Monthly Archive for September, 2010

SEPTEMBER 2010 BAD FAITH CASES
BAD FAITH CLAIM NOT PERMITTED TO BE AMENDED TO A CLASS ACTION SUIT AFTER THE DISCOVERY DEADLINE PASSES (Western District)

In Graham v. Progressive Direct Insurance Company, one insured was in an automobile accident with another driver, who had failed to stop at a stop sign and collided with the insured’s vehicle and caused her injuries.  The other driver was underinsured, and her insurer concluded that it was her fault.  The driver’s insurer paid the insureds (the female who was not at fault and her husband) its policy limits in exchange for a release of future claims, but the insureds reserved their right to pursue a claim for underinsured motorists benefits under their policy with their insurer, a “stacked policy” under which the policy limits were $500,000.

The insureds made an underinsured motorists claim to their insurer, and the insurer offered them $55,000 over two months later.  The insureds filed a Complaint alleging bad faith on the part of the insurer, asserting that it waited too long to offer a settlement and it offered a value far less than a fair and reasonable amount.  Among the bad faith arguments was that the insurer removed an un-insured/underinsured arbitration clause from the policy without a corresponding reduction in premium or providing notice.

After the deadline for discovery passed, the insureds filed an a Motion for Leave to File a Second Amended Complaint, attaching a Proposed Second Amended Complaint.  They attempted to change the action from an individual action against their insurer to a class action suit against their insurer, where the plaintiffs were all Pennsylvania residents who purchased an auto policy from the insurer which included an arbitration provision wherein that provision was eliminated from the policy at renewal without notice as required by Pennsylvania state law.  The insurer opposed this motion, and the court’s opinion addressed the issue of whether the insured could convert the action to a class action suit.

The court analyzed the motion under Rules 16 and 15 of the Federal Rules of Civil Procedure.  Rule 16 authorizes a district court to enter orders for deadlines for discovery, amending pleadings, and the joinder of parties.  The rule states that a “schedule may be modified only for good cause and with the judge’s consent.”  The court determined that the insureds had not demonstrated that they acted diligently in pursuing the proposed class action claims, and they failed to establish good cause for the court to amend its prior orders.  Rule 16, therefore, could not permit the action to proceed as a class action.

Rule 15 permits a plaintiff to “amend its pleading only with the opposing party’s written consent or the court’s leave.  The court should freely grant leave when justice so requires.”  Here, the insurer successfully demonstrated to the court that the insured has unduly delayed the filing of its Proposed Second Amended Complaint, and that it would be prejudiced if the amendment was permitted after the close of discovery.  Rule 15 also would therefore not permit the class action to proceed.  Because Rules 16 and 15 both weighed against amending their Complaint to a class action suit, the court denied the insureds’ Motion for Leave to File a Second Amended Complaint.

Date of Decision:  September 15, 2010

Graham v. Progressive Direct Ins. Co., Civil Action No. 09-969, United States District Court for the Western District of Pennsylvania, 2010 U.S. Dist. LEXIS 96324 (Sept. 15, 2010) (Fischer, J.)

SEPTEMBER 2010 BAD FAITH CASES
COURT DISMISSES BAD FAITH CLAIM WHERE INSURER MADE THE CORRECT DECISION CONCERNING THE ISSUE THAT GAVE RISE TO THE SUIT (Middle District)

In Amica Mutual Insurance Company v. Fogel, the insureds owned an automobile insurance policy with the insurer which included underinsured motorist coverage of $300,000 for each accident.  After obtaining the policy, the insureds moved from New Jersey to Pennsylvania, whereupon they requested that the policy be adjusted to a Pennsylvania policy or they be issued a new one.  The insurer notified the insureds that it would not issue a Pennsylvania automobile insurance policy until the husband obtained a Pennsylvania driver’s license and registered his vehicles in Pennsylvania.  The insurer did bill the insured for premiums at the Pennsylvania address even though the insureds had not changed their licenses and registrations yet.

Before he obtained a Pennsylvania license, the husband insured and three of his children were in a car accident in Pennsylvania, killing one of his daughters.  There was a dispute whether Pennsylvania law (where the insureds resided) or New Jersey law (the law of the state where the policy was formed) should apply.  Under Pennsylvania law, the two insureds’ $300,000 limits for coverage would be stacked, and the total coverage for the accident would be $600,000.  However, under the policy and New Jersey law, the coverage would be limited to $300,000.  The insurer paid the insureds $200,000, which represented the undisputed $300,000 owed to them minus the $100,000 that the accident-causer’s insurer paid (under New Jersey law, an insurer is entitled to offset the amount of underinsured motorist benefits  it is obligated to pay against any amounts that the insured receives from other sources).

Because the insureds insisted that they were due $600,000, the insurer filed an action seeking a declaration that its obligations under the policy in effect at the time of the accident were those that it owed pursuant to the language of the policy and New Jersey law.  The insureds filed a motion for summary judgment and a counterclaim for bad faith.

In the insureds’ counterclaim, they alleged that the insurer failed adequately to investigate their claims, and that it improperly and unlawfully denied them benefits under the policy.  The court eventually determined that the insurer was correct in its determination that New Jersey law governed the policy.  Therefore, it would be impossible to hold that the insureds could proceed on a claim that alleged that the insurer’s claims adjuster engaged in bad faith by construing the Policy under New Jersey law.

The court also noted that “there exist numerous judicial decisions that offer varying degrees of support for the positions taken by both parties in this case,” and the fact that there is such a dispute means that the insurer could not be penalized for acting in bad faith when it was not clear that it should have made the opposite decision.  The magistrate judge therefore recommended that summary judgment be granted for the insurer on the bad faith claim.

Date of Decision:  June 7, 2010

Amica Mut. Ins. Co. v. Fogel, Civil Action No. 1:09-CV-674, United States District Court for the Middle District of Pennsylvania, 2010 U.S. Dist. LEXIS 89522 (June 7, 2010) (Carlson, U.S.M.J.)

The District Court issued an Opinion adopting the Report and Recommendation on July 29, 2010.

This case was affirmed on appeal.

SEPTEMBER 2010 BAD FAITH CASES
NO BAD FAITH WHEN THE INSURED FAILS TO COOPERATE; LONG TIME PERIOD BETWEEN DEMAND AND SETTLEMENT NOT NECESSARILY BAD FAITH (Western District)

In Tangle v. State Farm Insurance Companies, a fire occurred at the residential property owned by the insured.  The insured had a homeowner’s policy with the insurer.  The fire and police departments were suspicious as to the cause of the fire, as upon their entry, they noted a heavy odor of gasoline, and they determined that the fire had originated  in a second floor bedroom where they found evidence of a time delay ignition device and an accelerant.

Shortly after the insured visited the insurer’s office to make a claim, the police notified the insurer that the fire was being investigated as arson and that insured was a suspect.  The insurer retained a private fire investigator, who determined that the fire was “the direct result of an incendiary act” and was “aided by the use of an accelerant.”  The insurer’s investigator eventually held an examination under oath with the insured, but the insured failed to bring the requested documentation to the examination and allegedly did not provide it to the insurer after multiple other requests.

The insurer eventually paid the insured $46,459.62 for the value of the damaged property and the contents inside.  However, the insured had already filed a claim for breach of contract and bad faith, alleging that the insurer unreasonably delayed payment on the insurance contract for approximately 17 months.

The court first noted that under Pennsylvania law, a long period of time between demand and settlement does not necessarily constitute bad faith; so long as the delay occurs due to the need to investigate further or even because of simple negligence, no bad faith has occurred.  In this case, the record clearly showed that much of the delay was caused by the insured’s failure to cooperate with the insurer.  He failed to provide documents even after multiple requests, and he rescheduled his examination under oath many times before finally taking it.  The magistrate judge therefore concluded that the insurer reasonably delayed its payment, and she recommended that the insurer be granted summary judgment on the bad faith claim.

Date of Decision:  August 4, 2010 (Report and Recommendation), adopted August 30, 2010

Tangle v. State Farm Ins. Cos., Civil Action. No. 08-112 Erie, United States District Court for the Western District of Pennsylvania, 2010 U.S. Dist. LEXIS 89349 (Aug. 4, 2010) (Baxter, U.S.M.J.)

The Report and Recommendation was adopted by the Court.

SEPTEMBER 2010 BAD FAITH CASES
NO REINSTATEMENT OF BAD FAITH CLAIM IN MOTION FOR RECONSIDERATION WHEN INSUREDS FAIL TO ADDRESS BAD FAITH CLAIMS IN THEIR INITIAL COMPLAINT (Philadelphia Federal)

In 3039 B. Street Associates, Inc., v. Lexington Insurance Company, the insureds had a policy with the insurer for a property where it conducted its business.  One day, a frozen sprinkler pipe at the property burst, causing a flood.  The insurer paid the undisputed flooding damages but refused to pay for other disputed damages.

The insureds filed a claim against the insurer for breach of contract and bad faith.  They alleged that the insurer (1) withheld payment on the Policy for an unreasonable length of time; and (2) knowingly and recklessly disregarded a reasonable basis to pay real and personal property damages after frozen water caused the sprinkler pipe to explode in their commercial real estate property.

The insurer responded by arguing that (1) its investigation of the claim was proper and reasonable; (2) the insureds were paid the undisputed amount; and (3) pursuant to the Policy’s appraisal provision, the parties agreed to resolve continuing damages disputes through appraisal, which were since paid.  The court granted the insurer’s motion for summary judgment on the bad faith claims, and the insureds then filed a motion for reconsideration.

In its motion, the insureds listed eight issues for the court to consider, but these were all issues that either the court had ruled on in its previous opinion or new issues that were not allowed to be raised in a motion for reconsideration.  For example, in their initial bad faith claim and subsequent pleadings, the insureds failed to argue that the insurer acted in bad faith by failing to make advance payments on the policy, but they raised that issue on the motion for reconsideration.

Therefore, even though the court did make a factual error in its initial opinion by incorrectly stating that the insurer had advanced the insureds $50,000, the court’s legal conclusions were not impacted by the error because the insureds did not argue that the failure to advance money was a bad faith violation.

The court therefore granted the insureds’ motion for reconsideration to the extent that the factual error stating that the insurer advanced them $50,000 upon request would be corrected, but it denied the motion in all other respects and the bad faith claim was not reinstated.

Date of Decision:  August 27, 2010

3039 B St. Assocs. v. Lexington Ins. Co., Civil Action No. 09-1079, 740 F. Supp. 2d 671, United States District Court for the Eastern District of Pennsylvania, 2010 U.S. Dist. LEXIS 89533 (Aug. 27, 2010) (Robreno, J.)

SEPTEMBER 2010 BAD FAITH CASES
BAD FAITH ALLEGATION SURVIVES MOTION TO DISMISS WHEN INSURED ALLEGES A VIOLATION OF THE INDEPENDENT MEDICAL EXAMINATION PROCESS (Middle District)

In Hickey v. Allstate Property and Casualty Company, the insured owned an automobile insurance policy with the insurer for $100,000.  He was in a motor vehicle accident, and he suffered injuries to his neck and back.  The insured underwent physical therapy as a result of the injuries.  Almost two years after commencing the therapy, the insurer notified the insured that it would require an Independent Medical Examination before processing any further medical bills.  After the examination, the insurer notified the insured that it would no longer pay the bills.

The insured filed a Complaint in state court containing counts for breach of contract and bad faith.  After the case was removed to federal court on diversity, the insurer filed a motion to dismiss the Complaint’s bad faith count.  The motion was granted with respect to the allegations preempted by section 1797 of the Pennsylvania Motor Vehicle Financial Responsibility Law, but it was denied with respect to the allegation of the insurer’s abuse of the Peer Review Organization process.  The insurer then moved for reconsideration of the decision.

The insurer argued that the insured never alleged that it even used a peer review organization.  However, the court determined that the independent medical examination functioned as a peer review organization.  It also asserted that the insured’s claims did not allege an abuse of the independent medical examination process, but the court ruled that the allegations did sufficiently state a claim that the insurer violated the process.

Finally, the court disagreed with the insurer’s assertion that the remedies provided section 1797 of the Pennsylvania Motor Vehicle Financial Responsibility Law precluded any remedies under the Pennsylvania Bad Faith Statute.  Therefore, the court denied the insurer’s motion for reconsideration.

Date of Decision:  August 20, 2010

Hickey v. Allstate Prop. & Cas. Ins. Co., No. 3:10cv907, United States District Court for the Middle District of Pennsylvania, 2010 U.S. Dist. LEXIS 86086 (Aug. 20, 2010) (Munley, J.)

SEPTEMBER 2010 BAD FAITH CASES
NO REIMBURSEMENT FOR DEFENSE COSTS WHERE INSURER MOTIVATED TO AVOID POTENTIAL BAD FAITH BY DEFENDING UNDERLYING ACTION (Pennsylvania Supreme Court)

In this Pennsylvania Supreme Court case, the issue was whether the insurer was entitled to reimbursement of the amounts paid for the defense of its insured in the underlying lawsuit, following a court’s declaration that the insurer had no duty to defend the insured,.

The insured was a firearm wholesaler-distributor, and it was the defendant in a lawsuit where the plaintiff alleged that it negligently created a public nuisance due to its failure to distribute firearms reasonably and safely. The insurer defended the insured in the suit, but once the court determined that it was not required to do that, it asked the court for reimbursement of the fees it spent defending the suit.

The Supreme Court ultimately determined that an insurer is not entitled to be reimbursed for defense costs absent an express provision in the written insurance contract, and one of the reasons for the holding concerned bad faith law. It listed reasons that the insurer may have defended the insured for its own benefit, including protecting itself from a potential bad faith claim.

The Court noted that “bad faith damages are imposed where the insurer, with no good cause, refuses to provide a defense.” Therefore, the insurer could have faced a bad faith claim if a court eventually determined that it was required to defend the insured and it did not. Because the insurer was protecting its own interests in addition to the interests of the insured, the insurer was not entitled to reimbursement for the expenses of defending the insured.

Date of Decision: August 17, 2010

American & Foreign Insurance Co. v. Jerry’s Sport Center, Inc., 606 Pa. 584, 2 A.3d 526 (2010) (Baer, J.)

SEPTEMBER 2010 BAD FAITH CASES
NO STATUTORY BAD FAITH WHEN THE INSURER DOES NOT ACT UNREASONABLY, EVEN IF IT MAY HAVE BEEN INCORRECT IN INTERPRETING AN INSURANCE POLICY (Western District)

In Chebatoris v. Monumental Life Insurance Company, the insured was an obese woman with diabetes who owned a group accidental death life insurance policy with the insurer for $100,000.  She suffered a laceration to her lower leg in an accident at an amusement park, an a subsequent infection required multiple hospitalizations and treatments.  In November, the insured’s treating doctor indicated that she was improving during a hospital admission, but four days after that report, she passed away.  Her death was attributed to natural causes.

The daughter of the insured filed claims for payment of the life insurance policy, but they were denied.  The insurer asserted as reasons for denial that (1) the information did not show that the insured’s death resulted from accidental injury independent of all other causes, and (2) a policy exclusion for loss caused by sickness or disease applied to this situation.  The parties disputed whether the accidental laceration from the amusement park accident is a but-for cause of the death, and the insured’s daughter filed suit against the insurer.  The Complaint included claims for breach of contract, breach of the implied duty of good faith, and a violation of the Pennsylvania Bad Faith Statute, 42 Pa.C.S.A. § 8371.

The court first noted that the claim for breach of implied duty to act in good faith was subsumed into the breach of contract claim because the implied duty to act in good faith was part of the contract itself.  It denied the insurer’s Motion for Summary Judgment with respect to the breach of contract claim because the insured’s daughter’s allegations did state a claim for breach of contract.

The court then noted that a violation of 42 Pa.C.S.A. § 8371 only occurs when a plaintiff shows that the insurer did not have a reasonable basis for its action and acted knowingly or recklessly nonetheless.  It also stated that “if the insurer has a reasonable basis for denying or delaying payment of a claim, even if the basis is ultimately determined to be erroneous, it is not liable for a breach of the duty of good faith.”

While the court acknowledged that the insurer’s interpretation of the insurance policy may have been incorrect, it held that the insurer did not act unreasonable enough to support an award of damages for bad faith.  Therefore, the court granted the insurer’s Motion for Summary Judgment with respect to the claim for statutory bad faith.

Date of Decision:  August 23, 2010

Chebatoris v. Monumental Life Ins. Co., Civil Action No. 09-224, United States District Court for the Western District of Pennsylvania, 2010 U.S. Dist. LEXIS 86367, (W.D. Pa. Aug. 23, 2010) (Lenihan, U.S.M.J.)

SEPTEMBER 2010 BAD FAITH CASE
CONTRACTUAL BAD FAITH CLAIM SURVIVES DISMISSAL WHEN DISPUTE OVER WHETHER THE INSURER TRUTHFULLY PROVIDED INFORMATION TO THE INSURED (Philadelphia Federal)

In Wolk v. Westport Insurance Corporation, the insured was an attorney and his law firm, who had a pending suit against their professional liability insurer for failing to defend it against claims asserted against the firm in connection with its representation of a client in a state court lawsuit.  The dispute in this separate suit concerned the insurer allegedly retaliating against the insured by falsely reporting the cost of defending itself in the first action as a loss under the insurance policy, making it more difficult for the insured to find a replacement insurer.  The insured asserted claims for tortuous interference, disparagement, and contractual bad faith against the insurer.

While the court dismissed the insured’s claims for tortuous interference for failure to state a claim and commercial disparagement because the one-year statute of limitations had run, it denied the motion to dismiss the bad faith claim.  It noted that once the insurer undertook to provide the loss information, it was required to do so truthfully, and the parties disputed whether the insurer had actually truthfully provided the information.

Additionally, the court determined that it is not necessarily required that a claim for contractual bad faith, which is the equivalent of a claim for the breach of a contractual duty to act in good faith, be limited to situations where the insurer has defended or settled a claim on behalf of the insured; it was simply established that contractual bad faith claims most-often arise and are well-established in that context.

Date of Decision:  August 9, 2010

Arthur Alan Wolk & Arthur Alan Wolk Assocs. v. Westport Ins. Corp., Civil Action No. 09-cv-0998-JF, United States District Court for the Eastern District of Pennsylvania, 2010 U.S. Dist. LEXIS 81932 (E.D. Pa. Aug. 9, 2010) (Fullam, Sr., J.)

SEPTEMBER 2010 BAD FAITH CASES
BAD FAITH CLAIM SURVIVES MOTION TO DISMISS BECAUSE INSUREDS PROPERLY PLEADED VIOLATIONS OF PENNSYLVANIA’S BAD FAITH STATUTE (Middle District)

In Rice v. State Farm Fire and Casualty Company, the insureds owned a house that was covered by the insurer.  The policy allegedly covered both the property and the insureds’ personal property inside the dwelling.  A fire occurred in the house, and there was significant fire, smoke, and water damage to the insureds’ personal property located in the house.  They were displaced from their house, and although they demanded payment for the losses that have occurred, the insurer failed to pay them.

The insureds filed a Complaint with counts for breach of contract, bad faith, and a violation of the Unfair Trade Practices and Consumer Protection Law.  The insurer then filed a Motion to Dismiss all counts except for the breach of contract count.

In examining the bad faith claim at the pleading stage, the court noted established law that the insured must show that the insurer did not have a reasonable basis for denying benefits under the policy, and that it knew or recklessly disregarded its lack of reasonable basis in denying the claim.  It then determined that the insurer’s argument for dismissing the claim that there is no evidence that it acted in bad faith was not persuasive because the case was only at the pleading stage, where the insureds only must state a claim for bad faith.  Whether the evidence supports or refutes the insureds assertions should be determined at trial, not in a Motion to Dismiss.  Because the insureds’ Complaint contained multiple examples of how the insurer violated Pennsylvania’s bad faith statute, the bad faith count survived the Motion to Dismiss and proceeded to the next stage.

Date of Decision:  August 25, 2010

Rice v. State Farm Fire & Cas. Co., Civil Action No. 4: 10-CV-1280, United States District Court for the Middle District of Pennsylvania, 2010 U.S. Dist. LEXIS 87625 (M.D. Pa. Aug. 25, 2010) (McClure, Jr., J)

SEPTEMBER 2010 BAD FAITH CASES
NO BAD FAITH WHEN THE INSURER CORRECTLY INTERPRETS A POLICY BEFORE DENYING ADDITIONAL PAYMENTS TO THE INSURED (Philadelphia Federal)

In Caroselli v. Allstate Property & Casualty Insurance Company, the insurer issued a homeowner’s policy for the insured’s property.  The policy covered “sudden and accidental direct physical loss to property” up to $253,479.  The home was destroyed in a fire in June 2009, and the actual cash value loss was $284,752.02.  The insurer paid the policy limit of $253,479 but refused to pay the remainder of the cost of the loss.

The insured had purchased a Building Structure Reimbursement Extended Limits Endorsement, which under certain conditions increased the coverage to 120% of the original limit of liability.  The insurer would not pay the additional benefits under the endorsement unless he repaired, rebuilt, or replaced the dwelling within 180 days of the actual cash value payment, and the insured asserted that this was contrary to the policy’s language.  He filed a Complaint which contained claims for breach of contract, statutory bad faith, and a breach of the Pennsylvania Unfair Trade Practices and Consumer Protect Law (UTPCPL).

The court examined the language of the policy and determined that it clearly stated that absent repair or replacement within 180 days of the actual cash value payment, the insurer would pay actual cash value but would not exceed the limit of liability for the coverage that applies to the damaged, destroyed or stolen property, regardless of the number of items involved in the loss.  The insured had not repaired or replaced his property, so the insurer properly denied any further payments, and therefore there was no breach of contract.

Because the insurer correctly interpreted the policy, the court also dismissed the bad faith claim against it, as it had a reasonable basis to deny any additional payment to the insured.

Date of Decision:  Aug. 16, 2010

Caroselli v. Allstate Prop. & Cas. Ins. Co., Civil Action No. 10-1671, United States District Court for the Eastern District of Pennsylvania, 2010 U.S. Dist. LEXIS 83515 (E.D. Pa. Aug. 16, 2010) (Schiller, J.)