Yearly Archive for 2019

PENNSYLVANIA AND NEW JERSEY BAD FAITH CASE LAW BLOG LISTED AMONG TOP INSURANCE LAW BLOGS

In Feedspot’s recent list of “Top 50 Insurance Law Blogs, News Websites and Newsletters To Follow in 2019”, the Pennsylvania and New Jersey Insurance Bad Faith Case Law Blog was listed number 4.  This list included “the Best Insurance Law Blogs from thousands of Insurance Law blogs on the web using search and social metrics.”

COURT WILL NOT CONSIDER EVIDENTIARY DOCUMENTS ATTACHED TO AN ANSWER IN DECIDING A MOTION FOR JUDGMENT ON THE PLEADINGS (Middle District)

This breach of contract and bad faith action outlines what a court may consider in addressing a motion for judgment on the pleadings. In this case, the documents attached to an answer were not “written instruments” that a court could consider in deciding a motion for judgment on the pleadings.

There was an undisputed fire loss, but there was an issue of whether at least one of the insureds resided in the home at the time of the loss. If neither insured resided at the property, there would be no coverage.

The complaint alleged facts supporting the position that one of the insureds did live in the home at the time of the loss. In answering the complaint, the insurer attached that insured’s statement under oath, the insurer’s investigative report, an EMT form, and an electric usage bill. The insurer relied on the facts in these documents to argue that both insureds did not reside at the home.

The court ruled these documents could not be used in support of a motion for judgment on the pleadings. The court found these were not the kind of “written instruments” that could be incorporated into a pleading, as contemplated by the Rules of Civil Procedure. Instead, they were “lengthy exhibits containing evidentiary matter [that] should not be attached to the pleadings.”

For example, the court observed “[e]xhibits solely containing evidentiary matter, such as depositions, are not considered ‘written instruments’ under Rule 10(c) and are typically excluded from consideration of the pleadings.”

Thus, “[b]ecause the Statements Under Oath consist of only evidentiary matters, they cannot be considered at this juncture.” The same principle applied to the investigative reports and electric bills.

Date of Decision: October 9, 2019

Bloxham v. Allstate Ins. Co., U. S. District Court Middle District of Pennsylvania NO. 3:19-CV-0481, 2019 U.S. Dist. LEXIS 175198 (M.D. Pa. Oct. 9, 2019) (Caputo, J.)

COURT EXCLUDES EXPERT REPORT BEFORE TRIAL, AND REINSTATES BAD FAITH CLAIM THAT HAD BEEN DISMISSED ON THE BASIS OF THAT EXPERT REPORT (Middle District)

This is a breach of contract and bad faith disability benefits case. The court originally granted the insurer summary judgment on bad faith, based on a defense medical expert report that plaintiff could go back to work in his field (dentistry). Reliance of this report had established the insurer’s reasonableness in denying the claim.

On motions in limine and a Daubert hearing before trial, however, the court ruled the insurer’s same medical expert was not qualified to opine on the insured’s ability to continue working. It excluded this expert’s medical testimony. Soon after, the court reconsidered its earlier bad faith ruling, and reinstated the bad faith claim on plaintiff’s motion. The court stated: “Given that [the expert] can no longer give his expert opinion as an independent medical examiner that [the insured] was no longer disabled, the evidence in the record does not establish as a matter of law that Defendants ‘had a reasonable basis to deny [the insured’s] claim.’”

The insurer then moved for reconsideration, and the court denied that motion, allowing the bad faith claim to proceed.

Further opening the door on bad faith, the insured was now permitted to testify about his personal beliefs on the insured’s intentions during claims handling and the reasonableness of the insurer’s conduct, the insurer’s requiring certain testing on plaintiff, and the reasonableness of how the insurer’s expert conducted that testing. The insured’s credibility could be challenged at trial on these issues. The insured could not testify, however, about his own internet research into the insurer’s claim handling history, “given [the insurer’s] recent reforms to its claim handling procedures.”

For purposes of defending the bad faith claims, the insurer could still use evidence of certain excluded expert opinions, even though these experts were found unqualified for other purposes. These reports remained relevant to show what the insurer relied upon during the denial process, and in “considering [the insured’s] credibility in bringing his disability claim.”

Date of Decision: October 4, 2019

Brugler v. Unum Group, U. S. District Court Middle District of Pennsylvania No. 4:15-CV-01031, 2019 U.S. Dist. LEXIS 172587, 2019 WL 4917922 (M.D. Pa. Oct. 4, 2019) (Brann, J.)

CONCLUSORY PLEADINGS INSUFFICIENT TO STATE BAD FAITH CLAIM; MERE REFUSAL TO PAY SUM DEMANDED IS NOT BAD FAITH PER SE (Philadelphia Federal)

In this UIM case, the tortfeasor’s insurer settled for $15,000, and the injured insured demanded the $300,000 UIM policy limits from his own carrier. The insurer did not accede to that demand, and the husband and wife insureds sued for breach of contract and bad faith. Judge Schiller dismissed the bad faith claim with leave to amend, if a plausible claim could be pleaded.

Plaintiff failed to allege sufficient facts to state a plausible claim. The insureds’ conclusory allegations included “failing to evaluate Plaintiff’s claim objectively and fairly; failing to complete a prompt and thorough investigation of Plaintiff’s claim… [and] unreasonably withholding policy benefits[.]” There are, however, no specific facts pleaded supporting these conclusions. “Courts consistently hold that bare-bones allegations of bad faith such as these, without more, are insufficient to survive a motion to dismiss. Indeed, conclusory allegations that an insurer ‘unreasonably withheld the payment of [UIM] benefits under the policy…failed to engage in good faith negotiations… [and] failed to perform an adequate investigation’ are insufficient to state a claim for bad faith.”

Similarly, the complaint alleges the insurer “failed to conduct a fair and reasonable investigation into his claim but does not plead any facts related to that investigation.” The court further found the insured could not state a claim on the basis that the insurer “did not pay [the insured’s] claims even when he provided the same information that led [the tortfeasor’s insurer] to tender the limits of its policy.” The court observes that “the failure to immediately accede to a demand for the policy limit cannot, without more, amount to bad faith.” [Though the court does not so state, there appears to be no explanation in the complaint why providing information leading to a $15,000 payment automatically requires an additional $300,000 payment.]

The court provided the insureds “may file an amended complaint to add a bad faith claim, but only if they can plausibly do so.” (Emphasis in original)

Date of Decision: October 4, 2019

Doyle v. Liberty Mutual Ins., U. S. District Court Eastern District of Pennsylvania No. 19-3460, 2019 U.S. Dist. LEXIS 172581, 2019 WL 4917123 (E.D. Pa. Oct. 4, 2019) (Schiller, J.)

SANCTIONS AGAINST INSURED REVERSED WHERE INSURER DID NOT SHOW INSURED’S BAD FAITH IN BRINGING FAILED LITIGATION AGAINST INSURER (New Jersey Appellate Division) (Unpublished)

In this case, New Jersey’s Appellate Division affirmed the dismissal and grant of summary judgment to the insurer on all claims, but reversed the trial court’s award of frivolous litigation sanctions against the insured because there was no finding the insured acted in bad faith in bringing the claims.

Factual Background

The insurer provided the eighth layer of excess insurance in this Superstorm Sandy case. The primary and lower layers provided $75 Million, and the eighth layer provided another $50 Million above that.

In 2012, the insured hired a contractor to do repair and restoration work. The contractor allocated $950,000 to specific building repair and restoration work. The excess carriers all determined repair and restoration work was not covered. In 2014, the insured reached a global settlement with all insurers for $93.5 Million. The eighth layer insurance contributed $16 Million. The insured executed a release for any and all claims and demands for Superstorm Sandy property damage and business income losses, discharging the eighth layer insurer.

In 2015, however, the insured asked the eighth layer insurer to reconsider paying the contractor’s repair and restoration costs, after another anticipated source for this loss did not pan out. The eighth layer carrier refused. The insured brought suit in 2015.

The Litigation

The insured alleged it relied on the advice of the excess insurers’ adjuster and experts in how the repair and restoration costs were allocated, which resulted in it obtaining no sum to settle that out-of-pocket payment. The insured alleges that it only agreed to the 2014 settlement based on this bad advice, and would otherwise have included these repair and replacement costs in its negotiations and settlement with the insured, beyond the sum actually paid.

The insured brought various claims against the adjusters and experts, and claimed the eighth layer insurance was liable for their acts and omissions on an agency theory. The insured also claimed the eighth layer insurer was liable for breach of contract, unjust enrichment, breach of the implied covenant of good faith and fair dealing, and bad faith in denying the claim for the repair and restoration costs. Defendants moved to dismiss all claims, which the trial court granted in part, including the unjust enrichment claim and some of the agency theory claims. The remaining claims were later dismissed on summary judgment.

The eighth layer insurer filed a motion against the insured for frivolous litigation sanctions. The trial court granted that motion, and ruled the insurer was entitled to the attorney’s fees and costs.

The insured appealed the grant of summary judgment and the sanctions.

The Appellate Division Affirms for the Insurer on the Merits

First, the Appellate Division found no support in the record that the release was only executed as the result of fraud. The insured was well aware it was settling all Superstorm Sandy related claims, that the repair and restoration costs were not part of the settlement, and that the release would bar Superstorm Sandy related claims against all insurers. The insured was also aware that the repair and restoration costs were subject to recovery regarding another entity and its insurers, and that the settling excess insurance companies would not agree to make their settlement contingent on the outcome of that separate matter.

Next, the Appellate Division affirmed the trial court’s findings that there was no common law fraud or negligent misrepresentation by the agent or the insurer. It likewise affirmed judgment on the negligence claim on the basis that no expert testimony was proffered regarding the conduct of the independent insurance adjuster (which plaintiff was trying to bootstrap into a claim against the insurer as well).

The Appellate Division Reverses Sanctions Because there was no Finding of Bad Faith

The Appellate Division addressed the sanction award against the insured for frivolous litigation. [There were no sanctions against counsel.] The insurer’s attorneys had sent the insured’s counsel a letter stating the “complaint was frivolous because the release precluded … asserting any causes of action against [the eighth layer insurer].” The letter “also stated that [the] fraud claims were unsustainable because [the insured’s] representatives had acknowledged the [repair and restoration costs at issue] were not recoverable….” Despite this letter, the insured’s “counsel did not withdraw the complaint.”

A motion for attorneys’ fees and costs ensued. The insured and its counsel both asserted that they believed the claims had merit.

The trial judge found the claims frivolous on the basis that the insured’s claims had no reasonable basis in the law or equity, and there was no good faith argument for the extension, modification or reversal of existing law. Further, the trial judge found the insured knew that the repair and restoration costs would have to come from another source, and that the excess insurers would not make their settlement contingent on recovery of those costs from another source.

The Appellate Division reversed the frivolous litigation sanctions, finding the trial court relied upon the wrong standards. The frivolous litigation statute, N.J.S.A. 2A:15-59.1, which applies only to represented parties, requires a finding of bad faith on the plaintiff’s part. Here, there was no such finding. Thus, the claim failed.

The Appellate Division laid out these bad faith standards:

Where ‘a prevailing defendant’s allegation is based on the absence of a ‘reasonable basis in law or equity’ for the plaintiff’s claim and the plaintiff is represented by an attorney, an award cannot be sustained if the ‘plaintiff did not act in bad faith in asserting’ or pursuing the claim.” …. A finding of bad faith is essential because “clients generally rely on their attorneys ‘to evaluate the basis in law or equity of a claim or defenses,’ and ‘a client who relies in good faith on the advice of counsel cannot be found to have known that his or her claim or defense was baseless.’” …. Furthermore, under the FLS, the party seeking the imposition of sanctions “bears the burden of proving that the non-prevailing party acted in bad faith.” …. We have held that “a grant of a motion for summary judgment in favor of a [prevailing party], without more, does not support a finding that the [non-prevailing party] filed or pursued the claim in bad faith.”

The trial court did reference Rule 1:48, which only applies to attorneys and pro se parties, and thus had no application in this matter.

Date of Decision: October 4, 2019

Fedway Assocs. v. Engle Martin & Assocs., Superior Court of New Jersey Appellate Division DOCKET NO. A-0297-18T4, 2019 N.J. Super. Unpub. LEXIS 2048 (N.J. App. Div. Oct. 4, 2019) (Currier, Hoffman, Yannotti, JJ.) (Unpublished)

ASSAULT OR BATTERY EXCLUSION ENCOMPASSES ALLEGATIONS AGAINST INSURED FOR ALLEGEDLY CREATING CONDITIONS THAT ALLOWED THE ASSAULT OR BATTERY (Philadelphia Federal)

In this case, an insurer won declaratory judgment on coverage based on an assault or battery exclusion. Fineman Krekstein & Harris partner Diane B. Sher and associate Matthew E. Selmasska were successful counsel for the declaratory judgment plaintiff in this action.

The underlying plaintiff was shot in a parking lot, and brought an action against various parties other than the unknown assailant. The underlying complaint went out of its way to make clear that there was no assault and battery count, but only claims for negligence or recklessness against parties whose alleged failures to make the parking lot safe enabled the shooting.

One defendant in the underlying action had a commercial general liability policy with an “Assault or Battery Exclusion” excluding coverage for personal injury damages arising out of an assault, battery, or physical altercation. This exclusion had four subparagraphs defining its scope, which were broad and went well beyond the actual acts of assault, battery, or physical altercation, e.g., coverage was excluded “[w]hether or not [the personal injury from the assault, battery, or physical altercation was] caused by or arising out of an insured’s failure to properly supervise or keep an insured’s premises in a safe condition.…”

The CGL insurer filed a declaratory judgment action that there was no duty to defend or indemnify, nor any duty to defend or indemnify as to any cross-claims for indemnification or contribution against the insured in the underlying action.  It moved for judgment on the pleadings.

The court concluded that “the fact that the exclusion covers acts and omissions in connection with the prevention of an assault or battery means that [the insurer] is not obligated to defend its insured from allegations that the insured’s failure to take certain precautions resulted in [the insured’s] injuries.”

Thus, the court granted the insurer’s motion for judgment on the pleadings on all counts.

Date of Decision: October 2, 2019

Great Lakes Insurance SE v. Smithwick, U. S. District Court for the Eastern District of Pennsylvania No. 2:18-cv-04797, 2019 U.S. Dist. LEXIS 171622 (E.D. Pa. Oct. 2, 2019).

REASONABLENESS OF INVESTIGATION IS NOT SOLELY DETERMINED BY THE LENGTH OF TIME USED BY THE ADJUSTER TO REACH A CONCLUSION ON COVERAGE (Middle District)

Through an unusual set of circumstances, the insureds’ electricity service at a vacation home was terminated by third parties, unbeknownst to the insureds. This led to the heating system’s not functioning, which in turn led to frozen pipes bursting, and significant water damage to their home. Their insurer denied coverage under a policy provision that required the insureds to take reasonable care in maintaining heat while the property was unoccupied, or in shutting down the water system.

The insureds brought claims for breach of contract, negligence, and bad faith. The negligence claim was dismissed under the gist of the action doctrine, as the claim was based on the breach of an insurance contract and any duties arose out of that contract. The breach of contract claim was dismissed as being initiated after the one-year contract period for bringing suit, expressly required in the insurance policy.

The court analyzed the bad faith came under both the common law and Pennsylvania’s Bad Faith Statute, 42 Pa.C.S. § 8371. One difference between the two claims is that common law bad faith permits recovery of compensatory and consequential damages, while statutory bad faith is limited to interest, punitive damages, legal fees and costs.

In this case, the common law bad faith claim was time barred, being subject to the same analysis as the breach of contract claim.

The statutory bad faith claim was based upon an allegedly unreasonable failure to investigate the facts as to the history of the termination of the insureds’ electric service as the cause of the loss. The insureds argued that the adjuster’s single day visit to “the property was insufficient to ascertain the information necessary to determine the cause of the damage, particularly in light of the adjuster’s failure to contact [other relevant parties] to determine what events led to the transfer and termination of electric service at the [insureds’] Pennsylvania vacation home.” The court, however, granted the insurer summary judgment on this issue.

While the “adjuster may not have pursued an investigation into the ultimate cause of the property damage to the extent the [insureds] desired, a single, one-day visit to the home was sufficient for the adjuster to ascertain that the property was vacant for an extended period of time, that electric service to the home had been shut off for a period of months resulting in a failure to maintain heat inside the home over an extended period of time, and that the cause of property damage was a freeze out. This information, together with that gathered by claims handlers—including, in particular, the [insureds’] failure to note over the course of several months that they were no longer being billed for electric service—was sufficient … to reasonably determine that the [insureds] had failed to use reasonable care to maintain heat in the home while it was vacant for several months of winter weather. Stated another way, we find that, based on the evidence adduced by the parties on summary judgment, viewed in the light most favorable to the plaintiffs, no reasonable jury could find that [the insurer’s] investigation was inadequate or that its denial of coverage was frivolous or unfounded.

Date of Decision: September 27, 2019

Pager v. Metro. Edison, U. S. District Court Middle District of Pennsylvania CIVIL ACTION NO. 3:17-cv-00934, 2019 U.S. Dist. LEXIS 166052 (M.D. Pa. Sept. 27, 2019) (Saporito, M.J.)

BAD FAITH CLAIM MAY PROCEED ON SOME CLAIMS HANDLING ISSUES, BUT OTHERS FAIL TO MAKE OUT A CASE (Western District)

In this UIM bad faith case, Judge Conner, sitting in the Western District for this matter, closely analyzed the insurer’s investigation and claims handling in allowing the bad faith case to proceed. While agreeing with the carrier on a few distinct bad faith sub-issues, summary judgment was denied on the bad faith and breach of contract claims.

The insured was a tetraplegic prior to being hit by the tortfeasors’ vehicle. She made claims that there were new injuries and an exacerbation of her existing autonomic dysreflexia (AD). The carrier assigned a senior adjuster, and offered $20,000 on a $1 Million policy.

The key underlying fact is that a claims adjuster, with no medical training, was making critical decisions based on medical reports and records, or an absence thereof, without sufficiently consulting with doctors or someone with medical training who had experience with AD. The insured provided medical records and a report from her own doctor, a specialist in spinal cord injuries, setting out the basis of her claims of new injuries and the details of the exacerbated AD. The adjuster did have access to a consulting nurse, but the nurse had no AD experience, and her advice to obtain an IME allegedly was disregarded.

The adjuster never sought a statement under oath or obtained an IME, despite the consulting nurse’s recommendation to obtain an IME. There was a hot dispute of fact over whether the adjuster orally requested an IME from the insured’s attorney. After finally obtaining all medical records, the carrier offered $25,000 on the UIM claim, and the insured subsequently sued for breach of contract and bad faith. After litigation started, the carrier did obtain an IME. The carrier’s IME concluded that any AD symptoms were the result of preexisting injuries, and not the motor vehicle accident at issue.

Judge Conner gave close analysis to each distinct aspect of the insured’s bad faith claim.

  1. There must be a meaningful investigation.

An “insurance company must conduct a meaningful investigation, which may include an in-person interview, examination under oath, medical authorizations, and/or independent medical examinations.” “Both federal and Pennsylvania courts have indicated that failure to timely obtain an IME is probative of bad faith. … Common sense dictates that an IME is particularly insightful when the insured suffers from a rare, complex, and unique preexisting condition.”

Again, this was summary judgment, so the facts were taken in the insured’s favor as non-movant. That said, it is undisputed there was no pre-suit IME, that the insured had a long medical history, and that her expert doctor stated the accident exacerbated the AD. Moreover, the carrier’s own nursing consultant had recommended an IME, which advice was not followed. The court was concerned “that an adjuster with no medical training, tasked with evaluating a unique medical condition for an insured with a unique medical history, ignored a medical professional’s recommendation.” “Whether this decision was made in bad faith is an issue of genuine dispute, but [the insured] has put forth enough clear and convincing evidence that [the carrier’s] decision stemmed from recklessness rather than mere negligence.”

  1. The court rejects a “harmless error” argument.

The carrier argued that even if it improperly failed to take a pre-suit IME, it did so post-suit and its doctor found no claim existed because all symptoms were the result of a pre-existing condition. The court rejected this theory.

“To begin with, the court is unaware of a harmless error doctrine in Pennsylvania’s statutory bad-faith jurisprudence, and [the carrier] does not point to one. This argument also misconceives our inquiry. We must review the process by which [the carrier] made its decisions and determine whether they were supported by a reasonable basis. That process need not be ‘flawless,’ but it must be thorough enough to provide … a ‘reasonable basis’ for declining to settle [the] claim. Whether [the carrier] had a ‘reasonable basis’ during its investigation is in dispute because [it] did not seek a pre-suit IME. This, coupled with [the consulting nurse’s] disregarded recommendation that [the carrier] obtain an IME, is enough clear and convincing evidence to suggest that [the] settlement strategy lacked a reasonable basis. That [the] post-suit report confirms [the carrier’s] pre-suit determination does not change whether [the carrier] acted in bad faith in making that determination.”

  1. The insurer’s selecting a doctor to conduct an IME does not by itself show bias.

The insured asserted that the doctor selected to perform the IME was improperly biased. The court observed, “[b]ias in selecting a physician to conduct an IME may be relevant to bad faith, but a baseless allegation of bias alone will not suffice.” The insured did not bring out any evidence to support her bias claim. This naked assertion was not sufficient: “[I]t is clear that [the carrier] chose a physician who would not be independent but instead would be biased in his opinions regarding the extent of [the] alleged injuries and complaints as well as the cause of same.” That the doctor did “prior work for insurance companies does not alone establish unlawful bias or bad faith, and [the insured] does not cite on-point authority to show otherwise.”

  1. The court rejects the carrier’s argument that chose not to take the IME to avoid acting in bad faith.

In its final point on the IME issue, the court states: “In a last-ditch effort to combat [the insured’s] claim, [the carrier] maintains that an IME is not required because ‘insurers have been sued for bad faith when they require insureds submit to IME’s to obtain benefits.’ (Doc. 91 at 14 (citing Sayles v. Allstate Ins. Co., 260 F. Supp. 3d 427, 432 (M.D. Pa. 2017)). That may be true in a vacuum, but Sayles arose in a different context: there, the insurer demanded that the insured submit to an IME without seeking leave from the court in violation of Pennsylvania law. Sayles, 260 F. Supp. 3d at 432, 434-38. [The carrier] did not demand (or request) an IME here. Thus, Sayles is unhelpful.”

  1. A failure to consider relevant information could support a bad faith claim.

The court found that whether the carrier “adequately considered [the insured’s] complete medical profile is a material issue, and the evidence on this point is in genuine dispute.” The record did include the adjuster’s testimony that she considered the insured’s medical report, but relied more heavily on the actual medical records. The court stated: “At first blush this sounds reasonable. But [the adjuster] is not a medical professional and is not qualified to decide if a treating doctor’s narrative is irrelevant to an insured’s medical condition. No IME was conducted to place these records in context despite the suggestion of [the nursing consultant]—a medical professional. [The adjuster] may not have ignored facts per se, but it is difficult for an adjuster to favor some evidence (medical records) over others (medical reports) without professional expertise or the findings of an IME.” Thus, the insured had put on sufficient evidence to go forward on the argument that the insurer “based its settlement strategy on an incomplete medical picture.”

  1. The insured did not have a case for bad faith delay.

“To show bad-faith delay, the insured must establish ‘the delay is attributable to the defendant, that the defendant had no reasonable basis for the actions it undertook which resulted in the delay, and that the defendant knew or recklessly disregarded the fact that it had no reasonable basis to deny payment.’” The court observed that “[t]he process for resolving an insurance claim can be slow and frustrating … but a long claims-processing period does not constitute bad faith by itself….”

In this case, the insured cause some of the delay, “which leans against a finding of bad faith.” The court further observed the four-month time delay between the insured’s last contact with the carrier and filing suit, and rejected the argument of delays in connection with transmitting records, the timing of the IME report and the IME itself, and the carrier’s filing various motions in the case.

After finding the bad faith case could go forward, the court also denied the carrier’s summary judgment on the breach of contract claims, under the law of the case theory and because there was a dispute of fact over whether the AD exacerbation resulted from accident or pre-existing condition.

September 26, 2019

Baum v. Metro. Prop. & Cas. Ins. Co., U. S. District Court Western District of Pennsylvania CIVIL ACTION NO. 2:16-CV-623, 2019 U.S. Dist. LEXIS 164736 (W.D. Pa. Sept. 26, 2019) (Conner, J.)

AS RACCOONS ARE NOT PEOPLE, THERE IS NO COVERAGE, AND NO BAD FAITH (Western District)

The insured argued the carrier’s policy provided coverage for property damage caused by raccoons. Specifically, it asserted the policy’s language covering vandalism and malicious mischief applied, i.e., the raccoons should be treated as vandals having malicious intent in wreaking havoc inside the insured dwelling.  This reading was possible because the terms vandalism and malicious mischief were undefined in the policy, and Pennsylvania’s courts had never determined if those terms could apply to animals.

The court rejected these arguments, and the notion that the absence of definition in the policy could open the door to meanings outside of commonly understood usage.

The court analyzed, at significant length, common law, dictionary definitions, and statutes using the terms vandalism or malicious mischief.  The court concluded that vandalism could only be the act of human beings. Likewise, animals could not have malicious intent. Rather, malice as used in an insurance contract, or anywhere in the law, is a human quality. As the court observed, “[b]y its very language criminal mischief, like all crimes, requires a human actor. Animals are subject only to the laws of nature, not the Pennsylvania Crimes Code or law governing human conduct.”

The court cited a New Mexico case, involving a bobcat, reaching a similar conclusion. The  court quoted the New Mexico judge’s poetic conclusion summarizing his opinion on feline mentation, which the Pennsylvania court found good for raccoons too:

“Alas, it is written in the law

That an animal with the paw

Does not have the mind

To do the damage of this kind.

And so, I’m sorry, the Plaintiff won’t get paid.

That’s how the contract was made.

This policy does not apply

When the bobcat runs awry.”

In sum, there was no coverage. Thus, there could be no bad faith.

[The court did not mention that the original “Vandals” were human beings, most famous for sacking Rome in 455 (hence the term vandalism).

For some interesting reading on raccoons, this recent article describes the destructive risks raccoons pose to the world, and how they too have now reached Italy.]

Date of Decision: September 19, 2019

Capital Flip, LLC v. American Modern Select Insurance Co., U. S. District Court Western District of Pennsylvania Civil Action No. 2:19-cv-180, 2019 U.S. Dist. LEXIS 165422, 2019 WL 4536164 (W.D. Pa. Sept. 19, 2019) (Stickman, J.)

THIRD CIRCUIT FINDS KVAERNER DOES NOT APPLY TO POLICY USING “EXPECTED OR INTENDED” LANGUAGE TO DEFINE “OCCURRENCE” (Third Circuit)

While not directly a bad faith case, this Third Circuit decision creates an important annotation to the Kvaerner doctrine. Specifically, after last week’s Sapa Extrusions decision, insureds, insurers, and their counsel must now scrutinize the specific definition of “occurrence” to determine if Kvaerner controls, at least in federal courts applying Pennsylvania law. [It is also realistic to expect that Pennsylvania’s state courts will strongly consider Sapa Extrusion’s persuasive value as well.]

The case involved millions of allegedly faulty products sold by the insured to a window contractor, which were then incorporated into millions of windows. Those windows had to be replaced, and the contractor brought suit against the insured. That case settled for a large sum. The insured sought recovery for the settlement sum against 28 different insurance policies.

The District Court found that there was no “occurrence” under the Pennsylvania’s Supreme Court’s Kvaerner decision and its progeny, and ruled for the insurers. The Third Circuit agreed that nineteen of the policies were subject to Kvaerner’s principles, but nine were not. It sent those nine policies back to the District Court for further analysis on whether there could be coverage.

By way of background, in Kvaerner U.S., Inc. v. Commercial Union Insurance Co., 908 A.2d 888 (Pa. 2006), Pennsylvania’s Supreme Court established the principle that faulty workmanship is not an “occurrence,” and therefore is not covered under a liability policy. In, e.g., Millers Capital Insurance Co. v. Gambone Brothers Dev. Co., 941 A.2d 706 (Pa. Super. Ct. 2008) and Nationwide Mutual Insurance Co. v. CPB International, Inc., 562 F.3d 591 (3d Cir. 2009), the courts further explained that Kvaerner’s interpretation of occurrence likewise did not encompass the reasonably foreseeable consequences of faulty workmanship. In the 2013 Indalex case, Pennsylvania’s Superior Court explained that Kvaerner did not govern faulty product claims against the product manufacturer for off-the-shelf products purchased by contractors.

As now set forth in Sapa Extrusions, however, Kvaerner only establishes its meaning of “occurrence” based on the specific policy language at issue in that case, i.e., Kvaerner does not automatically apply to all occurrence policies regardless of how occurrence is defined. Looking at the language of all 28 policies in this case, the Third Circuit found that Kvaerner and its progeny did not apply to some of those policies because their language defining “occurrence” differed from the policy language in Kvaerner.

In Kvaener, occurrence was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The Third Circuit called this the “accident definition” of occurrence. Under Kvaerner, this definition measures occurrence by an objective standard of what constitutes an accident, and faulty workmanship cannot objectively constitute an accident by its very nature.

The Third Circuit contrasted the accident definition with the “expected/intended definition” of occurrence. The expected/intended definition defined occurrence “as ‘an accident, including continuous or repeated exposure to conditions, which results in Bodily Injury or Property Damage neither expected nor intended from the standpoint of the Insured.’” [Emphasis added] This definition is similar to the “injurious exposure definition,” which defines occurrence as “’injurious exposure, including continuous or repeated exposure, to conditions, which results, during the policy period, in personal injury or property damage … neither expected or intended from the standpoint of the insured.’” [Emphasis added]

The court found that the expected or intended language created a subjective standard for determining whether an act was an accident, as expressed by the Pennsylvania Superior Court’s decision in United Services Automobile Association v. Elitzky, 517 A.2d 982 (Pa. Super. Ct. 1986). Thus, the Third Circuit found that the “expected or intended” language in the latter two types of policy definitions took the meaning of occurrence outside the objective rule applied in Kvaerner.

The panel concluded:

(1) “For the seven policies that contain the Expected/Intended Definition of ‘occurrence,’ we hold that the Insured’s Intent Clause triggers the subjective-intent standard from Elitzky. We will vacate the District Court’s decision as it relates to these policies and remand for further consideration consistent with this opinion.”

(2) “And for the two policies that contain the Injurious Exposure Definition of ‘occurrence,’ since they also include the Insured’s Intent Clause, we will vacate the District Court’s decision and remand for further consideration consistent with this opinion.”

The court took “no position on whether [the insured] may ultimately recover under any of the policies we are remanding to the District Court for more consideration. Given the extensive record and the amount in controversy, the parties should be afforded the opportunity to develop their coverage arguments, including various theories of triggering conditions, under those policies before the District Court in the first instance.”

Date of Decision: September 13, 2019

Sapa Extrusions, Inc. v. Liberty Mutual Insurance Co., U. S. Court of Appeals for the Third Circuit No. 18-2206, 2019 U.S. App. LEXIS 27668, 2019 WL 4384187 (3d Cir. Sept. 13, 2019) (Fisher, Porter, Restrepo, JJ.)