ALLEGED “RED FLAGS” NOT ENOUGH TO DEFEAT BAD FAITH CLAIM; MOTION TO BIFURCATE DENIED (Philadelphia Federal)

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Eastern District Judge Younge denied the insurer’s summary judgment motion on bad faith, and its motion to bifurcate the bad faith claim.

Plaintiff sought coverage based on auto theft and damage to the vehicle. The carrier investigated the claim, and took the vehicle into its custody during the investigation.  The carrier never paid on the claim.  Rather, it assigned the claim to its Special Investigation Unit (SIU) because of “red flags” it allegedly uncovered. The carrier argued these red flags supported its decision to further investigate the claim and then to deny coverage, making the process reasonable and thus beyond the scope of a bad faith claim.

Summary Judgment Denied on the Merits

Judge Younge gives a thorough exposition of bad faith law, and specifically the law concerning the reasonableness of investigations and red flags.  Despite the carrier’s arguments that its investigation, and denial based thereon, were reasonable, Judge Younge ruled that the carrier’s arguments were insufficient to get summary judgment under this case law.  The insured adduced “several holes” in the carrier’s investigation that could be indicia of an unreasonable investigation, despite the putative red flags.  Further, the record was lacking in evidence that the insured “had any motive to damage, destroy or fake the theft of her Vehicle.”

[Judge Younge cited legal principles from the April 2021 Fuentes case, summarized here, which cited the 2019 Merrone case, summarized here, where “red flags” were sufficient to make to carrier’s investigation reasonable.  For those litigating “red flag” cases, it will be useful to compare and contrast Judge Younge’s Bermudez opinion with these two cases.]

Motion to Bifurcate Denied

In denying the motion to bifurcate, Judge Younge found:

  1. The insurer “failed to establish the level of prejudice necessary to warrant bifurcation.”

  2. “[I]t would appear that the evidence related to Plaintiff’s breach of contract claim will overlap evidence presented in relationship to Plaintiff’s insurance bad faith claim.”  “For example, both claims will focus on whether Plaintiff was involved in the theft of her own Vehicle and/or whether Plaintiff made a material misrepresentation to her insurance company in connection with her claim.”

  3. “Defendant’s investigatory process, its interpretation of the evidence and impression of witnesses which would ordinarily be relevant to an insurance bad faith claim will be equally relevant to the breach of contract claim under the facts of this case. Defendant’s reason for refusing to provide coverage for the Vehicle will be at issue in the breach of contract claim.”

  4. “From the perspective of judicial economy, bifurcation of trial on separate claims could prove inefficient and inconvenient.”

  5. “Bifurcation could result in the unnecessary need to call the same witnesses twice to testify before the same jury on two separate occasions which would extend the amount of time necessary for the jury to resolve this litigation.”

Judge Younge did recognize the insurer had some legitimate concerns, and stated: “Based on overlapping evidence and the intertwined nature of the two claims, the prejudice that Defendant will suffer from trying these two claims together remains to be seen. However, to mitigate any potential concerns, the Court could provide curative instructions and/or implement a staged verdict sheet that would ask the jury to resolve the breach of contract claim prior to reaching the insurance bad faith claim. The varying burdens of proof for breach of contract and insurance bad faith could be explained to the jury and described on the verdict sheet. Potentially, evidence related to damages under insurance bad faith, and specifically punitive damages, could be presented to the jury after it resolves issues related to liability. These issues can be fairly addressed at a pretrial conference prior to jury selection.”

Date of Decision:  July 19, 2021

Bermudez v. Progressive Insurance Co., U.S. District Court Eastern District of Pennsylvania No. 19-CV-4085-JMY, 2021 WL 3033757 (E.D. Pa. July 19, 2021) (Younge, J.)

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