Monthly Archive for March, 2019

SUPREME COURT ACCEPTS APPEAL IN BERG V. NATIONWIDE ON WHETHER SUPERIOR COURT ABUSED ITS DISCRETION IN REWEIGHING EVIDENCE (Pennsylvania Supreme Court)

Of the thousands of statutory bad faith cases since section 8371’s creation, Berg v. Nationwide stands at the top of the list. The case started in 1998. One of the plaintiffs has since passed away. In 2014, Common Pleas Judge Jeffrey K. Sprecher awarded plaintiffs bad faith damages of $21,000,000. In 2018, the Superior Court reversed that $21,000,000 judgment.

This past Friday (March 29, 2019), the Supreme Court made known that the litigation will go into its third decade when it granted an appeal from that Superior Court decision, on the following three issues:

  1. [D]oes an appellate court abuse its discretion by reweighing and disregarding clear and convincing evidence introduced in the trial court upon which the trial court relied to enter a finding of insurance bad faith?

  2. [D]id the Superior Court abuse its discretion by reweighing and disregarding clear and competent evidence upon which the trial court relied to support its finding of insurance bad faith [pursuant to the standard set forth in Rancosky v. Washington Nat’l Ins Co., 170 A.3d 364 (Pa. 2017)]?

  3. Does an insurer that elects under an insurance contract to repair collision damage to a motor vehicle, rather than pay the insured the fair value of the loss directly, have a duty to return the motor vehicle to its insured in a safe and serviceable condition pursuant to national insurance standards, and pursuant to its duty of good faith and fair dealing?

The Order granting the petition on these three issues can be found here, in Berg v. Nationwide Mutual Insurance Co., No. 569 MAL 2018 (Pa. Mar. 29, 2019).

A summary of the Superior Court’s 2018 decision is posted here, and amendment thereto is posted here.

A summary of Judge Sprecher’s 2014 trial court decision awarding $21,000,000 can be found here.

Judge Sprecher’s ruling followed an earlier 2012 Superior Court decision in Berg, summarized here. This 2012 opinion has proven influential. A quick Lexis search shows it being cited 70 times.

COURT REFUSES TO RECONSIDER RULING THAT DISPUTE OVER VALUATION ALONE CANNOT SERVE AS THE FOUNDATION OF A BAD FAITH CLAIM (Middle District)

On February 11, 2019, Middle District Judge Richard Caputo dismissed the insured’s bad faith claim for solely pleading conclusory allegations without sufficient factual allegations to support a plausible claim, and for pleading facts that could not support a bad faith claim. That case is summarized here. At most, the complaint alleged a discrepancy in the insured’s and insurer’s damage valuations, which alone is not enough to make out a bad faith case.

The insured later requested reconsideration and additionally asked the court to certify a discretionary interlocutory appeal, on the basis that Judge Caputo made a clear error of law. Both efforts were rejected.

The insured’s clear error of law argument is based on the court not finding the following pleadings constituted factual allegations supporting a bad faith claim: The insurer had a detailed summary of plaintiff’s medical expenses in its possession. The medical expenses in those documents exceeded the third party tortfeasor’s policy limits. The insurer concluded the claim was worth less than those policy limits. The insured argued this reasonably and objectively placed the damage value above those limits, despite the insurer’s valuing the claim within those damage limits.

The plaintiff further argued that there was other case law in the Third Circuit that would have found such allegations sufficient to make out a plausible claim, that this case law was controlling, and that the court failed to follow that case law.

Judge Caputo denied the motion for reconsideration. First, the insured was simply trying to re-litigate the same arguments originally made. This is not permissible on a motion for reconsideration. Second, there was no controlling case law. Rather, the insured referenced decisions of other District Court Judges whose opinions are not binding precedent on their peers. Third, even considering those other opinions, Judge Caputo found that they did not demonstrate any clear error of law. To the contrary, he cited seven cases that supported his original position that a discrepancy in valuation alone cannot form the basis of a bad faith claim.

Judge Caputo also refused to certify the case for interlocutory appeal. First, there was no controlling question of law at issue, over which there was a substantial ground for difference of opinion. As Judge Caputo stated, courts routinely find that disputes over valuation alone cannot constitute bad faith. Moreover, this was not the kind of exceptional case that merited immediate appeal.

March 19, 2019

Clarke v. Liberty Mutual Insurance Co., U. S. District Court Middle District Pennsylvania NO. 3:18-CV-1925, 2019 U.S. Dist. LEXIS 44549 (M.D. Pa. Mar. 19, 2019) (Caputo, J.)

NO BAD FAITH WHERE SCOPE OF DAMAGES IS FAIRLY DEBATABLE; NO CFA CLAIMS FOR DENIAL OF INSURANCE BENEFITS (New Jersey Federal)

This Superstorm Sandy case involved a $400,000 discrepancy in damage estimates between the insured’s and insurer’s adjustors. The court found a material issue of fact existed on these damage claims, and thus summary judgment could not be granted on a breach of insurance contract claim. (Some categories of damages were barred as resulting from water damage under an anti-concurrent cause provision in the policy).

Under New Jersey law, a bad faith plaintiff must show the insurer acted unreasonably in denying a claim, and did so knowingly or with reckless disregard. Even negligence, standing alone, cannot constitute bad faith. Under these standards, an insurer cannot act in bad faith if the claim was fairly debatable, i.e., if the insured “could not have established as a matter of law a right to summary judgment on the substantive claim [the insured] would not be entitled to assert a claim for an insurer’s bad faith refusal to pay the claim.”

As summary judgment could not be granted on the basic coverage claim, the insurer’s position remained “fairly debatable”. Thus, the insured’s bad faith claim failed, and summary judgment was granted to the insurer.

The court also granted summary judgment to the insurer on plaintiff’s Consumer Fraud Act (CFA) claim. New Jersey’s “courts are clear the CFA does not provide a remedy for failure to pay benefits….”

Date of Decision: March 18, 2019

Zero Barnegat Bay, LLC v. Lexington Insurance Co., U. S. District Court District of New Jersey Civil Action Nos: 14-cv-1716 (PGS) (DEA), 2019 U.S. Dist. LEXIS 43625 (D.N.J. Mar. 18, 2019) (Sheridan, J.)

NO SEPARATE CLAIM FOR BREACH OF THE COVENANT OF GOOD FAITH AND FAIR DEALING IF IDENTICAL TO BREACH OF CONTRACT CLAIM (New Jersey Federal)

This New Jersey federal case involved allegations the insurer underpaid benefits without adequate explanation, and without considering payments required under state law. The case eventually turned into a class action for breach of contract, breach of the implied covenant of good faith and fair dealing, declaratory judgment and injunctive relief, and violation of New Jersey’s Consumer Fraud Act (CFA).

The court found the allegations underlying the breach of contract and implied covenant of good faith and fair dealing claims to be identical. Under New Jersey law, without additional bad faith allegations and adequately distinguishing the bases of the two causes of action, there can be no separate action for breach of the covenant of good faith and fair dealing outside the breach of contract claim. Thus, the implied covenant claim was dismissed.

The CFA claim likewise was dismissed because the damages sought resulted from nothing more than a breach of contract. The court agreed with the insurer that no damages resulted from the insureds relying upon any misrepresentations. Rather, damages only resulted from the insurer’s withholding money allegedly due under the policy, i.e., from a breach of contract. Thus, no damages resulted from the misconduct alleged to violate the CFA, and that claim was dismissed.

The Declaratory Judgment/Injunctive Relief count was dismissed on the basis that, as pleaded, these were forms of relief rather than causes of action.

Date of Decision: March 14, 2019

Lewis v. GEICO, U. S. District Court District of New Jersey No. 1:18-cv-05111-RBK-AMD, 2019 U.S. Dist. LEXIS 41403 (D.N.J. Mar. 14, 2019) (Kugler, J.)

 

DISTRICT JUDGE LEESON ISSUES TWO OPINIONS DEMONSTRATING THE DIFFERENCE BETWEEN WELL-PLEADED vs. CONCLUSORY BAD FAITH COMPLAINTS (Philadelphia Federal)

In these two UIM cases, Eastern District Judge Joseph F. Leeson, Jr. addressed motions to dismiss bad faith claims. In Krantz v. Peerless, he dismissed the bad faith claim and remanded the action to state court, but in Perez-Garcia v. State Farm, the bad faith claim survived a motion to dismiss. The pleading differences in these two cases are described below.

Failure to plead to supporting facts results in dismissal of bad faith claim.

In Krantz, the UIM bad faith plaintiff argued that the insurer improperly interpreted the policy in refusing to pay full policy limits. The complaint alleged the insurer relied upon an invalid and unlawful setoff provision in withholding $37,500 out of the $100,000 policy limit. Judge Leeson found, however, the insured failed to plead facts showing the setoff provision was invalid, “or, more importantly, that [the insurer] knew or should have known that it was denying the full amount of benefits based on an invalid provision.”

In granting the motion to dismiss the bad faith claim, Judge Leeson also found the following allegations conclusory because the complaint lacked any other supporting factual allegations that could make these statement plausible:

(1) the insurer did not make any good faith offers to settle despite repeated demands;

(2) the insurer “failed to objectively and fairly evaluate his claim”;

(3) the insurer “failed to promptly tender payment of the fair value of the claim”; and

(4) the insurer failed to reasonably investigate the claim.

Judge Leeson gave examples of the kind of facts needed to support these sorts of conclusory allegations, but such facts were absent from the complaint. He concluded:  “’Essentially, Plaintiff’s cursory allegations assert that Defendant lacked a reasonable basis for denying Plaintiff’s claim for benefits, but do not provide any factual allegations from which the Court could make a plausible inference that Defendant knew or recklessly disregarded its lack of a reasonable basis for denying benefits.’”

The case had been removed from the Court of Common Pleas of Lancaster County. After dismissing the bad faith count, plaintiff’s damage claims no longer exceeded $75,000. Thus, Judge Leeson remanded the case.

Date of Decision: March 11, 2019

Krantz v. Peerless Indemnity Insurance Co., U. S. District Court Eastern District of Pennsylvania No. 18-cv-3450, 2019 U.S. Dist. LEXIS 38923, 2019 WL 1123150 (E.D. Pa. Mar. 11, 2019) (Leeson, Jr., J.)

Factual details support the bad faith claim, but UTPCPL claim dismissed.

In Perez-Garcia, the insured alleged he “incurred medical bills and wage loss following an automobile accident caused by an underinsured driver….” The complaint alleged the insured provided “medical documentation clearly setting forth injuries to [his] right knee and injuries to the left ankle caused by the motor vehicle accident….” [Emphasis added.]

To support his bad faith claims, plaintiff further alleged the insurer’s claim specialist “asserted, without medical support, that none of the injuries that Plaintiff sustained were the result of the motor vehicle accident” at issue. The complaint alleged the insurer refused to pay any benefits on the basis on this adjuster’s medical conclusions, despite medical reports to the contrary which had been provided to the adjuster.

The insurer unsuccessfully moved to dismiss the bad faith claim. Judge Leeson first rejected the notion that this was merely a bald claim that the insurer refused to pay UIM benefits after having paid first-party benefits. Rather, the complaint specifically alleged that the insurer had medical documentation in hand that supported the insured’s version of events, but rejected that evidence without any medical evidence to the contrary.

The complaint alleged the insurer did not conduct a proper investigation into the medical history. Rather, the insurer allowed its own claim adjuster — described as “a non-medical reviewer” — to substitute the adjuster’s medical judgment for the judgment of actual medical professionals. These facts were sufficient to state a bad faith claim.

Judge Leeson did dismiss plaintiff’s Unfair Trade Practices and Consumer Protection Law (UTPCPL) claim on two bases: (1) there were no allegations that plaintiff relied upon the conduct at issue in suffering any damages; and (2) the UTPCPL can only address claims surrounding formation of the insurance contract, not post-contract claim denial.

Date of Decision: March 15, 2019

Perez-Garcia v. State Farm Mutual Automobile Insurance Co., U. S. District Court Eastern District of Pennsylvania No. 5:18-cv-03783, 2019 U.S. Dist. LEXIS 42327 (E.D. Pa. Mar. 15, 2019) (Leeson, Jr., J.)

BAD FAITH CLAIM SURVIVES MOTION TO DISMISS WHERE DEFENSE AND INDEMNIFICATION MAY BE DUE FOR FAULTY PRODUCT CLAIM (Western District)

This case involves an Indalex type claim where an insured’s defectively manufactured product causes damage to other property when used in a construction project. In this case, plaintiff-assignee alleged that the insured was negligent in manufacturing concrete used to build a bridge. The defective concrete caused components of the bridge to fail, and required replacing bridge columns.

The general contractor sued the insured. The insured lost a multi-million dollar arbitration, and incurred over $500,000 in defense fees and costs. The insured assigned any claims against its insurer to the general contractor, and the GC pursued breach of contract and bad faith claims.

The court rules providing a faulty product may state a claim for coverage.

The insurer denied a defense and coverage under the Pennsylvania Supreme Court’s Kvaerner decision, as well as pre-Indalex cases, on the basis that providing a faulty product was not an occurrence. The court applied the Superior Court’s 2013 decision in Indalex and held that damages resulting from a negligently manufactured product can be a covered “occurrence”. Judge Horan distinguished Kvaerner because that case only applied to faulty workmanship claims (which are not occurrences). By contrast, Pennsylvania’s Superior Court ruled that negligently making defective products, which later cause damages when incorporated into a construction project, are outside Kvaerner’s ambit.

The court further found that denying coverage based on six specific policy exclusions could not be determined at the motion to dismiss stage. These included the insured contract exclusion (exclusion b), workmanship exclusions (exclusions j(5-6)), the “your product” (exclusion k), the “your work” (exclusion l), and the impaired property exclusion (exclusion m).

The bad faith claim likewise survives a motion to dismiss.

The insurer had also moved to dismiss the bad faith claim on the theory that there was either no “occurrence” under Kvaerner, or because one or more of the exclusions cited above applied. In addressing this argument, rather than citing the Terletsky/Rancosky test for bad faith, the court relied upon the Superior Court’s 2012 Berg decision. The court stated that “42 Pa.C.S. § 8371 applies in any action in which an insurer is called upon ‘to perform its contractual obligations of defense and indemnification or payment of a loss that failed to satisfy the duty of good faith and fair dealing implied in the parties’ insurance contract.’”

Under this principle the court concluded that “[b]ecause the Court has determined that [plaintiff] has sufficiently pleaded, at this stage, the factual bases to sufficiently support its claim that [the insurer] breached its contractual obligations to defend and indemnify [the insured], [plaintiff] has sufficiently pleaded a statutory bad faith claim.” [Note: See the recent 1009 Clinton Properties decision on the notion that finding a breach of the insurer’s contractual obligation alone may be sufficient to survive a motion to dismiss a concomitant bad faith claim. It should also be noted here that the insurer’s sole argument to dismiss the bad faith claim was based on an absence of coverage, and not, e.g., a failure to allege facts sufficient to support a bad faith claim that the coverage denial was unreasonable and/or that the insurer knew or recklessly disregarded the fact that it was unreasonable, even if coverage was due.] 

Date of Decision: March 6, 2019

Brayman Construction Corp. v. Westfield Insurance Co., U. S. District Court for the Western District of Pennsylvania No. 2:18-CV-00457-MJH, 2019 U.S. Dist. LEXIS 36432 (W.D. Pa. Mar. 6, 2019) (Horan, J.)

 

AN INSURER DOES NOT ACT IN BAD FAITH WHEN IT DOES NOT BREACH A DUTY TO DEFEND OR INDEMNIFY, EVEN WHEN DENIAL IS BASED ON LATE NOTICE (Western District)

This case involves two bases for coverage denials: (1) late notice resulting in prejudice, and (2) first party claims are not covered under a commercial general liability policy.

The bad faith plaintiff is a general contractor. It was named as an additional insured on a subcontractor’s policy with the defendant insurer.

There was an explosion resulting in personal injury to a third party, and first party property damage to the contractor. The contractor was named as a defendant in the personal injury action, and claimed over against other parties, including the named insured subcontractor. The contractor also brought a property damage suit against others, including the subcontractor, for its own property damages.

Nearly 3½ years into the personal injury suit, the parties mediated a settlement. The contractor did not request a defense or indemnity from the insurer in the personal injury action until the day that suit settled. For the first time, during that mediation, the additional insured contractor orally requested a defense and indemnification from the defendant insurer.

A representative of the contractor’s own primary insurer was present at the mediation as well as a representative of the defendant insurer. However, the defendant insurer’s representative had only come to the mediation to represent the subcontractor’s interests, not the contractor’s interests.

There is no bad faith when the claim is plainly outside the scope of coverage.

The court readily found no coverage due for the contractor’s own property damage claims. The contractor was seeking coverage as an additional insured under the subcontractor’s CGL policy. CGL policies only apply to property damage claims raised by others against an insured, not to the insured’s own property damages.

An “insurer does not act in bad faith when the insurer does not breach its duty to defend or indemnify.” The property damage claim “was plainly outside the scope of coverage”. Thus, as there was no duty to defend or indemnify there could be no bad faith, and summary judgment was granted on both the first party property damage coverage and bad faith claims.

There could be no bad faith where late notice and prejudice also resulted in a coverage denial.

After extensive analysis, Judge Hornak concluded that there was no coverage due in the personal injury action because of the contractor’s late notice, and the actual prejudice resulting from the late notice. He granted the insurer’s summary judgment motion on any duty to defend or indemnify. The insurer lost the opportunity to retain counsel and pay a fee structure significantly less expensive than what was charged by the contractor’s counsel; lost “the opportunity to take control of the matter at an early stage and resolve it prior to the accumulation of those expenses”; lost the opportunity to advance potential defenses; and “was indisputably prejudiced by its inability to control [the] defense, or the costs incurred in furtherance of it, until the end of the underlying litigation—when [the contractor] expected payment for all of the expenses that they had accumulated up to that point along with what it ‘fronted’ for settlement.”

Absent that late notice and prejudice, there is no question the insurer had a duty to defend the personal injury claim against the contractor. Still, as no coverage was due because of the late notice and prejudice, there could be no bad faith under the same principles used in rejecting the bad faith claim on property damage, i.e., no coverage due = no bad faith.

However, the court went on to analyze the personal injury bad faith claim, assuming arguendo what would have happened if it allowed the issue of prejudice to go to the jury instead of granting summary judgment. Judge Hornak concluded that even under those circumstances, he would have rejected the bad faith claim. There was simply no basis in the record to show the insurer’s refusal to step in at the mediation, or its ongoing refusal to pay the contractor, was frivolous or unfounded.

The following facts were undisputed, and showed the insurer acted reasonably in believing it was prejudiced by late notice and would not have to provide any defense or indemnity payments. It did not choose counsel; the contractor had amassed years of legal fees and expenses over which the insurer had no control; the insurer “was not provided an accounting of the defense costs for which it would potentially have to indemnify” the contractor; the insurer “did not participate in early investigation or settlement discussions”; and the insurer “had no reason, until the moment that the oral demand was made, to believe that [the contractor] desired a defense or expected indemnification”.

The court also found it nonsensical to conclude the insurer could have made a decision in the midst of the mediation to provide indemnification and pay a settlement, or even could have stopped the mediation at which it was protecting the named insured’s interests. This was highlighted by the fact that the case had been going on for years, and the contractor had never before asked for defense or indemnification. Moreover, at that moment in time there remained legitimate coverage issues reasonably justifying a refusal to pay on demand.

Finally, the insurer’s ongoing refusal to pay for the subcontractor’s legal fees and settlement payment also had a reasonable foundation, and could not be deemed frivolous or unfounded. Thus, summary judgment on bad faith was granted even assuming it would not have been granted on the coverage claim.

Date of Decision: March 1, 2019

NVR, Inc. v. Motorists Mutual Insurance Co., U. S. District Court Western District of Pennsylvania No. 2:16-cv-00722, 2019 U.S. Dist. LEXIS 32802, 2019 WL 989393 (W.D. Pa. Mar. 1, 2019) (Hornak, J.)

COURT STATES THAT COMMON SENSE MUST BE USED IN APPLYING TWOMBLY/IQBAL STANDARDS TO MOTIONS TO DISMISS BAD FAITH CLAIMS (Philadelphia Federal)

This case involves a motion to dismiss the insured’s bad faith claim.

In carrying out the analysis under Twombly/Iqbal, Judge Kenney states that a “Court must also use its judicial experience and common sense when analyzing a motion to dismiss ….” Specifically, “[i]n the context of breach of insurance contract claims that also contain a count for bad faith, the Court must do away with a robotic reading of Twombly and Iqbal and instead use its common sense when addressing whether a bad faith claim can survive a motion to dismiss.”

This blog post includes a few notes which are not intended to be conclusive or exhaustive on the wide range of interesting issues raised in the court’s opinion, but are added as some starting points for discussion on a few of those issues.

THE ALLEGATIONS

In this case, the insured suffered a property damage loss and alleged the insurer refused to pay the claim in bad faith. Specifically, the insured alleged the insurer’s bad faith conduct included:

  1. Sending correspondence falsely representing that Plaintiff’s loss caused by a peril insured against under the Policy was not entitled to benefits due and owing under the Policy;

  2. [F]ailing to complete a prompt and thorough investigation of Plaintiff’s claim before representing that such claim is not covered under the Policy;

  3. [F]ailing to pay Plaintiff’s covered loss in a prompt and timely manner;

  4. [F]ailing to objectively and fairly evaluate Plaintiff’s claim;

  5. [C]onducting an unfair and unreasonable investigation of Plaintiff’s claim;

  6. [A]sserting Policy defenses without a reasonable basis in fact;

  7. [F]latly misrepresenting pertinent facts or policy provisions relating to coverages at issue and placing unduly restrictive interpretations on the Policy and/or claim forms;

  8. [F]ailing to keep Plaintiff or their representatives fairly and adequately advised as to the status of the claim;

  9. [U]nreasonably valuing the loss and failing to fairly negotiate the amount of the loss with Plaintiff and their representatives;

  10. [F]ailing to promptly provide a reasonable factual explanation of the basis for the denial of Plaintiff’s claim;

  11. [U]nreasonably withholding policy benefits;

  12. [A]cting unreasonably and unfairly in response to Plaintiff’s claim;

  13. [U]nnecessarily and unreasonably compelling Plaintiff to institute this lawsuit to obtain policy benefits for a covered loss, that Defendant should have paid promptly and without the necessity of litigation.

THE COURT’S ANALYSIS

After reviewing motion to dismiss standards under Federal Rules 1, 8, and 12, the court stated that it “must do away with a robotic reading of Twombly and Iqbal and instead use its common sense when addressing whether a bad faith claim can survive a motion to dismiss. When the Court applies its common sense in analyzing a bad faith claim, here, it becomes apparent that Plaintiff’s bad faith claim survives Defendant’s Motion to Dismiss.”

In beginning its analysis, the court set out the three required steps in analyzing a motion to dismiss: (1) are the elements of a claim stated; (2) identifying conclusory allegations that are not entitled to an assumption of truth; and (3) assuming the veracity of well-pleaded facts and determining if these facts give rise to plausible rights to relief. Judge Kenney further observed that “[a] claim may survive a motion to dismiss if it ‘pleads sufficient factual allegations to raise a reasonable expectation that discovery will reveal evidence’ which supports the claim’s elements.”

The court also recited the basic elements of a bad faith claim: (1) the absence of a reasonable basis to deny a benefit; and (2) a knowing or reckless disregard for this lack of a reasonable basis.

The court then set out the following specific bad faith pleading principles in reaching its conclusion.

PRINCIPLES CONCERNING NATURE OF THE BAD FAITH CLAIM

  1. “[B]ad faith claims are inherently intertwined with breach of insurance contract claims.”

  2. “If an insurance company denies a claim and a plaintiff truly believes it was unreasonable, then a bad faith claim only logically follows the underlying breach of contract claim.”

[Note: Some cases have observed that the insured’s subjective belief in the insurer’s unreasonableness is not adequate to state a claim; rather, there must be facts pleaded that can lead to an objective inference of bad faith in handling the insureds claims. See, e.g., Grustas (summarized here), Clarke (summarized here), Bodnar (citing Williams v. Hartford, summarized here), and Robbins (summarized here). Also supporting the notion that a subjective belief is not alone sufficient, and that adequate facts must be pleaded from which to draw objective inferences, is the Third Circuit’s note in Allstate v. Squires “that our experience in addressing Pennsylvania insurance coverage disputes has demonstrated that insureds tend to bring bad faith claims when insurers reject their claims even though there are legitimate disputes over whether the claims are covered.”]

  1. “Plaintiff pleading facts pertaining to the breach of contract are also facts that suggest the denial was unreasonable, which goes to satisfying the first element of a bad faith claim under § 8371.”

[Note: There are other cases appearing to hold that the alleged breach of contract alone is not a basis by itself to infer bad faith, e.g., Kiessling, Wyoming Valley FOP, and Sherman.]

  1. “Although there is a logical connection between a breach of contract and bad faith claim, it is virtually impossible for a plaintiff to know whether a defendant insurance company actually acted in bad faith when denying the plaintiff’s claim.” This is relevant to the second element, knowing or reckless indifference element of a bad faith claim.

  2. “A plaintiff is not in a position to specifically factually plead the second element because those facts go to the insurer’s state of mind. This information is clearly not available to a plaintiff at the time of the filing of the complaint.”

  3. “This [lack of information] is an obstacle that a plaintiff may never overcome because the defendant holds the evidence of bad faith.”

  4. “The bad faith aspect of an insurance matter will never fully materialize to a plaintiff until discovery is completed.”

  5. “The only aspect of a bad faith claim that a plaintiff can legitimately plead that is within its purview is the length of time the insurance company took to deny the plaintiff’s claim.”

[Note: It seems possible, e.g., that an insured may also have information concerning communications with an insurer about the insurer’s reasoning in denying a claim. Insureds will provide at least an original notice of the claim to the insurer, and will typically follow up with communications on the claim’s status. These communications may originate with the insured, the insured’s counsel, or the insured’s own adjuster or expert, and can be described in a pleading. If there are no communications from the insurer in response to the insured’s communications, or no visits from the insurer to inspect and investigate the damages or claim at issue, then the insured can likewise plead its knowledge of the insurer’s failure to respond to such specific communications or to investigate the claim.]

  1. “Other than the length of time, a plaintiff will never know whether a denial was done in bad faith, i.e., whether the insurance company denied the plaintiff’s claim knowing it did not have a reasonable basis to do so.”

[Note: Imagine a scenario where a portion of a building fails, and the issue is whether it failed due to wear and tear over a period of decades. The insured makes a claim and the insurer promptly sends out an expert engineer to inspect the damage. The expert prepares a report in short order, that identifies wear and tear as the cause of loss. The insurer writes to the insured that its expert engineer indicated there was a failure due to decades of wear and tear, there is a policy exclusion for wear and tear, and thus coverage is denied.

The insured is in a position to engage its own expert to review that conclusion, or it could demand coverage without any countervailing expert opinion on a theory the exclusion does not apply. If the insured were to obtain a countervailing expert opinion or offer an argument as to why the exclusion did not apply, the insured could plead these facts in its complaint concerning the dispute over causation or the scope of the exclusion, and why the insurer’s position is unreasonable on the facts or the law.]

  1. “The crucial undiscovered facts would only show themselves in discovery.”

  2. “It is inequitable for an insurance company to hold all the facts pertaining to a bad faith claim and then move to dismiss the bad faith claim because the plaintiff did not have access to specific facts to plead bad faith.”

PRINCIPLES CONCERNING BURDEN ON THE PARTIES IF THE MOTION TO DISMISS IS DENIED

  1. If the motion to dismiss is not granted, “there would no greater burden on the parties.”

  2. “The discovery needed to flesh out a breach of insurance contract claim is the same discovery needed to investigate the related bad faith claim.”

  3. “There would be no extra discovery nor any extra costs on the parties in order to determine whether the insurer acted in bad faith.”

[Note: While there is some overlap in facts relevant to both coverage and bad faith, the evidence needed to prove the two claims is not necessarily identical. Imagine a breach of contract/bad faith case where the insurer denied coverage based upon its interpretation of a policy exclusion. The exclusion’s applicability hinges on a disputed fact outside of the insurer’s control, such as the date the key event occurred, whether the insured was acting in the course and scope of employment, whether a substance constitutes a pollutant as a matter of law, whether the insured’s act was intentional from the point of view of the insured, etc.

Determining the nature of that one factual issue will determine the coverage/breach of contract claim. This fact has an independent existence. It is not created or determined by the insurer’s claim files, adjuster communications with the insured, expert opinions on claims procedures, etc., but by physical reality at the time of the event at issue. The contents of these materials may go to bad faith, but they do not appear necessary to proving the existence of the key fact that will determine the breach of contract itself.]

  1. “[I]f the insurance company did not act in bad faith, then it can move to dismiss the bad faith claim at the summary judgment stage after discovery has been completed.”

NOTICE TO THE DEFENDANT INSURER

  1. “[W]hen pleading a bad faith claim in conjunction with a breach of insurance contract claim that is sufficiently pled, the defendant is on notice as to what needs to be defended.”

  2. “A bad faith claim in conjunction with the breach of contract claim does not change the facts or issues of the case.”

  3. “On the contrary, facts in a complaint alleging a breach of insurance contract normally support a plaintiff’s allegation that the defendant acted in bad faith.”

  4. “These facts properly put the defendant on notice as to what it needs to defend against.”

JUDGING A PLEADING’S SUFFICIENCY IS UNIQUE TO EACH CASE

  1. “[J]udging the sufficiency of a pleading is a context-dependent exercise.”

  2. “Some claims require more factual explication than other to state a plausible claim for relief.”

  3. “An insurance bad faith claim is in the category of claims that require less factual explication.”

[Note: This aspect of the opinion may be compared to other opinions on adequately pleading bad faith where the pleading was found inadequate, e.g. these recent opinions: Judge Slomsky’s February 2019 opinion in Kiessling, these three opinions issued by Judge Caputo in February 2019, Judge Leeson’s McDonough opinion from February 2019, Judge Darnell Jones’ opinion in Das from December 2018, Judge Rambo’s opinions in Winslow from December 2018 and Rickell in November 2018, and Judge Fischer’s Rosenberg opinion from July 2018.]

  1. “[E]ach bad faith claim should be analyzed according to the potential facts available to the plaintiff at the time of the filing of the complaint and must depend on the context of each case.”

PRINCIPLES APPLIED TO THE INSTANT COMPLAINT

Applying the foregoing principles, the court first recognized that the plaintiff was not attempting to argue that a failure to immediately pay policy limits was bad faith. Rather, the court observed that “Plaintiff’s Complaint generally pleads bad faith.” Plaintiff alleges it suffered covered damages to insured property and gave prompt notice of its loss. The complaint alleges that the insurer has refused multiple demands for payment over a period of time without any legal basis or cause in refusing to pay benefits.

The court found these to be factual allegations, and not conclusory allegations. As such, these allegations must be accepted as true, the court must assume the alleged damages were covered under the policy, and therefore it must be assumed as true that the insurer refused to pay money owed on covered claims.

The court recognized that the allegations were “broad and not very specific”; however, they still “support a bad faith claim because of the Court’s responsibility to draw reasonable inferences from well-pled factual allegations.” Thus, “Plaintiff’s factual allegations, in conjunction with the allegations pertaining to bad faith conduct, support the reasonable inference that Defendant knew it lacked a reasonable basis to deny Plaintiff’s claim, thereby acting in bad faith when it denied Plaintiff’s claim.” In addition, “[t]he allegations in Plaintiff’s Complaint also raise a reasonable expectation that discovery will uncover proof that Defendant acted in bad faith.”

[Note: Here are links to categories of opinions summarized on this Blog where federal pleadings were considered adequate and inadequate.]

Finally, it is interesting to compare Judge Kenney’s opinion in this matter to the first few sentences of Judge Kearney’s opinion in the 2017 Sherman case, quoted here, even with the factual distinctions in the two cases:

“Pennsylvanians suing their automobile insurer for failing to pay their insurance claim may allege breach of the insurance policy and bad faith under a Pennsylvania statute. They are not the same claim. Alleging bad faith requires showing how the insured acted unreasonably both in denying the policy benefits and later ignoring its unreasonable denial.  When, as today, the insured pleads facts from over two years ago which detail the insurer’s responsive steps but then fail to allege a single fact thereafter to describe why the claim is not paid other than concluding the claim is not paid, we are left without a basis to understand if the insurer acted in bad faith. Failure to pay a claim may be a breach of contract but is not bad faith without pleading specific facts as to the insurer’s repsonses to the claim.”

Date of Decision: March 4, 2019

1009 Clinton Properties, LLC v. State Farm Fire & Casualty Co., U. S. District Court Eastern District of Pennsylvania Civil Action No. 18-5286, 2019 U.S. Dist. LEXIS 33668, 2019 WL 1023889 (E.D. Pa. Mar. 4, 2019) (Kenney, J.)

STATUTORY ATTORNEY’S FEES AND CONTINGENCY ENHANCEMENTS (Philadelphia Federal)

The case at hand did not involve statutory bad faith, but relied on one of the Third Circuit’s leading bad faith cases, Polselli v. Nationwide Fire Insurance Company, for guidance on the issue of determining statutory attorney fee enhancements. Judge Kearney provides a good summary of Polselli’s key points.

[We are only highlighting Polselli in this post, and refer the reader to Judge Kearney’s general discussion on fee enhancement criteria as set forth in his opinion, which can be found here.]

First, Judge Kearney defined the meaning of the words being analyzed and the fees at issue:

“In a statutory fee shifting case, the attorney’s recovery is contingent on a court awarding its reasonable hourly fees (a lodestar) only if the [plaintiff] succeeds; but, a contingency could also mean a percentage of the total recovery awarded … regardless of the invested time. As we would not compare the lodestar to a percentage fee in this context and [plaintiff’s counsel] swears the lawyers kept regular time records and the firm generates approximately $500,000 annually in hourly billings, we presume [plaintiff’s counsel’s] use of the term ‘straight contingency fee’ means the lodestar awarded today — and it is not also asking [plaintiff] to pay a ‘straight contingency’ on the total recovery.”

The issue in Polselli was “whether, and under what circumstances, a court may enhance a fee under Pennsylvania law to reflect the contingent risk of nonpayment assumed by the plaintiff’s attorney in accepting the case on a contingent-fee basis.”

The Third Circuit stated the following:

  1. A contingency fee enhancement does not apply in every case.

  2. A trial court can “enhance the lodestar amount to account for a particular case’s contingent risk only to the extent that those factors creating the risk are not already taken into account when calculating the lodestar amount.”

  3. Trial courts must “’exercise caution’ in considering an enhancement ‘so as not to skew the calculation of a reasonable rate by double counting’”.

[By way of example, “if the complexity of a case is reflected in the high number of hours researching the complex issues or in the relatively high regular hourly rate of the attorney, complexity does not justify a contingency enhancement.”]

  1. The trial court must consider “’whether the attorney was able to mitigate the risk of nonpayment….’”

[By way of example, “an attorney who enters into a contingency fee agreement ‘has significantly mitigated the continued risk’ because the attorney ‘obtains the prospect of compensation under the agreement substantially in excess of the lodestar amount.’”]

  1. Trial judges “must not … deviate from [their] ultimate responsibility — the calculation of a ‘reasonable’ fee.”

In sum, “[t]o the extent factors creating a contingent risk in a particular case are mitigated or already taken into account when calculating the lodestar amount, a contingency enhancement is not reasonable and should not be awarded.”

Date of Decision: February 25, 2019

Middlebrooks v. Teva Pharms. USA, Inc., U. S, District Court Eastern District of Pennsylvania CIVIL ACTION NO. 17-412, 2019 U.S. Dist. LEXIS 30530, 2019 WL 936645 (E.D. Pa. Feb. 25, 2019) (Kearney, J.)

COURTS IN THE THIRD CIRCUIT DISFAVOR DISCOVERY OF SIMILAR CLAIMS EVIDENCE IN BAD FAITH CASES (Western District)

Plaintiff served an interrogatory asking the insurer to identify all bad faith suits in which it was involved for the preceding 10 years. The insurer objected and the insured moved to compel. Judge Gibson of the Western District cited his own 2012 precedent in the Zettle case, as well as a bounty of other case law, in denying the motion to compel.

The main point in these cases is that other bad faith claims are irrelevant. As Judge Gibson states, there is not any necessary “connection between other bad faith claims against Defendant and the issue of materiality here, particularly considering the myriad of potential factual differences between other claims and the present claim, including different types of policies, unique policy language, the application of different states’ law, [and] varying circumstances surrounding the bad faith allegations….”

Thus, “the general rule [is] that courts in the Third Circuit ‘disfavor the discovery of similar claims evidence in bad faith cases.’”

Judge Gibson also found the request overbroad and unduly burdensome. There is no geographic limit, no limit to the type of insurance policy at issue, and no explanation as to why a 10-year period is necessary and why a shorter period would be inadequate.

Date of Decision: February 28, 2019

Horvath v. Globe Life & Accident Ins. Co., U. S. District Court Western District of Pennsylvania Case No. 3:18-cv-84, 2019 U.S. Dist. LEXIS 31688 (W.D. Pa. Feb. 28, 2019) (Gibson, J.)