Monthly Archive for September, 2019

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.)

CONDUCT VIOLATING UIPA MAY BE CONSIDERED IN STATUTORY BAD FAITH CASES (Philadelphia Federal)

In this putative class action, plaintiff sought declaratory relief under the Unfair Insurance Practice Act (UIPA). The court observed that there is no private right of action under the UIPA, and seeking declaratory relief for violating specific UIPA provisions would amount to an impermissible private cause of action.

In a footnote, the court added:

“In D’Ambrosio [v. Pa. Nat. Mut. Cas. Ins. Co., 494 Pa. 501, 431 A.2d 966, 969 (Pa. 1981)], the Pennsylvania Supreme Court held that the UIPA is enforced by the Insurance Commissioner of Pennsylvania, and stated that was for the legislature to determine whether additional sanctions should be available. Pennsylvania later enacted 42 Pa. C.S. § 8371, which permits an insured under a policy to pursue a claim of bad faith against the insurer. See Rancosky v. Washington Nat’l Ins. Co., 642 Pa. 153, 170 A.3d 364, 371 (Pa. 2017). Conduct that violates the UIPA may be considered in determining whether an insurer acted in bad faith under this statute. Jones [v. Nationwide Property & Casualty Ins.], 995 A.2d [1233,] 1236-37 [(Pa. Super. Ct. 2010)].”

On this last point, there is a split in authority whether UIPA violations even can be used as evidence of a bad faith claim. See this post discussing the different positions courts have taken on the UIPA in connection with statutory bad faith claims.

Date of Decision: September 13, 2019

Excel Pharmacy Services, LLC v. Liberty Mutual Insurance Co., U. S. District Court Eastern District of Pennsylvania CIVIL ACTION NO. 18-4804, 2019 U.S. Dist. LEXIS 156306, 2019 WL 4393076 (E.D. Pa. Sept. 13, 2019) (Rufe, J.)

THERE CAN BE NO BAD FAITH IF THE POLICY WAS NOT IN EFFECT (Superior Court of Pennsylvania) (Non-precedential)

The trial court had determined a life insurance policy was not in effect at the time plaintiff’s husband died, and dismissed breach of contract and bad faith claims on summary judgment. The insured appealed, and the Superior Court affirmed.

The Superior Court closely scrutinized the facts and the policy language to determine whether the policy was in effect at the time of death. The panel concluded it was not, and affirmed the trial court’s rejection of plaintiff’s breach of contract claim.

As to bad faith, the court affirmed in short order: “In sum, the trial court properly concluded that the policy was not in effect when the decedent died and that Appellee was entitled to summary judgment on Appellant’s claims of breach of contract. …. For the same reason, we agree with the trial court that Appellant could not establish that Appellee acted in bad faith when denying her claim for death benefits.”

Thus, as there was no policy in effect there could be no bad faith. The Superior Court cited the Supreme Court’s Rancosky decision to support this conclusion.

Date of Decision: September 11, 2019

O’Hara v. Metlife, Superior Court of Pennsylvania No. 3477 EDA 2018, 2019 Pa. Super. Unpub. LEXIS 3456 (Pa. Super. Ct. Sept. 11, 2019) (Nichols, Shogan, Strassburger, JJ.)

 

(1) NOT ACCEDING TO INSURED’S DEMAND IS NOT BAD FAITH PER SE (2) THERE IS NO FIDUCIARY DUTY IN UIM CONTEXT AND (3) COMPENSATORY DAMAGES NOT AVAILABLE UNDER BAD FAITH STATUTE (Western District)

In this UIM bad faith case, the court dismissed the bad faith count with leave to amend, struck all allegations referencing fiduciary duty, and dismissed the claim for compensatory damages under the Bad Faith Statute, 42 Pa.C.S. § 8371.

The insured was injured in a motor vehicle accident. The tortfeasor’s carrier paid his $25,000 policy limits. The insured sought additional recovery under the UIM provisions of his own policy.

The insured provided various medical records, economic reports, and other documents to the carrier, and ultimately demanded $250,000 in UIM policy limits. The insured’s carrier did not meet this demand, and the insured sued for breach of contract and bad faith, as well as loss of consortium for his wife.

The insurer moved to dismiss the bad faith count for failure to state a claim. It also moved to strike all averments concerning fiduciary duty, and to dismiss any claim for compensatory damages under the Bad Faith Statute.

The insured fails to plead a plausible bad faith claim

In reviewing the complaint, the court observed that while the list of 15 allegations in the bad faith count was long, it only pleaded “essentially conclusory acts and omissions,” which are insufficient to make out a plausible bad faith cause of action. These flawed allegations included:

a) “failing to objectively and fairly evaluate Plaintiffs’ claim”; b) “failing to objectively and fairly reevaluate Plaintiffs’ claim based on new information”; c) “engaging in dilatory and abusive claims handling”; d) “failing to adopt or implement reasonable standards in evaluating Plaintiffs’ claim”; e) “acting unreasonably and unfairly in response to Plaintiffs’ claim”; f) “not attempting in good faith to effectuate a fair, prompt, and equitable settlement of Plaintiffs’ claim in which the Defendant’s liability under the policy had become reasonably clear”; g) “subordinating the interests of its insured and those entitled under its insureds’ coverage to its own financial monetary interests”; h) “failing to promptly offer reasonable payment to the Plaintiffs”; i) “failing reasonably and adequately to investigate Plaintiffs’ claim”; j) “failing reasonably and adequately to evaluate or review the medical documentation in Defendant’s possession”; k) “violating the fiduciary duty owed to the Plaintiffs”; l) “acting unreasonably and unfairly by withholding underinsured motorist benefits justly due and owing to the Plaintiffs”; m) “failing to make an honest, intelligent, and objective settlement offer”; n) “causing Plaintiffs to expend money on the presentation of their claim”; and o) “causing the plaintiffs to bear the stress and anxiety associated with litigation.”

Beyond these conclusory allegations, the bad faith count was “devoid of facts explaining ‘who, what, where, when, and how’ Defendant failed to handle Plaintiffs’ UIM claim in good faith.”

The court did scour the complaint for facts. However, those facts did “not detail which of Defendant’s acts or omissions constitute bad faith, separately or in conjunction with others.” All those facts amounted to was that the insured was (1) injured in a motor vehicle accident, (2) the tortfeasor’s liability limit did not cover all of the insured’s injury claims, (3) the insured submitted his claim to his UIM carrier, and (4) the claim made has not been paid.

“While such facts might be sufficient to plead a claim for breach of contract, they are insufficient to support a claim of bad faith under the Pennsylvania statute. Simply put, requiring the Court to infer bad faith through Defendant’s ‘failure to immediately accede to a demand [under an insurance policy] cannot, without more, amount to bad faith.’”

Plaintiff’s citation to documents in his pleadings did not cure this problem. These documents simply show there may be some merit to the UIM claim, but do not show the “where, when and how” of a bad faith claim. These documents do not show how the denial was unreasonable or that that the allegedly unreasonable denial was knowing or reckless.

Again, the complaint simply amounted to an argument that bad faith should be inferred from the carrier’s refusing the insured’s demand. This is not enough.

There is no fiduciary duty in the UIM context

The court also struck all references in the complaint to breaches of fiduciary duty. The court rejected the notion that an insurer bears a fiduciary duty to the insured in all circumstances. Rather, while there may be a fiduciary duty in the context of third party claims against the insured, there is no such duty in first party claims, such as UIM claims.

Compensatory damages cannot be recovered under the Bad Faith Statute

Pennsylvania’s Bad Faith Statute only allows for recovery of punitive damages, interest, attorney’s fees, and costs. It essentially provides for additional remedies other than compensatory damages, which must be recovered under other theories, principally breach of contract.

Date of Decision: September 9, 2019

Ream v. Nationwide Property & Casualty Insurance Co., NAIC, U.S. District Court Western District of Pennsylvania No. 2:19-cv-00768, 2019 U.S. Dist. LEXIS 152870, 2019 WL 4254059 (W.D. Pa. Sept. 9, 2019) (Hornak, J.)

1. POSSIBLE BAD FAITH FOR IMPROPER RESCISSION AND UNREASONABLY INADEQUATE INVESTIGATION, BUT 2. NO BAD FAITH FOR ALLEGED VIOLATIONS OF THE UIPA OR UCSP REGULATIONS, OR FOR ALLEGEDLY SWITCHING DENIAL THEORIES (Western District)

The insured purchased various life insurance coverages for her son. She answered no to questions about whether he had any chronic health problems requiring periodic medical care. The terms chronic and periodic were undefined, as to, e.g., what kinds of illness fell under this question and what constituted “periodic” treatment. She answered no. Medical records subsequently showed the son some had gastric issues, lymph issues, and had been in rehab for marijuana dependency on two occasions.

The son was shot in the head and killed. The insurer denied coverage and invoked rescission. The insurer took the position that the mother had failed to disclose that he had chronic conditions that required periodic medical care.

The mother brought claims for breach of contract and bad faith. The insurer sought summary judgment on the bad faith claims. During discovery, the insurer took the position that the marijuana use, along with lymph and gastric problems met the definition of chronic illnesses needing periodic treatment, though later appeared to back off this position on the lymph and gastric allegations on periodic treatment grounds.

The court observed that the first bad faith element, concerning the reasonableness or unreasonableness of the insurer’s benefit denial, is objective. Thus, if a reasonable basis exists for an insurer’s decision, even if the insurer did not rely on that reason, there is no bad faith as a matter of law. It then described the other bad faith elements, and the burden of proof requiring clear and convincing evidence.

There were four types of bad faith claims at issue in the case:

  1. Refusal to pay insurance proceeds and rescission of the Policies.

The court found that the jury could conclude rescission was unreasonable in determining the son’s marijuana, lymph, and gastric allegations, were reasonable bases to rescind. The court further found that rescinding based on the lymph or gastric issues could go to the jury on intent/recklessness because there was apparently no periodic treatment in the record.

As to the marijuana issue, the mother explained to the insurer why she did not think the son’s stints in rehab constituted periodic treatment. Rescission required a knowing misrepresentation. A jury could find it reckless to conclude that this was a knowing misrepresentation on the mother’s part.

In sum, the bad faith claims could proceed on the rescission issue.

  1. Lack of investigation into the facts regarding the son’s alleged medical conditions.

The court allowed a bad faith claim for an unreasonably inadequate investigation to proceed as well. First, the court stated that an unreasonably inadequate investigation could be a separate ground for bad faith. It noted, however, while the law does require a thorough investigation, that investigation need not be flawless.

The insurer took the position that obtaining medical records was sufficient. The mother argued this was not enough. She set out six detailed steps the insurer failed to take in further drilling down beyond the medical records to get full answers. “While the Court agree[d] that not all the disputed facts identified by Plaintiff suggest bad faith, there is enough evidence from which a jury could reasonably conclude that Defendant failed to conduct a reasonable investigation into the factual circumstances underlying Plaintiff’s insurance claims.”

        3. Failure to comply with a Pennsylvania statute and regulation.

The mother also cited failure to comply with specific sections of the Unfair Insurance Practices Act and Unfair Claims Settlement Practices regulations in connection with the manner of rescission. Assuming arguendo these sections were applicable, the court found the insurer’s claim handling, in how it formally went about rescinding the policies, did not violate those sections.

Moreover, even assuming the UIPA and UCSP were violated, “a violation of the UIPA does not constitute per se bad faith under section 8371.” In this case, “the rescission letter’s language is not sufficient for a reasonable jury to find statutory bad faith, as the letter does not suggest unreasonable behavior on the part of Defendant and there is no evidence that Defendant knew of or recklessly disregarded any unreasonable behavior. At most, any violations of these provisions suggest that Defendant may have been negligent in the preparation of the rescission letter.”

        4.  No bad faith for alleged theory switching.

“Finally, Plaintiff argues that Defendant’s constantly changing bases for rescinding the Policies, as well as Defendant’s failure to reference gastroenteritis and lymphadenopathy in its affirmative defenses, are evidence of Defendant’s bad faith. The Court disagrees. There is no evidence that Defendant has constantly changed its basis for rescission—instead, Defendant has asserted since it sent the rescission letter that the rescission was based on misrepresentations about [the son’s] medical history in the applications. And the fact that the specific medical conditions that Defendant claims Plaintiff omitted have changed as the parties engaged in discovery, without more, is simply not evidence of bad faith.”

Thus, the motion was granted in part and denied in part.

Date of Decision: August 27, 2019

Horvath v. Globe Life & Accident Insurance Co., U. S. District Court Western District of Pennsylvania Case No. 3:18-cv-84, 2019 U.S. Dist. LEXIS 144933 (W.D. Pa. Aug. 27, 2019) (Gibson, J.)

PENNSYLVANIA SUPERIOR COURT FINDS NO BAD FAITH WHERE NO BREACH OF CONTRACT (Pennsylvania Superior Court) (Not Precedential)

This UIM case involved two policies, a garage/auto policy and an umbrella policy. The crux of the issue was the insureds’ position that a UIM exclusion in the umbrella policy should not apply.

The same carrier issued both policies. After an accident in 2010, it paid $1 million under the garage policy, but nothing under the umbrella policy. (There is some discussion about the garage policy no longer providing UIM benefits at the time of the accident, though it appears the carrier did pay $1 million under this garage policy.)

The insured brought claims for negligence, fraud, breach of contract, bad faith and claims under the Unfair Trade Practices and Consumer Protection Law. The contract, bad faith, and UTPCPL claims were dismissed with prejudice on preliminary objections. Summary judgment was granted on the fraud claim, and the insured was non-suited on the negligence claim at trial.

The court found the umbrella policy’s UIM exclusion applied. As no coverage was due under the umbrella policy, there could be no bad faith in denying benefits under the policy. (There could be no UTPCPL claim because the policy was not issued to a consumer for personal, household or family use).

The court also addressed the insured’s claims of bad faith conduct during litigation. The alleged bad faith conduct during litigation consisted of the insurer filing a summary judgment motion to frighten the insured, making ethical claims against the insured’s counsel, acting in a dilatory manner by threatening a Dragonetti action, and slandering the insured’s counsel.

As stated above, the bad faith claims had been dismissed on preliminary objections, and the trial court never addressed these assertions. In upholding the trial court’s dismissal, the Superior Court noted that the summary judgment claim was partially successful, and that the trial court later dismissed all claims against the insurer.

Date of Decision: August 21, 2019

Lewis v. Erie Insurance Exchange, Superior Court of Pennsylvania No. 2115 EDA 2018, 2019 Pa. Super. Unpub. LEXIS 3209 (Pa. Super. Ct. Aug. 21, 2019) (Murray, Nichols, Shogan, JJ.)