Monthly Archive for November, 2010

NOVEMBER 2010 BAD FAITH CASES
INSURED HAS A RIGHT TO FEDERAL JURY FOR HIS BAD FAITH CLAIM DUE TO THE PUNITIVE DAMAGES REMEDY, DESPITE BAD FAITH STATUTE NOT CREATING A RIGHT TO JURY (Philadelphia Federal)

In Pratt v. Victoria Insurance Company, the insured had brought a bad faith insurance claim against the insurer for the insurer’s failure to pay what he maintained was due to him for vandalism to his motor vehicle.  The case was referred to an arbitration panel, which found in favor of the insurer.

The insured proceeded to demand a trial de novo, and the issue before the court was whether the action could be tried before a jury.  The court noted that on his Entry of Appearance in the Court of Common Pleas, the insurer’s counsel wrote, “A jury of twelve (12) persons is demanded.”  Rule 38 of the Federal Rules of Civil Procedure provides that when an issue is triable of right by a jury, a party may demand a jury trial by serving the other parties with a written demand.

In determining whether this case allowed for a jury trial based on the above information, the court first noted that “under Pennsylvania law, there is no right to a jury trial in the state courts” when the sole claim is a bad faith insurance claim brought under 42 Pa. Cons. Stat. § 8371.  However, it then recognized that the Third Circuit had previously determined that “when a § 8371 claim is brought in federal court, the punitive damages remedy triggers the Seventh Amendment right to trial by jury.”  It therefore held that the insured’s claim was in fact triable by jury in the Eastern District court because one of the parties had properly and effectively made a demand for a jury trial.

Date of Decision:  November 12, 2010

Pratt v. Victoria Ins. Co., Civil Action No. 10-1629, United States District Court for the Eastern District of Pennsylvania, 2010 U.S. Dist. LEXIS 120637, (Nov. 12, 2010) (Bartle III, J.)

NOVEMBER 2010 BAD FAITH CASES
NO BAD FAITH WHEN INSURER PROVIDES NOTICE OF VALID REASONS FOR DENIAL AND IT TAKES THREE MONTHS FOR INSURER TO ISSUE RESERVATION OF RIGHTS LETTER (Third Circuit)

In Scottsdale Insurance Company v. City of Hazleton, a prior lawsuit had resulted in the City of Hazleton being enjoined from enforcing ordinances regulating the employment and housing of aliens who lack lawful immigration status.  In this case, the district court had granted the insurer summary judgment on various insurance coverage claims arising out of the original litigation.

The City of Hazleton had raised a bad faith issue in the original Complaint, and the District Court granted the insurer summary judgment.  It again raised the bad faith argument on appeal.  It alleged in the original Complaint that the insurer acted in bad faith when it failed to timely advise Hazleton of a conflict of interest, claiming that it failed to put the city on notice of the potential grounds for its denial of coverage.  It also alleged that the insurer acted in bad faith when it delayed the issuing of its reservation of rights letter for three months.

The District Dourt had ruled that because the insurer had retained counsel for the city’s defense within days of receiving notice of its claim and a three month delay was not unreasonable, the City of Hazleton had failed to demonstrate clear and convincing evidence of bad faith.  Without further explanation, the Circuit Court panel agreed with the district court’s ruling that the insurer properly put Hazleton on notice of the grounds for its potential denial of coverage through a reservation of rights letter, and that the three-month delay in issuing the letter was not unreasonable as a matter of law.  It therefore affirmed the District Court’s order granting summary judgment to the insurer.

Date of Decision:  November 4, 2010

Scottsdale Ins. Co. v. City of Hazleton, No. 09-4176, United States Court of Appeals for the Third Circuit, 2010 U.S. App. LEXIS 23187, (Nov. 4, 2010) (Scirica, J., Rendell, J., and Roth, J.)

The District Court opinion is Scottsdale Ins. Co. v. City of Hazleton, 2009 U.S. Dist. LEXIS 44861 (M.D. Pa. May 28, 2009) (Caputo, J.)

NOVEMBER 2010 BAD FAITH CASES
NO BAD FAITH POSSIBLE WHEN INSURER REASONABLY INVESTIGATES CLAIM AND KEEPS INSURED NOTIFIED OF PROGRESS THROUGHOUT (Philadelphia Federal)

In Morrisville Pharmacy, Inc. v. Hartford Casualty Insurance Company, the insured was a pharmacy operating under an “all risk” policy issued by the insurer. It initially filed a claim for insurance benefits in December 2008, claiming that the loss was caused by theft from the pharmacy earlier that year. The insured eventually changed its claim to allege that the property owner caused the loss by changing the pharmacy’s locks so that the pharmacy owner could not enter and remove the medications, documents, and equipment that belonged to the pharmacy.

The pharmacy owner had attempted to commit suicide in August 2008, and the pharmacy had closed down shortly thereafter. The property owner’s attorney wrote to the pharmacy owner asking for her to surrender the premises and return the keys, but she did not respond.

The pharmacy owner attempted to enter the premises almost two months after the pharmacy closed down, but she discovered that the property owner had changed the locks. The two sides communicated with each other, but they could not arrange for the pharmacy owner to recover the narcotics and other files left in the pharmacy. She filed a claim with the insurer, alleging direct physical loss of pharmacy property, which would be recoverable under her “all risk” policy.

She later admitted that her claim was simply that the property owner prevented her access to files and documents in the building, and that this prevented her from taking an offer for that sale of her pharmacy files.

The pharmacy owner filed a claim for breach of contract and bad faith after five months had passed without the insurer providing a determination on the claim. The main issue on the breach of contract claim was the legal question of whether the pharmacy owner suffered a direct physical loss of property, as defined by its insurance policy.

The court determined that because it was the pharmacy owner who was unable to effectively communicate with the property owner and her attorney, to the extent that there was a loss, it was due to her failure to take reasonable action to mitigate its loss, and even if there was a loss, “all risk” policies do not cover direct physical losses stemming from non-fortuitous events under Pennsylvania law. Therefore, there was no breach of contract that occurred.

Concerning the bad faith allegation, the court first noted that the insurer never even denied any benefits under the policy before the filing of the lawsuit. While the insurer had been evaluating the claim for five months before the suit was filed, the insured did not file proof-of-loss statements for the first two months after she submitted her claim. The court finally determined that the insurer adequately investigated the insured’s claim after the proof-of-loss statements and kept the insured notified of the investigation’s progress.

Therefore, the court determined that there was no issue of material fact as to whether bad faith was the reason for the delay, and it granted the insurer’s Motion to Dismiss both counts of the Complaint.

Date of Decision: November 3, 2010

Morrisville Pharm., Inc. v. Hartford Cas. Ins. Co., Civil No. 09-cv-02868, United States District Court for the Eastern District of Pennsylvania, 2010 U.S. Dist. LEXIS 116607, (Oct. 28, 2010) (Rufe, J.)

NOVEMBER 2010 BAD FAITH CASES
BAD FAITH MAY OCCUR IF AN INSURER PROFLIGATELY INCURS COSTS UNDER A “DEFENSE WITHIN LIMITS” PROVISION IN A POLICY (Philadelphia Federal)

In NIC Insurance Company v. PJP Consulting, LLC, the insurer represented a restaurant/bar that was the scene of an altercation in 2006.  The victim was attacked by four intoxicated patrons at a Philadelphia bar.  The patrons beat him, struck him in the head with a bottle, and slashed his face with a knife inside the bar.  The bouncers then failed to contact the police and instead removed the attackers and the victim from the bar.  The victim was then further beaten and stabbed in the chest outside the bar, suffering a collapsed lung among other injuries.

The victim proceeded to file a Complaint against the bar for negligence.  The bar was insured by the insurer, who then filed a declaratory judgment action against the bar.  The insurer’s Complaint alleged that the liability insurance policy contained not only a $1 million per-occurrence limitation on liability, but also an Assault and Battery Limits of Liability Endorsement that limits its liability to $50,000 for any injuries arising out of an assault and battery.  Finally, the policy also contained a “defense within limits” “DWL” provision  that reduced the amount of coverage that was available to indemnify the bar by the expenses the insurer incurred in defending the bar.  It therefore alleged under this provision that once the bar’s legal fees and expenses exhausted the applicable limits of liability, it had no further obligation to defend or indemnify the bar.

The lone bad faith issue arose when the court discussed the legality of the DWL provision in the policy.  The court noted in a footnote that “profligate spending by an insurer operating under a DWL provision could expose the insurer to a claim for bad faith.”  It cited a law review article where the author provided an example where a bad faith claim may arise in this situation:  “If settlement attempts by plaintiff’s counsel meet with rejection or an aggressive stance by the defense, plaintiff faces the prospect of fighting a battle that will reduce the limit below that necessary for settlement or satisfaction of verdict.  In such a situation, plaintiff has every incentive to attempt to manipulate the insurer into a position of having made a bad faith decision by refusing to settle and engaging in expensive defense.”

The court eventually granted the victim’s Motion to Dismiss the insurer’s Complaint because the action presented unsettled issues under Pennsylvania law that could not be decided at the declaratory judgment stage.  The parties did not raise the bad faith issue at this stage of litigation, and the court therefore did not discuss whether bad faith actually may have occurred in this case.

Date of Decision:  October 22, 2010

NIC Ins. Co. v. PJP Consulting, LLC, Civil Action No. 09-0877, United States District Court for the Eastern District of Pennsylvania, 2010 U.S. Dist. LEXIS 113207 (Oct. 22, 2010)