Monthly Archive for July, 2012

JULY 2012 BAD FAITH CASES: COURT RULES THAT BAD FAITH COUNT SHOULD NOT PROCEED TO DISCOVERY BECAUSE CARRIER WAS NOT REQUIRED TO INDEMNIFY INSUREDS (Middle District)

In Borough of Moosic v. Darwin Prof’l Underwriters, Inc., the court heard a carrier’s motion to dismiss filed in response to an insured’s complaint seeking declaratory judgment and bad faith damages. The case stemmed from an underlying civil rights action between an aggrieved couple and the Pennsylvania municipality that allegedly violated their freedom of speech.

As a result of the suit, the insured defendants in the underlying action sought coverage pursuant to their “Public Officials Liability” policy with the carrier. However, the carrier denied coverage because the incidents leading to the underlying lawsuit predated the inception date of the policy. The insureds argued that the carrier owned them indemnification and defense because the alleged civil rights violations were “related claims” that should be treated as a single claim post-dating the commencement of the insurance policy.

The court ruled that the insureds were not entitled to indemnity and defense, granting the carrier’s motion for dismissal. Because the insureds were not entitled to indemnity or defense, a finding of bad faith would be inconsistent with the court’s holding. As such, the court held that the insureds’ bad faith claim should not proceed to discovery.

Date of Decision: June 29, 2012

Borough of Moosic v. Darwin Prof’l Underwriters, Inc., No. 3:11-cv-1689, 2012 U.S. Dist. LEXIS 90372, U.S. District Court for the Middle District of Pennsylvania (M.D. Pa. June 29, 2012) (Mariani, J.)

JULY 2012 BAD FAITH CASES: COURT PERMITS CHIROPRACTOR’S DEFAMATION COUNT TO PROCEED, BUT DECLINES TO ASSERT SUPPLIMENTAL JURISDICTION OVER BAD FAITH CLAIM (Philadelphia Federal)

In Schatzberg v. State Farm Mut. Auto. Ins. Co., the court heard a carrier’s motion to dismiss a chiropractor’s six-count complaint, which alleged (1) defamation; (2) invasion of privacy; (3) violations of the Pennsylvania Motor Vehicle Financial Responsibility Law (“MVFRL”); (4) bad faith; and (5)–(6) RICO violations.

The case stemmed from a series of challenges that the carrier made to treatments its insureds received at the chiropractor’s pain management practices, which were thereafter billed to the carrier under its insureds’ health insurance policies. According to the complaint, the carrier implemented certain programs in an effort to reduce the payout of claims by approximately one billion dollars a year. Part of the carrier’s plan allegedly included characterizing all soft tissue injuries caused by motor vehicle accidents as potentially fraudulent and enlisting its fraud unit to investigate the claims.

The fraud unit would then often hire counsel to litigate against all claimants who have sustained soft tissue injuries. The carrier would also send letters to their insureds, the chiropractor’s clients, apprising them of the ongoing investigations. Moreover, the carrier was alleged to have manipulated the MVFRL peer review process, exchanging with peer review organizations (“PRO”) a steady source of business for favorable reviews. After being targeted for litigation by the carrier’s fraud unit on numerous occasions, the chiropractor brought suit, alleging the aforementioned six-counts against the carrier.

Addressing the defamation claim, the court examined three letters that the carrier had sent to the chiropractor’s patients, alerting them to the ongoing fraud investigations. The court ruled that these letters could plausibly carry defamatory implications and rejected the carrier’s motion. However, the court granted the carrier’s motion with respect to the chiropractor’s invasion of privacy, MVFRL, fraud, and RICO claims, dismissing all but the defamation count.

With respect to the chiropractor’s bad faith claim, the carrier challenged the allegations on jurisdictional grounds, defending that the court did not possess subject matter jurisdiction. The court agreed, declining to assert supplemental jurisdiction over the bad faith claim because the claim was not derived from a common nucleus of operative fact. Essentially, the court reasoned that the bad faith claim relates to actions of the carrier in obtaining and relying on the PRO process, not the carrier’s attempt to minimize its payout of benefits for soft tissue injuries. These are two facially distinct scenarios, the court held, that would not necessarily be tried in one judicial proceeding.

Date of Decision: July 12, 2012

Schatzberg v. State Farm Mut. Auto. Ins. Co., 877 F. Supp. 2d 232, 2012 U.S. Dist. LEXIS 96567 (E.D. Pa. July 12, 2012) (Pratter, J.)

JULY 2012 BAD FAITH CASES: COURT RULES THAT POLICY LANGUAGE, NOT CARRIER’S INITIAL REACTION TO A CLAIM PRIOR TO INVESTIGATION, CONTROLS THE INSURED’S BAD FAITH CLAIM; SUBCONTRACTOR WORK SUBJECT TO EXCLUSION AS WELL (Philadelphia Federal)

In Neshaminy Constructors, Inc. v. Fed. Ins. Co., the court heard cross motions for summary judgment filed by an insured general contractor and its insurance carrier. The insured claims that the carrier breached its contract and denied coverage under the policy in bad faith.

The case stems from bridge work performed by the insured’s subcontractor. As a result of defective concrete forms the bridge’s beams were damaged, requiring repairs that resulted in cost overruns and delays. The main question for the court was whether the losses were covered or fell under policy exclusions in the insured’s policy.

The policy covered direct physical loss or damage to “project works cause by or resulting from a peril not otherwise excluded.” The term “project works” was defined as materials, supplies, machinery and equipment which you own . . . to be used in and become permanent part of the construction . . . or repair of an insured installation project.” The policy exclusions barred coverage for design defects and faulty or defective workmanship, materials, maintenance or construction.

The insured first argued that the policy was ambiguous because it did not specify to whom the exclusion applies. Given this question as to the scope of the exclusion, the insured argued, it is unclear if the provisions prevented coverage for work performed by a subcontractor, as in this case. The insured also claimed that its expectation when purchasing the policy was that the exclusions did not apply to subcontractors. The court disagreed, finding that the omission of a limitation on the scope of the exclusion supports a conclusion that all design defects and faulty workmanship is excluded, no matter who caused them.
The insured also claimed that the policy was illusory because the exclusions were so broad as to negate any possible coverage under the policy.

The court disagreed, ruling that the policy language covered several “fortuitous events that are not the result of deficiency in design or faulty or defective workmanship and materials.”

The court also rejected the insured’s bad faith claims. Soon after the insured submitted its claim to the carrier, the latter put the insured’s subcontractor on notice of a potential subrogation claim. The insured claimed that this was an admission by the carrier that the claim was covered under the policy and that denying coverage was based upon a bad faith interpretation of the policy. The court refused to accept this argument, finding that the policy language is always controlling, not the carrier’s initial reaction to the insured’s claim.

Therefore, the court granted the carrier’s motion for summary judgment.

Date of Decision: June 21, 2012

Neshaminy Constructors, Inc. v. Fed. Ins. Co., No. 11-7168, 2012 U.S. Dist. LEXIS 86079, U.S. District Court for the Eastern District of Pennsylvania (E.D. Pa. June 21, 2012) (Savage, J.)

JULY 2012 BAD FAITH CASES: NO BAD FAITH WHERE PRIOR ACTS POLICY DID NOT COVER INSURED’S ACTIONS BEFORE RETROACTIVE DATE IN POLICY; REASONABLE EXPECTATIONS DOCTRINE NOT APPLICABLE TO COMMERCIAL INSURED (Philadelphia Federal)

In A.P. Pino & Assocs. v. Utica Mut. Ins. Co., the court heard a carrier’s motion for summary judgment filed in response to an insured’s claims for declaratory judgment, reformation of its policy and bad faith in connection with its carrier’s handling of coverage under an errors and omissions (“E&O”) policy.
The insured is in the business of selling life insurance policies and sought to purchase E&O policies for several new employees, as the company was expanding. The insured’s prior carrier only insured individuals, which was fine until 2010, when the insured began to hire other employees. As such, the insured purchased E&O insurance for its new brokers.

Part of the reason that the insured purchased a policy from the carrier was because of the availability of “prior acts” coverage. However, the carrier’s policies only covered prior acts of businesses that have previously been insured. As the insured had previously held a policy only for its sole insurance broker, and was now adding new brokers, the carrier treated the insured as a “new business entity” because it was insuring new employees. The effect of this classification was that the insured’s policy contained a retroactive date of October 15, 2009, a date later in time than the insured desired because of its assumption that it was not being treated as a new business.

In November 2010, an individual claimant sued the insured for professional negligence that allegedly occurred in May 2009, prior to the retroactive date in the insured’s policy. As such, the carrier denied the insured’s claim for indemnification and defense under the policy because the underlying complaint alleged negligent acts that occurred prior to October 15, 2009.

First, the court addressed the parties’ competing interpretation of insured’s E&O policy. The court reasoned that the language in the policy is unambiguous and that the retroactive date was readily apparent in multiple places. However, the owner of the insured business claimed that he did not read the policy and that even if he did, he would not understand its contents. The court rejected these claims, finding that the policy is “readily comprehensible” and that the insured would not be able to avoid its clear language.

Second, the court addressed the insured’s contention that the policy should be reformed on the basis of its reasonable expectations. However, the court held, this doctrine only applies to “unsophisticated non-commercial insureds.” Moreover, the carrier did not mistakenly treat the insured as a “new business entity,” resulting in the insured’s ineligibility for prior acts coverage. In fact, the insured knew that it would have to be continuously insured to qualify for that coverage. Because it was expanding and hiring new employees, it could not be deemed to have been continuously insured.

Lastly, the court denied the insured’s bad faith claim. Because it was found that the carrier had a reasonable basis for denying coverage, it did not breach its contract with the insured and subsequently cannot be liable for bad faith.

Date of Decision: July 3, 2012

A.P. Pino & Assocs. v. Utica Mut. Ins. Co., 2012 U.S. Dist. LEXIS 91918, U.S. District Court for the Eastern District of Pennsylvania (E.D. Pa. July 3, 2012) (Schiller, J.)

JULY 2012 BAD FAITH CASES: ATTEMPT TO NEGOTIATE A LOWER COST WITH THE INSURED’S GENERAL CONTRACTOR WAS NOT IN BAD FAITH ALTHOUGH IT DELAYED THE RESOLUTION OF THE INSURED’S CLAIM (Middle District)

In Dameshek v. Encompass Ins. Co. of Am., the court heard a carrier’s motion for summary judgment. The case stemmed from a fire in the insureds’ home. After the incident, the insureds sought coverage under their policy with the carrier. The policy provided for Additional Living Expenses (“ALE”) to compensate the insureds for living expenses above their normal expenses to repair a covered loss or for relocating elsewhere.

The insureds selected the third party defendant in this case as their general contractor for repairing the fire damage to their home. However, there was a significant delay in obtaining an estimate because the carrier’s representative entered negotiations with the contractor to lower the price of the work. Moreover, the repairs took more than a year to complete.

From April 2009 to July 2009, the insureds lived at one location. Then, from July 2009 to June 2010, the insureds lived in Harrisburg. When their ALE benefits expired in April 2010, prior to the time that their home was complete, the carrier’s representative encouraged the contractor to provide free housing for the insureds. The contractor obliged, but there was a dispute as to how long he agreed to allow the insureds to stay. The insureds were under the impression, as told to them by the carrier’s representative, that they were permitted to live there until the completion of their home.

The insureds filed the instant action in early 2011, alleging the following seven claims against the carrier: (1) breach of contract; (2) bad faith; (3) misrepresentation; (4) negligence; (5) deceit; (6) breach of covenant of good faith and fair dealing; and (7) unfair trade practices. The carrier later impleaded the contractor into the case as a third party defendant, seeking indemnification from the lawsuit brought by the insureds.

Examining the breach of contract count, the court ruled that the carrier had fulfilled its obligation under the contract with the insureds. In fact, the insureds even admitted that the carrier fulfilled its obligations, but alleged that the carrier should have accepted the contractor’s initial estimate instead of entering negotiations. The court disagreed, entering summary judgment for the carrier because the negotiations actually benefitted the insureds, seeking a lower price.

The court also rejected the insureds’ bad faith argument. The insureds claimed that the carrier acted in bad faith by delaying the completion of the repairs and by denying the payment of ALE’s. However the court disagreed, finding that the carrier never denied benefits; rather, the carrier paid the insureds benefits under the policy until they expired in April 2010.

The court also rejected the insureds’ argument that the allegations the carrier negotiated with the contractor to benefit itself and incorrectly stated the duration of the free housing that the contractor would provide, constituted bad faith.

The court granted summary judgment to the carrier on the insureds’ remaining claims, which were largely based upon the dispute between the carrier and the contractor with respect to the length of time that the insureds were able to live for free.

Notably, however, the court held that there is no separate cause of action against an insurer for negligence in Pennsylvania. Such a claim is “rooted in contract” and does not exist in tort because such a claim would be duplicative of the insureds’ breach of contract count.

Therefore, the court granted the carrier’s entire summary judgment motion and disposed of the insureds’ lawsuit in total.

Date of Decision: June 25, 2012

Dameshek v. Encompass Ins. Co. of Am., No. 1:11-cv-18, 2012 U.S. Dist. LEXIS 87570, U.S. District Court for the Middle District of Pennsylvania (M.D. Pa. June 25, 2012)

JULY 2012 BAD FAITH CASES: COURT STAYS BAD FAITH CLAIMS PENDING UIM CLAIM (Philadelphia Federal)

In Moninghoff v. Tillet, the court heard a carrier’s motion to stay an insured’s bad faith claims until the accompanying underinsured motorist (“UIM”) claims were disposed.

The court granted the carrier’s motion and stayed the insured’s bad faith claims until the UIM claim was addressed. Specifically, the court reasoned that UIM claims require a determination of liability and an assessment of the insured’s injuries. By contrast, bad faith claims require an analysis of the process that the carrier went through to investigate the insured’s claims.

At a trial for a UIM claim, the insured would need to prove liability, requiring the carrier to pay those damages up to the insured’s $200,000 policy limits. On the other hand, the court explained, the insured’s bad faith claims focus on the carrier’s investigative procedures and the deliberative process that it went through in handling the insured’s UIM claims.

The court went on to state that this difference is also obvious when discovery is considered. In the insured’s UIM claim, discovery would be rather limited with respect to the carrier. Yet, in the insured’s bad faith claims, there would be broad discovery of the carrier’s investigation. Moreover, the bad faith claim may become moot as the UIM claim is litigated, or its focus may become the carrier’s conduct during the UIM litigation.

Therefore, the court granted the carrier’s motion to stay the insured’s bad faith claim.

Date of Decision: June 27, 2012

Moninghoff v. Tillet, No. 11-7406 (E.D. Pa. June 12, 2012) (McLaughlin, J.)

JULY 2012 BAD FAITH CASES: COURT DISMISSES SUBROGEE’S BAD FAITH ACTION AS TIME-BARRED, BUT ALLOWS BREACH OF CONTRACT ACTION TO PROCEED BECAUSE THE INSURED HAD NO DUTY TO ALERT CARRIER OF LAWSUIT AFTER ITS CARRIER DISCLAIMED COVERAGE (Philadelphia Federal)

In Lloyd’s London v. United Fin. Cas. Co., the court heard a carrier’s motion to dismiss a bad faith and breach of contract action brought by an insurer acting (1) as the assignee of the assignor-insured and (2) the subrogee of an insured shipping company whose goods were damaged in the underlying accident.
The assignor-insured owned a “Flag Car Service” that escorted oversized loads being transported by shipping companies. In 2008, an employee of the assignor-insured passed under an overhead bridge as a truck owned by the shipper-insured followed. The truck hit the bridge, causing damage to the vehicle and its oversized cargo.

The assignor-insured’s carrier denied coverage under the policy, but the shipper’s insurer paid $124,386 in damages resulting from the accident. In 2011, the subrogee filed a tort action against the assignor-insured (prior to the assignment) and obtained a default judgment for $143,846.91. However, the assignor-insured’s carrier contends that it never received notice of the subrogee’s 2011 lawsuit against the assignor-insured.

After the default judgment, the shipper’s insurer sought subrogation against the assignor-insured’s liability carrier, alleging breach of contract and bad faith on behalf of the assignor-insured for the carrier’s original denial of coverage.

The assignor-insured’s carrier filed a motion to dismiss in opposition of the subrogee’s suit, alleging that (1) the bad faith action was time-barred and that (2) the assignor-insured failed to provide notice of the 2011 lawsuit, a condition precedent to coverage under its policy.

First, the court addressed the statute of limitations argument, finding that the subrogee’s bad faith claims on behalf of the assignor-insured should be dismissed. The court reasoned that the two-year statute of limitations for bad faith claims began to run when the carrier provided notice of its refusal to provide coverage to the assignor-insured. The date of its denial was in August 2009, more than two-years prior to the filing of this action, warranting dismissal of the bad faith claim.

Second, the court addressed the carrier’s claim that the assignor-insured failed to comply with the policy’s notice provision. The court rejected this claim because, under Pennsylvania law, an insured is generally excused from complying with a notice provision after its insurance company has disclaimed coverage. Therefore, once the assignor-insured’s carrier denied coverage over the accident, it could not rely on the policy’s notice provision as a condition precedent to coverage.

In conclusion, the court dismissed the bad faith count, but permitted the subrogee’s breach of contract action to proceed.

Date of Decision: June 28, 2012

Lloyd’s London v. United Fin. Cas. Co., No. 12-2063, 2012 U.S. Dist. LEXIS 89992, U.S. District Court for the Eastern District of Pennsylvania (E.D. Pa. June 28, 2012) (Schiller, J.)

JULY 2012 BAD FAITH CASES: COURT DISMISSES INSURED’S SECOND SUIT FOR BAD FAITH UNDER DOCTRINE OF RES JUDICATA (Philadelphia Federal)

In D’Orazio v. Hartford Underwriters Ins. Co., the court heard the carrier’s motion to dismiss the insured’s suit for breach of contract and bad faith. The suit arose from the carrier’s denial of first-party injury coverage under the insured’s automobile policy.

The insured previously filed a similar suit against the carrier for bad faith and breach of contract, but did not prevail because the court granted the carrier’s summary judgment motion in 2011. (See this blog). Nevertheless, the insured thereafter filed a similar action in state court. The carrier removed the case to federal court and raised claim preclusion and issue preclusion in support of its motion.

Addressing the carrier’s defense, the court reasoned that a claim preclusion defense will succeed where the prior suit (1) ended in a final judgment on the merits; (2) involved the same claim; and (3) involved the same parties.

The court examined these factors in light of the insured’s renewed claims. First, in 2011, the insured’s suit ended with a grant of summary judgment to the carrier, a final judgment on the merits. The insured cited no case law to the contrary in support of its suit.

Second, the court considered whether the insured’s claims were identical, reasoning that there was an “essential similarity of the underlying events giving rise to various legal claims.” For instance, the insured’s amended complaint was copied verbatim from its earlier motions. The only difference now was that the insured included medical reports and wage loss information in the reintroduced complaint.

As such, the court also held that the second claim preclusion element was met because the insured’s bad faith claims were still predicated on the carrier’s failure to pay medical benefits under the insured’s policy. With respect to the third element, the parties were the same in the instant action, satisfying that prong of the court’s inquiry.

Therefore, the court granted the carrier’s motion to dismiss, ruling that claim preclusion applied due largely to the “trivial changes in the pleadings.” In support of its holding, the court highlighted the fact that the only real difference between the insured’s two complaints was that, in the present case, the “[carrier] was given more time to not pay [the insured’s] insurance claims.” The court ruled that such factual aversions could not form the basis of a separate lawsuit.

Lastly, the court did not address the carrier’s issue preclusion, or “collateral estoppel,” defense because the case was already dismissed under the claim preclusion doctrine.

Date of Decision: June 19, 2012

D’Orazio v. Hartford Underwriters Ins. Co., No. 11-cv-7443, 2012 U.S. Dist. LEXIS 84681, U.S. District Court for the Eastern District of Pennsylvania (E.D. Pa. June 18, 2012) (Joyner, J.)

JULY 2012 BAD FAITH CASES: COURT GRANTS CARRIER’S MOTION TO RECONSIDER DISCOVERY ORDER IN FAVOR OF INSURED BECAUSE THE THIRD CIRCUIT DISFAVORS DISCOVERY OF SIMILAR CLAIMS EVIDENCE IN BAD FAITH LITIGATION (Western District)

In Zettle v. American National Property & Casualty Co., the court ruled on a motion to reconsider part of the court’s May 7, 2012 order which directed the carrier to produce to the insured certain claims files relating to underinsured and uninsured motorist claims. The motion arose from a bad faith action that the insured initiated against the carrier.

The court first examined the carrier’s two theories for granting its motion for reconsideration. First, the carrier argued that the burden of complying with the court’s discovery order was extremely onerous. Second, the carrier alleged that the court should have examined the various Third Circuit decisions that reject the discoverability of other insureds’ claim files in bad faith actions.

The insured, who did not submit a written opposition brief, raised two counterarguments. First, the insured argued that the discovery order was not extremely burdensome. Second, the insured argued that the potentially disparate treatment of its claim vis-à-vis other claims is very relevant to the instant litigation.

The court ruled in favor of the carrier and granted its motion to reconsider. The court reasoned that, while the carrier’s estimate of its burden of production may be inflated, the extent of time and effort required to comply with the insured’s discovery requests was too great to place upon the carrier. Moreover, the court acknowledged Third Circuit precedent that disfavors the discovery of similar claims evidence in bad faith cases. Accordingly, the court granted the carrier’s motion for reconsideration and vacated the portion of its May 7, 2012 order directing the carrier to produce the relevant files.

Date of Decision: June 19, 2012

Zettle v. Am. Nat’l Prop. & Cas., Co., No. 3:10-cv-307, 2012 U.S. Dist. LEXIS 85330, U.S. District for the Western District of Pennsylvania (W.D. Pa. June 19, 2012) (Gibson, J.)

JULY 2012 BAD FAITH CASES: COURT DISMISSES BAD FAITH COMPLAINT AS CONCLUSORY AND REMANDS CASE FOR LACK OF PROPER AMOUNT IN CONTROVERSY (Middle District)

In Sypeck v. State Farm Mut. Auto. Ins. Co., the court heard a carrier’s motion to dismiss an insured’s claim for bad faith and breach of contract. The suit stemmed from a 2007 car accident which left the insured severely and permanently injured. The negligent driver who caused the accident had a $100,000 bodily injury policy. The driver’s carrier tendered those limits, but the amount was inadequate to compensate the victim for the injuries she sustained.

As a result of the shortfall, the victim filed a claim for underinsured motorist benefits with her carrier. After the carrier offered the insured $5,000 to settle her claim, she filed suit in state court. The carrier removed the case to federal court shortly thereafter and filed the instant motion to dismiss.

First, the court rejected the carrier’s motion to dismiss the insured’s breach of contract action. Contrary to the carrier’s argument, the court reasoned, the insured alleged sufficient facts to support her allegations. For instance, the carrier was obligated to investigate her claim, but failed to do so, causing the insured to suffer financial losses. The carrier also claimed that the insured’s suit was time-barred, a defense that was deemed meritless. The court therefore held that the insured’s breach of contract claim would not be dismissed.

Second, the court granted the carrier’s motion to dismiss the insured’s bad faith allegations. The court reasoned that the insured failed to state a proper bad faith claim. Her allegation that the carrier made a “facially unreasonable” offer does not mean that the carrier acted in bad faith or failed to investigate her claim. Moreover, the insured claimed that the carrier “knew or should have known” that its defenses were meritless. The court reasoned that such a claim only “offers the possibility of negligence,” which is not enough to establish bad faith under Pennsylvania law.

The court also rejected the insured’s request for leave to amend its bad faith claims. The insured had previously been granted leave to amend and later submitted an amended complaint that was nearly identical to her first complaint. The court therefore ruled that granting the insured leave to amend her bad faith claims would be futile.

Lastly, the court remanded the remaining breach of contract action to state court because the insured’s demand no longer exceeded the jurisdictional amount of $75,000. The court reasoned that, because neither punitive damages, nor attorney’s fees are available in breach of contract suits, along with the fact that the insured’s bad faith claim was dismissed, a reasonable estimation of damages was around $44,000.00 ($24,000.00 in medical expenses and $20,000.00 in lost wages).

Date of Decision: June 15, 2012

Sypeck v. State Farm Mut. Auto. Ins. Co., No. 3:12-CV-324, 2012 U.S. Dist. LEXIS 83326, U.S. District Court for the Middle District of Pennsylvania (M.D. Pa. June 15, 2012) (Caputo, J.)