Monthly Archive for October, 2010

OCTOBER 2010 BAD FAITH CASES
BAD FAITH CANNOT EXIST WHEN INSUREDS BRING CLAIM FOR BREACH OF ANNUITY CONTRACTS INSTEAD OF INSURANCE CONTRACTS (Philadelphia Federal)

In Prusky v. Allstate Life Insurance Company, the insureds purchased annuity contracts from the insurer.  The contracts permitted the value invested to be apportioned in various subaccounts at the direction of the insureds, and the insureds were allowed to transfer assets between and among the subaccounts to take advantage of market fluctuations.

However, soon after the contracts were formed, the insurer began to impose different restrictions on transfers between accounts.  The insurer eventually notified the insureds that one of their subaccounts was closed to new premiums or transfers and that they would be restricted with new premium allocations and transfers into three other subaccounts to a maximum of $50,000 per day.

The insureds filed a Complaint, asserting that based on the contracts, the insurer was not permitted to impose transfer limitations on the annuity contracts.  They claimed that they were induced to purchase the annuity contracts by representations of the insurer that transfers would be unrestricted, and that the insurer knew that they would not have purchased the contracts had they not had the ability to have unlimited daily transfers among subaccounts.

The Complaint contained counts for breach of contract, fraud, and bad faith among other things.  The court determined that at the pleading stage, it was too early to dismiss the counts for breach of contract and fraud.

However, in addressing the bad faith claim, the court stated that Pennsylvania’s Bad Faith statute only provides remedies for an action arising under an insurance policy.  In this case, the insureds alleged that the insurer breached contracts for annuities, not insurance.  It held that “while annuities contracts are regulated by the Pennsylvania Insurance Commission, they are not insurance policies.”  It would be impossible to grant relief to an insured for an insurer violating the bad faith statute of the policy is not an insurance policy.

Therefore, the court had no choice but to grant the insurer’s motion to dismiss the bad faith count of the Complaint.

Date of Decision:  Sept. 30, 2010

Prusky v. Allstate Life Ins. Co., Civil Action No. 09-cv-05156, United States District Court for the Eastern District of Pennsylvania, 2010 U.S. Dist. LEXIS 105864 (Sept. 30, 2010) (Ditter, Jr., J.)

OCTOBER 2010 BAD FAITH CASES
CLAIMS NOT SUBJECT TO SECURITIES INDUSTRY ARBITRATION CLAUSE WHERE PLAINTIFF IS OUTSIDE POLICY LANGUAGE OF THOSE REQUIRED TO ARBITRATE (Allegheny County)

In Gialames v. Raymond James Financial Services, Inc., the plaintiff purchased and sold securities as an independent contractor of one of the defendants, a financial services organization.  Allegedly, there was an Errors and Omissions Group Liability Program administered by the insurer-defendant that insured the plaintiff against claims of wrongful conduct made against him while engaged in the purchase and sale of securities.  The plaintiff claimed that the insurer automatically deducted insurance premiums for the program from his commissions, but it failed to pay $426,985 in expenses from a wrongful conduct claim made against him that was covered by the program.

The plaintiff filed a Complaint with counts for breach of contract, breach of fiduciary duty, and insurer bad faith.  The insurer then filed preliminary objections to the Complaint, asserting that the plaintiff had signed an agreement to submit all claims against the defendant to arbitration rather than bring them to court, as long as the dispute arose “out of the business activities of a member or an associated person.”  The plaintiff argued that the definition of “business activities” was limited to conduct connected to activity actually regulated by the Financial Industry Regulatory Authority (FINRA).

The court agreed with the plaintiff but for different reasons.  The arbitration clause required disputes to be “between or among: Members; Members and Associated persons; or Associated Persons.”  It held that despite being extensively involved in the dispute, the insurer-defendant was not a Member or Associated person under the policy because neither party had alleged that it was.  Therefore, the court determined that the litigation was not within the scope of the agreement to arbitrate, and it allowed the breach of contract, breach of fiduciary duty, and bad faith claims to proceed.

Date of Decision:  June 7, 2010

Gialames v. Raymond James Fin. Servs., Case No. GD 09-16481, Common Pleas Court of Allegheny County, Pennsylvania, Civil Division, 2010 Pa. Dist. & Cnty. Dec. LEXIS 232 (June 7, 2010) (Hertzberg, J.)

OCTOBER 2010 BAD FAITH CASES
IN DISMISSING BAD FAITH COMPLAINT COURT SAYS: “DISCOVERY IS NOT PERMITTED AS A WAY FOR A PLAINTIFF TO SEE IF HE HAS A CAUSE OF ACTION.” (MIDDLE DISTRICT)

In Muth v. State Farm Fire & Casualty Company, the insured owned a fire and casualty insurance policy for his residential property.  A fire eventually damaged the property, and the insurer’s claims adjuster then sent Plaintiff a letter admitting coverage and stating that a partial payment was enclosed with the letter.  However, at the time of the suit, the insured had not been paid.

The insured filed a Complaint with counts for breach of contract and bad faith.  The bad faith allegation claimed that the insurer (1) had no reasonable basis to deny the insured’s claim, (2) failed to conduct a reasonable investigation into the claim, (3) failed to attempt to come to a fair and reasonable settlement of the claim when the liability was clear and (4) failed to promptly provide a reasonable explanation for denial of the claim.

The court determined that the Complaint failed to allege sufficient facts to state a bad faith claim.  It stated that all of the allegations were simply conclusory allegations.  The insured attempted to persuade the court that he should have the right to prove, after discovery, that bad faith has occurred when an insurer has not paid a covered loss for over a year.  However, the court rejected this assertion, stating that “discovery is not permitted as a way for a plaintiff to see if he has a cause of action.”  The court therefore dismissed the insured’s bad faith allegation.

Date of Decision:  September 22, 2010

Muth v. State Farm Fire & Cas. Co., Civil No. 1:cv-10-1487, United States District Court for the Middle District of Pennsylvania, 2010 U.S. Dist. LEXIS 99745 (Sept. 22, 2010) (Caldwell, J.)

OCTOBER 2010 BAD FAITH CASES
BAD FAITH CLAIM PRE-EMPTED BY ERISA (Western District)

In Jobe v. The Prudential Insurance Company of America, the insured was diagnosed in October, 2007 with long-standing relapsing multiple sclerosis causing fatigue and lack of endurance that interfered with her cognition and ability to work.  She filed a disability claim with the insurer about three weeks later.  Almost four months later, the insurer sent the insured a letter initiating a review of the insured’s claim.  In May, 2008, the insurer denied the insured’s claim for disability, as it had determined that she was not disabled after reviewing her medical records.  The insured promptly appealed the denial, and in November, 2008, the insurer finally approved the her claim.

The insured filed a Complaint with four claims: breach of contract, breach of the duty of good faith and fair dealing, violations of Pennsylvania’s insurance bad faith statute, and violations of Pennsylvania’s Unfair Trade Practices in Consumer Protection Law.

The court first dismissed the counts for breach of contract and breach of the duty of good faith and fair dealing.  The insured had filed for disability relating to an employee benefit plan, and the plan was governed by the Employee Retirement Income Security Act of 1974 (“ERISA”).  ERISA expressly preempts breach of contract claims (and claims for the breach of the duty of good faith and fair dealing, because they are subsumed with breach of contract claims) based upon claims related to benefits arising out of an employee benefit plan.

Concerning the bad faith claim, the insured alleged that the insurer violated legal duties that arose independently of ERISA and the terms of the employee benefit plan.  However, after an analysis of prior case law that said that the Pennsylvania Bad Faith Statute was preempted by ERISA, the court held that the insured could not proceed with a bad faith claim.  It therefore granted the insurer’s Motion to Dismiss the Complaint on all counts.

Date of Decision:  September 23, 2010

Jobe v. Prudential Ins. Co. of Am., Civil Action No. 10-684, United States District Court for the Western District of Pennsylvania, 2010 U.S. Dist. LEXIS 100429, (Sept. 23, 2010) (Conti, J.)

OCTOBER 2010 BAD FAITH CASES
BAD FAITH ALLEGATION DISMISSED WHEN THE INSURER CONDUCTS AN ADEQUATE INVESTIGATION BEFORE DENYING COVERAGE (Philadelphia Federal)

In Atiyeh v. National Fire Insurance Company of Hartford, the insured owned a real estate business that was covered by the insurer with a commercial insurance policy.  One day, the pipes in the insured’s building froze, causing damage to the building and the insured’s personal property.  The insured also suffered a loss from the interruption of his business.  The insured promptly notified the insurer of the damages.  After an investigation of the insured’s real estate and personal property, the insurer denied the insured coverage.

The insured filed a Complaint, containing counts for breach of contract and bad faith.  The court then dismissed the Complaint, but the bad faith count was only dismissed without prejudice.  The insured then filed an amended Complaint that only alleged a bad faith violation.  He claimed that the insurer falsely and fraudulently represented that he had not performed routine maintenance on the premises, when in reality the insurer knew or should have known that the premises were properly maintained.  In addition, the insured asserted that the insurer unreasonably refused to indemnify him for his loss.

In addressing this bad faith claim, the court acknowledged Pennsylvania case law, stating that to successfully plead bad faith, an insured’s allegations must “demonstrate that the insurer (1) lacked a reasonable basis for denying benefits and (2) knew or recklessly disregarded its lack of a reasonable basis.”  It then held that because the insured asserted that the insurer did actually perform an investigation before denying his claim, and no sufficient allegation it was done in bad faith, there is no possible bad faith.  Concerning the insured’s additional allegations that the insurer falsely represented that he had not maintained the premises and that it unreasonably refused to indemnify him for his loss, the court ruled that these were “bare-bones conclusory allegations which [did] not state a plausible bad faith claim.”  The court therefore the court granted the insurer’s Motion for Judgment on the Pleadings to dismiss the bad faith claim.

Date of Decision:  September 27, 2010

Atiyeh v. Nat’l Fire Ins. Co., Civil Action No. 07-cv-04798, United States District Court for the Eastern District of Pennsylvania, 742 F.Supp. 2d 591, 2010 U.S. Dist. LEXIS 102697 (Sept. 27, 2010) (Gardner, J.)

OCTOBER 2010 BAD FAITH CASES
BECAUSE NO INDEPENDENT CAUSE OF ACTION FOR BREACH OF IMPLIED DUTY OF GOOD FAITH, BAD FAITH ALLEGATIONS FALL WITHIN A BREACH OF CONTRACT CLAIM (Western District)

In Klay v. Axa Equitable Life Insurance Company, the insured was a cardiothoracic and vascular surgeon who purchased six disability insurance policies from the insurer in the 1980s.  When purchasing the policies, the insured was notified that if he could no longer perform his full and complete duties as a cardiothoracic and vascular surgeon, he would be considered totally disabled.

When the insured applied for life insurance in 2006, his application was denied because the results of his blood tests showed that he had diabetes, high cholesterol, high triglycerides, and hypertension.  In April 2007, the insured began to experience leg pain, and he eventually had to go to the hospital, where he was diagnosed with an acute pulmonary embolism.  His doctor told him to cut down on his working hours at that time.  Since then, the insured had been an insulin-dependent diabetic and has suffered many continuing symptoms of diabetes.

While he had been suffering from many different injuries and had cut down on his workload since initially being diagnosed in 2006, the insured still had performed multiple surgeries, as he operated about two days a week.  In September, 2007, the insured informed the insurer that he wanted payment for 50% disability immediately and that he would probably be fully disabled within six months.

He and the claims adjuster assigned to handle his claim had multiple disagreements, and he unsuccessfully attempted to talk to the adjuster’s supervisor about the situation.  It was revealed that the adjuster was not required to undergo any training prior to starting his employment with the insurer, and since that time he had no additional education or training, beyond on-the-job training, concerning disability claims.

The insured filed a Complaint, alleging that the insurer failed to pay him total disability insurance benefits.  One of the counts of the complaint was for a violation of the covenant of good faith and fair dealing.  Concerning the bad faith allegation, the court noted that there was no action for a breach of the implied duty of good faith and fair dealing separate and distinct from the underlying breach of contract claim.  It therefore subsumed the bad faith count within the breach of contract count.

The court then analyzed the breach of contract claim.  The insured alleged that the insurer failed to conduct a proper investigation followed by a fair and equitable resolution of plaintiff’s claim.

After a lengthy analysis, the court noted that the facts dictated that the insured was still earning his primary living as a cardiothoracic and vascular surgeon, showing that he clearly was not completely disabled.  Even though the claims adjuster may have not been adequately trained or qualified to deal with the insured, he made the correct decision in the end.

The court therefore granted the insurer’s Motion for Summary Judgment for the breach of contract claim, which effectively dismissed the bad faith allegations as well.

Date of Decision:  September 28, 2010

Klay v. Axa Equitable Life Ins. Co., Civil Action No: 09-12, United States District Court for the Western District of Pennsylvania, 2010 U.S. Dist. LEXIS 102881 (Sept. 28, 2010) (Conti, J.)

OCTOBER 2010 BAD FAITH CASES
NO BAD FAITH WHEN INSURER CONDUCTS REASONABLE INVESTIGATION BEFORE PAYING PROPERTY DAMAGE, EVEN WHEN PARTIES ESTIMATES THAT ARE FAR APART (Middle District)

In Fitzmartin v. Allstate Property & Casualty Company, the insureds owned a house that was insured under a homeowners policy with the insurer.  One day while the plaintiffs were not home, a pipe burst in the second floor laundry room, causing water damage to the property.  The insureds reported the claim the insurer the day after the incident.  The insurer then contacted an emergency water remediation company to dispatch a team to undertake emergency repairs to the house.

After the company performed a tear out and remediation of the affected areas, the insurer remitted payment to the company for their services.  After four more days of drying the property, the water remediation company finished its work, but there was still significant damage to the property.  After multiple estimates by representatives of the insured, representatives of the insurer, and other contractors, the insureds attempted to use their own hired contractor for repairs instead of having the insurer help them find one.  The insureds’ contractor’s estimate was $147,444.12, compared to the insurer’s estimate of $67,739.45.  The insurer had paid the insureds the full $67,739.45 of its estimate when the insureds filed suit.

The insureds filed a Complaint for breach of contract and bad faith, and the insurer then filed a Motion to Dismiss the bad faith count. The insureds asserted that the insurer acted in bad faith when it did not agree to pay the extent of damages estimated by the insureds’ contractor, but instead paid the insureds based on its own estimate.

The court, citing a prior case, stated that to avoid acting in bad faith, “an insurance company simply must show it conducted a review or investigation sufficiently thorough to yield a reasonable foundation for its action.”  Cantor v. Equitable Life Assurance Soc’y, 1999 U.S. Dist. LEXIS 4805, 1999 WL 219786, *3 (E.D. Pa. 1999).  Here, the insurer sent its final payment to the insureds after viewing numerous estimates for the value of repairs.

Additionally, the court noted that insureds’ second contractor’s estimate was only $5,375.55 greater than the insurer’s estimate, demonstrating that the insurer’s estimate was at least reasonable.  The undisputed facts showed that the insurer conducted a thorough investigation before determining that $67,739.45 was the proper amount to pay the insureds.  None of the insureds’ allegations, even if true, amounted to bad faith, and therefore the court granted the insurer’s Motion to Dismiss the bad faith claim.

Date of Decision:  September 13, 2010

Fitzmartin v. Allstate Prop. & Cas. Co., Civil Action No. 4:CV-09-00605, United States District Court for the Middle District of Pennsylvania, 2010 U.S. Dist. LEXIS 98299 (Sept. 20, 2010) (Blewitt, U.S.M.J.)

OCTOBER 2010 BAD FAITH CASES
NO BAD FAITH WHEN EXCLUSION FOR COVERAGE AS TO INSURED AND INSURED'S EMPLOYEE HAS NO STANDING UNDER POLICY (Middle District)

In Empire Fire & Marine Insurance Company v. Jones, the insured ran a trash collection business. When one of his employees attempted to jump aboard the outside of the truck after throwing a trash bag into the back of the truck, he slipped and fell onto the road, and the truck proceeded to run over the employee’s lower leg, causing him severe injuries.

The insured had a “truckers coverage” insurance policy with the insurer at the time of the accident. The policy included a statement that the insurer would “pay all sums an [insured] legally must pay as damages because of ‘bodily injury’ or property damage to which this insurance applies, caused by an ‘accident’ and resulting from the ownership, maintenance or use of a covered ‘auto.’”

However, the policy also contained an exclusion, which stated that the coverage would not apply to bodily injury to an employee suffered in the course of employment by the insured or performing the duties related to the conduct of the insured’s business.

At issue in the case was whether the injured party was actually an employee of the insured (which would place his under the exclusion), or whether he was simply a “temporary worker,” which would allow the insured to recover from the insurer under the policy. After an analysis of the exclusion clause and the definition of “employee,” the court upheld the magistrate judge’s recommendation that the injured party was an employee instead of a temporary worker, and therefore it decided that the accident was excluded from the insurer’s liability coverage owed to the insured.

The injured party had filed his own counterclaim against the insurer, alleging breach of contract and bad faith by denying him liability coverage. The magistrate judge had recommended that the court dismiss these claims as well, as the insurer had promptly addressed his claims for first party benefits and paid the full amount of medical benefits available to him under the policy.

Also, the court observed that because the injured party was a third party claimant and not an insured, he could not have a cause of action for bad faith.

The court agreed with the magistrate judge’s recommendation, summarized below, and promptly denied the injured party’s cross-Motion for Summary Judgment.

Date of Decision: September 20, 2010

Empire Fire & Marine Ins. Co. v. Jones, 4:09-cv-422, United States District Court for the Middle District of Pennsylvania, 2010 U.S. Dist. LEXIS 94936 (Sept. 13, 2010) (Jones III, J.)

In Empire Fire & Marine Insurance Company v. Jones, the insured ran a trash collection business.  When one of his employees attempted to jump aboard the outside of the truck after throwing a trash bag into the back of the truck, he slipped and fell onto the road, and the truck proceeded to run over the employee’s lower leg, causing him severe injuries.

The insured had a “truckers coverage” insurance policy with the insurer at the time of the accident.  The policy included a statement that the insurer would “pay all sums an [insured] legally must pay as damages because of ‘bodily injury’ or property damage to which this insurance applies, caused by an ‘accident’ and resulting from the ownership, maintenance or use of a covered ‘auto.’”  However, the policy also contained an exclusion, which stated that the coverage would not apply to bodily injury to an employee suffered in the course of employment by the insured or performing the duties related to the conduct of the insured’s business.

The accident victim did not have an employment contract with the business owner, but the parties instead had a loosely understood agreement where the victim would work one or two days a week during certain times.  At issue in the case was whether the injured party was actually an employee of the insured (which would place his situation within the policy’s exclusion), or whether he was simply a “temporary worker,” which would allow the insured to recover from the insurer under the policy.

The victim filed a Complaint for breach of contract and statutory bad faith.  In the bad faith claim, he asserted that the insurer was liable because of its refusal to pay him first party benefits and because it denied him liability coverage benefits without adequately investigating whether he was a “temporary worker” under the insurance policy.

Citing case law, the court first noted that the “good faith standard requires the insurance company to evaluate the case in an ‘honest, intelligent and objective’ manner.”  It then reinforced the Pennsylvania bad faith standard that there must be “clear and convincing evidence that the insurer did not have a reasonable basis for denying benefits under the policy and that the insurer knew of or recklessly disregarded its lack of reasonable basis in denying the claim.”

Using the standards mentioned above, the magistrate judge stated that the insurer did not act in bad faith in this situation.  First, the evidence showed that the insurer promptly addressed the victim’s claim for first party benefits and paid the full amount of medical benefits available under the policy.

The magistrate judge also noted that the insurer did not fail to conduct an adequate investigation, as it properly determined that the victim was bringing his Complaint as a third-party claimant, not an insured, and a third party claimant cannot have a cause of action for bad faith under Pennsylvania law.  Therefore, the magistrate judge recommended that the court grant the insurer’s Motion for Summary Judgment concerning the bad faith claim.  As summarized above, this Report and Recommendation was adopted by the District Court.

Date of Decision:  August 19, 2010

Empire Fire & Marine Ins. Co. v. Jones, Civil Action No.. 4:cv-09-0422, 739 F. Supp. 2d 746, United States District Court for the Middle District of Pennsylvania, 2010 U.S. Dist. LEXIS 101046 (Aug. 19, 2010) (Blewitt, U.S.M.J.)

 

OCTOBER 2010 BAD FAITH CASES
BAD FAITH ALLEGATION CANNOT SURVIVE MOTION TO DISMISS WHEN THE FACTS INSUFFICIENTLY ALLEGE BAD FAITH ON THE PART OF THE INSURER (Philadelphia Federal)

In Bomgardner v. State Farm Fire & Casualty, the insured was in the business of performing “concrete-related services.”  He had business liability insurance coverage under a “Contractor’s Policy” with the insurer.  The policy stated that the insurer would pay the insured if he became legally obligated to pay damages due to property damage caused by an occurrence in the coverage territory.

In February, 2009, the insured was notified that there were problems with a floor he had installed at a residence approximately three months earlier.  The general contractor for the project sent the insured a bill for over $25,000, who proceeded to request coverage from the insurer for this amount.  The insurer’s investigators notified the insurer that the concrete floor defects were are result of “improper workmanship” and not an “occurrence” as required by the policy.  The insurer therefore denied payment to the insured, who then brought an action against the insurer with claims for breach of contract and bad faith.

The court first held that the facts clearly showed that the damages were caused by faulty workmanship and were not an “occurrence” under the policy.  It thus determined that the insured could not proceed with his breach of contract claim.

Central to the insured’s bad faith allegation was the assertion that after the insured was initially denied coverage, he sent a letter to the insurer requesting a copy of the investigation report.  According to the insured, the insurer did not reply to him for three months, and once it did respond, it refused to provide him with the report.

The court, however, determined that the insured’s claim for bad faith offered “little more than legal conclusions and bare allegations of wrongdoing with insufficient factual support.”  Simply denying a claim, refusing to turn over documents such as investigation reports before a lawsuit is filed, and taking a few months to respond to a request do not amount to violations of the Pennsylvania Bad Faith Statute, the court said.  Because the insured failed to allege a bad faith violation, the court granted the insurer’s motion to dismiss both the breach of contract and bad faith claims.

Date of Decision:  September 14, 2010

Bomgardner v. State Farm Fire & Cas., Civil Action No. 10-1287, United States District Court for the Eastern District of Pennsylvania, 2010 U.S. Dist. LEXIS 96379 (Sept. 14, 2010) (McLaughlin, J.)