon the sources identified in the engineer’s report; the conclusions of which the insured disputed.  She hired her own expert and lawyer, who disputed the claim but would not produce the expert report contrary to the carrier’s engineer though repeatedly requested.

Only after suit was filed and three years after the damage arose, did plaintiff produce her own expert’s report that the damage was related to construction work vibrations affecting the soil.  The carrier retained two additional experts, both of whom disagreed with plaintiff’s expert on the origins of any damage to the home.

The court found the exclusions ambiguous and ruled in the insured’s favor, denying a summary judgment motion on the breach of contract claim.  The court also denied summary judgment on the issue of causation, as there were material disputes of fact.

However, the court granted summary judgment on the bad faith claim.

First, there was a reasonable basis to deny the claim as plaintiff did not produce her report – and her ultimate theory as to what caused the harm — for years after the damage occurred, and until months after suit was initiated.

Second the carrier actively investigated the harm by engaging the engineer and repeatedly seeking plaintiff’s response thereto and her own expert study.  Plaintiff offered no challenge to this expert’s methods other than subjective speculation on how the expert should have carried out her work; and even if the expert was ultimately proven wrong, this would not make trust in her conclusions unreasonable.

Once plaintiff’s expert report was finally received, the carrier obtained two additional reports; while plaintiff disagrees with the results, if these reports are correct, which a jury could find, then there would be no basis for coverage – again making the denial reasonable.

The court observed that a jury could accept the causation theories advanced by the carrier, and rule the exclusions did apply.  Simply because the carrier argued the exclusions applied under plaintiff’s theory of the case, as it had to for summary judgment purposes, did not make it bad faith for the carrier to persist in its original opinion.

The court concluded:  “There simply is no evidence that Defendant advanced this argument to evade its obligations under the policy as opposed to defend itself in the lawsuit Plaintiff filed against it. See W.V. Realty Inc. v. Northern Ins. Co., 334 F.3d 306, 313-15 (3d Cir. 2003); O’Donnell v. Allstate Ins. Co., 1999 PA Super 161, 734 A.2d 901, 909 (Pa. Super. Ct. 1999); see also Jung v. Nationwide Mut. Fire Ins. Co., 949 F. Supp. 353, 360 (E.D. Pa. 1997) (aggressive defense of insurer’s interests is not bad faith).”

Date of Decision:  August 28, 2006

Totty v. Chubb Corp., 455 F. Supp. 2d 376 (W.D. Pa. 2006) (Ambrose, J.).

Plaintiff sought reconsideration of an Order granting Defendant’s Motion for Summary Judgment.  Plaintiff contended that granting summary judgment on her bad faith claim was inappropriate because there was a genuine issue of material fact as to whether Defendant insurance company had conducted an adequate investigation into the cause of Plaintiff’s alleged damage.  The United States District Court for the Western District of Pennsylvania denied Plaintiff’s Motion.  The Court held that a Motion for Reconsideration would be granted only where: (1) new evidence becomes available; (2) there has been an intervening change in controlling law; or (3) there is a need to correct a clear error of law or fact or to prevent manifest injustice.  Because Plaintiff did not offer any new evidence; raise any new issues of fact; or raise any new issues of law, the Court held that another review of Defendant’s Motion was not warranted.  In reviewing the relevant case law and the evidence supplied by both parties in the light most favorable to Plaintiff, the Court found that no reasonable jury could conclude, by clear and convincing evidence, that Defendant had acted in bad faith.

Date of Decision:  September 19, 2006

Totty v. The Chubb Corp., United States District Court for the Western District of Pennsylvania,  No. 05-111, 2006 U.S. Dist. LEXIS 67026 (W.D. Pa. Sept. 19, 2006) (Ambrose, J.)

SEPTEMBER 2006 BAD FAITH CASES
PLAINTIFF SUFFICIENTLY ALLEGED BAD FAITH TO WITHSTAND DISMISSAL (Philadelphia Federal)

Plaintiffs, an insured and its corporate officers, filed against Defendant insurer claims for breach of contract and bad faith refusal to defend in litigation in Pennsylvania, Delaware and Texas.  Defendant moved to dismiss Plaintiff’s bad faith claims under Federal Rule of Civil Procedure 12(b)(6).

The United States District Court for the Eastern District of Pennsylvania stated that to assert a viable bad faith claim, Plaintiff must allege two elements:  (1) that the insurer lacked a reasonable basis for denying benefits; and (2) that the insurer knew or recklessly disregarded its lack of reasonable basis.  Because the Court looked to the allegations on the face of Plaintiff’s Complaint and found Plaintiff had alleged the requisite facts, Defendant’s motion to dismiss the bad faith counts was denied.

Plaintiffs had alleged that the carrier had refused to pay the underlying defense costs in two of three actions brought against the insureds; that it lacked a reasonable basis in law or fact for denying coverage in those cases; that it knew or should have known that it had a duty to defend as a matter of law; and that this constituted bad faith.  This was sufficient to withstand summary judgment, though the Court stated that the issue of reasonableness could be revisited on a summary judgment motion after the end of discovery.

Date of Decision:  September 14, 2006

MP III Holdings, Inc. v. The Hartford, United States District Court for the Eastern District of Pennsylvania, No. 05-1569, 2006 U.S. Dist. LEXIS 65667 (E. D. Pa. Sept. 14, 2006) (Shapiro, J.)

SEPTEMBER 2006 BAD FAITH CASES
COURT REVIEWS THE DEFINITION OF “INSURER” UNDER BAD FAITH STATUTE (Western District)

Plaintiffs asserted statutory bad faith and breach of contract claims against a doctor and the claims administrator for a co-defendant disability insurance carrier.  The claims administrator defendant was allegedly acted as the disability carrier’s agent and was allegedly involved in denying Plaintiff’s claim.  Defendants argued that the claims against them must be dismissed because they are not “insurers” and  Pennsylvania’s bad faith statute only applies to “insurers.”

The United States District Court for the Western District of Pennsylvania did an extensive analysis of the case law on the subject of defining “insurer”, as no controlling rule had issued from Pennsylvania’s Supreme Court.  The Court stated that the question is one of fact, to be decided first by assessing whether the defendant is an “insurer” as defined by the Insurance Act of 1921, as amended, 40 P.S. § 221.3.  The inquiry, however, should not stop there.

The Court opined that two additional factors must be considered: (1) the extent to which the company was identified as the insurer of the policy documents; and more important (2) the extent to which the company acted as an insurer.

The Court observed that prior case law provided for the concepts that (1) even a true insurance carrier might not be an “insurer” if it was not part of the contract of insurance; but that (2) it might assume a duty as an insurer by its conduct even though otherwise not a party.

Thus, the court found that there is no simple rule for determining who is an insurer for purposes of the Pennsylvania Bad Faith statute.  It ruled that dismissal of Plaintiffs’ claims against the claims administrator defendant allegedly acting as an agent, which was involved in a claim denial, was premature, as discovery was needed to determine whether it was an “insurer” based on the aforementioned analysis.

However, the Court did dismiss Plaintiff’s bad faith claim against one of the other defendants, Dr. Keller, because Plaintiffs never alleged that he was an insurer under the statute, or that he had made any decision with respect to their claims for benefits.

Date of Decision:  August 29, 2006

Chu v. Disability Reinsurance Mgmt. Servs., United States District Court for the Western District of Pennsylvania, No. 06-91E, 2006 U.S. Dist. LEXIS 61244 (W.D. Pa. Aug. 29, 2006) (Cohill, J.)

This case placed significant reliance on Brown v. Progressive Insurance Company, 860 A.2d 493 (Pa. Super. 2004), appeal den’d, 582 Pa. 714, 872 A.2d 1197 (2005) and SEPTA v. Holmes, 835 A.2d 851 (Pa. Commw. Nov. 13, 2003), appeal den’d, 577 Pa. 738, 848 A.2d 930 (2004)

Compare however, Kvaerner U.S. Inc. v. OneBeacon Insurance Company, April Term 2003, No. 940, 2003 Phila. Ct. Com. Pl. LEXIS 45 (Sept. 29, 2003) (Sheppard, J.) (“Bad faith claims against insurance agents, claims representatives, peer review physicians have been found to be impermissible under § 8371.”  In that case, a third party claims administrator was not an insurer under section 8371 and was not subject to such a claim.)

SEPTEMBER 2006 BAD FAITH CASES
CUMULATIVE EFFECT OF CONDUCT, INCLUDING MISLEADING OWN COUNSEL, SHOWS BAD FAITH (Philadelphia Common Pleas)

Plaintiff originally filed a first-party underinsured motorist claim against AMEX, which AMEX later refused.  Plaintiff brought suit against AMEX alleging, among other things, bad faith under Pennsylvania’s bad faith statute.  Specifically, AMEX was aware of Plaintiff’s undisputed, correctly filed lost wages claim, yet AMEX withheld the undisputed compensation without showing any reasonable basis for doing so.

Additionally, despite estimates by AMEX’s counsel and AMEX itself, that the value of the claim was approximately $50,000, AMEX never increased its offer beyond an initial $32,180.

Philadelphia’s Court of Common Pleas held that while such tactics as delaying payments, withholding the full amount of damages, compelling the insured to seek arbitration, and making an offer substantially less than what was ultimately awarded may not, in and of themselves, constitute bad faith, the cumulative effect of AMEX’s conduct shows beyond a clear and convincing standard that AMEX exhibited bad faith.  Among other behavior found to be colored with bad faith was AMEX agreeing to the selection of an arbitrator whom its counsel described as a “strong advocate for the defense.”

The Court rejected AMEX’s defense that it reasonably relied upon the advice of its counsel in handling Plaintiff’s claim, as the evidence showed that Defendant misled its own counsel in a letter expressing an alleged settlement impasse.  The Court accordingly held that AMEX exhibited bad faith conduct in breaching its fiduciary duty to its insured.

Date of Decision:  August 30, 2006

Zappile v. AMEX Assur. Co., November Term 2004, No. 3881, 2006 Phila. Ct. Com. Pl. LEXIS 357 (C.C.P. Philadelphia 2006) (Lynn, J.)

This case was subsequently reversed on appeal by the Superior Court (Superior Court’s Opinion).

SEPTEMBER 2006 BAD FAITH CASES
ERISA PRE-EMPTS PENNSYLVANIA’S BAD FAITH STATUTE (Philadelphia Federal)

Plaintiff’s complaint consisted of eight counts, including a bad faith claim under Pennsylvania’s bad faith statute, all arising from an employment dispute resulting in ineligibility for group health insurance.  The Court noted that although there is a private right of action directly under Pennsylvania’s bad faith statute, those claims are still pre-empted by ERISA.

The United States Supreme Court has declared that any state-law cause of action that duplicates, supplements or supplants the ERISA civil enforcement remedy conflicts with the clear Congressional intent to make the ERISA remedy exclusive and is therefore pre-empted.

The Court also noted that the Third Circuit specifically held that ERISA pre-empts Pennsylvania’s bad faith statute.

Date of Decision:  September 11, 2006

Olick v. Kearney, United States District Court for the Eastern District of Pennsylvania , Civil Action No. 06-1531, 2006 U.S. Dist. LEXIS 64580 (E.D. Pa. 2006) (Katz, J.)

SEPTEMBER 2006 BAD FAITH CASES
BAD FAITH CLAIMS UNDER PENNSYLVANIA’S BAD FAITH STATUTE CANNOT REST ON INSURERS EXACTING HIGHER PREMIUMS (Middle District)

Liberty Mutual brought suit against Muskin to recover retrospective premiums allegedly owed under a series of workers’ compensation policies.  Muskin counterclaimed, seeking bad faith damages pursuant to Pennsylvania’s bad faith statute based on Liberty Mutual’s attempt to collect retrospective premiums, alleging that this was not allowed under the policy.

Liberty Mutual moved to dismiss the bad faith claims arguing, among other things, that a bad faith claim premised on extracting a higher premium is not actionable under Pennsylvania’s bad faith statute.

The United States District Court for the Middle District of Pennsylvania considered current case law and agreed with Liberty Mutual, ultimately dismissing the bad faith claim.  After noting that a bad faith claim under Pennsylvania’s bad faith statute cannot rest on an insurer exacting higher premiums, the Court found that because Muskin did not allege Liberty Mutual denied benefits, as required by the statute, there was no such cause of action against Liberty Mutual.

Date of Decision:  September 13, 2006

Liberty Mut. Ins. Co. v. Muskin Leisure Prods., U.S. District Court for the Middle District of Pennsylvania, No. 3:CV-05-0253, 2006 U.S. Dist. LEXIS 65271 (M.D. Pa. 2006) (Vanaskie, J.).

SEPTEMBER 2006 BAD FAITH CASES
ATTORNEY’S FEES NOT RECOVERABLE IN DECLARATORY JUDGMENT ACTION IF PLAINTIFF HAS NOT ALLEGED INSURER BAD FAITH (Western District)

The carrier asserted that attorney’s fees could not be granted to a plaintiff which had not averred bad faith in the Complaint.  The United States District Court for the Western District of Pennsylvania stated that Pennsylvania case law entitles a party to attorney’s fees in connection with a declaratory judgment action only if two requirements are met:  (1) the party seeking to recover attorney’s fees defended against or prosecuted the insurer in a declaratory judgment action to determine the insurer’s duties to defend and indemnify the insured in an action by a third party; and (2) the insurer failed to indemnify the party seeking to recover attorney’s fees in bad faith.

After reviewing the Complaint, the court found that Plaintiffs had failed to allege any facts that established bad faith on the part of the insurer.  Accordingly, the court granted Defendants’ motion to dismiss as to the issue of attorney’s fees.

Date of Decision:  August 31, 2006

E.P. Bender Coal Co. v. Chubb Group of Ins. Cos., U.S. District Court for the Western District of Pennsylvania,  No. 05-216 J, 2006 U.S. Dist. LEXIS 62607 (W.D. Pa. Aug. 31, 2006) (Gibson, J.)

SEPTEMBER 2006 BAD FAITH CASES
NO BREACH OF CONTRACT, AND SO NO BAD FAITH, WHEN DECEDENT DID NOT ACCEPT TERMS OF LIFE INSURANCE POLICY WHILE ALIVE (Western District)

A widow brought an action against the insurer claiming that she was entitled to life insurance benefits under a policy for which her deceased husband had applied, alleging that the insurers breached the contract in bad faith.

The United States District Court for the Western District of Pennsylvania stated that in Pennsylvania, if a decedent did not fulfill the requirement of remitting the first premium payment while there was no change in his health, the insurance policy does not go into effect, and the insurer has no contractual obligation to provide insurance coverage to decedent upon his death.

In the instant case, the carrier offered decedent a policy of insurance, but the decedent did not accept the terms of the policy while he was still alive by signing the delivery documents and paying the premium.  Accordingly, because there was no insurance policy in effect at the time of decedent’s death, the court held that Plaintiff could not establish a prima facie case under Pennsylvania’s bad faith statute.

Date of decision:  September 1, 2006

Tate v. U.S. Fin. Life. Ins. Co., U.S. District Court for the Western District of Pennsylvania, No. 02:04cv0820, 2006 U.S. Dist. LEXIS 62603 (W.D. Pa. 2006) (McVerry, J.)

SEPTEMBER 2006 BAD FAITH CASES: NO INSURER BAD FAITH PERMITTED WHEN THE INSURED ENTITY WAS DEEMED RESPONSIBLE FOR FALSE REPRESENTATIONS ON INSURANCE APPLICATION (Philadelphia Federal)

The carrier sought a declaration that the missionary (1) was not Defendant’s employee at the time of an accident and (2) made material misrepresentations, and thus was not entitled to coverage under a worker’s compensation policy.  The Church counterclaimed that American Home’s attempt to rescind the policy constituted bad faith in violation of Pennsylvania’s Bad Faith Statute.

The United States District Court for the Eastern District of Pennsylvania stated that an insurer may rescind an insurance policy if (1) the application contained a false representation; (2) material to the insured risk; and (3) the insured knew the representation was false, or made the representation in bad faith.

The court found that the Church failed to review and correct information which fell in the false representation/bad faith category on the relevant insurance applications.  Thus, American Home had the right under Pennsylvania law to rescind.

Since the court found in favor of American Home on its rescission claim, Defendants could not demonstrate by clear and convincing evidence that American Home did not have a reasonable basis for bringing that claim, thus finding no bad faith on the part of the insurer.

Date of Decision:  September 6, 2006

American Home Assurance Company v. Church of Bible Understanding, United States District Court for the Eastern District of Pennsylvania, Civil Action No. 03-6052, 2006 U.S. Dist. LEXIS 63859 (E.D. Pa. Sept. 6, 2006) (Kauffman, J.)