Monthly Archive for December, 2012

DECEMBER 2012 BAD FAITH CASES: COURT AFFIRMS SUMMARY JUDGMENT OF NO BAD FAITH AS CARRIER’S POSITION BASED ON PRIOR APPELLATE DECISION WAS REASONABLY DEBATABLE (New Jersey Appellate Division)

In Badiali v. New Jersey Mfrs. Ins. Group, the court ruled that a carrier did not act in bad faith by refusing to pay its share of an arbitration award that it was later deemed responsible to pay.

In a prior appeal in this case, an appellate panel ruled that the uninsured motorist carrier, which was barred from rejecting an arbitration award of $15,000, was not entitled to reject a $29,148.62 award for its insured when that carrier was only liable to pay half.

On the appeal on the bad faith, however, the court reasoned that the carrier had properly relied upon the case of Geiger v. New Jersey Mfrs. Ins. Co. In that case, the court held that a carrier was entitled to reject an arbitration award and seek trial de novo. As the appellate division had previously endorsed this argument, the present Panel affirmed the grant of summary judgment to the carrier on the insured’s bad faith claim because the carrier’s position was reasonably debatable.

Date of Decision: November 28, 2012

Badiali v. New Jersey Mfrs. Ins. Group, No. A-2795-11T3, 429 N.J. Super. 121, 57 A.3d 37, 2012 N.J. Super. LEXIS 182, New Jersey Appellate Division (App.Div. Nov. 28, 2012) (Fisher, P.J.)

DECEMBER 2012 BAD FAITH CASES: COURT PRECLUDES INSURED FROM INTRODUCING INADVERTANTLY DISCLOSED PRIVILEGED DOCUMENTS, IRRELEVANT EXPERT TESTIMONY, AND EVIDENCE OF CARRIER’S NET WORTH, BUT PERMITS INSURED TO INTRODUCE EVIDENCE OF EXPERT BIAS (Western District)

In Smith v. Allstate Ins. Co., the court heard a carrier’s motion in limine seeking to preclude its insured from introducing four types of evidence in coverage litigation regarding injuries the insured suffered in a car accident.

First, the carrier sought to preclude the insured from introducing privileged information that was inadvertently disclosed during discovery. The insured argued that the carrier had waived any privileges by failing to provide it with redacted files. Yet, the court held that no waiver occurred because the carrier immediately notified the insured and relied on an understanding with the insured that the matter was resolved.

Second, the carrier sought to preclude the introduction of certain expert testimony because of the insured’s failure to satisfy Rule 26(a)(2)(B) and irrelevancy of the testimony. The court reasoned that the insured’s failure to satisfy Rule 26 by omitting publications from its expert report was a harmless error, but that the testimony was nevertheless irrelevant because it consisted of legal conclusions that did not require scientific or technical testimony.

Third, the carrier sought to preclude the insured’s introduction of evidence related to alleged punitive damages and the carrier’s net worth. The court granted this motion because the insured may not introduce evidence of net worth and punitive damages prior to presenting legally sufficient evidence in support of a claim for such damages.

Fourth, the carrier sought to preclude the insured’s argument that carrier’s expert was a “hired gun.” The court denied the carrier’s motion on this count because evidence of bias is relevant to a statutory bad faith analysis. Therefore, the court granted the carrier’s motion in limine on all counts except the fourth.

Date of Decision: November 8, 2012

Smith v. Allstate Ins. Co., NO. 3:11-CV-165, 912 F. Supp. 2d 242, U.S. District Court for the Western District of Pennsylvania (W.D. Pa. Nov. 8, 2012) (Gibson, J.)

DECEMBER 2012 BAD FAITH CASES: COURT APPLIES NEW YORK LAW AND GRANTS SUMMARY JUDGMENT FOR CARRIER ON INSURED’S INDEMNITY CLAIM STEMMING FROM UNDERLYING ASBESTOS SUIT (Philadelphia Commerce Court)

In Anheuser-Busch, Inc. v. Ins. Co. of N. Am., the court undertook a conflict of law analysis, reasoning that New York law should apply to a dispute between a carrier and it’s insured regarding the carrier’s duty to indemnify the insured in an underlying asbestos exposure lawsuit.

The carrier’s duty to indemnify was triggered by excess liability coverage within the insured’s policy. Based on New York’s risk allocation method, however, an analysis that Pennsylvania rejects, a court should pro-rate the total amount of an insured’s losses based upon the length of time for which insurance coverage existed. When damages to the insured are allocated over the thirty-year span during which it was insured, the resulting figure did not trigger excess coverage in the policy requiring the carrier to indemnify its insured.

As such, the insured’s claims for bad faith and breach of contract, arising out of the carrier’s denial of coverage, were denied as moot.

Date of Decision: November 1, 2012

Anheuser-Busch, Inc. v. Ins. Co. of N. Am., No. 315, 2012 Phila. Ct. Com. Pl. LEXIS 335, Philadelphia Court of Common Pleas (Pa. C.P. 2012) (McInerney, J.)

DECEMBER 2012 BAD FAITH CASES: COURT GRANTS INSURED’S MOTION TO AMEND COMPLAINT WITH BAD FAITH COUNT, BUT GRANTS PARTIAL PROTECTIVE ORDER TO CARRIER, SHIELDING IT FROM DISCOVERY ON RELATED BAD FAITH CLAIMS (New Jersey Federal)

In Raritan Bay Fed. Credit Union v. CUMIS Ins. Soc’y, Inc., the insured sought discovery and to amend its complaint after its bad faith claims were initially dismissed without prejudice in 2009. (See this case). The carrier objected on several grounds, seeking to: (1) preclude the insured from conducting discovery on the sales and marketing of the bond it purchased, along with “best practices” advice offered by the carrier to its customers; (2) preclude depositions of present and former employees of the carrier; (3) limit depositions and quash subpoenas seeking information from the carrier’s investigator.

First, the court found that the insured should be entitled to amend its complaint with respect to claims that the carrier engaged in a sham investigation after deciding to deny coverage, for the sole purpose of obtaining information against the insured for future litigation. The court also permitted the insured to amend its complaint with a claim that the carrier failed, in bad faith, to advise the insured as to the basis for its denial. However, the court found that the carrier did not act in bad faith by citing vagueness in the insured’s loan policies as a reason to deny coverage.

Second, the court refused to permit discovery on the carrier’s marketing of its bonds and its “best practices” advice because this information was outside the scope of the insured’s amended claims. The court also denied the insured’s request to depose the carrier’s present and former employees, as well as the subpoenas sought by the insured. The court did permit the insured to seek information relating to the carrier’s investigators, finding that such information was not privileged or attorney work product.

Date of Decision: October 21, 2010

Raritan Bay Fed. Credit Union v. CUMIS Ins. Soc’y, Inc., No. 09-1512, 2010 U.S. Dist. LEXIS 112640, U.S. District for the District of New Jersey (D.N.J. Oct. 21, 2010) (Bongiovanni, J.)

DECEMBER 2012 BAD FAITH CASES: COURT DENIES LEAVE TO AMEND COMPLAINT BECAUSE INSUREDS LACKED STANDING TO BRING COMMON LAW BAD FAITH CLAIM (Western District)

In Norco v. Allstate Ins. Co., the insureds sought to amend their complaint to include common law bad faith claims after the district court previously adopted a magistrate’s Report and Recommendation denying their statutory bad faith claims for lack of standing as guardians at litem. (See this blog). The court also dismissed a statutory bad faith claim brought by the third-party, on behalf of whom this coverage action was initiated, because, in the context of a third-party negligence claim, a statutory bad faith claim must arise from the carrier’s duty to defend and/or indemnify its named insured.

First, the court ruled that the common law bad faith claim as to the third-party was improper because it sought damages in the amount of the reduction in settlement it incurred when it was forced to retain outside counsel. The court rejected such an amendment because the claim was a mere attempt to recast attorney’s fees, which are not recoverable in a breach of contract claim, as consequential damages.

Second, the court rejected the amendment of the named insureds’ common law bad faith claim because such a claim was predicated on lost earnings from time spent attending court proceedings and conferring with the carrier. The court ruled that these are not the type of compensatory damages typically awarded in common law bad faith claims based upon an insurance contact and that such damages would not restore the injured third-party to the position he was in prior to the carrier’s alleged bad faith conduct.

Lastly, the court reiterated the rationale of its previous opinion, holding that the third-party insured cannot assert the existence of a duty owed to him and the named insureds lack standing to bring a common law bad faith claim. As such, the motion to amend was denied.

Date of Decision: October 26, 2012

Norco v. Allstate Ins. Co., No. 2:11-cv-1453, 2012 U.S. Dist. LEXIS 154070, U.S. District Court for the Western District of Pennsylvania (W.D. Pa. Oct. 26, 2012) (Lenihan, M.J.)

DECEMBER 2012 BAD FAITH CASES: COURT DENIES CARRIER’S SUMMARY JUDGMENT MOTION ON TWO BAD FAITH COUNTS, CITING DISPUTED MATERIAL FACTS AS TO THE INVESTIGATION OF AND MOTIVE FOR DENIAL OF INSURED’S CLAIM (Western District)

In Hall v. Nationwide Mut. Ins. Co., the court heard a carrier’s partial summary judgment motion on the insured’s two bad faith allegations. The case arose after the insured suffered serious injuries in a car accident and sought coverage for personal injuries and damage to his automobile. Upon notifying the carrier of this claim, the insured was told to file a police report, a condition of the insured’s policy. The police provided the insured a form to submit to PennDot, which the insured completed and sent to Harrisburg. However, the carrier claimed that no record of this submission existed, denying coverage. The carrier also denied coverage on the insured’s wage loss claim because the insured allegedly failed to prove his disability.

First, the court denied summary judgment on the bad faith claims arising from the insured’s injuries. Examining language from the Pennsylvania Motor Vehicle Financial Responsibility Law (“MVFRL”), the court reasoned that “report” in the insured’s policy does not mean a formal “police report.” As such, the insured did comply with the policy because he went to the police station to report the accident. The carrier’s failure to contact the local police or PennDot, and its choice to contact only the Pennsylvania State Police, raised an inference of bad faith sufficient to deny summary judgment.

Second, the court denied the carrier’s motion with respect to the insured’s bad faith claim on the denial of wage loss benefits. In the fall of 2009, the carrier made two wage loss payments to the insured. However, the carrier ceased payments when it learned that the insured would miss work because of seasonal lay-offs. In the spring of 2010, the insured returned to work, but had to stop because of his disability. The carrier subsequently failed to render wage loss payments, claiming that it was not notified of the disability. Citing a June 2010 letter from the insured regarding his disability, the court denied summary judgment, finding that the carrier knew about the insured’s disability and may have acted with improper motive.

Date of Decision: October 31, 2012

Hall v. Nationwide Mut. Ins. Co., 2012 U.S. Dist. LEXIS 155739, U.S. District Court for the Western District of Pennsylvania (W.D. Pa. Oct. 31, 2012) (Mitchell, J.)

DECEMBER 2012 BAD FAITH CASES: COURT RULES THAT ROVA FARMS PROVIDES A CONTRACTUAL CLAIM AT LAW TO WHICH THE RIGHT TO TRIAL BY JURY ATTACHES (New Jersey Supreme Court)

In Wood v. New Jersey Mfrs. Ins. Co., the New Jersey Supreme Court granted certification to settle an issue of first impression regarding the question of whether a claim brought under Rova Farms Resort, Inc. v. Investors Ins. Co., 65 N.J. 474 (N.J. 1974), is to be decided by judge or jury. The dispute originally arose when the assignee was attacked by the insured’s dog and suffered severe injuries.

After the assignee commenced a personal injury suit against the insured, the insured’s carrier refused to settle. Specifically, the assignee stated that she would accept a $500,000 settlement, which represented the insured’s policy limits. However, the carrier refused, arguing that its valuation of the claim was closer to $300,000. During the underlying litigation, the assignee put the carrier on notice of the potential for a Rova Farms claim. However, the carrier remained steadfast and refused to change from its position. Eventually, the assignee won its personal injury suit, receiving a molded verdict of $1,408,320.33.

Because of the deficiency between the judgment and the insured’s policy limits, the insured assigned all claims under the policy. The assignee then filed a declaratory judgment action, seeking a determination that the carrier was liable for this difference. The assignee also brought claims for bad faith under Rova Farms, seeking a jury trial. The assignee filed a motion for summary judgment and over the carrier’s contention that discovery was not yet completed the Court granted the assignee’s motion.

Specifically, the trial court reasoned that the carrier had proceeded to trial without an expert witness as to economic damages and asserted a “take-it-or-leave-it” settlement offer based on assumptions that the it could not prove at trial. Moreover, the court concluded, the carrier gambled on its chances at trial, contrary to the interests of its insured.

On appeal, the appellate court reversed the trial court’s grant of summary judgment to the assignee. Citing “countervailing factors,” the panel reasoned that the carrier justified in its finding that the assignee’s underlying personal injury claim was only worth $300,000. The panel held that there were genuine fact-sensitive determinations that needed to be made about the reasonableness of the carrier’s handling of settlement negotiations. The court also elected to have the trial court decide whether a judge or jury should decide the assignee’s Rova Farms claims against the insured’s carrier. The Supreme Court granted certification on that issue.

The assignee argued that the right to trial by jury does not attach to Rova Farms claims because they sound in strict liability. Submitting a Rova Farms claim to a jury, it argued, would essentially require another full trial.
However, the carrier argued that a Rova Farms claim is really a traditional contract claim for breach of the covenant of good faith and fair dealing. While this means that a jury should try the claim, the carrier qualified its argument, reasoning that the equitable nature of a bad faith claim may render a bench trial appropriate in some situations.

Several amici filed briefs as well. One argued that, because a Rova Farms claim did not exist at common law, claimants should not be entitled to a jury. Moreover, trying a Rova Farms claim might lead to inconsistent results if it requires two full separate trials. Others argued that jury trials for Rova Farm claims are appropriate because such a claim for bad faith is really a mundane contract claim to which the right to a jury normally applies.

Turning to the merits of these arguments, the Court stated that, regardless of how the action was styled, it was import to discern whether the suit was primarily legal and subject to trial by jury, or equitable, to which no right to a jury trial attaches. Although styled as a declaratory judgment action, the assignee’s case really addressed the carrier’s breach of fiduciary duty to its insured. As such, the assignee’s “Rova Farms bad faith claim is a garden-variety action at law.”

Moreover, the Court reasoned, a “Rova Farms bad faith claim always has been a breach of contract claim, and a breach of contract claim was at common law and remains today an action triable to a jury.” Therefore, the Court affirmed the appellate court’s holding as modified and remanded the case.

Date of Decision: June 4, 2011

Wood v. New Jersey Mfrs. Ins. Co., 206 N.J. 562, New Jersey Supreme Court (N.J. 2011) (Rivera-Soto, J.)

DECEMBER 2012 BAD FAITH CASES: COURT REJECTS INSURED’S BAD FAITH CLAIM BECAUSE ITS COVERAGE ACTION WAS DENIED UNDER CARRIER’S “DISCOVERY” AFFIRMATIVE DEFENSE (New Jersey Federal)

In Diebold, Inc. v. Cont’l Cas. Co., the insured party, a servicer of automated teller machines (“ATM”), brought an action against its carrier for coverage under the parties’ “Commercial Crime Policy” and bad faith. The loss at issue originated when one of the insured’s subcontractors, hired to replenish cash at various ATM’s owned by the insured’s clients, began to steal large sums of money. From 1998 to 2001, one of the insured’s subcontractors would replenish the ATM machines with insufficient amounts of cash.
During this period, the insured’s clients launched a series of complaints seeking to recover the stolen funds. In 2000, the FBI launched an investigation into the matter.

Around this time, the insured began to move its customers away from the subcontractor at issue. Although the insured’s contracts with its clients stated that it would not be liable for losses in money caused during transport to an ATM, yet, the insured made a business decision to compensate its clients for losses caused by its subcontractor. Originally, the insured sought to recover the missing funds from the subcontractor’s carrier. This became impossible, however, when that carrier won its lawsuit in bankruptcy court against the subcontractor, voiding the applicable policy on the basis of equitable fraud.

The insured filed a proof of loss with its carrier in 2007. However, the carrier denied coverage on the basis of a discovery clause in the parties’ policy, which stated that there would be no coverage after the “discovery” of a loss occurs. The insured filed an action for coverage and bad faith. After the court denied the carrier’s motion to dismiss, the parties filed cross-motions for summary judgment.

The carrier asserted an affirmative defense under the “discovery clause,” arguing that the insured first became aware of its loss during the period between 1998 and 2001. Thus, the carrier argued, it was not liable under the policy because the insured’s claim was made well after it first discovered evidence of the loss. The insured countered that the carrier had not produced evidence suggesting when the subcontractor first stole funds from its clients.

However, the court disagreed, reasoning that the insured bears the burden of production in this case because it was more likely than the carrier to first discover evidence of the missing funds. Examining the evidence that was produced, the court recognized that the date of discovery was likely sometime in 2000. At that time, an FBI investigation, with which the insured willingly complied, commenced into the activities of the subcontractor. Moreover, the insured began to move its customers away from that specific subcontractor because it received complaints of missing funds.

Nevertheless, the insured argued that these facts were irrelevant and that it did not discover the loss until a later time because its Director of Risk Management was not aware of the investigation. It claims that the officer who attended meetings and approved the reimbursements to customers with the FBI was not a part of the Risk Management team.

However, the court disagreed that these “corporate formalities” should permit the insured to avoid the carrier’s “discovery” defense. Based on the evidence it received, the court held that the insured’s Risk Management team was aware of facts in 2000 that would lead a reasonable person to conclude that a loss occurred. As such, the court denied the insured’s coverage action.

Without the success of the predicate coverage claim, the court concluded, the insured’s bad faith claim should be denied. Such a claim is not independent of the insured’s coverage action and was therefore denied.

Date of Decision: June 21, 2010

Diebold, Inc. v. Cont’l Cas. Co., 719 F. Supp. 2d 451, U.S. District Court for the District of New Jersey (D.N.J. 2010) (Irenas, J.)

DECEMBER 2012 BAD FAITH CASES: COURT DISMISSES BAD FAITH CLAIM BECAUSE DENIAL OF CLAIM ALONE DOES NOT AMOUNT TO LIABILITY; COURT ALSO RULES THAT ATTORNEYS FEES ARE IMPROPER WHERE DISPUTED POLICY IS A FIRST-PARTY SURETY CONTRACT OR BOND (New Jersey Federal)

In Raritan Bay Fed. Credit Union v. CUMIS Ins. Soc’y, Inc., the court heard a carrier’s motion to dismiss its insured’s claim for bad faith and strike a request for attorney’s fees and punitive damages. The case arose from a coverage dispute over an “Employee or Director Dishonesty” policy purchased by the insured from the carrier.

In 2005, the insured, a credit union, began a new lending program whereby it extended its loan services to local automobile dealerships. However, the insured’s loan manager, who was in charge of approving or denying applications in conformance with the insured’s policy manual, began to obtain improper financial benefits for approving loans. As a result, the insured lost money when various loans defaulted. The insured filed a claim with the carrier, but was denied coverage. The insured subsequently filed suit against the carrier, alleging bad faith among other claims. The carrier filed the instant motion, seeking to dismiss the bad faith count.

The carrier argued that the insured’s complaint did not allege sufficient facts to support a finding of bad faith. In its complaint, the insured had alleged that the policy was meant to cover losses caused by an employee’s dishonest acts, and that in denying coverage for such an event, the carrier acted in bad faith. However, the court sided with the carrier, ruling that these allegations were insufficient to support a finding that the carrier acted with reckless indifference in denying the insured’s claim. The court did not grant leave to amend, but dismissed without prejudice, noting that the insured could amend its complaint if it later discovers facts sufficient to allege bad faith.

Next, the court granted the carrier’s motion to strike the insured’s request for punitive damages because the bad faith count had been dismissed and punitive damages are unavailable for the underlying contract claims.

Lastly, the court denied the insured’s request for attorney’s fees. Specifically, it reasoned that this request should be stricken because the policy at issue was a surety bond, not a liability and indemnity policy. Under New Jersey law, attorney’s fees are only permitted in cases dealing with a liability policy. According to N.J. Ct. R. 4:42-9(a)(6), a surety bond that protects an insured against a third-party is not actually a surety bond, but a liability policy. In such a case, attorney’s fees may be awarded.

However, the court held that the policy in this instance was a surety bond between the insured and its carrier. It did not protect against liability, but existed to pay the insured for acts or omissions of its employees. As such, the unambiguous language of the policy created a suretyship agreement or bond between the parties that fell outside the scope of N.J. Ct. R. 4:42-9(a)(6). Accordingly, the court granted the carrier’s motion and struck this request from the complaint.

Date of Decision: July 22, 2009

Raritan Bay Fed. Credit Union v. CUMIS Ins. Soc’y, Inc., 09-1512, 2009 U.S. Dist. LEXIS 63216, U.S. District Court for the District of New Jersey (D.N.J. July 22, 2009) (Wolfson, J.)