Monthly Archive for May, 2007

MAY 2007 BAD FAITH CASES
PHILADELPHIA COMPULSORY ARBITRATION CASE REMANDED AFTER REMOVAL BY INSURER TO FEDERAL COURT, BECAUSE INITIAL CLAIM WAS LIMITED TO $50,000 (Philadelphia Federal)

Published on May 24, 2007 in PA - Removal & Remand. Closed

In Punzak v. Allstate Insurance Company, the U.S. District Court for the Eastern District of Pennsylvania was presented with the common scenario of a carrier’s removing a case from the Philadelphia Court of Common Pleas’ Compulsory Arbitration Program, which has a maximum jurisdictional limit of $50,000, even though federal jurisdiction requires an amount-in-controversy of at least $75,000.  The insureds moved to remand the case to state court.  They argued that removal was improper because the case did not meet the minimum amount-in-controversy.  The insurer countered that the insureds could conceivably recover in excess of $75,000 if they succeeded on their contract claim, their bad faith claim (which sough punitive damages), and for attorneys fees.

Judges in the Eastern District have come to different conclusion in remanding or retaining jurisdiction.  Some have remanded these cases, reasoning that the insured effectively limited their recovery by agreeing to try their case in the arbitration program. (see, e.g., Valley v. State Farm; McFadden v. State Farm)  Other Judges have refused to remand the cases because the insured could recover in excess of $50,000.00 if awarded punitive damages and attorneys’ fees  (see, e.g., Howard v. Allstate, October 2006 archive on this site).  In this case, the Judge ruled that the case should be remanded because the damages clause of the Plaintiff’s Complaint sought damages “not in excess of $50,000.00.”

Date of Decision: April 16, 2007

Punzak, et al. v. Allstate Insurance Company, United States District Court for the Eastern District of Pennsylvania, No. 07-1052, 2007 U.S. Dist. LEXIS 28574 (E.D. Pa. April 12, 2007) (McLaughlin, J.)

MAY 2007 BAD FAITH CASES
INSURER DID NOT ACT IN BAD FAITH IN DENYING HOMEOWNER’S CLAIM FOR DAMAGES TO PLUMBING CAUSED BY NORMAL DETERIORATION OF PIPE (Philadelphia Federal)

Published on May 22, 2007 in PA - Claims Handling (reasonable) and PA - Coverage Issues. Closed

The Plaintiffs were insured under a homeowner’s policy they purchased from the Defendant.  The policy insured against “accidental direct physical loss” to their home.  Plaintiffs made a claim for damages under the policy after learning they needed to replace a drain pipe in their bathroom.  Since the Plaintiff’s home was built on a concrete slab and the drain pipe was contained within the concrete slab, the plumbers Plaintiffs hired to replace the pipe were forced to rip up the carpeting, break up the concrete slab and expose the pipe.

Defendants denied coverage for the water damage stating that the insurance policy did not extend to plumbing that was being replaced due to wear, tear or deterioration.  As a result, Plaintiffs filed an action alleging that defendants acted in bad faith and breached the insurance contract.  Both Plaintiff and Defendant filed motions for summary judgment.

In reviewing these motions, the Court held that Plaintiffs failed to present evidence that Defendants breached the insurance contract.  The Court found that the insurance contract was intended to insure Plaintiffs against unexpected physical damage to their house and personal property.  The Plaintiffs losses, however, were due to normal wear and tear and were not unexpected.  The fact that the pipe was difficult to get to was a result of the construction of the property and therefore the costs of the repairs are not covered under the policy.

The Court also held that Plaintiffs failed to present evidence showing that Defendant acted in bad faith.  The Court found that Defendant conducted an adequate investigation and denied the claim based on a reasonable interpretation of the policy language.

Defendants sent an adjuster to Plaintiffs’ home nine days after the claim was made and spoke to the plumbers who did the repair work.  The Defendant then sent Plaintiffs a letter outlining the reasons for the denial and citing the applicable policy provisions.  Because Plaintiffs failed to show that Defendant lacked a reasonable basis for denying their claim and failed to establish claim for bad faith, the Court granted judgment in favor of Defendant.

Date of Decision:  May 8, 2007

McMahon v. State Farm Mutual Automobile Insurance Company, United State District Court for the Eastern District of Pennsylvania, CV-06-34137, 2007 U.S. Dist. LEXIS 34137 (E.D. Pa. May 8, 2007)(Kelly, J.)

MAY 2007 BAD FAITH CASES
INSURED ENTITLED TO CONSEQUENTIAL DAMAGES ALTHOUGH NO BAD FAITH FOUND ON PART OF INSURER (Philadelphia Commerce)

Published on May 21, 2007 in PA - Attorney's Fees, PA - Common Law Bad Faith (contractual or fiduciary basis), PA - Late notice, PA - Limitations Period, PA - Negligence not bad faith and PA - Punitive Damages. Closed

The Philadelphia Court of Common Pleas, Commerce Court, issued a written opinion relative to the cross appeals of plaintiff and defendant of the court’s order denying plaintiff’s post trial motions for pre-judgment interest, punitive damages and attorneys fees.  The court had previously granted defendant’s motion for remittitur and ordered plaintiff’s damages reduced from $4 million to $2,049,000.  Plaintiff also appealed that order.

The case arises from plaintiff’s ownership of an office building, which defendant insured.  Plaintiff leased the building to Medic.  Medic made structural changes to  the building to accommodate a CT scanner and MRI unit.  Plaintiff also spent $1.4 million to renovate the building to accommodate this equipment.  Upon termination of the lease, Medic was required to either leave the equipment in working order, replace it with like kind or restore the building to its original conditions.

In November 1998, Tenant took over Medic’s lease with Plaintiff.  In November 2000, Tenant notified Plaintiff it planned to terminate the lease on March 30, 2001.  When a principal of the Plaintiff visited the building on March 15, 2001, Tenant had abandoned the property but did not remove the MRI unit and CT scanner.  Tenant had left the property in a shambles and the building was then vandalized and the equipment stolen.  Tenant ceased paying rent on April 1, 2001.  Plaintiff attempted to re-let the building, but was unsuccessful.

Plaintiff filed suit against Tenant for damages, but before it was able to recover from this suit, the property was foreclosed upon.  At sheriff’s sale, the building sold for $1.8 million.  On May 30, 2003 the jury awarded damages to the Plaintiff, but the amount awarded was well short of  the amount necessary to cover Plaintiff’s losses.  Plaintiff, therefore submitted a claim to Defendant insurance carrier.

Defendant denied coverage and Plaintiff instituted a claim for bad faith and damages.  A jury awarded Plaintiff $4 million dollars in damages.  A bench trial was held regarding Plaintiff’s bad faith claims and the court held that although it felt the Defendant had not acted appropriately, it denied Plaintiff’s bad faith claim.

In post trial motions, the court found that Defendant was not entitled to a new trial based on Plaintiff’s expert’s testimony regarding Defendant’s alleged bad faith.  In addition, the court held that Defendant was not entitled to a new trial based on the jury’s award of $4 million in damages although Plaintiff only asked for $3.3 million.

The court found that in a first-party insurance claim, the insured Plaintiff is not denied the right to obtain consequential damages.  The court relied on the fact that the defendant was so close to acting in bad faith that Plaintiff was entitled to consequential damages.

In addition, the court held that Plaintiff’s claim was not barred for failure to promptly notify Defendant of the loss.  Although the Plaintiff waited over a year to notify Defendant of the loss, the court found that the late notice did not prejudice Defendant.

The court also found that Plaintiff’s claims were not barred for failure to institute suit within the two year time limit specified by the policy as Plaintiff was induced to forbear bringing a lawsuit within the two year period because Defendant was still investigating the claim.

Finally the court found that Plaintiff was not entitled to pre-judgment interest, punitive damages or attorneys fees because the damages were not specific enough to warrant an award of pre-judgment interest and because the court did not make a finding of bad faith.

Date of Decision:  April 26, 2007

Prime Medica Associates v. Valley Forge Insurance Company, November Term 2004, No. 621, No. 0621, 2007 Phila Ct. Com. P. LEXIS 122  (C.C.P. Philadelphia April 26, 2007)(Sheppard, J.) (Commerce Program)

MAY 2007 BAD FAITH CASES
COURT DENIES EXTENDING REQUIREMENT THAT INSURER ESTABLISH PREJUDICE FROM INSUREDS FAILURE TO COMPLY WITH CONSENT TO SETTLE PROVISION (Western District)

Published on May 17, 2007 in PA - Claims Handling (unreasonable) and PA - Settlement related issues. Closed

 

In Voest Alpine Industries, Inc. v. Zurich American Insurance Co., the insured filed a motion for summary judgment based on two propositions: (1) that Pennsylvania law requires an insurer to establish prejudice in order to rely on an insured’s failure to comply with a consent-to-settle provision; and (2) that the insurer breached its duty to investigate coverage for a settlement which the insured tendered for indemnification in a separate suit.

As to the first proposition, the court noted that although the Third Circuit has noted that Pennsylvania Courts have readily applied the prejudice requirement in a variety of insurance settings, applying the prejudice requirement to all insurance policies issued within Pennsylvania had no basis in Pennsylvania law or public policy.  The court noted that the Pennsylvania Supreme Court has “consistently . . . taken a cautionary approach when considering whether to invalidate provisions of a private contract on the ground of public policy.”

As to the second proposition, the court found that it was premature to rule on the insurer’s duty to investigate the claim promptly before denying the consent to settle.  The court noted that an insurer has an obligation to investigate the reasonableness of a settlement proposed to its insured by a third party.  However, it also noted that a claim for a breach of a failure to investigate before denying the consent to settle cannot create coverage where coverage never existed pursuant to the policy.

The court opined that while the insured’s claim for breach of the duty to investigate coverage for the settlement may “ultimately prove to be germane to its claim for bad faith [denial of coverage], an assessment of this prong of [the insured’s] summary judgment motion cannot conclusively resolve any claim in this litigation at this point in time.”  This was because any potential damages flowing from the failure to investigate the claim before denying the consent to settle is interwoven with the success of the insured’s bad faith claim, for which a jury demand existed.  Therefore, the court denied the insured’s motion for summary judgment.

Date of Decision:  April 20, 2007

Voest Alpine Industries, Inc. v. Zurich American Insurance Co., United States District Court for the Western District of Pennsylvania, No. 2:02cv1605, 2007 U.S. Dist. LEXIS 29374 (W.D. Pa. April 20, 2007) (Cercone, J.)

MAY 2007 BAD FAITH CASES
COURT DISMISSES BAD FAITH CLAIM SUA SPONTE WHERE INSUREDS FAIL TO IMPLICATE FEDERAL RIGHTS AND FAIL TO MEET AMOUNT IN CONTROVERSY REQUIREMENT (Middle District)

Published on May 16, 2007 in PA - Procedural Issues. Closed

The insureds sought coverage when their inflatable swimming pool “split suddenly and without warning,” causing 3,000 gallons of water to enter their basement.  The insureds’ homeowners’ insurance policy contained a policy exclusion for damage caused by surface water, and therefore the insurer denied coverage.

The insureds filed a complaint in federal court alleging breach of contract, violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law, and violation of the Pennsylvania Insurance Bad Faith Statute.

However, the insureds only alleged damages of approximately $11,000.00.  Therefore, although the insurer did not move to dismiss for lack of subject matter jurisdiction, the court dismissed the insureds’ complaint sua sponte because the claims raised did not implicate federal rights or obligations, and the amount in controversy did not exceed $75,000.00.

Date of Decision:  April 17, 2007

Sieger v. Nationwide Mutual Ins. Co., United States District Court for the Middle District of Pennsylvania, No. 1:06-CV-2228, 2007 U.S. Dist. LEXIS 28246 (M.D. Pa. April 17, 2007) (Conner, J.)

 

MAY 2007 BAD FAITH CASES
COURT RECONSIDERS PRIOR ORDER TO PRODUCE ALLEGEDLY PRIVILEGED DOCUMENTS FROM LEGAL COUNSEL (Middle District)

Published on May 11, 2007 in PA - Attorney Client Privilege and PA - Work Product. Closed

In Pengate Handling Systems, Inc. v. Westchester Surplus Lines Insurance, the Court reconsidered its prior decision (summarized in the March 2007 Archive on this site) requiring an insurer to produce allegedly privileged documents.  In the first decision, Judge Rambo found that the insurance carrier failed to show that “the attorney involved was acting solely in his professional capacity as a lawyer at all times and that a number of the communications at issue are not shielded by the attorney-client privilege.” Essentially the attorney was treated as a claims investigator, rather than a legal advisor.  The court had framed the issues as “whether Defendant may withhold the discovery sought by Plaintiff by asserting the attorney-client and work product privileges.

The attorney-client inquiry turns on whether Defendant’s attorney was acting in a legal capacity, while the work product inquiry depends upon whether documents were prepared in anticipation of litigation.”  In this later decision, the court did not explicitly change its ruling; however, following an in camera inspection of some documents that the carrier was asserting were privileged, the court found certain documents to “clearly constitute communications that fall within…the attorney-client privilege.”

The Court did not state that these documents were clearly privileged because the attorney was acting as a “lawyer” as opposed to an “adjuster”;  or whether some adjuster-type communications made by attorneys are still protected by the privilege.

Date of Decision:  April 20, 2007

Pengate Handling Systems, Inc. v.  Westchester Surplus Lines Ins. Co., United States District Court for the Middle District of Pennsylvania, No. 06-00993, 2007 U.S. Dist LEXIS 29290 (M.D. Pa. April 20, 2007) (Rambo, J.)

MAY 2007 BAD FAITH CASES
BAD FAITH CLAIM DISMISSED SINCE GENERAL CONTRACTOR NOT NAMED AS AN ADDITIONAL INSURED DUE TO PROPERTY USE EXCLUSION(Middle District)

Published on May 10, 2007 in PA - No coverage duty, no bad faith. Closed

A new model home was destroyed by a fire allegedly due to the negligent installation of a gas fire place.  The subcontractor who had installed the fire place was insured by Penn National.  Citing to an indemnification provision in the agreement between the general contractor and the subcontractor, the general contractor argued that it was an additional named insured under the subcontractor’s insurance policy and submitted a claim to Penn National for defense and indemnification due to litigation stemming from the fire.

Penn National denied the claim.  The general contractor subsequently filed suit against Penn National asserting, among other claims, a bad faith claim.  The United States District Court for the Middle District of Pennsylvania the District Court, however, adopted the findings of the Magistrate Judge and held that the general contractor was not entitled to coverage under a subcontractor’s insurance policy.

The Court held that the general contractor was not an additional named insured under the Policy.  Further, the Court opined, that the general contractor was not entitled to coverage under the automatic additional insureds endorsement under the policy because the policy also contained an exclusion for property damage occurring after that portion of the work “which the injury or damages arises has been put to its intended use by any person or organization other than another contractor or subcontractor engaged in performing operations for a principal as part of the same project.”

Finding that the owner of the home had already put the gas fire place to use, the Court held that the policy exclusion applied and dismissed the general contractor’s bad faith claim against Penn National.

Date of Decision: April 20, 2007.

Penn National Insurance Company v. HNI Corp., No. 1:05-cv-2096, 482 F. Supp. 2d, 568, 2007 U.S. Dist. LEXIS 29291 (M.D. Pa. April 20, 2007) (Jones III, J.)