Archive for the 'PA – Discovery and Evidence' Category

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.)

A LOW BUT REASONABLE ESTIMATE IS NOT BAD FAITH (Third Circuit)

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The Third Circuit affirmed Middle District Judge Robert Mariani’s grant of summary judgment to the insurer on a bad faith claim. A summary of the trial court opinion can be found here.

In this UIM case, the tortfeasor paid $95,000 out of a $100,000 policy. The insurer initially valued the claim at $110,000 to $115,000 and offered $10,000 to settle (after deducting the $100,000 for the tortfeasor’s policy). The insured demanded the full $200,000 UIM policy limits, and filed suit when her demand was not met. The insurer upped its offer to $50,000, and the parties finally agreed to a high low arbitration ($200,000/$10,000). The arbitrator found the “total claim was worth $306,345, and calculated [the insurer’s] responsibility under the UIM policy to be $160,786.78.”

Insured’s Responses to Undisputed Facts Found Inadequate

First, the appeals court rejected the argument that the trial court improperly accepted certain of the insurer’s statements of undisputed fact as undisputed. The insured failed to set forth detailed facts contradicting the insurer’s specifically described undisputed facts. Rather, she generally denied the insurer’s undisputed facts and responded with facts that did not actually go to the issues presented in the insurer’s statements of fact. The Third Circuit found these failings amounted to admissions.

[This is a clear warning to parties opposing summary judgment that simply denying an alleged undisputed fact, without also setting out specific facts of record directly casting doubt on the putative undisputed facts, will result in an admission.]

Next, the appellate court affirmed the trial court’s discretion to disregard an additional 289 counterstatements of fact that went beyond the insured’s responsive paragraphs to the insurer’s allegations of undisputed facts. Under local district court rules, the trial court had broad discretion in reviewing such supplementary counterstatements of fact, and determined they were outside the scope of the evidentiary issues presented in the insurer’s statement of undisputed facts.

Low but Reasonable Estimate not Bad Faith

Finally, the Third Circuit observed that “[w]hile successful bad faith claims do not need to show fraudulent behavior, negligence or bad judgment will not support a bad faith claim. … Nor will ‘a low but reasonable estimate of the insured’s losses.’”

The Third Circuit found “[t]he District Court properly applied this standard and granted summary judgment because the undisputed facts in the record show that [the insurer] had a reasonable basis for contesting [the insured’s] UIM claim. The record shows that (1) a large portion of [the insured’s] valuation of her claim was attributable to potential future surgery, (2) an independent medical examination disputed [her] claim that she needed the future surgery, (3) [she] had additional health coverage that would defray the cost of future surgery, and (4) [the carrier] believed [the insured] was exaggerating her symptoms in her deposition during the underlying UIM litigation.”

Even taking any remaining factual disputes in the insured’s favor, she could not demonstrate the absence of a reasonable basis to deny benefits. As there was a reasonable basis to deny benefits, the court did not have to address the second bad faith element of knowing or reckless disregard.

Date of Decision: November 27, 2019

Rau v. Allstate Fire & Casualty Insurance Co., U. S. Court of Appeals for the Third Circuit No. 19-1078, 2019 U.S. App. LEXIS 35560 (3d Cir. Nov. 27, 2019) (Chagares, Jordan, Restrepo, JJ.)

GENERAL ALLEGATIONS OF KNOWLEDGE OR RECKLESSNESS SUFFICIENT, AND THE INSURER’S INTENT CAN BE PURSUED IN DISCOVERY (Middle District)

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In his second bad faith opinion this week, Middle District Judge James Munley found bad faith adequately pleaded, and denied a motion to dismiss. The case involved an uninsured motorist claim. The insured suffered injuries, the insurer had $300,000 on its policy, and it appears the insurer refused to pay policy limits or make a payment meeting the insured’s demands.

First, on the reasonableness prong of the bad faith test, Judge Munley stated: “Plaintiff’s complaint pleads facts indicating that defendant’s actions were unreasonable. Plaintiff alleges that she was injured in an automobile accident that was covered by the insurance policy. … She notified defendant of the damages and provide it with sufficient documentation to support her claim, including updating records for ongoing medical treatment. … Defendant refused to make a reasonable offer of settlement despite plaintiff trying to work with it and despite the ‘mountain of evidence’ that she had provided. … ‘[D]espite the results of any investigations performed by [defendant] and the clear medical documentation supporting their claim for UM benefits, [defendant] has blatantly ignored the evidence, has done no further investigation and has simply denied [plaintiff] the recovery of appropriate UM benefits without explaining its reason for the denial. … These allegations are sufficiently specific to make out a claim for bad faith — at least with respect to the first prong, that defendant lacked a reasonable basis for denying the benefits at issue.”

The court rejected the argument that these allegations were akin to the failed pleadings in the Third Circuit’s 2012 Smith v. State Farm case. By contrast to the “much more general” allegations in Smith, and the exhibits attached to the Smith Complaint indicating there was no bad faith, the instant allegations “are much more specific and no exhibits indicate that the defendant acted in good faith.”

As to the second prong, i.e., whether the benefit denial was known to be unreasonable or its unreasonableness was recklessly disregarded, Judge Munley states: “Additionally, we find that plaintiff has sufficiently pled the second element of a bad faith claim, that is, that defendant knew or recklessly disregarded its lack of reasonable basis to deny the benefits. Plaintiff’s complaint makes a general allegation that defendant knew it had no basis to deny the claim. … We find that at this stage of the proceedings, such an allegation is sufficient to survive a motion to dismiss. This element goes to the knowledge and state of mind of the defendant. Plaintiff will not be able to fully inquire into such matters until discovery occurs in the case. Accordingly, we find that the motion to dismiss should be denied.”

Date of Decision: November 6, 2019

Deluca v. Progressive Advanced Ins. Co., U. S. District Court Middle District of Pennsylvania No. 3:19cv1661 (M.D. Pa. Nov. 6, 2019) (Munley, J.)

COURT EXCLUDES EXPERT REPORT BEFORE TRIAL, AND REINSTATES BAD FAITH CLAIM THAT HAD BEEN DISMISSED ON THE BASIS OF THAT EXPERT REPORT (Middle District)

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This is a breach of contract and bad faith disability benefits case. The court originally granted the insurer summary judgment on bad faith, based on a defense medical expert report that plaintiff could go back to work in his field (dentistry). Reliance of this report had established the insurer’s reasonableness in denying the claim.

On motions in limine and a Daubert hearing before trial, however, the court ruled the insurer’s same medical expert was not qualified to opine on the insured’s ability to continue working. It excluded this expert’s medical testimony. Soon after, the court reconsidered its earlier bad faith ruling, and reinstated the bad faith claim on plaintiff’s motion. The court stated: “Given that [the expert] can no longer give his expert opinion as an independent medical examiner that [the insured] was no longer disabled, the evidence in the record does not establish as a matter of law that Defendants ‘had a reasonable basis to deny [the insured’s] claim.’”

The insurer then moved for reconsideration, and the court denied that motion, allowing the bad faith claim to proceed.

Further opening the door on bad faith, the insured was now permitted to testify about his personal beliefs on the insured’s intentions during claims handling and the reasonableness of the insurer’s conduct, the insurer’s requiring certain testing on plaintiff, and the reasonableness of how the insurer’s expert conducted that testing. The insured’s credibility could be challenged at trial on these issues. The insured could not testify, however, about his own internet research into the insurer’s claim handling history, “given [the insurer’s] recent reforms to its claim handling procedures.”

For purposes of defending the bad faith claims, the insurer could still use evidence of certain excluded expert opinions, even though these experts were found unqualified for other purposes. These reports remained relevant to show what the insurer relied upon during the denial process, and in “considering [the insured’s] credibility in bringing his disability claim.”

Date of Decision: October 4, 2019

Brugler v. Unum Group, U. S. District Court Middle District of Pennsylvania No. 4:15-CV-01031, 2019 U.S. Dist. LEXIS 172587, 2019 WL 4917922 (M.D. Pa. Oct. 4, 2019) (Brann, J.)

BAD FAITH CLAIM BIFURCATED AND STAYED; REQUEST TO DEPOSE INSURER’S COUNSEL QUASHED AS COVERAGE COUNSEL COMMUNICATING WITH INSURED IS COMMONPLACE AND DOES NOT MAKE COUNSEL A FACT WITNESS (Middle District)

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In this first-party property damage case, Judge Conner addressed a motion to sever and stay a bad faith claim, as well as a motion for a protective order to quash the deposition of the carrier’s coverage counsel, who was also defending the breach of contract and bad faith action.

Motion to Sever and Stay Results in Bifurcation and Stay

Judge Conner first noted the difference between a Rule 21 motion to sever and stay, and a Rule 42 motion to bifurcate, observing that severance results in two separate and distinct actions, resulting in separate judgments. In this case, the insurer had moved to sever, but also included in its motion bifurcation as a form of relief.

“Severance is appropriate when the claims are ‘discrete and separate,’ each capable of resolution without dependence or effect on the other.” Factors include whether the two claims will require different evidentiary proof, judicial economy, and party prejudice. Judge Conner observed the wealth of case law addressing severance and bifurcation in insurance bad faith cases, but noting that the cases go both ways.

As in other cases, the insurer here argued, “irreparable prejudice from premature and potentially unnecessary disclosure of otherwise privileged information, inefficiency in litigating a secondary claim of bad faith that may be mooted by resolution of the coverage claim, and jury confusion and the potential loss of [the insurer’s] chosen counsel if the claims proceed together.”

  1. The court agreed that the breach of contract claim and bad faith claim are separate and distinct, with only minor overlap. For example, “[i]nformation concerning how [the insurer] investigated and evaluated the coverage claim, its claims-handling policies, and its attorney and personnel communications regarding denial of coverage … are simply immaterial to the issue of whether coverage is required under the policy.”

  2. The court also found the prejudice element favored the insurer’s position. The insurer focused on revealing its attorneys’ advice, opinions and strategy as providing an undue advantage in the insured’s contract case, where such information would not otherwise be discoverable. The insured focused on increased litigation expenses.

Judge Conner found “that although both parties have proffered potential prejudice, [the insurer’s] likely injury from denying separation of these claims outweighs the possible increased costs identified by [the insured]. As [the insurer] correctly notes, attorney-client privilege and the work product doctrine are long-held, venerated components of our legal system. …. Such protections are not absolute, but they should not be disregarded lightly. We do not dismiss [the insured’s] legitimate concern regarding litigation costs, but ultimately conclude that this factor also favors [the insurer].”

  1. On the judicial economy element, the court rejected the notion that a ruling denying coverage would moot the bad faith claim; instead observing that a bad faith claim can exist independently of a coverage denial. [Note: As recently reiterated on this Blog, there is a longstanding issue as to whether statutory bad faith can be pursued in Pennsylvania simply for poor claims handling, if there is no benefit due under the policy.] The court also rejected the notion that the likelihood of more complex discovery disputes if both actions are litigated together requires severance.

After weighing all factors, Judge Conner chose to bifurcate, rather than sever; and to stay discovery on the bad faith claim. He recognized other courts had ruled differently in insurance bad faith cases, but highlighted the fact that each case is unique, that judges have broad discretion, and that in “this” case bifurcation and stay were warranted.

Court denies insured’s request to depose the insurer’s counsel

The insured sought to depose the insurer’s defense counsel in the case, who was also involved in the underlying coverage dispute. The insurer moved to quash the deposition. As the only pending case was now the breach of contract claim, Judge Conner viewed the issue through that prism.

The insured argued that counsel acted as a claim investigator, and was thus a fact witness. However, it offered no support for that position. It sought to depose counsel to obtain his: “’thoughts and reasoning as to why certain information was or was not included in the denial letters,’ knowledge of the cause and extent of the loss, and reasons why ‘certain information was disregarded” and the claim ultimately denied.’” The court found this “either irrelevant to the breach of contract claim, privileged, discoverable through other means, or a combination thereof.”

“Furthermore, that [the insurer’s counsel] authored letters denying coverage and setting forth [the insurer’s] reasons for its denial has no bearing on whether his deposition is necessary on the breach of contract claim. The practice of insurers consulting with their attorney regarding coverage and having their attorney communicate with the insured is quite commonplace and does not transform [coverage counsel] into a fact witness.”

The court further recognized the potential issue that the deposition could result in counsel’s disqualification. This was another reason to quash the deposition in connection with the contract claim. Judge Conner did leave the door open for the insured to reassert its request to depose counsel in the bad faith case.

Dated: July 25, 2019

McFarland, LP v. Harford Mutual Insurance Cos., U. S. District Court Middle District of Pennsylvania CIVIL ACTION NO. 1:18-CV-1664, 2019 U.S. Dist. LEXIS 124038 (M.D. Pa. July 25, 2019) (Conner, J.)

Our thanks to Dan Cummins of the excellent Tort Talk Blog for bringing this case to our attention.

EMAILS BETWEEN CLAIMS ADJUSTER AND PLAINTIFF’S COUNSEL AFTER INSURER’S DEFENSE COUNSEL’S INVOLVEMENT IS MADE KNOWN: IT’S BEST NOT TO DO THAT, EVEN IF ADJUSTER INITIATES THE CONTACT (Middle District)

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This UIM breach of contract and bad faith case involved an alleged ex parte contact with the carrier’s claims adjuster, after defense counsel had communicated a letter of representation to the insured’s counsel. Three months later after that representation letter, there were direct communications, via email exchanges, between plaintiff’s counsel and the claims adjuster. They discussed the plaintiff’s demands and claims handling events. The carrier brought a motion for a protective order to preclude use of these emails in the case, because of the allegedly impermissible ex parte contacts with a represented person.

The email initiating the communications came from the adjuster to plaintiff’s counsel. The carrier took the position this was inadvertent, asserting the adjuster actually intended the email for her own defense counsel. The court observed it was unclear whether the communication was inadvertent. In any event, the court found whether intended or inadvertent, the result is the same.

The court generally observed that the prudent course would have been for plaintiff’s counsel to communicate with defense counsel regarding the adjuster’s very first email, rather than responding to the adjuster. This clearly would have avoided the ensuing issues.

The court analyzed the contact under Rule of Professional Conduct 4.2, governing direct contacts with represented persons. It concluded the rule was not violated. There was no intent to create an unfair advantage or indicia of dishonest intent. Further, the court observed defense counsel did not make an issue of the email exchange for a year, in demanding that it not be disseminated by plaintiff’s counsel, e.g., to plaintiff’s expert.

However, though there was no rule violation, some remedial measures were warranted. Thus, the court precluded any information obtained from the adjuster via these emails, that could bind the carrier.

The court did deny a request for attorney’s fees on the motion. The communications were limited, and the conduct did not rise to the level of egregiousness that would call for an attorney’s fee award.

Date of Decision: July 17, 2019

Golden v. Brethren Mutual Insurance Co., U. S. District Court Middle District of Pennsylvania Civil No. 3:18-CV-02425, 2019 U.S. Dist. LEXIS 118519, 2019 WL 3216629 (M.D. Pa. July 17, 2019) (Saporito, M.J.)

 

DISCOVERY IN BAD FAITH CASE: (1) RESERVES DISCOVERABLE; (2) MENTAL IMPRESSIONS NOT DISCOVERABLE; (3) TRADE SECRET OBJECTIONS CANNOT STAND ABSENT APPROPRIATE MOTION FOR PROTECTIVE ORDER (Philadelphia Federal)

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In this bad faith action, Eastern District Judge Slomsky addressed three disputed discovery issues: (1) reserves; (2) claim adjuster work product; and (3) trade secrets.

Reserves are Discoverable

District courts within the Third Circuit are split on whether reserves are discoverable in bad faith cases. In this action, Judge Slomsky stood with those judges who find reserves relevant and discoverable.

Work Product Privilege not Eviscerated Simply by Bringing a Bad Faith Action

On the other hand, he refused to require production of a claim adjuster’s mental impressions simply because it was a bad faith case. As the court states: “In essence, Plaintiff’s sole argument to compel production of [the adjuster’s] mental impressions is that [the mental impressions] are relevant merely because this case contains a bad faith claim. It is well-settled that this argument is insufficient to disregard the work-product privilege set forth in Rule 26.”

Trade Secret Objections Fail When (1) Insurer Does not Move for Protective Order, and (2) Does not Lay Out Nature of Trade Secrets in Opposing Motion to Compel

The insurer made redactions to document production based on trade secret objections. The court first observed that Pennsylvania Civil Rule 4012 governed this trade secrets issue, rather than the Federal Rules. The interpreted Pa.R.C.P. 4012 to require a party objecting on this basis to bring a motion for a protective order in the first instance, which the insurer did not do in this case. The court then observed that the insurer failed to address the insured’s arguments against the presence of trade secret protections, which could have been done without revealing any trade secrets. Still, after granting the motion to compel on this issue, the court gave leave for the insurer to file an “appropriate” motion for a protective order.

Date of Decision: July 16, 2019

Penn-Dion Corp. v. Great American Insurance Co. of N.Y., U. S. District Court Eastern District of Pennsylvania CIVIL ACTION NO. 17-4634, 2019 U.S. Dist. LEXIS 117635, 2019 WL 3202503 (E.D. Pa. July 16, 2019) (Slomsky, J.)

BAD FAITH ADEQUATELY PLEADED IN RAISING BIAS ON PART OF INSURER’S EXPERT (Middle District)

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As we posted earlier today, the theme is plaintiffs adequately pleading bad faith claims in federal court.

In this second post, the insured set out plausible bad faith claims in this property damage case by making specific factual allegations. The key assertions were that the insurer improperly “hired, retained and relied upon the opinion of an engineer or other professional knowing that such opinion would be favorable to [the insurer] on a financial incentive basis; and (2) disregarded information provided to it from the Plaintiffs that [the insurer’s] inspection and engineering report was inadequate, flawed, and erroneous.”

The court found the “complaint, taken as a whole, goes beyond a mere boilerplate recital of the elements of the statute. Rather, as we construe the complaint, it provides a chronology detailing alleged failures … to evaluate this claim in good faith. Instead, according to the plaintiffs [the insurer] relied upon false justifications to deny their claim; under-valuated their property; failed to account for the loss of use of the property; and demonstrated bad faith in its investigation of this insurance claim in 14 different ways, including specific allegations that [the insurer]: (1) hired, retained and relied upon the opinion of an engineer or other professional knowing that such opinion would be favorable to Allstate on a financial incentive basis; and (2) disregarded information provided to it from the Plaintiffs that Allstate’s inspection and engineering report was inadequate, flawed, and erroneous.”

The issue of the expert’s alleged financial bias could not be resolved in a judgment on the pleadings. “Thus, the plaintiffs’ complaint raises questions of motivation and bias which cannot be resolved on the pleadings alone. Therefore, the task of determining whether this expert report provides a defense as a matter of law to the bad faith claim in this case, in our view, may not be performed on consideration of a motion for judgment on the pleadings, where we must simply assess the adequacy of the pleadings. Instead, assessment of any such defense must await a properly documented motion for summary judgment.”

Date of Decisions: January 8, 2019 (Report and Recommendation), adopted by District Court on April 25, 2019

Flower v. Allstate Property & Casualty Insurance Co., U.S. District Court Middle District of Pennsylvania Civil No. 3:18-CV-1321, 2019 U.S. Dist. LEXIS 4096 (M.D. Pa. Jan. 8, 2019) (Carlson, M.J.) (Report and Recommendation), adopted by District Judge Mariani on April 25, 2019

COURTS IN THE THIRD CIRCUIT DISFAVOR DISCOVERY OF SIMILAR CLAIMS EVIDENCE IN BAD FAITH CASES (Western District)

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Plaintiff served an interrogatory asking the insurer to identify all bad faith suits in which it was involved for the preceding 10 years. The insurer objected and the insured moved to compel. Judge Gibson of the Western District cited his own 2012 precedent in the Zettle case, as well as a bounty of other case law, in denying the motion to compel.

The main point in these cases is that other bad faith claims are irrelevant. As Judge Gibson states, there is not any necessary “connection between other bad faith claims against Defendant and the issue of materiality here, particularly considering the myriad of potential factual differences between other claims and the present claim, including different types of policies, unique policy language, the application of different states’ law, [and] varying circumstances surrounding the bad faith allegations….”

Thus, “the general rule [is] that courts in the Third Circuit ‘disfavor the discovery of similar claims evidence in bad faith cases.’”

Judge Gibson also found the request overbroad and unduly burdensome. There is no geographic limit, no limit to the type of insurance policy at issue, and no explanation as to why a 10-year period is necessary and why a shorter period would be inadequate.

Date of Decision: February 28, 2019

Horvath v. Globe Life & Accident Ins. Co., U. S. District Court Western District of Pennsylvania Case No. 3:18-cv-84, 2019 U.S. Dist. LEXIS 31688 (W.D. Pa. Feb. 28, 2019) (Gibson, J.)

COURT ADDRESSES DISCOVERY RE: (1) RESERVES (2) OTHER CLAIMS/DISPUTES; (3) CLAIM LOGS; (4) CLAIM STATUS REPORTS; (5) POLICY AND PROCEDURE MANUALS; (6) EMPLOYEE INCENTIVES; (7) ANTICIPATION OF LITIGATION/WORK PRODUCT; AND (8) OVERBROAD DISCOVERY LANGUAGE (Middle District)

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This case addresses a number of discovery issues in this first party benefit denial breach of contract and bad faith case.

RESERVES (BAD FAITH ON COVERAGE VS. REFUSAL TO SETTLE/VALUE DISPUTES)

Magistrate Judge Carlson observed courts in the Third Circuit are split on whether reserves are discoverable in bad faith cases. He first states that when the bad faith case is about a failure to settle or dispute over a claim’s value, the prevailing view is that reserves are discoverable. “However, when the bad faith claim is based on a denial of coverage and ‘does not involve the value of the claim or [the plaintiff’s] estimation of liability… the reserve information requested is neither relevant nor reasonably calculated to lead to the discovery of admissible evidence.”

The alleged bad faith in this case is based on denying coverage through a biased and unfair review process, and not a dispute over value. Thus, reserves are irrelevant to the bad faith claim, and production is not required.

OTHER MATTERS NOT RELEVANT OR DISCOVERABLE

The alleged basis of the bad faith claim was that the insurer intentionally used a biased peer review organization and doctor to terminate plaintiff’s medical benefits unfairly. Plaintiff served interrogatories concerning virtually all matters in which the same PRO and doctor were selected by the insurer. Magistrate Judge Carlson did not permit this discovery.

The court first looked at prior case law denying discovery on the issue of the size of an adjuster’s case load, finding it both irrelevant and of marginal utility compared to the burden imposed on the insurer to make production. In the present case, Magistrate Judge Carlson found that “the number of times that this PRO and/or doctor decided in favor of the insurer, whether on initial review or on reconsideration, will not necessarily speak to any such bias.” If, e.g., a PRO found for the insurer 98 out of a 100 times, “those 98 claims may very well have been legitimately decided on their merits, which could not be known without an extensive post hoc evaluation of the merits of each claim.”

The court was not going to carry out that kind of evaluation, and observed that “courts in this circuit have held that ‘discovery of other insureds’ claims in bad faith cases is generally improper, as such information is irrelevant.”

ADDITIONAL RULINGS ON CLAIMS LOGS, CLAIMS STATUS REPORTS, ANTICIPATION OF LITIGATION, OVERBROAD DISCOVERY LANGUAGE, EMPLOYEE INCENTIVES, AND POLICY/PROCEDURE MANUALS

Magistrate Judge Carlson made the following additional points and rulings:

  1. Magistrate Judges have broad discretion in resolving discovery disputes.

  2. Plaintiff alleged there was a biased peer review process used to deny medical benefits. The court found the portions of the insurer’s policy manuals on the peer review process, and employee procedures or policies for handling inquiries about insurance policies, must be produced.

  3. A request for “all communications of any nature whatsoever” concerning the complaint are vague and overbroad, as are requests for communications regarding “any matters raised by Plaintiff’s and Defendants’ initial disclosures”.

  4. The work product doctrine kicked in when plaintiff’s counsel wrote to the insurer expressing dissatisfaction with the outcome of the PRO process. Actual suit or even the threat of suit are not required to trigger the insurer’s anticipation of litigation. Thus, claim notes created after the date of that letter received work product protection, but claim notes before that date had to be produced.

  5. Claim log entries indicating an employee simply looked at the file or generically uploaded a document are not protected work product.

  6. The insurer was required to respond to an interrogatory asking for “the nature and amount of any employee incentive to close out insureds’ claims”.

Date of Decision: February 6, 2019

Barnard v. Liberty Mutual Insurance Corp., U. S. District Court Middle District of Pennsylvania Civil No. 3:18-CV-01218, 2019 U.S. Dist. LEXIS 18660 (M.D. Pa. Feb. 6, 2019) (Carlson, M.J.)