Monthly Archive for April, 2020

PLAINTIFFS ADEQUATELY PLEAD DELAY, INADEQUATE INVESTIGATION, AND LACK OF COMMUNICATION TO SUPPORT BAD FAITH CLAIM (Philadelphia Federal)

This is one of the few recent cases finding that a bad faith plaintiff met federal pleading standards, surviving a motion to dismiss.

In this UIM case, the plaintiffs alleged the insured husband suffered serious and permanent bodily injuries, requiring ongoing treatment. The tortfeasor’s carrier paid $250,000, and the insureds sought the full UIM coverage limit, $1,000,000, from the insurer. The insurer’s highest offer was $200,000, only made nearly three years after the original claim. The insureds brought breach of contract and bad faith claims.

The complaint alleged the insureds cooperated with the carrier, providing information over a 32-month period, “with the necessary liquidated and unliquidated damages information from which Defendant could fairly evaluate and make a timely and reasonable offer on the claim.” The insureds estimated their damages in excess of $1,000,000, “based on Plaintiffs’ unchallenged medical records, narrative reports, and vocational loss and medical prognosis reports, which they provided to Defendant.” They further alleged the carrier “failed to timely respond or comply with Plaintiffs’ counsel’s request for Defendant to fairly evaluate the underinsured motorist claim.”

The insureds focused their bad faith arguments on the insurer’s alleged conduct over the 32-month time period. They alleged the carrier failed to properly respond to the claim and/or failed to evaluate the UIM claim; failed to offer a payment or to pay in good faith; and failed to inform the insureds of its evaluation of their claim. The insureds asserted the carrier “did not have a reasonable basis for delaying and/or denying underinsured motorist benefits or a partial tender of such under the policy” for nearly three years. The insureds labeled the refusal to pay policy limits as frivolous and unfounded, adding that the insurer “lacked a legal and factual basis” for its valuation of the claim.

The insurer moved to dismiss for failing to adequately plead a bad faith claim.

The court first focused on delay. Delay is a bad faith factor, but standing alone does not make out an automatic case for bad faith. In evaluating whether delay might constitute bad faith, “’[t]he primary consideration is the degree to which a defendant insurer knew it had no basis to deny the claimant: if delay is attributable to the need to investigate further or even to simple negligence, no bad faith has occurred.’” (Court’s emphasis)

In beginning his analysis, Judge Jones took cognizance of the potential negative impact of a 32-month window between the claim’s submission and the carrier’s first offer, though again, standing alone this could not prove bad faith. However, as pleaded in the complaint, there were additional factual allegations fleshing out the bad faith delay argument. These included the absence of any facts suggesting the husband was at fault, or that there was any question the UIM policy limit was $1,000,000. The insureds further pleaded: (i) the husband suffered multiple injuries with ongoing expenses; (ii) they provided medical records, reports, vocational loss information and medical prognoses over the 32-month period; and (3) their liquidated and unliquidated damage estimates to the insurer exceeded the $1,000,000 policy limit.

As to the carrier’s conduct, the insureds alleged that during the 32-month period the insurer did not seek an independent medical examination, and did not conduct a records review to properly evaluate the claim. The insureds added that the carrier’s motion to dismiss did not include any argument that the “delay was attributable to the need to investigate further or even to simple negligence.”

On these facts, Judge Jones found the plaintiffs set forth a plausible bad faith claim, focusing on a lack of investigation and failure to communicate. He distinguished this pleading from numerous other cases dismissing conclusory bad faith claims. He stated, “[i]n particular, it is wholly plausible that Defendant did not have a reasonable basis for denying Plaintiffs’ monies owed based upon the information Plaintiffs provided Defendant. Additionally, viewing the time lapse in conjunction with the lack of an independent medical evaluation by Defendant, it is plausible that Defendant knew of, or recklessly disregarded, its lack of a reasonable basis for denying Plaintiffs’ benefits of the policy.”

Judge Jones also rejected the argument that this was merely a disagreement over fair valuation. On a motion to dismiss, the court had to assume the truth of the plaintiffs’ factual allegations. The allegations set out a plausible case the insurer made an unreasonably low offer, or no offer, potentially constituting bad faith conduct. Judge Jones looked to Judge Stengel’s 2017 Davis decision to support this finding.

Date of Decision: April 17, 2020

Lowndes v. Travelers Property Casualty Co. of America, U. S. District Court Eastern District of Pennsylvania CIVIL ACTION NO. 19-5823, 2020 U.S. Dist. LEXIS 67620 (E.D. Pa. April 17, 2020) (Jones, II, J.)

 

STATUTORY BAD FAITH CLAIMS ONLY AVAILABLE TO INSUREDS; COMMON LAW DUTY OF GOOD FAITH SUBSUMED IN CONTRACT CLAIM (Philadelphia Federal)

The insurer issued a policy to the plaintiff’s lender, the mortgage holder. The plaintiff sought relief under the policy, and the insurer argued plaintiff was not a party or third party beneficiary to the policy. The plaintiff brought breach of contract and bad faith claims. The insurer successfully moved to dismiss both claims.

The court first ruled that plaintiff was not an insured or third party beneficiary to the policy. Thus, the breach of contract claim failed.

The court then held that plaintiff could not bring a statutory bad faith claim when he had no rights under the policy. Thus, it was “immaterial that [the plaintiff] may have sufficiently alleged facts to support the other elements of the bad faith cause of action.”

Finally, plaintiff asserted a “common law” bad faith claim. The court observed that Pennsylvania has no common law bad faith tort remedy. Pennsylvania does recognize a contract based claim for breach of the implied duty of good faith and fair dealing, separate from statutory bad faith. However, this common law contact claim also failed.

As already stated, the plaintiff was not a party or a third party beneficiary to the insurance contract, thus there could be no contract based bad faith claim. Further, the breach of the contractual duty of good faith and fair dealing is not separate from the breach of contract claim. In alleging the insurer “violated the duty of good faith and fair dealing by denying benefits under the policy, his bad faith claim is subsumed into the breach of contract claim and fails with that claim.”

Date of Decision: April 13, 2020

Weiser v. Great American Insurance Co., U. S. District Court Eastern District of Pennsylvania CIVIL ACTION NO. 19-1218-KSM, 2020 U.S. Dist. LEXIS 63839 (E.D. Pa. April 13, 2020) (Marston, J.)

 

New Covid-19 Business Loss Insurance Coverage Cases Filed in Pennsylvania (April 2020)

Like other states, Pennsylvania Covid-19 coverage cases are rapidly expanding in the last few weeks.

Western Pennsylvania

In Western Pennsylvania, two cases were filed in the Allegheny County Court of Common Pleas on April 17, 2020, HTR Restaurants, Inc. v. Erie Insurance Exchange, a class action, and Joseph Tambellini, Inc. v. Erie Insurance Exchange. Counsel of record are the same in both cases, two of whom are from Philadelphia firms, along with one firm each in Pittsburgh and Harrisburg. The same counsel filed a separate class action less than a week later in the U.S. District Court for the Western District of Pennsylvania, Windber Hospital v. Travelers Property Casualty Company of America.

On Friday, April 24, 2020, a new Western District action was filed by two different Philadelphia firms, Chester County Sports Arena v. The Cincinnati Specialty Underwriters Insurance Company. The two Philadelphia firms in Chester County Sports are also counsel in all the Eastern District cases listed immediately below (with Alabama co-counsel in this Western District case only).

Eastern Pennsylvania

In Eastern Pennsylvania, five cases were filed in the U.S. District Court for the Eastern District of Pennsylvania, LH Dining, L.L.C. v. Admiral Indemnity Co. (April 10, 2020), Newchops Restaurant Comcast, LLC v. Admiral Indemnity Company (April 17, 2020), C. A. Spalding Co. v. Selective Insurance Group (April 20, 2020),  Jul-Bur Associates, Inc. v. Selective Insurance Company of America (April 21, 2020), and Ian McCabe Studio, LLC v. Erie Insurance Exchange (April 21, 2020). The same two Philadelphia firms are counsel in all of these cases, and a Pittsburgh firm is also counsel in the Ian McCabe matter.

Counsel have moved the Judicial Panel on Multidistrict Litigation to transfer all federal Covid-19 business loss coverage cases arising from government shutdown orders to the United States District Court of the Eastern District of Pennsylvania, requesting coordination and consolidation of all pre-trial proceedings before the Honorable Timothy J. Savage.  Other counsel seek transfer to federal courts elsewhere.

Pennsylvania Supreme Court and Covid-19 Insurance Coverage

These new cases all involve the now familiar issues concerning what constitutes direct physical loss or damages for purposes of business interruption or civil authority coverage. See our earlier article discussing the basic issues in Covid-19 coverage cases for business losses. Three of the Philadelphia cases and one Western District case, however, add the argument that Pennsylvania’s Supreme Court has already weighed in on whether the Covid-19 virus can constitute direct physical loss or damage, citing Friends of Danny DeVito v. Wolf (decided April 13, 2020). This reflects the hot debate over the impact of the Court’s reference to “substantial damage to property” in determining Governor Wolf’s power to compel “the closure of the physical operations of all non-life-sustaining business to reduce the spread of the novel coronavirus disease.”

[The Danny DeVito mentioned in the complaint is not the actor.]

The plaintiff’s perspective is that DeVito v. Wolf has virtually decided the issue for coverage purposes, while the insurer side points out the Court’s Opinion is focused on health issues and not business interruption, and that insurance coverage was in no way an issue before the Court, which did not render any decision on insurance coverage. While close legal analysis would seem to favor the insurer’s arguments, the underlying message from plaintiffs’ counsel could be that Pennsylvania’s Supreme Court may be open to finding coverage due when the time comes to rule on the issue. (There is no language in DeVito v. Wolf addressing the virus exclusion found in many policies.)

The Legislative Alternatives

Finally, as discussed in our most recent article, all of these legal disputes may be resolved by emergency legislation to create coverage where it does not otherwise exist, in return for a state or federal “backstop” to protect insurers from bankruptcy. There is a recent Pennsylvania Senate bill (No. 1114), however, that does not appear to propose such protections for insurers required to pay when coverage is otherwise not due, while still expanding the definition of direct physical loss, damage or injury to tangible property to include, “The presence of COVID-19 having otherwise been detected in this Commonwealth.” It is hard to imagine legislation passing that could financially cripple insurers when they were expressly seeking to avoid the payment risks posed by viral pandemics (for which specific risks their insureds did not pay premiums).

Further, insurers are uncertainty averse. This kind of legislation would cast a future pall over all insurers if legislatures develop a sense of empowerment to rewrite insurance coverage for any public emergencies, contrary to express policy language, to provide an involuntary alternative to a government safety net. If such legislation is imposed on insurers, they will certainly seek significantly large premium increases to anticipate uncertain future coverage risks, or argue that they will otherwise eventually go out of business.

Thus, the most likely result of any legislation likely would be some sort of compromise, rather than placing all the burden on insurers.

Posted by Lee Applebaum, Fineman, Krekstein & Harris, P.C.

 

Important Pennsylvania Superior Court Opinion on Reservation of Rights Letters – (1) Investigate to Assure a Sufficient Level of Specificity, (2) Don’t Rely on Boilerplate, and (3) Use Multiple Reservation of Rights Letters as a Best Practice Where New Facts Develop (Pennsylvania Superior Court)

The insured was exclusively in the business of snow and ice removal. The carrier issued a policy having an exclusion for snow and ice removal. The insured was sued for a slip and fall on an icy parking lot.

Despite the clear exclusion, the insurer did not expressly reference the exclusion in its reservation of rights letter. Rather, the insurer defended the case for 18 months before first raising the exclusion via a declaratory judgment complaint, seeking a declaration that it had no duty to defend or indemnify.  The insured counterclaimed for defense and coverage, bad faith, fraud, and most significantly for present purposes, that the insurer “should be estopped from ceasing its representation and indemnification….”

After discussing that a defense was being provided, the reservation of rights letter states, in pertinent part: “In the meantime, please be aware that [the insurer] will be handling this matter under a reservation of rights. This means that [it] reserves all rights reserved to it under applicable law, insurance regulations and policy provisions that may become relevant as this matter continues to develop. Those rights include, but are not limited to, the rights to decline coverage for this claim and to withdraw assigned defense counsel.” As stated, the letter did not specifically reference the snow and ice exclusion.

The trial court found this broad language sufficient to preserve the insurer’s right to assert the snow and ice exclusion 18 months later, and granted the insurer summary judgment on all counts. The Superior Court reversed.

STANDARDS GOVERNING RESERVATION OF RIGHTS LETTERS AND IMPORTANT PRACTICE POINTS

The Superior Court observed some general principles in reaching its decision:

  1. Pennsylvania law does not require an insurance company to list every potential defense to coverage in its reservation of rights letter. However, the small body of recent case law discussing this precise issue suggests that some level of specificity is necessary.”

  2. “[I]nsurance companies can … choose to send multiple reservation of rights letters during the evolution of a case as a best practice.”

  3. “Pennsylvania counterbalances the insurer’s broad obligation to defend even claims as to which coverage may not apply by providing the insurer [with] the option of defending subject to a reservation of its rights later or simultaneously to contest coverage.”

  4. “Where the insurer assumes the duty to defend, the insurer can simultaneously challenge whether the claim is covered under the insurance policy, even if the underlying case settles. An insurer’s defense of the insured, therefore, does not waive the insurer’s claims that a policy exclusion applies.”

  5. An insurer is “required to provide timely and sufficient notice of any such reservation of rights to the insured….”

  6. The reservation of right must “(1) be submitted in a timely fashion; and (2) ‘fairly inform the insured of the insurer’s position’ in order to preserve an insurer’s assertion of policy exclusions once a defense of the insured has been mounted.”

  7. “[A]n insurance company preserves defenses via a reservation of rights ‘[i]f its investigation is conducted with reasonable dispatch and its disclaimer is made with promptness upon the discovery of the facts….”

  8. An insurer “cannot delay its decision and refrain from giving notice to the insured until such time has elapsed that his rights in relation to the accident are prejudiced or may become so….”

  9. “’[W]here an insurer fails to clearly communicate a reservation of rights to an insured, prejudice may be fairly presumed.’” (Court’s emphasis)

  10. The court quoted, and emphasized, a nearly 40-year old Superior Court opinion as guiding precedent: “[A] liability insurer will not be estopped [from setting] up the defense that the insured’s loss was not covered by the insurance policy, notwithstanding the insurer’s participation in the defense of an action against the insured, if the insurer gives timely notice to the insured that it has not waived the benefit of its defense under the policy. However, a reservation of rights in this respect, to be effective, must be communicated to the insured. It must fairly inform the insured of the insurer’s position and must be timely, although delay in giving notice will be excused where it is traceable to the insurer’s lack of actual or constructive knowledge of the available defense.” (Court’s emphasis)

  1. It cited a 91-year old Supreme Court precedent for the proposition “When an insurance company or its representatives is notified of loss occurring under an indemnity policy, it becomes its duty immediately to investigate all the facts in connection with the supposed loss as well as any possible defense on the policy. It cannot play fast and loose, taking a chance in the hope of winning, and, if the results are adverse, take advantage of a defect in the policy. The insured loses substantial rights when he surrenders, as he must, to the insurance carrier the conduct of the case.”

  2. “[I]nsurance carriers may be estopped from asserting a policy exclusion where it has ‘lulled the insured into a sense of security to his detriment.’”

The reservation of rights letter was timely

In this case, the insurer issued the reservation of rights letter within three weeks of the suit against the insured, and before any defense was undertaken. The court generally observed “that a reservation of rights letter sent close-in-time to the institution of a potentially covered legal action is ‘timely’ under Pennsylvania law.” The Court found the instant reservation of rights letter timely.

The reservation of rights letter did not “fairly inform the insured of the insurer’s position”

The court observed that the reservation of rights letter stated the insured’s defense was “potentially covered,” and that defense counsel was being appointed. Although the letter stated the insured had “a right to obtain private counsel on its own initiative, it simultaneously instructed [the insured] to refrain from discussing the case with ‘anyone other than your attorney or a properly identified representative of [the insurer].’”

As set out above, the letter only “generally reserved all of [the insurer’s] rights under ‘applicable law, insurance regulations and policy provisions,’ including the right to deny coverage. However, the letter failed to specifically identify any emergent coverage issues. Instead, it simply purported to include any and all issues that may become relevant as this matter continues to develop.’”

In this case, while the reservation of rights letter may have adequately apprised the insured that something might occur in the future affecting coverage, “it provided no notice whatsoever of the existing coverage issue appearing on the face of the Policy, i.e., the snow and ice removal exclusion.” The Court found the insurer failed in its duties to investigate before issuing the reservation of rights letter.

The Court stated that “[a]ny complete review of the Policy would have immediately revealed the existence of this exclusion.” If the insurer had reviewed the policy and cited the exclusion, it would have “vitiated any obligation … to defend or indemnify….” “Instead, the boilerplate language relied upon by [the insurer] obfuscated this absolute defense to coverage, and caused [the insured] to reach the reasonable conclusion there was no pressing need to secure back-up counsel.”

The Court added that while insurers do not have to list everybody potential defense in a reservation of rights letter, the trend in the “small body of recent case law discussing this precise issue suggests that some level of specificity is necessary.” Thus, the Court tied specificity in a reservation of rights letter to the insurer’s duty to investigate before issuing a reservation of rights.

Thus, it was not the lack of specificity, standing alone, that doomed the insurer here. “The lack of specificity in [the insurer’s] reservation of rights letter is not determinative, in and of itself. We are not announcing some new paradigm by which Pennsylvania insurance companies must prophylactically raise all potential coverage defenses in order to preserve them. However, the lack of specificity in the letter bespeaks the deficient investigation carried out by [the insurer].” (Court’s emphasis) In this case the insurer had both the policy language and actual knowledge of the nature of the claim, but waited 18 months before specifically raising the exclusion.

There was presumptive prejudice sufficient to create an estoppel

The Court observed that insurer’s own conduct may lead to estoppel in belatedly asserting exclusions where, e.g., the insurer lulls the insured into a sense of security detrimental to the insured’s interests, or only raised the exclusion 9 months accepting exclusive control of the defense.

Here, where the insurer failed to “’clearly communicate’ its coverage position and the inherently speculative nature of determining how the case might have unfolded differently had the insurance company acted with appropriate diligence, prejudice can be fairly presumed in this instance.” Thus, the Court held, “[a]s a consequence of [its] deficient investigation, [the insurer’s] reservation of rights letter failed to ‘clearly communicate’ the extent of the rights being reserved, which resulted in presumptive prejudice….”

[As a practical matter, asserting the exclusion could have alerted the insured immediately that coverage was unlikely, and that it needed to get its own counsel instead of waiting for the other shoe to drop.]

“As a result of this prejudice, [the insurer] should have been estopped from asserting this policy exclusion for the first time eighteen months later without sufficient notice to [the insured] regarding [the insurer’s] coverage position.”

Thus, the trial court’s decision was reversed, and the case remanded.

Date of Decision: April 24, 2020

Selective Way Insurance Co. v. MAK Services, Superior Court of Pennsylvania No. 1289 EDA 2019, 2020 Pa. Super. LEXIS 342, 2020 PA Super 103 (Pa. Super. Ct. April 24, 2020) (Bowes, Shogan, Strassburger, JJ.)

BAD FAITH CLAIM FOR USING WRONG FEE SCHEDULE TO PAY FIRST PARTY MEDICAL BENEFITS PREEMPTED BY MVFRL; BUT CASE CAN PROCEED UNDER UTPCPL (Middle District)

This class action complaint alleged the insurer underpaid on motor vehicle personal injury benefits claims by using an improper fee schedule, resulting in lower payments than were due.

The court held the statutory bad faith claims were pre-empted by the Motor Vehicle Financial Responsibility Law (MVFRL). The court extensively discussed case law addressing when 75 Pa.C.S. § 1797 preempted 42 Pa.C.S. § 8371. It held the MVFRL preempts section 8371 bad faith claims where the gravamen of the insured’s claim “is the denial of first party medical benefits and nothing more.” By contrast, e.g., abuse of the PRO process might not be preempted.

On the other hand, the court found the complaint adequately pleaded a claim under the Unfair Trade Practices and Consumer Protection Law, as paying an improper sum is more than mere nonfeasance.

Date of Decision: April 13, 2020

Banks v. Allstate Fire & Casualty Insurance Co., U. S. District Court Middle District of Pennsylvania Civil No. 3:19-CV-01617, 2020 U.S. Dist. LEXIS 63863 (M.D. Pa. April 13, 2020) (Wilson, J.)

An Insurer Brings a Covid-19 Declaratory Judgment Action

Covid-19 coverage suits against insurers are expanding daily. We recently summarized some key litigation issues concerning the “Exclusion of Loss Due to Virus or Bacteria”; the need to establish “direct physical loss of or damage to property at the described premises” for business interruption insurance; and the same type of damage or loss to property, other than the insured’s premises, to get civil authority coverage.

On Monday (April 20, 2020), an insurer became the plaintiff when Travelers brought a declaratory judgment action against a Los Angeles law firm, asking a California federal court to “[e]nter a declaratory judgment that the Policies do not provide coverage for the losses claimed….” The case is Travelers Insurance Company of America v. Geragos & Geragos, P.C. A copy of the complaint can be found here.

Travelers begins its complaint with a statement aimed at putting its coverage denial in context: “Travelers understands that the COVID-19 Pandemic has affected the public and the vast majority of businesses throughout the country (and world) in unprecedented ways. But these challenging and unfortunate circumstances do not create insurance coverage for losses that fall outside the terms of a policyholder’s insurance contract.”

Travelers alleges the law firm’s broker told Travelers that “G&G closed its business in light of directives issued by government officials in California and New York (the “Governmental Orders”), and was suffering an ongoing loss of business income as a result of closing its law firm’s physical offices.” Travelers also alleges the firm’s CEO told Travelers that (i) “SARS-CoV-2 purportedly causes physical damage because other countries impacted by the COVID-19 Pandemic have fumigated public spaces, and scientists have found that SARS-CoV-2 is detectable in aerosols and on certain surfaces for particular periods of time”; (2) “he was claiming loss of business income due to the Governmental Orders and courts being closed”; and (3) the firm lost rental income in New York.

After reciting relevant policy terms and exclusions, Travelers sets out various bases for its position:

  1. “There is no coverage for G&G’s claimed losses of business income under the Business Income provision … because any suspension of G&G’s operations was not ‘caused by direct physical loss of or damage to property at the described premises.’”

  2. “[T]he presence of SARS-CoV-2 on a surface would not cause physical damage to that surface.”

  3. “[T]here can be no coverage for G&G’s claimed losses of business income under the Business Income provision because the COVID-19 Pandemic is not a Covered Cause of Loss.”

  4. “There is no coverage for G&G’s claimed losses of business income under the Civil Authority provision … because the Governmental Orders were not ‘due to direct physical loss of or damage to property at locations, other than described premises, that are within 100 miles of the described premises.’”

  5. “[T]he Government Orders do not prohibit all access to G&G’s premises.”

  6. “There is no coverage for G&G’s claimed losses of business income under the Business Income and Extra Expense From Dependent Property provision … because any suspension of G&G’s operations was not ‘caused by direct physical loss or damage at the premises of a Dependent Property’ within the meaning of the Policies. Any temporary closure or limitation of operations of courts in which G&G conducts litigation was the result of governmental actions taken to slow the spread of the COVID-19 Pandemic, not the result of direct physical loss or damage at the premises of a Dependent Property.”

  7. The “EXCLUSION OF LOSS DUE TO VIRUS OR BACTERIA” excludes “’loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.’ SARS-CoV-2 is a virus that induces or is capable of inducing physical distress, illness or disease.”

Geragos & Geragos had earlier sued Travelers for coverage in California’s Superior Court (Los Angeles). A copy of that complaint can be found here.

When juxtaposed with Travelers’ claims, the law firm’s allegations set out the battle lines:

  1. “The global COVID-19 pandemic has physically impacted both public and private property and physical spaces around the world, as well as the right of the general public to gather and utilize retail business locations. The currently-raging pandemic has been exacerbated by the fact that the deadly virus physically infects and stays on surfaces of objects or materials, ‘fomites,’ for up to twenty-eight days. The scientific community in the United States and indeed, across the world, including the World Health Organization, has recognized that the Coronavirus is a cause of real physical loss and damage.”

  2. “Indeed, a number of countries such as: China, Italy, France, and Spain have required the fumigation of public areas prior to allowing them to re-open. A recent scientific study printed in the New England Journal of Medicine explains that the virus is detectable for up to three hours in aerosols, up to four hours on copper, up to 24 hours on cardboard boxes, and up to three days on plastic and stainless steel. Notably, the most potent form of the virus is not airborne but rather present on physical surfaces.” (footnote omitted)

  3. The local (Los Angeles) order directing closure of non-essential businesses “specifically referenced that it was being issued based on the dire risks of exposure with the contraction of COVID-19 and evidence of physical damage to property.” Shortly after that, the Governor “issued a state-wide ‘Stay-at-Home Order’ for all residents of California. In this case, the property that is damaged is in the immediate area of the Insured Property.”

  4. “Any effort by Travelers to deny the reality that the Coronavirus causes physical loss and damage would constitute a false and potentially fraudulent misrepresentation that could endanger policyholders, such as Plaintiff, and the public.”

  5. “[T]he Policy does not include an exclusion for a viral pandemic and actually extends coverage for loss or damage due to physical loss and damage, including by virus….”

The court(s) will have to determine the scope and meaning of direct physical loss or damage to property. They will also have to address either (i) the presence of a factual dispute over whether the virus exclusion is in the applicable policies, or (ii) if present, why that exclusion might apply to discrete viruses, but not viral pandemics. There may also be an abstention issue in the federal action.

Moreover, as discussed in our previous post, all of these legal disputes may be superseded by emergency legislation to create coverage where it may not otherwise exist, in return for a state or federal “backstop” to protect insurers from bankruptcy.

INSURER REASONABLY RELYING ON ENGINEERING INSPECTION REPORT CANNOT BE LIABLE FOR BAD FAITH (Philadelphia Federal)

The insureds had two nearly identical losses. In 2016, there was water damage to their roof and interior home damage. The insurer originally paid for the interior damage, while having an engineer inspect the roof. The engineer concluded the roof damage was not the result of a storm, but the result of uncovered faulty construction. Moreover, he concluded that even the interior home damage resulted from the uncovered faulty roof construction. The insurer issued a denial letter on this basis and the insureds did not respond.

Two years later, there was another storm, with new roof and interior damage. The insurer sent out the same engineer who reached the same conclusions, i.e., the damage resulted from faulty construction, not storm damage. Further, the record showed that the insureds had not repaired the roof after the original loss two years earlier. Again, under the policy, “coverage for damage caused by faulty, inadequate, or defective workmanship was explicitly excluded in their homeowner’s insurance policy.” Thus, the insurer denied the second claim.

On the second claim, the insured engaged a public adjuster and their own engineer. The public adjuster inspected the home, and took the position the insureds were not seeking coverage for faulty construction, but for damage caused by wind, snow and ice, on the theory that the poorly installed roof only made the home susceptible to these covered elements. The insurer’s engineer reviewed the other engineer’s report, but did not change his position, nor did the insurer rescind its denial.

The insureds sued for breach of contract and bad faith. The insurer moved for summary judgment on the bad faith claim.

The court observed that an insurer “may defeat a claim of bad faith by showing that it had a reasonable basis for its actions.” The court tied this axiom to the legal principle that summary judgment is warranted in bad faith cases when insureds cannot meet their burden of proving by clear and convincing evidence that the insurer’s conduct was unreasonable.

The insureds attempted to argue that the insurer improperly relied on its expert’s denying the first claim to deny the second, independent, claim. Judge Bartle rejected that argument.

The insureds conceded they never repaired the original damages identified two years earlier. Further, they did not dispute that the insurer’s engineer came out a second time and did a completely new report concluding “that the same unrepaired faulty construction caused the claimed damage,” and further rejecting the insureds’ claim the damage was caused by wind, ice, and snow.

In finding no bad faith, Judge Bartle stated “the cause of damage is not material to the plaintiffs’ bad faith claim. … Rather, the plaintiffs must present clear and convincing evidence to substantiate their claim that [the insurer] acted unreasonably.” They did not do so in this case.

The record demonstrated the insurer sent its engineer out to do a second inspection, and that the second denial was based on the second inspection, not events that transpired two years earlier. Once it was established that the insurer did base its denial on a current second inspection, the court found that “[f]or purposes of defeating a bad faith claim, an insurer may rely on the conclusions of its independent experts.”

Thus, summary judgment was granted on the bad faith claim.

Date of Decision: April 9, 2020

Balu v. The Cincinnati Ins. Co., U. S. District Court Eastern District of Pennsylvania NO. 19-3604, 2020 U.S. Dist. LEXIS 63987 (E.D. Pa. April 9, 2020 (Bartle, J.)

(1) NO COVERAGE DUE MEANS NO BAD FAITH AS A MATTER OF LAW ON COVERAGE DENIAL; (2) REASONABLE RELIANCE ON ENGINEERING EXPERT NEGATES BAD FAITH INVESTIGATION CLAIM (Philadelphia Federal)

The insured church’s roof collapsed. The insurer denied coverage on the basis that its engineer determined the causal factors were “a combination of deferred maintenance, improper roof slope, and poor drainage,” and none of these collapse factors are covered causes of loss under the policy.

The insured sued for breach of contract and bad faith.

The church’s evidence for coverage came from its public adjuster. He testified (1) there was heavy wind and rain “close” to the date of loss; (2) there was no long term damage from roof leaks; and (3) and even if so, he doubted any such leaks were the “main factor” in the roof’s collapse. The public adjuster, however, “did not offer an opinion as to what caused the roof’s collapse,” and the church did not produce “any other evidence suggesting the cause of the roof’s collapse was a covered event under the policy.”

The insurer successfully moved for summary judgment on both counts.

No Coverage Due

In granting summary judgment on the breach of contract claim, Judge Robreno stated the church “failed to produce any evidence, beyond mere speculation, that the roof’s collapse was caused by a wind and rain event.” Thus, there were no facts sufficient to show the roof’s collapse fell within a covered cause, and it could not meet its burden of proof.

Bad Faith Claim Analyzed for both Improper Coverage Denial and Inadequate Investigation

On the bad faith claim, the church alleged both improper denial and failure to conduct a proper investigation. The court noted that because a number of courts have held statutory bad faith claims are not contingent on the outcome of the breach of contract claim, the court would consider the inadequate investigation claim as a separate basis for plaintiff’s statutory bad faith claim. The court further observed Pennsylvania’s Supreme Court has not decided this specific issue.

[We have noted before on this Blog that a failure to investigate, standing alone, is arguably not a cognizable claim under the Bad Faith Statute based on the Pennsylvania Supreme Court’s 2007 decision in Toy v. Metropolitan Life.]

As to improper denial, the court found for the insurer as a matter of law. “A finding that denial of the claim under the policy was warranted is inconsistent with a claim that [the insurer] acted in bad faith in denying the claim.”

As to the inadequate investigation claim, Judge Robreno observed that “[i]nsurance companies act reasonably, and do not exercise bad faith, when they deny claims based upon engineering experts’ reports.” He relied on his 2011 decision in El Bor v. Firemen’s Fund, and Western District Judge Fischer’s decision in Palmisano v. State Farm.

The court then examined the reasonableness of the insurer’s reliance. There was no dispute the engineer’s report pre-dated the carrier’s claim denial. Further, there was no support in the record for the insured’s assertions that the report was “’devoid of facts, experiments, measurements, testing, and scientific principles.’” Rather, the report was based on an actual property inspection, and that the engineer provided the carrier “with photographs and measurements of the property.”

On the other hand, in its denial letter the carrier asked the church if it could provide any additional information supporting coverage. It gave the insured 30 days to provide any further information supporting coverage, but nothing was forthcoming.

The court stated that under these facts, there was no evidence that the insurer relied on the report in bad faith, observing that even if an insurer’s expert were incorrect, that alone “’is not evidence that his conclusions were unreasonable or that Defendant acted unreasonably in relying upon them.’”

Date of Decision: April 7, 2020

Gethsemane FBH Church of God v. Nationwide Insurance Co., U.S. District Court Eastern District of Pennsylvania CIVIL ACTION NO. 19-03677, 2020 U.S. Dist. LEXIS 60780 (E.D. Pa. April 7, 2020) (Robreno, J.)

 

EASTERN DISTRICT DISMISSES ANOTHER BAD FAITH CLAIM FOR INADEQUATE PLEADING (Philadelphia Federal)

Continuing a line of recent Eastern District decisions, the court dismissed the UIM plaintiff’s bad faith claim as inadequately pleaded, with leave to amend.

The complaint failed to provide sufficient factual allegations to support a bad faith claim. Rather, it includes “conclusory remarks in which the Court cannot deduce bad faith.” Thus, “[i]n construing the complaint in a light most favorable to [the insured], the Court cannot determine specific factual allegations from these paragraphs.” The complaint was dismissed with leave to amend. However, any amended bad faith claim “must describe, with specifics, how [the insurer] acted in bad faith.”

The court relied upon the Third Circuit’s 2012 Smith decision in reaching its conclusion, as well as Judge Buckwalter’s 2015 Pasqualino decision, and Judge Baylson’s 2015 Allen decision.

Date of Decision: April 7, 2020

Champ v. USAA Casualty Insurance Co., U. S. District Court Eastern District of Pennsylvania No. 5:20-cv-01238, 2020 U.S. Dist. LEXIS 60790 (E.D. Pa. April 7, 2020) (Leeson, J.)

 

NO BAD FAITH: (1) NO BENEFIT DUE; (2) NO ESTOPPEL UNDER THE UIPA OR UCSP REGULATIONS; (3) AN OVERSIGHT CAUSING DELAY IS NOT BAD FAITH (Philadelphia Federal)

The court described this as the case of the missing email. The insurance policy at issue covered various cars. The insured emailed its broker to add another vehicle to the policy. The broker claims it never got the email, and thus never asked the insurer to issue an endorsement adding the new car to the policy. As things sometimes go in life, the new car was involved in a collision, damaging another vehicle as well as its own new car.

The insured reported the claim. However, the insured identified its vehicle as one of existing cars listed in the policy, rather than the new unlisted vehicle. The insurer accepted coverage, and even paid damages to the other driver. The insurer later reversed itself on coverage once its appraiser determined the insured’s vehicle was not the car identified in the claim form, and was not covered under the policy.

The police report did list the correct vehicle. The insurer had the police report at the time it initially provided coverage, and only reversed itself when its appraiser realized that the damaged car was not the car on the claim form and was not listed in the policy.

The insured sued for breach of contract and bad faith, among other claims against the insurer as well as the broker. The insurer moved for summary judgment, which the court granted.

There is no breach of contract, or estoppel under the UIPA or UCSP regulations

First, there was no breach of contract, as the vehicle at issue never became part of the policy. The insured argued, however, that the insured was estopped from denying coverage under the Unfair Insurance Practices Act (UIPA) and the Unfair Claims Settlement Practices (UCSP) regulations governing “Standards for prompt, fair and equitable settlements applicable to insurers”. The insured relied on 31 Pa. Code § 146.7(a)(1), which states that, “Within 15 working days after receipt by the insurer of properly executed proofs of loss, the first-party claimant shall be advised of the acceptance or denial of the claim by the insurer.”

Judge Wolson rejected the statutory/regulatory argument for three reasons:

  1. There is no private right of action under the UIPA and UCSP regulations, and only Pennsylvania’s Insurance Commissioner can enforce the UIPA and UCSP regulations.

  2. The policy itself did not incorporate the UIPA or UCSP obligations or impose those obligations on the insurer. “Absent the incorporation of these obligations into the Policy, their potential violation does not breach the Policy.”

  3. The doctrines of waiver or estoppel cannot “create an insurance contract where none existed.”

THERE IS NO BAD FAITH

  1. The broker is not an insurer subject to the bad faith statute

First, the court recognized that there was no sustainable statutory bad faith action against the broker because it was not an insurer.

  1. There is no bad faith where no benefit is denied

Next, as to the insurer, “To prevail on a bad faith claim, a plaintiff must present clear and convincing evidence that, among other things, an insurer ‘did not have a reasonable basis for denying benefits under the policy’ or that an insurer committed a ‘frivolous or unfounded refusal to pay proceeds of a policy.’” Because the insurer had no contractual obligation to pay its refusal could not have been unreasonable, and the claim failed.

  1. The UIPA and UCSP regulations do no prevent changing a coverage decision based on new information

The court rejected another argument based on the UIPA and UCSP regulations cited above. The insured argued the failure to pay was unreasonable once the insurer accepted coverage. The court found, however, the UCSP regulations did not “prevent an insurer from changing a coverage determination based on new information.”

More importantly to the court, the insured adduced no case law adding such a gloss to section 146.7, i.e. a mandate that once coverage was accepted it could never be denied under any circumstances. Thus, it was reasonable for the insurer to interpret that regulation to permit an insurer to revise a coverage decision based on new information.

  1. A Delay based on an Oversight is not the Basis for Bad Faith

Finally, any delay in revising its coverage determination was likewise not bad faith. Citing the 2007 DeWalt decision, the court observed that an “insurer’s actions in allegedly delaying investigation did not constitute bad faith under Pennsylvania law [when] there was no evidence that such delay was deliberate or knowing, or was unreasonable.”

While the carrier “probably could have been more diligent” in determining which vehicle was involved in the collision by looking at the police report earlier, “an insurer ‘need not show that the process used to reach its conclusion was flawless or that its investigatory methods eliminated possibilities at odds with its conclusion.’” There was nothing in the record to establish the insurer “acted with reckless disregard of its obligations or otherwise fell so short that it acted in bad faith.”

Date of Decision: April 1, 2020

Live Face on Web, LLC v. Merchants Insurance Group, U.S. District Court Eastern District of Pennsylvania Case No. 2:19-cv-00528-JDW, 2020 U.S. Dist. LEXIS 56852 (E.D. Pa. April 1, 2020) (Wolson, J.)

Our thanks to attorney Daniel Cummins of the excellent Tort Talk Blog for bringing this case to our attention.  We also note the Tort Talk Blog’s three recent posts on post-Koken motions to sever and stay bad faith claims in the Western District, York County, and Lancaster County.