Monthly Archive for April, 2021

NO BAD FAITH WHERE “RED FLAGS” EXISTED THAT COULD UNDERMINE COVERAGE; RULE TO FILE COMPLAINT NOT BAD FAITH (Middle District)

This case involved an auto accident death, and whether the deceased was an insured “family member” under his stepfather’s auto policy.  Coverage depends on whether the deceased resided with the named insured/step-father at the time of the accident.  The stepfather brought breach of contract and bad faith claims, on behalf of his stepson’s estate.

The court denied summary judgment to both parties on the coverage issues, as material facts remained open on the coverage issued.  As Judge Mannion states, “[i]n short, there exist too many disputed material facts as to whether [the stepson] was a ‘family member’ of plaintiff’s household at the time of the accident.”

The court did grant the insurer summary judgment on the bad faith claim, as plaintiff could not meet the clear and convincing evidence standard necessary to prove bad faith.

Judge Mannion observed that during its investigation, the insurer discovered that the stepson might not have met the definition of “family member” under the policy.  There were statements from two people that the stepson with living with his girlfriend and her mother, not the stepfather; that the stepfather had removed the stepson from the policy at issue; and that the deceased had purchased his own vehicle with its own insurance policy, and that policy had an address other than the stepfather’s address at the time of the accident.

While the stepson’s driver’s license and tax returns did indicate he resided with his stepfather, the insurer “certainly had sufficient evidence that showed [the stepson’s] physical residence was at [the girlfriend’s] house.”

Red flags oblige the insurer to investigate thoroughly

Looking at all the circumstances, Judge Mannion observed that “[u]nder Pennsylvania law, insurers are permitted to ‘conduct a thorough investigation’ of a questionable claim without acting in bad faith”, and “[w]here an insurer sees red flags’ that cause concern of insurance fraud and prompt an investigation, the insurer has a reasonable basis for investigation, and is therefore not liable for claims of bad faith.”  Here, the insurer “had more than a reasonable basis to investigate where [the stepson] was really residing at the time of the accident since it had ample evidence to show that he may have moved out of plaintiff’s house months before the accident.”

Under these circumstances, the insurer was “entitled to conduct its own investigation and its finding that [the stepson] was not residing with plaintiff and was not a covered family member as defined in plaintiff’s Policy was reasonably based on evidence it uncovered. Thus, defendant’s denial [of] plaintiff’s UIM claim made on behalf of [the stepson’s] Estate was not an act in reckless disregard of its obligations under plaintiff’s Policy.”

Rule to file a complaint not bad faith

The court also rejected the notion that the insurer acted “outrageously” in filing a rule to file a complaint, after plaintiff had initiated the action by way of writ of summons.  The insurer sought to have a complaint filed because it lacked information, and “instructed plaintiff to file a complaint so that it could develop the facts as to [the stepson’s] residence.” Judge Mannion added, “[i]ndeed, as defendant points out, the court held in Fabrikant v. State Farm Fire and Cas. Co., [a summary of which can be found here] …. that ‘an insurer’s exercising its procedural right to serve a Rule to File Complaint is not bad faith, absent a showing of clear and convincing evidence that such action was taken in bad faith.’” Here the insurer “was obliged to investigate where [the deceased] was physically residing at the time of the accident in order to properly consider plaintiff’s UIM claim, especially since there was evidence that his residence was at [another] house.” [Emphasis added]

Date of Decision:  April 1, 2021

Fuentes v. USAA General Indemnity Co., U.S. District Court Middle District of Pennsylvania, No. CV 3:19-1111, 2021 WL 1225934 (M.D. Pa. Apr. 1, 2021) (Mannion, J.)

INSURER’S AGENT CAN BE DIRECTLY LIABLE FOR BAD FAITH CONDUCT IN BREACH OF CONTRACT, AND NEGLIGENCE IN CLAIM HANDLING, EVEN IF NOT A PART OF THE INSURANCE AGREEMENT (New Jersey Federal)

The district court allowed the insured to pursue claims against the insurer’s agent, even though the agent was not party to the insurance policy, where the policy was underwritten by Lloyds and effected through the agent.

The complaint alleged there was a delay in payment undisputedly due the insured after the claim was submitted. This unwarranted and unjustified delay allegedly caused the insured to suffer extra-contractual consequential damages.  The insured alleged the insurer was liable for breach of contract and bad faith in delaying payment.  The claims against the insurer itself, however, were not before the court.

Rather, the insured wanted to bring distinct claims against the insurer’s agent as a claims handler. The insured asserted the agent was independently liable for failing to timely process the claim and for failure to make undisputed payments promptly, leading to the consequential extra-contractual damages.  The insured also brought a negligence claim against the agent for failing to meet its duty of care in claims handling. The insured contended the agent’s “conduct contributed to or caused Plaintiff’s damages and therefore, [the agent] is potentially liable to Plaintiff in contract for its bad faith.”

The court permitted all of these claims to proceed.

Citing the New Jersey Supreme Court’s seminal Pickett v. Lloyds opinion, the district court found the insurer’s agent could be “liable to the insured in contract for lack of good faith and fair dealing outside of its agency relationship with Lloyd’s for its role in the claims handling delay that caused consequential damages to the policyholder.” This requires that the agent’s own conduct contributed to the delay causing consequential damages.

Under Pickett, “’agents of an insurance company are obligated to exercise good faith and reasonable skill in advising insureds.’” The district court further observed that “’although the allegation of an agent’s breach of duty of care carries tort overtones, the contractual relationship between the insured and insurer dominates not only the relationship between them, but also that between the insured and the agent.’”

As to the negligence claim, the district court looked again to Pickett, which stated that “’clearly cases may arise in which the insurance company’s conduct in response to an insured’s claim for payment constitutes an independent tort.’” Thus, the district court held the insured could state a negligence claim against the agent, in addition to the contract claim.

Date of Decision:  March 31, 2021

Microbilt Corporation v. Certain Underwriters at Lloyds, London, U.S. District Court District of New Jersey No. CV2012734FLWZNQ, 2021 WL 1214774 (D.N.J. Mar. 31, 2021) (Quraishi, M.J.)

PRIMARY INSURER’S ALLEGED BAD FAITH FAILURE TO SETTLE RAISED BY EXCESS CARRIER COULD NOT BE DECIDED ON SUMMARY JUDGMENT; BAD FAITH IS DETERMINED FROM FACTS AT THE TIMES DECISIONS WERE MADE, NOT BY USING HINDSIGHT AFTER THE FINAL OUTCOME IS KNOWN (New Jersey Federal)

The plaintiff-excess insurer sued a primary auto insurance carrier for failing to settle within its $1,000,000 policy limits. The case went to trial against the insured driver, and the jury verdict exceeded the $1,000,000 primary policy limit. Thus, the excess insurer wound up paying over $600,000, and it brought suit to recover those funds from the primary carrier.

The detailed history between the injured claimant and the primary insurer shows ongoing negotiations, a mediation, case assessments, and a suggested settlement by the trial judge. Almost none of these valuations or negotiations placed the case value in excess of $1,000,000.  In fact, the injured claimant and their counsel valued the case for settlement in the $600,000 to $750,000 range, though the claimant would not accept less than $750,000. (Claimant’s counsel would have agreed to a settlement in the $600,000 range.)  The primary carrier would not settle at $750,000, but did offer $600,000 at one time.

The case went to trial, resulting in a $1,400,000 verdict.

The umbrella carrier’s complaint alleged liability for the primary insurer’s breach of a duty to negotiate in good faith and settle, along with asserting it was equitably subrogated to the insured concerning the excess payments above the $1,000,000 limit.

Both sides moved for summary judgment, and both motions were denied. New Jersey District Judge Cecchi found material issues of fact remained to be decided.

Rova Farms analysis

Judge Cecchi set out the following standard:

Under the seminal case of Rova Farms Resort, Inc. v. Investors Ins. Co., 65 N.J. 474 (1974), a primary insurer is liable to an excess insurer for an excess verdict where the primary insurer failed to settle with a third-party claimant within the primary policy limit prior to trial, and where, prior to trial, (1) a jury could have potentially found liability for the third-party claimant and the potential verdict could have exceeded the primary policy limit, (2) the third-party claimant was willing to settle within the primary policy limit, and (3) the primary insurer did not negotiate in “good faith.”

The only disputed issue was whether the primary insurer did not negotiate in good faith.  The relevant legal principles applicable include:

  1. The primary insurer “has a positive fiduciary duty” to act in “good faith,” i.e., “to take the initiative and attempt to negotiate a settlement within the [primary] policy coverage.”

  2. Thus, a primary insurer’s “negotiation strategy” with the third-party claimant must have a “reasonable prospect for a successful outcome” for both itself and the excess insurer … such that the strategy is not infected with “dishonest[y]” or “negligence.”

  3. Moreover, consideration of “all the factors bearing upon the advisability of a settlement,” including the primary insurer’s “experience, expertise and judgment,” is required to assess this “good faith” inquiry.

  4. Finally, evaluating whether a primary insurer negotiated in “good faith” must not be done in “[h]indsight,” e.g., a “mere failure to settle within the [primary] policy limit when there was an opportunity to do so before or during trial is not a per se demonstration of bad faith.”

Disputes of material facts remain open

Disputes of fact remained open concerning the settlement value the primary carrier placed on the case at the mediation, and whether that value, once determined, was reasonably calculated.  Judge Cecchi was particularly interested in the factual question of whether the settlement authority given at the mediation differed significantly from the primary insurer’s internal valuation numbers.

Judge Cecchi further noted that while the excess carrier adduced facts that the primary insurer placed a much higher value on the case than it offered in settlement, the primary carrier argued that the “full value” it may have placed on the case, or how it determines reserves, were materially different kinds of evaluations from determining a settlement value.

There were also disputes of facts over the primary carrier’s alleged “hard ball” negotiation tactics at the mediation.  Again, the excess carrier drew on facts that made the primary carrier seem unreasonable, but the primary carrier argued it was willing to be more flexible than the picture plaintiff painted.  This factual dispute could not be resolved at the summary judgment stage.

Hindsight cannot be used to argue the presence or absence of bad faith

Judge Cecchi lastly observed that courts, and presumably the ultimate triers of fact, could not use hindsight to advance or defend their positions. She states:

For instance, Plaintiff argues that the trial verdict of over $1,000,000 awarded to Claimant demonstrates that Defendant’s limited extension of settlement authority and subsequent settlement offer at the Mediation were unreasonably low and thus made in “bad faith.” … Alternatively, Defendant argues that, irrespective of whether its settlement offer to Claimant was too low, it did not negotiate in “bad faith” at the Mediation because it was not reasonable at that time to settle with Claimant for $750,000, a figure which Defendant later learned Claimant would not have “move[d] below” …. Nevertheless, “the perfect vision of hindsight is not the lens through which our courts assess compliance with good-faith obligations.” …. Rather, whether Defendant negotiated in “good faith” at the Mediation depends only on the facts known to it at that time.  (Emphasis added)

Date of Decision: March 30, 2021

Hartford Casualty Insurance v. Liberty Mutual Fire Insurance Company, U.S. District Court District of New Jersey No. 18-CV-0444, 2021 WL 1186759 (D.N.J. Mar. 30, 2021) (Cecchi, J.)

NO COVERAGE FOR COVID-19 LOSSES = NO BAD FAITH IN DENYING COVERAGE (Philadelphia Federal)

On March 30, 2021, Eastern District Judges Beetlestone and Baylson independently issued opinions finding no insurance coverage due for business losses resulting from the Covid-19 pandemic.  In both cases, plaintiffs not only demanded coverage, but asserted bad faith claims against their insurers.

Motions to dismiss were granted in both cases, with prejudice, the courts finding no coverage due for the types of losses claimed. We leave you to read these cases in detail on the issues of physical loss or damage, direct loss or damage, governmental closures, business losses, and the other issues now regularly before the courts on Covid-19 business interruption and government closure claims.

Neither court gave any lengthy address to the bad faith claims, or even an express analysis for their dismissal. By comparison, the breach of contract and declaratory relief claims over coverage were addressed in detail.

The first element of any bad faith claim is that the claim denial is unreasonable.  In dismissing the bad faith claims, with prejudice, it seems fair to infer that because the coverage denial was correct under the policy language, these courts found no bad faith possible, i.e., where the coverage denial is correct under the relevant policy language, it is impossible to prove the carrier acted unreasonably, thus precluding a finding of bad faith.

Dates of Decision:  March 30, 2021

Tria WS LLC, v. American Automobile Insurance Company, U.S. District Court Eastern District of Pennsylvania, No. CV 20-4159, 2021 WL 1193370 (E.D. Pa. Mar. 30, 2021) (Beetlestone, J.) COVID

Chester Cty. Sports Arena v. The Cincinnati Specialty Underwriters Ins. Company, U.S. District Court Eastern District of Pennsylvania No. 20-2021, 2021 WL 1200444 (E.D. Pa. Mar. 30, 2021) (Baylson, J.) COVID

BAD FAITH CLAIM BARELY STATED BASED ON ALLEGED FAILURES TO INVESTIGATE, DELAY, AND LOW VALUATION, TAKEN IN THEIR TOTALITY (Middle District)

This is a breach of contract and bad faith first party property damage claim.  The court denied the insurer’s motion to dismiss the bad faith claim.

The insured suffered a furnace malfunction that she claimed led to $35,000-$40,000 in damages. She later suffered a second malfunction leading to a roughly equal amount of additional damages.

The insurer valued the first claim at $15,000, paid that sum less the deductible, and refused to pay any sum for the second claim.  This full denial was based on the insured’s alleged failure to clean after the first incident, and that the only odor in the house was from cigarettes, not soot from the furnace discharge.

Middle District Judge Mariani found that while the complaint included some conclusory allegations, and the facts alleged on bad faith were “sparse”, the complaint’s allegations were “enough to barely ‘nudge[ ] [the] claim[ ] across the line from conceivable to plausible….’”

Delay related bad faith

The relevant facts pleaded were that the insurer waited one month until after the first loss to send out an adjuster to investigate.  Further, the insurer did not pay anything for the first loss for seven months. The court observed that “’bad faith may be premised on an insurer’s bad faith in investigating a claim, such as by failing to conduct a good faith investigation into the facts or failing to communicate with the claimant.’”  Further, “[a]lthough delay ‘on its own [does not] necessarily constitute bad faith’, the delay between a demand for benefits and an insurer’s determination of whether to pay a claim is a relevant factor in determining whether an insurer has acted in bad faith.”

Applying these principles to the factual allegations, Judge Mariani found enough delay pleaded in both sending out an investigator, and in paying on the first claim, to survive dismissal.

Valuation related bad faith

The court next addressed whether the valuation differences could amount to bad faith.  As stated, the insured provided estimates ranging from $35,000 to $40,000 and the carrier’s expert valuation was $15,000.  After taking out the deductible, the payment was $10,400.

Judge Mariani observed that “[a]lthough bad faith ‘is not present merely because an insurer makes a low but reasonable estimate of an insured’s damages,’ the disparity between the defendant insurer’s payment and the plaintiff’s estimates is a relevant consideration in bad faith claims.” He relied on Middle District Judge Mannion’s Meiser v. State Farm opinion for the proposition that an “extreme disparity” in the parties’ damage estimates can lend support to a bad faith claim, especially where exhibits are attached showing the extent of the damages. A link to our Meiser summary can be found here.

Judge Mariani found the $25,000 disparity, accompanied by exhibits explaining the damages, to be sufficient to support a bad faith claim. The opinion’s language indicates that the valuation allegations were read along with the delay allegations in evaluating the bad faith claim, and that it was the totality of these three factors (delayed investigation, delayed payment, and valuation disparity) that together made out a plausible bad faith claim.

[For a few examples of valuation disputes insufficient to state a bad faith claim, see this post.]

Failure to investigate related bad faith

As to totally denying the second claim, the complaint alleged denial was based on the insured’s alleged failure to clean the premises after the first loss. However, the insured allegedly informed the carrier that she and her daughter made a significant cleanup effort after the first malfunction and before the second, and the insurer knew this before denying the claim.  Thus, plaintiff alleged the carrier ignored the fact that she did clean, and then ignored her damage estimate transmitted to the carrier because of this putative failure to clean. The insured also alleged the carrier did not pay heed to her public adjuster “pointing out that the home was a forced, hot air system and that [the insurer] had agreed to clean the ducts on the second floor, but not the rooms that were contaminated with the soot/smoke….”

Judge Mariani found the totality of these factual allegations, taken in the light most favorable to plaintiff,  made out a bad faith claim for failure to conduct an adequate investigation, which in turn resulted in an unfounded claim denial. He added that, “[a]lthough discovery in this case may later reveal that Defendant did in fact have a reasonable basis to deny Plaintiff’s second claim, the Complaint states the minimum amount of facts necessary to allow Plaintiff’s bad faith claim to survive the motion to dismiss.”

After surveying the totality of the facts on both claims, Judge Mariani summarized as follows: “Though none of these factual allegations alone may be sufficient to state a claim under § 8371, taken together, Plaintiff has successfully, though barely, stated a plausible claim of bad faith.”

Date of Decision:  March 19, 2021

Chuplis v. State Farm Fire and Casualty Co., U.S. District Court Middle District of Pennsylvania No. 3:20-CV-1757, 2021 WL 1080932 (M.D. Pa. Mar. 19, 2021) (Mariani, J.)

THIRD CIRCUIT AFFIRMS IN CASE WHERE DISTRICT COURT FOUND NO BAD FAITH WHERE NO COVERAGE DUE (Third Circuit)

The Third Circuit affirmed a Western District decision finding no UIM coverage due because the insured rejected stacking.  While not discussed in the appellate opinion, the trial court observed there could be no bad faith case if no coverage was due.  This point is not expressly addressed by the Third Circuit, but it did affirm on all claims, including bad faith.

A summary of the lower court’s decision can be found here.

Dunleavy v. Mid-Century Ins. Co., U.S. Court of Appeals for the Third Circuit No. 20-2100, 2021 WL 1042981 (3d Cir. Mar. 18, 2021) (Matey, Schwartz, Traxler, JJ.)