Archive for the 'PA – Coverage Issues' Category

EVEN THOUGH COVERAGE MIGHT BE DUE, INSURED COULD NOT ESTABLISH DENIAL WAS UNREASONABLE (Philadelphia Federal)

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This case involved a wall collapse. The insured and carrier provided each other with expert reports on causation. The carrier’s expert analysis would result in a finding of no coverage under the policy, but the insured’s expert analysis would result in coverage. The insurer denied coverage, and the insured sued for breach of contract and bad faith.

After discovery, the insured moved for summary judgment on both counts. The court denied summary judgment on the contract claim, because issues of fact remained on causation that might allow for coverage, but granted summary judgment on the bad faith claim after finding that the insured could not meet her burden to show the insurer lacked a reasonable basis in denying coverage.

In addressing bad faith, the court observed that an insurer can defeat bad faith by showing there was a reasonable basis for its action. The court further made clear that at the summary judgment stage, the plaintiff’s obligation to prove its case at trial by clear and convincing evidence of bad faith was a necessary consideration. In this case, even taking the facts in the insured’s favor, the insurer had a reasonable basis to deny the claim.

The insurer’s denial was based on a reputable forensic engineer’s report that determined two causes of the collapse; both of which were excluded under the policy. The insured argued that the carrier should have rejected this report, and instead followed the analysis in the report provided by the insured’s expert. The court found this was not enough to make out a claim of bad faith because “the mere fact that the parties disagree about coverage is not enough to show bad faith.” The court cited Post v. St. Paul Travelers Ins. Co., for the proposition that there is no bad faith “when the plaintiff could only show the parties disagreed about coverage….”

The insured also argued bad faith because the insurer allegedly “ignored the possibility that [the insured’s] house would be demolished.” The court found this irrelevant to the bad faith claim.

“If the collapse was not covered under the insurance policy, [the insurer] would not have been obligated to pay [the insured] regardless of whether her house was later demolished. In other words, whether the house was demolished would have no impact on [the] coverage decision.” Thus, this argument did not go to the reasonableness of the coverage decision itself.

In sum, the insured did not adduce evidence that the insurer lacked a reasonable basis for its coverage decision, and summary judgment was granted on the bad faith count.

Date of Decision: January 31, 2020

Hentz v. Allstate Property & Casualty Insurance Co., U.S. District Court Eastern District of Pennsylvania CIVIL ACTION No. 19-2007, 2020 U.S. Dist. LEXIS 17379 (E.D. Pa. Jan. 31, 2020) (Sanchez, J.)

LACK OF COVERAGE CONSTITUTES UNDISPUTED EVIDENCE OF REASONABLE BASIS TO DENY CLAIM, AND WARRANTS REJECTION OF BAD FAITH CAUSE OF ACTION (Philadelphia Federal)

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The loss at issue was the result of intentional conduct by the named insured’s son, in this tragic matter. The son was also an insured under the policy.

The court found the named insured (actually his estate) could not make out a prima facie case for coverage because the loss was not accidental, and the intentional conduct was the act of an insured. Alternatively, the court found the intentional loss exclusion applied. For these reasons, the court granted summary judgment on the breach of contract claim.

As to bad faith count, the court first reiterates that the insurance coverage claims are barred under the policy. Next, “[t]he Court therefore concludes that undisputed evidence demonstrates that defendant had a reasonable basis for denying plaintiff’s claim. The bad faith claim is therefore rejected.”

Thus, summary judgment was granted on all counts.

Date of Decision: January 30, 2020

Tartour v. Safeco Insurance Co., U.S. District Court Eastern District of Pennsylvania CIVIL ACTION NO. 17-1896, 2020 U.S. Dist. LEXIS 16271, 2020 WL 489467 (E.D. Pa. Jan. 30, 2020) (DuBois, J.)

BAD FAITH CLAIM CAN PROCEED TO TRIAL WHERE RECORD SHOWED A POTENTIAL BASIS FOR COVERAGE, EVEN THOUGH INSURER BELIEVED THAT BASIS WAS ONLY PUT FORWARD IN AN ATTEMPT TO EVADE A WAIVER (Middle District)

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In this bad faith case, one type of injury was specifically not covered under a disability policy, pursuant to a waiver, but other forms of injury might be covered. The insurer denied the claim on the basis that the uncovered injury was the only injury that could have caused the disability at issue. The insured two types of injury were at issue, and brought breach of contract and bad faith claims.

The insured moved for summary judgment on the bad faith claim.

Middle District Judge James Munley found the record showed evidence of both uncovered and covered injuries. The insurer argued that the covered injury type was merely put forward as a make weight to avoid the true, uncovered, injury being the only basis for the disability claim.

As this was a summary judgment motion, the court could not disregard record evidence of either injury. Taking the evidence in the non-movant’s favor, the court found that (1) because the insurer reviewed the record before denying coverage and (2) the record included a covered claim as well as an uncovered claim, then (3) “these facts may show that [the insurer] knew it lacked a reasonable basis for denying the plaintiff’s disability insurance claim, or it recklessly disregarded its lack of a reasonable basis for doing so.”

“Therefore, plaintiff has sufficient evidence, which if credited by the jury, would support his bad faith claim making summary judgment for the defendant inappropriate here.”

Date of Decision: January 13, 2020

Dileo v. Federated Life Ins. Co., U. S. District Court Middle District of Pennsylvania No. 3:18cv628, 2020 U.S. Dist. LEXIS 5003 (M.D. Pa. Jan. 13, 2020) (Munley, J.)

COMMON PLEAS JUDGE FINDS BAD FAITH FOR (1) RELYING ON UNWARRANTED RED FLAGS; (2) REACHING COVERAGE CONCLUSIONS UNSUPPORTED BY ACTUAL FACTS; (3) UNREASONABLE INTERPRETATION OF POLICY’S COVERAGE LANGUAGE; (4) DRAWING UNWARRANTED CONCLUSIONS FROM EXPERT REPORT; (5) FAILING TO INVESTIGATE FULLY; (6) VIOLATING UIPA (Common Pleas Lehigh)

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Today’s post summarizes Lehigh County Judge Melissa Pavlack’s Findings of Fact and Conclusions of Law in this breach of contract and bad faith case.

The Court’s Factual Findings

The insureds’ car was stolen. It was recovered, but with considerable damage. The insureds’ license plate was replaced with a stolen plate. The court found that the thieves never intended to return the vehicle. The insureds sought coverage based on the theft and vandalism, relying on policy language covering theft, larceny, vandalism, and malicious mischief.

The court found the insureds were not involved in any way with the theft or vandalism, nor was there any fraud on their part. The car was deemed a total loss, and valued at around $13,000. There were additional costs for hauling and storage, bringing the total claim to approximately $17,000.

The insurer denied the claim, citing insufficient evidence the car had been stolen. It refused to consider a separate vandalism claim because the damages arose out of an alleged theft. Thus, the insurer did not investigate the vandalism claim, and the denial letter never addressed the vandalism claim’s merits. The insurer never cited any policy exclusions applying to the vandalism claims. There was also no denial based on fraud.

The insurer’s investigation included a claim’s adjuster and supervisor, a fraud investigator, an appraiser, an appraisal report, an investigator and three investigator reports, an examination under oath over the telephone and in person, document requests, and a site visit to the loss location. At trial, the adjuster could not recall which of the insured’s statements under oath led to the claim denial.

The investigator reported to the carrier that one of the insureds was uncooperative because she did not bring unredacted tax returns and cell phone records to her examination under oath. Relying on this alleged lack of cooperation, the claims supervisor wrote to the insured that she had failed to cooperate by not bringing these tax returns and records, and failed to cooperate with the insurer’s investigation. However, the investigator was not aware that another of the insurer’s representatives had actually instructed the insured to bring redacted copies of the tax returns to the examination under oath, which she did.

As to other document issues allegedly evidencing a failure to cooperate, it was made clear during the examination under oath that the insured was a medical professional. She could not simply produce her phone records without violating HIPAA. She attempted to cooperate during the examination under oath by showing some messages in her phone from the days in question; but the adjuster was also concerned about HIPAA, and was hesitant to proceed with looking at her phone. Further, the court found the insured could not respond to the insurer’s request for the car purchase documents because these had been stolen from the glove compartment.

Moreover, in contrast to assertions that the insureds failed to cooperate, the court found that the insurer’s fraud investigator conceded the insureds had cooperated, and had provided documents requested in the manner requested.

As to the allegation there was insufficient evidence of theft, the insurer relied upon its expert report. The expert opined there was no forced entry, and that the car only could have been moved using a key. The court found (1) the insurance policy did not require forced entry as a condition precedent to establish theft, and (2) the car could be moved without a key. Further, the insurer’s fraud investigator testified that cars can be stolen without noticeable signs of forced entry, and there was other testimony to the same effect. The court also found that the fraud investigator never communicated with the claim adjuster that forced entry was not required to steal a car.

In sum, the court found these conclusions (forced entry and use of a key) were not reasonable bases to deny the very existence of a theft.

Most significantly, the expert only opined the car was not stolen by means of forced entry, and that a key had to have been used. Whether or not these conclusions were correct was irrelevant in the court’s view, because the expert never opined the car was not stolen. Thus, it was an error to make the leap that the car was not stolen, as it could have been stolen by some means other than forced entry, or could have been moved without a key.

There was Coverage for Theft, Vandalism, and Malicious Mischief

In addressing the breach of contract claim, the court looked at the policy’s plain language. The policy expressly covered theft, larceny, vandalism, and malicious mischief. There were no applicable exclusions in this case, so the court only had to interpret the coverage language.

The court looked at the dictionary definition of these terms, rather than any criminal statutes or case law defining vandalism, theft, etc. It concluded the facts of the case fell within these coverage terms, and the insureds claims were covered. As to bad faith, it was unreasonable to conclude the facts at hand did not fall within the policy’s plain and unambiguous language. Further, the court found the insurer’s conduct unreasonable in failing to consider coverage for vandalism and malicious mischief when denying the claims.

Court uses Unfair Insurance Practices Act and Unfair Claim Settlement Practices Regulations as Standards

The court cited (1) Unfair Claim Settlement Practice regulations (UCSP), 31 Pa. Code § 146.4, on obligations to fully disclose coverages and benefits; and (2) the Unfair Insurance Practices Act (UIPA), 40 Pa.S.A. § 1171.5(a)(10)(iv), on failing to reasonably explain a claim denial.

The court cited these UCSP and UIPA provisions in the context of the first bad faith prong, lack of a reasonable basis to deny benefits. The court then observed the insurer had completely failed to consider the vandalism and malicious mischief claims covered under the policy. This supported the existence of bad faith, though it is not wholly clear whether the UCSP and UIPA violations were evidence of bad faith conduct, or were bad faith per se.

[We have previously posted on how courts treat alleged violations of UCSP regulations and the UIPA in bad faith cases, ranging from (1) their being completely outside the scope of consideration in determining bad faith, (2) as constituting potential evidence of bad faith, or (3) as amounting to statutory bad faith. It is not quite clear in the present case which of the latter two standards applied. Even without citing the UCSP or UIPA, however, it would seem the court’s finding that the insurer gave no regard to plainly covered vandalism claims was a basis for bad faith, regardless of any UCSP or UIPA violations.]

Erroneous Red Flags

The insurer justified its conduct by identifying certain “red flags” that caused legitimate doubt in the insureds veracity. When scrutinized, however, the court found these red flags were based on factual errors or erroneous assumptions.

  1. The insured was deemed uncooperative for failing to attend a unilaterally scheduled examination under oath. In fact, however, the court found the insured gave sufficient notice she could not attend on that date, and cooperated in rescheduling the examination under oath on another date, at which she appeared. She also had agreed to, and participated in, an examination over the phone.

As to the original date for the in-person examination, the court observed that the insurer knew in advance the insured was not going to appear on the first scheduled date, but still had its representatives appear to make a record against the insured for failing to appear.

  1. The insurer also asserted the insured was uncooperative because she provided redacted tax returns. As stated above, the insurer’s own representative had informed the insured in writing that certain redactions could be made. Further, when the insurer later requested an unredacted return, the insureds provided it.

  2. As to the alleged lack of cooperation on cell phone records, this was fully addressed during the examination under oath. As stated above, the insured was a medical professional and there were certain items on her phone records that could not be produced under HIPAA. That being said, she still offered to let the insurer’s representative look at her cell phone during the examination under oath, regarding non-HIPAA messages from the date the car was stolen. The adjuster was concerned about violating HIPAA, and was hesitant to do so.

  3. The insurer also deemed it a red flag that the loss came shortly after the policy’s purchase. This turned out to be an error. The court found the policy was purchased at least six months earlier. Another suspicion surrounded alleged excessive mileage on the car, which the court found was likewise not factually the case.

Failure to Fully Investigate the Red Flags

The court observed that while the insurer took the insured’s examination under oath, and conducted various investigations based on these alleged red flags, it failed to contact the police. Nor did the insurer follow up on evidence that drugs reportedly were found in the glove compartment. Though not expressly stated in the conclusions of law, this implies that the presence of drugs, under all the facts, favored the idea that strangers had stolen the car for nefarious purposes.

The Insurer Relied on its Expert Report for the Wrong Conclusion

For the court, the coverage issue concerning the insurer’s expert was simple: Was the car stolen? The issue was not: How was the car stolen?

The expert opined on two means by which the car was not stolen. The court found the expert never opined, however, that the car was not stolen. Moreover, the insurer never argued that the insureds faked a theft or lied about it.

The court pointed out that other means could have been used to steal the car, including non-intrusive and non-mechanical means. For example, after the car was recovered it was towed twice. The court found this demonstrated the car could be moved without forced entry and/or without a key.

Thus, the insurer’s reliance on the expert report to deny the fundamental existence of theft was unreasonable. The court found relying on the expert report to reach a conclusion (no theft) on which the report did not render an opinion, amounted to a knowing or reckless unreasonable denial of benefits, i.e. bad faith.

After finding bad faith on all the foregoing grounds, the court stated it would schedule a hearing on attorney’s fees, interest, and punitive damages.

Date of Decision: December 27, 2019

Unterberg v. Mercury Insurance Company of Florida, Court of Common Pleas of Lehigh County Case No. 2016-C-806 (Dec. 27, 2019) (Pavlack, J.)

Thanks to Daniel Cummins of the excellent and extremely useful Tort Talk Blog for bringing this case to our attention.

NO BAD FAITH WHERE EXCLUSION APPLIES AND NO COVERAGE DUE (Western District)

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Plaintiff loaned her car to her boyfriend. Unknown to her, the boyfriend’s license was suspended. He got into an accident, and the carrier denied coverage based on an exclusion for drivers with suspended licenses. Plaintiff sued for bad faith and breach of contract. The parties filed cross motions for summary judgment. The court granted the insurer’s motion.

The dispute centered on the policy exclusion. The court analyzed the exclusion in detail based on the policy language and facts of the case, finding the exclusion applied. The court rejected the insured’s piecemeal policy reading as contrary to governing standards requiring the policy to be viewed “in its entirety, giving effect to all of its provisions,” with the policy’s words “construed in their natural, plain, and ordinary sense”.

Thus, the insured’s “attempts to read ambiguity into [policy] sections where none exist [] cannot demonstrate bad faith or breach of contract as a matter of law.”

Date of Decision: December 20, 2019

Lewandowski v. Nationwide Mutual Insurance Co., U.S. District Court Western District of Pennsylvania Civil Action No. 18-1441, 2019 U.S. Dist. LEXIS 218713, 2019 WL 7037587 (W.D. Pa. Dec. 20, 2019) (Bissoon, J.)

1. GOOD NEWS AND BAD NEWS IN DEFINING SCOPE OF STATUTORY BAD FAITH; 2. MOTION TO SEVER AND STAY DENIED; 3. COURT OUTLINES PROPER PRIVILEGE LOG AND CHALLENGE PROCESS (Middle District)

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The good news: The court in Ferguson v. USAA General Indemnity takes on the issue of whether a statutory bad faith claim can survive if the insured’s breach of contract claim fails, and does an historical analysis of the statute and case law to reach a conclusion.

The bad news: The court does not address the Pennsylvania Supreme Court’s decision in Toy v. Metropolitan Life. As we have observed over the years, Toy requires the denial of a benefit as a necessary predicate for statutory bad faith claims. Yet, numerous courts have applied pre-Toy case law, or cases rooted in pre-Toy case law, in holding that bad faith might exist outside of that context, e.g., solely for unfair claims handling or unreasonable failures to communicate. These courts have not directly addressed the argument that Toy apparently rejected that possibility, and that poor conduct may be evidence of bad faith, but not cognizable bad faith in itself where no benefit is denied.

We are not speaking of the situation where there is a contractually due benefit that the insurer belatedly pays. As Toy itself makes clear, there is little dispute that delay in paying a benefit can still support a bad faith case on the basis that this denies a benefit. Rather, we are speaking of the situation where there is no indemnity or defense of any kind contractually due, and the insurer prevails on the breach of contract count. Attached here is an article addressing Toy’s distinction between bad faith conduct that is necessary to make out a cognizable cause of action, and bad faith conduct that is only evidentiary in nature.

The Ferguson court, and similar cases, are concerned with dishonest claims handling and unreasonable delay even in cases where no coverage was ultimately due. They may want to inhibit poor conduct on the claims handling end that is driven by a presently unsubstantiated hope that there will be no coverage at the end of the day. In the court’s words, statutory bad faith exists to “generally regulate dishonest conduct by insurers….” This dishonest conduct still can be punished even if no coverage is due because “[h]olding otherwise could potentially result in insurers taking the gamble that a denial based on a cursory review will be rescued by a clever trial lawyer.”

Arguably, this interpretation runs counter to the Supreme Court’s decision in Toy, which concludes that there must be a denial of a benefit accompanying such poor claims handling. This reading of Toy implies that dishonest conduct where no coverage is due and no benefit denied is left to regulation by the Insurance Commissioner, not the courts.

In one of the few cases addressing this aspect of Toy, previously summarized on this Blog, another district court states:

Even assuming that the bad faith denial of the benefits claimed by plaintiff was properly alleged in the Complaint, plaintiff’s argument fails because plaintiff does not allege the denial of any benefits within the meaning of the statute. “‘[B]ad faith’ as it concern[s] allegations made by an insured against his insurer ha[s] acquired a particular meaning in the law.” Toy v. Metro. Life Ins. Co., 593 Pa. 20, 928 A.2d 186, 199 (Pa. 2007). Courts in Pennsylvania and the Third Circuit have consistently held that “[a] plaintiff bringing a claim under [§ 8371] must demonstrate that an insurer has acted in bad faith toward the insured through ‘any frivolous or unfounded refusal to pay proceeds of a policy.'” Wise v. Am. Gen. Life Ins. Co., 459 F.3d 443, 452 (3d Cir. 2006) (emphasis added); see also Nw. Mut. Life Ins. Co. v. Babayan, 430 F.3d 121, 137 (3d Cir. 2005); Toy, 593 Pa. at 41. None of the “benefits” that defendant allegedly denied plaintiff concern the refusal to pay proceeds under an insurance policy. To the contrary, plaintiff concedes that he “does not allege bad faith for refusal to pay benefits.”

Motion to sever claims and stay discovery denied

As stated, the Ferguson court determined a bad faith claim could proceed independently of the breach of contract claim, even if the breach of contract claim failed. The court reached this conclusion in the context of a motion to stay discovery and sever the breach of contract and bad faith claims. After reaching this conclusion, the court reviewed and denied the motion to sever and stay.

Even if conceptually distinct, the breach of contract and bad faith claims are “significantly intertwined from a practical perspective.” By way of example, the court states that both claims will involve discovery on “the nature of Plaintiffs’ injuries; and … what efforts did the insurer make to investigate Plaintiffs’ injuries.”

Trying to separate the two claims and stay discovery “would potentially create a discovery mess, requiring truncated depositions, interrogatories, and requests for production, only to have them all re-started following the conclusion of the first leg. This risk of judicial inefficiency warrants denial of Defendant’s request.” In sum, “Defendant’s request is, at root, asking the court to manipulate this case’s procedural framework in a way that will make litigation convenient for insurers, which the court will not do.”

This is how to handle the privilege and work product process

The court did observe there might still be legitimate attorney client privilege or work product issues. The court outlined how the parties should address this issue:

“This issue, however, is not properly before the court at this time. Defendant has not filed a protective order, nor has Plaintiff yet moved to compel. While Plaintiffs have requested the court conduct an in camera review of Defendant’s claims file, it will only do so if Plaintiffs show which parts of the claims file they may legally be entitled to. While Plaintiffs’ brief fails to do as much, they were unable to in part because Defendant has not provided an adequate privilege log.”

An adequate privilege log requires the party asserting the privilege to set forth sufficient facts as to each document at issue, and is further required to “establish each element of the privilege or immunity that is claimed. The focus is on the specific descriptive portion of the log, and not on conclusory invocations of the privilege or work-product rule.”

The court instructed the insurer “to provide an amended privilege log supplying some of the underlying factual bases for its privilege and work product claims—but not so much that it effectively discloses any such privileged information—so that Plaintiffs may raise, by brief, the parts of the privilege log they believe Defendant has failed to show are privileged.” After these steps are taken, the “court can then decide whether to conduct an in camera inspection of certain portions of the insurer’s claim file.”

Date of Decision: December 5, 2019

Ferguson v. USAA General Indemnity Co., U. S. District Court Middle District of Pennsylvania Civil No. 1:19-cv-401, 2019 U.S. Dist. LEXIS 209579 (M.D. Pa. Dec. 5, 2019) (Rambo, J.)

COURT ALLOWS FOR POSSIBILITY OF STATUTORY BAD FAITH, EVEN WHERE NO BENEFIT DUE – BUT STILL DENIES CLAIM (Western District)

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The court determined no coverage was due under a policy exclusion in this water damage case. Thus, there could be no statutory bad faith claim on the basis coverage was improperly denied.

However, even though no benefit was denied under the policy, the court concluded that denial of a benefit was only one type of statutory bad faith. Under this view, failures to investigate facts, communicate with insureds, or do proper legal research could still create actionable bad faith claims even if no duty to indemnify or defend exists under the policy. [Note: As this Blog has set forth on many occasions, this view is questionable, i.e., the denial of a benefit is a sine qua non of statutory bad faith, and poor investigation or communication are only evidence of bad faith where a benefit has been denied, and cannot be a stand-alone basis for bad faith claims where no benefit is denied.]

Even under this broader standard, the court granted the insurer summary judgment. The insured asserted inadequate investigation bad faith concerning the cause of water damage in this case. It alleged the investigation was too brief, the inspector did not investigate all areas of the property, and did not communicate with the insured about the loss. The plaintiff admitted the adjuster did investigate a burst public water supply pipe from which all of the alleged property damage originated.

The court found because the policy excluded losses originating from a burst water supply pipe, there was in fact no need for any further investigation. “Under these circumstances, any additional investigation would not have changed the outcome of [the] decision to deny [the insured’s] claim.” Thus, there was insufficient “evidence from which a reasonable jury could find by clear and convincing evidence that [the insurer] performed an inadequate investigation or otherwise acted in bad faith in its handling [the] claim.” [Note: It is clear that the policy’s coverage language defining benefits due informed the court’s decision on what constituted a reasonable investigation.]

Thus, summary judgment was granted on the bases that there was no improper benefit denial, and no bad faith investigation.

Date of Decision: November 21, 2019

Sypherd Enterprises, Inc. v. Auto-Owners Insurance Co., U. S. District Court Western District of Pennsylvania 2022102:18-CV-00141-MJH, 2019 U.S. Dist. LEXIS 202210 (W.D. Pa. Nov. 21, 2019) (Horan, J.)

It is interesting to compare this case to the statement of principles governing actionable statutory bad faith claim in last week’s post on Judge Beetlestone’s Purvi decision.

ASSAULT OR BATTERY EXCLUSION ENCOMPASSES ALLEGATIONS AGAINST INSURED FOR ALLEGEDLY CREATING CONDITIONS THAT ALLOWED THE ASSAULT OR BATTERY (Philadelphia Federal)

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In this case, an insurer won declaratory judgment on coverage based on an assault or battery exclusion. Fineman Krekstein & Harris partner Diane B. Sher and associate Matthew E. Selmasska were successful counsel for the declaratory judgment plaintiff in this action.

The underlying plaintiff was shot in a parking lot, and brought an action against various parties other than the unknown assailant. The underlying complaint went out of its way to make clear that there was no assault and battery count, but only claims for negligence or recklessness against parties whose alleged failures to make the parking lot safe enabled the shooting.

One defendant in the underlying action had a commercial general liability policy with an “Assault or Battery Exclusion” excluding coverage for personal injury damages arising out of an assault, battery, or physical altercation. This exclusion had four subparagraphs defining its scope, which were broad and went well beyond the actual acts of assault, battery, or physical altercation, e.g., coverage was excluded “[w]hether or not [the personal injury from the assault, battery, or physical altercation was] caused by or arising out of an insured’s failure to properly supervise or keep an insured’s premises in a safe condition.…”

The CGL insurer filed a declaratory judgment action that there was no duty to defend or indemnify, nor any duty to defend or indemnify as to any cross-claims for indemnification or contribution against the insured in the underlying action.  It moved for judgment on the pleadings.

The court concluded that “the fact that the exclusion covers acts and omissions in connection with the prevention of an assault or battery means that [the insurer] is not obligated to defend its insured from allegations that the insured’s failure to take certain precautions resulted in [the insured’s] injuries.”

Thus, the court granted the insurer’s motion for judgment on the pleadings on all counts.

Date of Decision: October 2, 2019

Great Lakes Insurance SE v. Smithwick, U. S. District Court for the Eastern District of Pennsylvania No. 2:18-cv-04797, 2019 U.S. Dist. LEXIS 171622 (E.D. Pa. Oct. 2, 2019).

THIRD CIRCUIT FINDS KVAERNER DOES NOT APPLY TO POLICY USING “EXPECTED OR INTENDED” LANGUAGE TO DEFINE “OCCURRENCE” (Third Circuit)

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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.)

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)

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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.)