Archive for the 'PA – Attorney’s Fees' Category

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.

BAD FAITH NOT ADEQUATELY PLEADED; NO PRIVATE ACTION FOR UIPA VIOLATIONS; ATTORNEY’S FEES NOT AVAILABLE FOR BREACH OF CONTRACT CLAIM (Middle District)

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The court reiterates here that (1) bad faith claims must be pleaded with supporting factual allegations, (2) there is no private cause of action for UIPA or Unfair Claims Settlement Practices regulation violations, and (3) attorney’s fees are not recoverable under a breach of contract claim.

This is a UIM case for breach of contract and bad faith, as well as unfair claim settlement practices violations. The insurer moved to dismiss the bad faith claim as improperly pleaded. It moved to dismiss the unfair claim settlement count on the basis that the Unfair Insurance Practices Act (UIPA) and Unfair Claim Settlement Practices regulations do not provide for a private cause of action. Finally, the insurer moved to dismiss the attorney’s fee claims in the breach of contract count.

  1. Bare-bones bad faith claims dismissed without prejudice

The court dismissed the bad faith claim, without prejudice, because the insureds only pleaded conclusory bare-bones allegations. The complaint did not include any factual allegations supporting the conclusory pleadings.

These inadequate bare-bones allegations were as follows:

Delay. Even after determining that Plaintiffs had a right to the insurance proceeds claimed, the Defendant has delayed paying Plaintiffs their policy proceeds for unknown reasons.

Forcing Insured to Seek Legal Redress. By delaying payment of Plaintiffs’ claim, Defendant Progressive Corporation, knowing that it had no legal justification for doing so, purposefully forced Plaintiffs to file this Complaint in order to obtain the insurance proceeds to which they are entitled. Defendant, Progressive Corporation, forced Plaintiffs to seek legal redress for unknown reasons.

Deception. Defendant realizing that it had no legal grounds for denying or delaying payment of Plaintiffs’ claim, and/or engaged [sic] in deceptive acts relating to Plaintiffs’ policy for the purposes of creating an apparent reason for denying the Plaintiffs’ claim where no such reason existed.

False Accusations. Defendant realizing that it had no legal grounds for denying or delaying payment of Plaintiffs’ claim, made false statements to the Plaintiffs’ representatives and/or other persons for the purposes of creating an apparent reason for denying the Plaintiffs’ claim where no such reason existed.

Oppressive Demands. In the course of adjusting Plaintiffs’ claim, Defendant made oppressive demands of the Plaintiffs for the purposes of delaying payment of Plaintiffs’ claim.

The court looked to the following decisions in supporting this result: Myers, Peters, Sowinski, Moran, and Grustas.

  1. There is no private cause of action under the UIPA or under Pennsylvania’s Unfair Claim Settlement Practices Regulations

The insureds relied upon the Supreme Court’s 1981 D’Ambrosio decision in asserting causes of action for UIPA and Unfair Claim Settlement Practices violations. They contended the Supreme Court’s 2017 Rancosky decision superseded D’Ambrosio, and created these private causes of action. The court rejected this argument, observing that Rancosky simply observed that the 1989 bad faith statute superseded D’Ambrosio to the extent it created a new statutory bad faith cause of action years after D’Ambrosio was decided. Rancosky, however, still recognized D’Ambrosio’s holding there is no private UIPA cause of action.

The insurer “therefore did not err in relying on D’Ambrosio for the proposition that there is no private cause of action under UIPA. It remains the case that neither UIPA nor the regulations governing unfair claim settlement practices allow a plaintiff to bring a private cause of action.” The “unfair claim settlement practices claim will accordingly be dismissed with prejudice because there is no private cause of action for unfair claim settlement practices under Pennsylvania law.”

The court looked to the recent Excel and Neri cases in reaching this decision.

3. Attorney’s fees cannot be recovered under a breach of contract theory

Litigants are responsible for their own attorney’s fees and legal costs absent a statute authorizing fees, a contractual provision for fees, or some other recognized exception to the general rule. None of these circumstances applied to the insureds’ breach of contract claim. The court rejected the argument that fees were allowed because attorney’s fees may be permitted during the pendency of litigation for dilatory, obdurate, vexatious or bad faith conduct in the course of litigation. This was irrelevant as neither party filed a sanctions motion, and such behavior was not part of the actual case pleaded.

Date of Decision: December 17, 2019

Kline v. Progressive Corp., U.S. District Court Middle District of Pennsylvania Civil No. 1:19-CV-00676, 2019 U.S. Dist. LEXIS 216258 (M.D. Pa. Dec. 17, 2019) (Wilson, J.)

INSURED SANCTIONED UNDER 28 U.S.C. § 1927 FOR “ACTING IN BAD FAITH BY PERPETUATING A NONSENSICAL LAWSUIT AGAINST THE INSURER AT EVERY TURN”

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The court earlier found the insured, an attorney, prosecuted her suit against the carrier in bad faith. This case addressed sanctions against the insured and her one-time co-counsel under 28 U.S.C. § 1927, after finding Rule 11 inapplicable.

The Court had identified fifty-two filings evincing “an unreasonable and vexatious multiplication of the proceedings.” It ordered the insured and co-counsel “to pay the carrier’s reasonable excess costs, expenses and attorneys’ fees associated with those filings….”

The court found 217.3 hours of the insurer’s legal fees reasonable, totaling $39,114. The court, however, rejected the argument expert fees could be awarded under section 1927. It left open for a later date a request for court costs.

The court then looked at whether it should reduce the sanctions, after balancing the equities between the parties. The court found no basis to reduce the fee award, stating that the insured and her co-counsel “acted in bad faith by perpetuating a nonsensical lawsuit at every turn.” By contrast, the insurer handled itself with “professionalism”.

The court then looked at the respective equities as between the insured and her co-counsel in dividing their payment obligations. The court described the insured as “the ring master of this circus.” The court found: “She devised this suit ‘to try to con [the insurer] into paying for damage most likely caused by [her] own neglect of her properties.’”Moreover, the court found the insured’s “bad-faith conduct was borne of malice.”

On the other hand, the court observed: “To be sure, [co-counsel] willingly enabled [the insured’s] worst instincts, and he is neither as naïve nor as guiltless as he pretends to be.” However, counsel lacked the insured’s “malice, and his misconduct pales in comparison to [the insured’s].” The court also considered that co-counsel already had been disbarred for unrelated conduct, blunting the deterrent effect of present sanctions. By contrast, the court stated, the insured “will exploit her law license and continue abusing the civil justice system unless and until she is discouraged from doing so.”

For all of the court’s stated reasons, it required the insured to pay $35,000 and co-counsel to pay $4,114.

A motion to seal the insurer’s time record’s was denied without prejudice, as the insurer neither specified what documents should be placed under seal, nor provided the good cause basis for sealing any documents.

Date of Decision: December 17, 2019

Doherty v. Allstate Indem. Co., U. S. District Court Eastern District of Pennsylvania CIVIL ACTION NO. 15-05165, 2019 U.S. Dist. LEXIS 216253 (E.D. Pa. Dec. 17, 2019) (Pappert, J.)

Earlier Blog summaries concerning this case can be here (2016), and here (2017).

 

COURT ADDRESSES “WHO IS AN INSURER” FOR BAD FAITH PURPOSES (Philadelphia Federal)

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The plaintiff obtained insurance against its tenants failing to pay rent. It allegedly entered a relationship with two entities licensed to provide that insurance. One of those entities denied being an insurer, and moved to dismiss a bad faith claim against it.

The court observed:

“The Insurance Department Act of 1921, as amended, 40 P.S. § 221.3, defines ‘insurer’ as ‘any person who is doing, has done, purports to do, or is licensed to do an insurance business, and is or has been subject to the authority of . . . any insurance commissioner.'” … A party will be deemed to be “doing [an insurance] business” if it engages in any of the following acts:

(1) the issuance or delivery of contracts or certificates of insurance to persons resident in this Commonwealth;

(2) the solicitation of applications for such contracts, or other negotiations preliminary to the execution of such contracts;

(3) the collection of premiums, membership fees, assessments or other consideration for such contracts; or

(4) the transaction of matters subsequent to execution of such contracts and arising out of them.

The Complaint alleged the moving defendant acted in concert with another entity to provide plaintiff with insurance coverage. Specifically, plaintiff claims that both entities “entered into insurance policies pursuant to which Defendants agreed to ‘insure and protect … against tenants failing to pay rent or failing to vacate properties after defaulting on rent or the expiration of their lease.’” Plaintiff also “alleges that Defendants marketed the policies to [plaintiff], that [plaintiff] made thousands of dollars of premium payments under the policies, and that Defendants subsequently sent termination notices as to the policies.” Drawing all reasonable inferences, the complaint alleged the moving defendant solicited the application for an insurance contract, entered into an insurance contract, collected fees and premiums, and “’transact[ed] [in] matters subsequent to execution of [the] contracts and arising out of [it].’”

The moving defendant argued that its contracts with plaintiff do not use the word insurance, that in a related document the moving defendant itself is described as a “named insured,” and that a search of the Pennsylvania Insurance Department’s web site did not include the moving defendant as an insurer. The court rejected all of these arguments.

First, taking all reasonable inferences in plaintiff’s favor, the court found the language in the parties’ agreement sufficient to be considered an insurance agreement, in referencing payment of fees in return for coverage. Second, that the moving defendant was a “named insured” itself in relation to a reinsurer did not define the relationship between the moving defendant and plaintiff. Third, the moving defendant’s absence from the Pennsylvania Insurance Department’s website “does not preclude a reasonable inference that [it] was doing . . . [or] purport[ing] to do . . ., an insurance business and, in that capacity, was subject to the authority of . . . an[] insurance commissioner, even if the insurance commissioner was not actively exercising that authority.” (internal quotations omitted).

While the court denied the motion to dismiss, however, it did not rule on the ultimate issue of fact as to whether the moving defendant was an insurer for statutory bad faith purposes. It simply allowed the case to proceed.

On a final point, the court recognized, but did not resolve, the issue of whether the insuring agreement could expressly limit recovery of attorney’s fees and punitive damages that are otherwise expressly permitted by the bad faith statute.

Date of Decision: December 17, 2019

ABC Capital Invs., LLC v. Nationwide Rentsure, U.S. District Court Eastern District of Pennsylvania CIVIL ACTION NO. 17-4980, 2019 U.S. Dist. LEXIS 216129 (E.D. Pa. Dec. 17, 2019) (Padova, J.)

PUNITIVE DAMAGES CLAIM PREVENTS REMAND; BAD FAITH PLEADED WHERE CASE IS NOT MERELY A VALUATION DISPUTE (Middle District)

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On July 1, 2019, Judge Munley issued two opinions in this UIM bad faith case: (1) finding removal proper; and (2) finding the insured pleaded a plausible bad faith case.

Removal was proper where potential punitive damages could take the case above the $75,000 jurisdictional minimum

Judge Munley ruled that the case would remain in federal court, after removal from state court. The insured allegedly suffered severe personal injuries, and the carrier refused to pay the $25,000 UIM policy limits. The state court complaint sought damages in excess of $50,000, punitive damages, interest, counsel fees and costs.

The court recognized that actual damages were limited to $25,000, and the punitive damage and attorney’s fees claims would have to exceed $50,000 to meet the $75,000 jurisdictional minimum. Judge Munley found that “[a] punitive damages award which is double the amount of the policy limit is reasonable and possible in such a case.” As remand is only proper when it appears to “a legal certainty that the plaintiff cannot recover, or was never entitled to recover, the jurisdictional amount [$75,000],” he denied the motion to remand.

The insured pleads a plausible bad faith claim where delays and refusal to pay the sum demanded are not mere disagreements over valuation

Judge Munley observed the insured alleged a severe injury, with damages beyond the tortfeasor’s coverage limits. The insured’s UIM coverage was $25,000, which the defendant carrier refused to pay. Judge Munley concluded the case, as pleaded, was not merely a disagreement over claim valuation, but made out a plausible bad faith claim.

The following averments were sufficient to survive the insurer’s motion to dismiss:

  1. “The amended complaint avers that defendant failed to effectuate a prompt fair and equitable settlement of plaintiff’s claim and compelled her to seek legal redress and commence litigation to recover the benefits to which she was entitled.”

  2. “Further, defendant ignored and discounted the severity of plaintiff’s injuries.”

  3. “Also, defendant did not promptly evaluate the claim, but rather engaged in dilatory and abusive claims handling by delaying the valuation of plaintiff’s claim and failing to pay the claim.”

  4. “The amended complaint also suggests that defendant failed to timely investigate or to make a reasonable settlement offer.”

  5. “Defendant further delayed by asking for authorization to receive medical records which were already in its possession.”

The court also refused to dismiss an attorney’s fee demand under the breach of contract count, as such fees might prove permissible under the Motor Vehicle Financial Responsibility Act (MVFRL).

Dates of Decision: July 1, 2019

Pivtchev v. State Farm Mutual Auto Insurance Co., U. S. District Court Middle District of Pennsylvania No. 3:19cv150, 2019 U.S. Dist. LEXIS 109378 (M.D. Pa. July 1, 2019) (Munley, J.)

Pivtchev v. State Farm Mutual Auto Insurance Co., U. S. District Court Middle District of Pennsylvania No. 3:19cv150, 2019 U.S. Dist. LEXIS 109377 (M.D. Pa. July 1, 2019) (Munley, J.)

STATUTORY ATTORNEY’S FEES AND CONTINGENCY ENHANCEMENTS (Philadelphia Federal)

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The case at hand did not involve statutory bad faith, but relied on one of the Third Circuit’s leading bad faith cases, Polselli v. Nationwide Fire Insurance Company, for guidance on the issue of determining statutory attorney fee enhancements. Judge Kearney provides a good summary of Polselli’s key points.

[We are only highlighting Polselli in this post, and refer the reader to Judge Kearney’s general discussion on fee enhancement criteria as set forth in his opinion, which can be found here.]

First, Judge Kearney defined the meaning of the words being analyzed and the fees at issue:

“In a statutory fee shifting case, the attorney’s recovery is contingent on a court awarding its reasonable hourly fees (a lodestar) only if the [plaintiff] succeeds; but, a contingency could also mean a percentage of the total recovery awarded … regardless of the invested time. As we would not compare the lodestar to a percentage fee in this context and [plaintiff’s counsel] swears the lawyers kept regular time records and the firm generates approximately $500,000 annually in hourly billings, we presume [plaintiff’s counsel’s] use of the term ‘straight contingency fee’ means the lodestar awarded today — and it is not also asking [plaintiff] to pay a ‘straight contingency’ on the total recovery.”

The issue in Polselli was “whether, and under what circumstances, a court may enhance a fee under Pennsylvania law to reflect the contingent risk of nonpayment assumed by the plaintiff’s attorney in accepting the case on a contingent-fee basis.”

The Third Circuit stated the following:

  1. A contingency fee enhancement does not apply in every case.

  2. A trial court can “enhance the lodestar amount to account for a particular case’s contingent risk only to the extent that those factors creating the risk are not already taken into account when calculating the lodestar amount.”

  3. Trial courts must “’exercise caution’ in considering an enhancement ‘so as not to skew the calculation of a reasonable rate by double counting’”.

[By way of example, “if the complexity of a case is reflected in the high number of hours researching the complex issues or in the relatively high regular hourly rate of the attorney, complexity does not justify a contingency enhancement.”]

  1. The trial court must consider “’whether the attorney was able to mitigate the risk of nonpayment….’”

[By way of example, “an attorney who enters into a contingency fee agreement ‘has significantly mitigated the continued risk’ because the attorney ‘obtains the prospect of compensation under the agreement substantially in excess of the lodestar amount.’”]

  1. Trial judges “must not … deviate from [their] ultimate responsibility — the calculation of a ‘reasonable’ fee.”

In sum, “[t]o the extent factors creating a contingent risk in a particular case are mitigated or already taken into account when calculating the lodestar amount, a contingency enhancement is not reasonable and should not be awarded.”

Date of Decision: February 25, 2019

Middlebrooks v. Teva Pharms. USA, Inc., U. S, District Court Eastern District of Pennsylvania CIVIL ACTION NO. 17-412, 2019 U.S. Dist. LEXIS 30530, 2019 WL 936645 (E.D. Pa. Feb. 25, 2019) (Kearney, J.)

COURT OUTLINES PRINCIPLES FOR REMOVING BAD FAITH CLAIMS TO FEDERAL COURT (Philadelphia Federal)

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Federal Judge Mitchell S. Goldberg sets out useful examples and principles concerning removal of statutory bad faith claims to federal court. The issue in these cases is the degree of certainty needed to measure claims made against the $75,000 jurisdictional threshold.

  1. The sum at issue is determined at the time the petition to remove is filed.

  2. Courts do not look at the low end of an open-ended claim; rather, the measure is “a reasonable reading of the value of the rights being litigated.”

  3. Punitive damages and attorneys’ fees are considered in statutory bad faith cases.

  4. There is no recovery cap on the punitive damages and attorneys’ fees available under the bad faith statute.

[Note: Attorney’s fees must still be reasonable, and the U.S. Supreme Court has placed limits on punitive damages to conform to due process requirements.]

  1. In a bad faith case, the “amount in controversy exceeds the $75,000 threshold where a plaintiff is able to recover a specified amount of damages, plus punitive damages and attorney’s fees….”

  2. The court gave two case examples of pleading specified damages along with punitives: (1) a claim for $53,315 in contract damages accompanied by a bad faith claim “in excess of $50,000 together with interests and costs” was sufficient; and (2) a claim for $28,682.41 in unpaid benefits plus punitive damages was sufficient.

  3. Under this line of cases, the instant plaintiff’s claim for $24,711.11 plus punitive damages meets the $75,000 pleading threshold.

  4. By contrast, failure to plead a specific unpaid benefit amount works against removal.

  5. In two cases where the action was remanded, the plaintiffs pleaded lost benefits in “an amount not in excess of $50,000” and punitive damages “not in excess of $50,000”.

In this case, even though the $75,000 threshold was met, the court still remanded the action because removal was untimely. The insurer argued that any damage sum was uncertain as pleaded in the complaint. Therefore, any effort at removal lacked “legal certainty” and the insurer had to serve requests for admissions to get sufficient clarity before it could properly remove the action. This process took many months.

The court disagreed, finding the complaint itself was adequate to make the monetary threshold determination. Thus, the thirty-day removal period from service of the complaint had long passed, without the insurer taking action to remove the case, and the case was remanded.

Date of Decision: January 28, 2019

Hutchinson v. State Farm Fire & Casualty Co., U.S. District Court Eastern District of Pennsylvania CIVIL ACTION No. 18-cv-2588, 2019 U.S. Dist. LEXIS 13820 (E.D. Pa. Jan. 28, 2019) (Goldberg, J.)

SEPTEMBER 2018 BAD FAITH CASES: OUTRAGEOUSLY EXCESSIVE FEE PETITION RESULTS IN DENIAL OF ALL FEES; 10 FACTORS TO CONSIDER IN EVALUATING A FEE PETITION (Third Circuit, Pennsylvania Bad Faith Statute)

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In this unusual case, the trial court entirely denied a successful bad faith plaintiff attorney’s fees petition, and the Third Circuit affirmed.

On appeal, the Third Circuit summarized the trial court opinion: “As the prevailing party under the Bad Faith Statute, [the insured] then submitted a petition for attorney’s fees, in which he requested an award of $946,526.43 in fees and costs. The District Court denied this request in its entirety, however.

In a thorough and well-reasoned one-hundred-page opinion, the court reviewed every time entry submitted, performed a traditional lodestar analysis, and concluded that eighty-seven percent of the hours billed had to be disallowed as vague, duplicative, unnecessary, or inadequately supported by documentary evidence. In light of that substantial reduction, the District Court deemed [the] request ‘outrageously excessive’ and exercised its discretion to award no fee whatsoever.”

The Third Circuit affirmed, and made clear that under circumstances of “outrageously excessive” fee demands, a trial court has discretion to award no fees at all, even though some fees were obviously incurred. The court stated:

“The District Court denied this petition in its entirety, reasoning that it was not adequately supported and that the requested amount was grossly excessive given the nature of the case. Finding no abuse of discretion, we will affirm and, in doing so, take the opportunity to formally endorse a view already adopted by several other circuits—that is, where a fee-shifting statute provides a court discretion to award attorney’s fees, such discretion includes the ability to deny a fee request altogether when, under the circumstances, the amount requested is ‘outrageously excessive.’”

The opinion gives some guidance on how to properly petition for attorney’s fees:

  1. Maintain contemporaneous time records. Even if not required, this is the best practice.

  2. It is best not to reconstruct time records. This is not forbidden, but will call for higher scrutiny in evaluating the fee petition.

  3. It is best not have one attorney reconstruct time records for another attorney, especially where the other attorney is no longer with the firm and cannot be consulted.

  4. Time entries should not be so vague that the amount of time needed to complete the task cannot be evaluated from the time entry. As the court states, the time entries must “be specific enough to allow the district court to determine if the hours claimed are unreasonable for the work performed.”

  5. Time spent must not be unnecessary or excessive.

  6. Purely clerical matters should not be billed at attorney rates.

  7. Trial preparation time should not be disproportionate to the time actually spent at trial.

  8. Do not seek to recover fees that never would have been billed to the client. (“Hours that would not generally be billed to one’s own client are not properly billed to an adversary.”)

  9. At trial, be prepared and know the applicable rules of court, especially when considerable time is billed for trial preparation.

  10. The billing attorneys themselves must put on evidence, by affidavit or testimony, of the reasonableness of their hourly rates.

In sum, “district courts have the discretion to deny a fee request in its entirety when the requested amount is ‘outrageously excessive’ under the circumstances.” “If courts did not possess this kind of discretion, ‘claimants would be encouraged to make unreasonable demands, knowing that the only unfavorable consequence of such conduct would be reduction of their fee to what they should have asked for in the first place.’”

“When a party submits a fee petition, it is not the ‘opening bid in the quest for an award.’ Rather, it is the duty of the requesting party to ‘make a good faith effort to exclude . . . hours that are excessive, redundant, or otherwise unnecessary, just as a lawyer in private practice ethically is obligated to exclude such hours from his fee submission.’”

Date of Decision: September 12, 2018

Clemens v. New York Central Mutual Fire Insurance Company, U. S. Court of Appeals for the Third Circuit No. 17-3150, 2018 U.S. App. LEXIS 25803 (3d Cir. Sept. 12, 2018) (Bibas, Greenaway, Restrepo, JJ.)

 

APRIL 2018 BAD FAITH CASES: $21 MILLION BAD FAITH JUDGMENT REVERSED BECAUSE TRIAL COURT “ENGAGED IN A LIMITED AND HIGHLY SELECTIVE ANALYSIS OF THE FACTS AND DREW THE MOST MALIGNANT POSSIBLE INFERENCES FROM THE FACTS IT CHOSE TO CONSIDER” (Pennsylvania Superior Court)

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Sometimes, lengthy litigation is described as an odyssey, warranted or not. In the Berg v. Nationwide case, the litigation has gone on as long as the times covered in both the Odyssey and the Iliad; and this most recent decision may not be the final word in its history.

In this 2-1 decision, the Superior Court reversed the trials judge’s $21 Million bad faith award against the insurer, and directed judgment for the insurer.

The essence of the majority opinion is in its final paragraph: “The trial court engaged in a limited and highly selective analysis of the facts and drew the most malignant possible inferences from the facts it chose to consider. We do not believe our appellate standard of review, circumscribed as it is, requires or even permits us to affirm the trial court’s decision in this case. This is especially so given Plaintiffs’ burden of proving their case by clear and convincing evidence.”

By contrast, the dissenting opinion begins: “Because it is not this Court’s role to usurp the fact-finding power of the trial court by its own interpretation of the factual and testimonial evidence, I respectfully dissent from the Majority’s decision to remand this matter for judgment notwithstanding the verdict.”

Court History

This case started with damage to plaintiffs’ car in September of 1996. The first step on this long road was between treating the car as a total loss vs. repairing it. The expenses at issue were $25,000 for a total loss and approximately half that for repairs. Under the insurance contract at issue, the carrier had significant control over the repair process itself. The insurer chose repairs, and the struggle begins in earnest with the beleaguered history of those repairs, and the litigation born from it.

Suit was filed in January 1998. The matter was bifurcated for trial purposes. In 2004, the first phase went to a jury, on fraud, conspiracy, and consumer protection law claims (UTPCPL). The jury found for plaintiffs on the UTPCPL claim, and awarded $1,925 against the auto repair shop and $295 against the insurer. The second trial phase was before the judge only, on the issues of treble damages, and statutory bad faith, both non-jury decisions. In 2007, the trial judge ruled for the insurer on the Bergs’ bad faith claim.

They appealed, but in 2008, the Superior Court ruled that they had waived all issues on appeal by failing to serve the trial court with a copy of their Rule 1925(b) statement. In 2010, the Supreme Court reversed that ruling and remanded to the Superior Court.

In 2012, reviewing the appeal on the merits, the Superior Court reversed and remanded the 2007 trial court decision. As discussed in our May 2012 blog posting, among other things, the Superior Court concluded that the trial court failed to consider various claims handling issues during the course of repairs and thereafter, as well as failing to consider the violation of other statutes in determining bad faith. Moreover, while the trial court would not consider the $900,000 spent to date by the carrier in defending the action, the Superior Court said this could be considered as evidence of bad faithfocusing on the concept of claims handling, and tying the amount to the claims handling.

After remand, a non-jury trial was held in 2014, and the trial judge found substantial evidence of bad faith in the carrier’s conduct, awarding $18,000,000 in punitive damages and $3,000,000 in attorneys’ fees. Again, this decision is discussed in our 2014 blog post.

On April 9, 2018, a 2-1 majority reversed that judgment, and entered judgment for the insurer. The dissenter would have affirmed. We discuss the highlights below, and commend the reader to the attached opinions for the lengthy drill-down detail the majority exercised in reaching its decision, with some of the same in the dissent.

Highlights of the 2018 Majority Opinion

  1. An appellate court can closely scrutinize the facts of record.

The most significant aspect of the majority opinion is its willingness to drill down into the factual record, and to put the trial judge’s factual findings and conclusions under very close analysis. The majority recognized that deference is due the trial court as trier of fact, but would not give deference where findings of fact were not supported in the record, and where conclusions about the factual record did not have the support of actual facts in the record. For the majority, hand-in-glove with the necessity for this oversight function is the heightened burden of proof in statutory bad faith cases, i.e., proof by clear and convincing evidence.

Specifically, the majority stated: “This Court will reverse a finding of bad faith where the trial court’s ‘critical factual findings are either unsupported by the record or do not rise to the level of bad faith.’” (emphasis in original). The majority added that the “[factfinder] may not be permitted to reach its verdict merely on the basis of speculation and conjecture, but there must be evidence upon which logically its conclusion may be based. Therefore, when a party who has the burden of proof relies upon circumstantial evidence and inferences reasonably deducible therefrom, such evidence, in order to prevail, must be adequate to establish the conclusion sought and must so preponderate in favor of that conclusion as to outweigh in the mind of the fact-finder any other evidence and reasonable inferences therefrom which are inconsistent therewith.”

After doing its own analysis of the same trial court findings of fact, the dissent replied that: “The majority vacates the judgment ‘because the record does not support many of the trial court’s critical findings of fact.’ …. In doing so, however, the Majority tacitly admits that other critical findings of the trial court are supported by clear and convincing evidence.” (Emphasis in original).

Again, we commend the reader to the attached majority opinion for its fact analysis, and the dissent’s analysis of the facts it concludes support affirming the trial court.

  1. Discovery violations do not constitute bad faith litigation conduct.

As stated by the majority: “The trial court found that Appellant hid and refused to give discoverable material to Plaintiffs, never produced photographs of the Jeep taken during the appraisal process, and refused to produce [a] report until ordered to do so during discovery. To the extent the trial court based its finding of bad faith upon discovery violations, it committed clear error. While it is true that a finding of bad faith under section 8371 may be premised upon an insurer’s conduct occurring before, during or after litigation, … we have refused to recognize that an insurer’s discovery practices constitute grounds for a bad faith claim under section 8371, absent the use of discovery to conduct an improper investigation.”

The Bad Faith statute “is designed to provide a remedy for bad faith conduct by an insurer in its capacity as an insurer for breach of its fiduciary duty to an insured by virtue of the parties’ insurance policy and not as a legal adversary in a lawsuit filed against it by an insured. Discovery violations are governed under the exclusive provisions of the Pennsylvania Rules of Civil Procedure. Nonetheless, even when considering these issues, we still find no merit to them supporting a bad faith claim under section 8371 by clear and convincing evidence.”

The majority recognized, among other things, that while there was an unwarranted refusal to produce an unredacted claims log, because the redacted material included no “smoking gun” this did not go beyond a discovery dispute subject to sanctions under rules governing discovery. Thus, it could not be used as actionable bad faith conduct subject to statutory relief under section 8371.

  1. There was no clear and convincing evidence of bad faith via a scorched earth policy, and the length of litigation alone is not evidence of bad faith.

The majority characterized the trial judge’s decision as improperly relying on an earlier Superior Court Opinion to establish a fact in the present case. The prior Opinion involved a ruling against the same insurer, but involved another party with a different dispute. That prior Opinion found the existence of a claim manual, in evidence in that case, material to its finding of bad faith because the manual directed bad faith practices. The Berg trial judge used that earlier Superior Court Opinion as a basis to include the same manual as part of the bad faith evidence in the Berg case.

On appeal, the Berg majority refused to permit this factual assumption about the existence of an internal manual directing bad faith coverage practices. Under the clear and convincing evidence standard, there had to be actual facts adduced in this case establishing the manual’s existence.

The majority further rejected the trial court’s using the length of the Berg litigation as evidence of bad faith. The majority had done some analysis rebutting that notion during its review of the record, and declined “further to conduct a detailed analysis of nearly two decades of highly contentious litigation and we note that the trial court did not do so in its findings. Plaintiffs had the right to prosecute their case zealously within the bounds of the law, just as Appellant had the right to defend itself if it believed its personnel did not act in bad faith. We cannot arbitrarily impose a limit on the time and resources an insurer spends in defending a bad faith action.”

  1. Matters, and thoughts, not of record cannot be considered.

The majority observed the trial court opinion was over 100 pages, and “devoted substantial portions … to matters not of record.” The majority was “troubled by [the] failure to limit … analysis to the facts of this case and applicable law.” The majority gave a number of examples of passages that concerned them. Excerpts of these non-record conclusions, which the majority describes as the trial court having “offered its thoughts”, concerning the insurance industry are quoted from the trial court’s opinion.

We quote just the first example of these conclusions/thoughts that the majority found to be outside the record. “[W]hat [p]laintiff, and more importantly, what lawyer in his right mind will compete with a conglomerate insurance company if the insurance company can drag the case out 18 years and is willing to spend $3 million in defense expenses to keep the policyholder from getting just compensation under the contract. Its message is 1) that it is a defense minded carrier, 2) do not mess with us if you know what is good for you, 3) you cannot run with the big dogs, 4) there is no level playing field to be had in your case, 5) you cannot afford it and what client will pay thousands of dollars to fight the battle, 6) so we can get away with anything we want to, and 7) you cannot stop us.” The majority clearly found such language out of bounds.

The majority’s conclusion.

In its conclusion, the majority states, among other things: “We disagree with the Dissent’s assertion that we are substituting our own findings for those of the trial court. Rather, our review of the extensive record in this matter convinces us that the trial court’s findings are not supported by the facts of record and our citations to the certified record belie any assertion that we have improperly substituted our findings for the trial court’s. The law permits a finding of bad faith only on clear and convincing evidence. Clear and convincing evidence is evidence that is “so clear, direct, weighty, and convincing as to enable either a judge or jury to come to a clear conviction, without hesitancy, of the truth of the precise facts in issue.’ ….The trial court’s highly selective citation to a voluminous record plainly failed to meet that standard. Respectfully, we believe the Dissent, under the guise of strict adherence to the standard of review, makes the same error.”

Date of Decision: April 9, 2018

Berg v. Nationwide Mutual Insurance Company, Pennsylvania Superior Court, No. 713 MDA 2015, 2018 Pa. Super. LEXIS 317 (Pa. Super. Ct. April 9, 2018) (Stabile and Ott, JJ., with Stevens, J., dissenting)

An order granting reconsideration and withdrawing this opinion was entered on May 31, 2018, and new opinions were issued on June 5, 2018 along the same lines, consistent with the foregoing majority and dissent.

 

SEPTEMBER 2017 BAD FAITH CASES: COURT GIVES CLOSE SCRUTINTY TO APPLICATION FOR STATUTORY FEES AND INTEREST: (1) NO INTEREST ON PUNITIVE DAMAGES; (2) NO FEES AND COSTS FOR INADEQUATELY SUBSTANTIATED AND MAINTAINED BILLING RECORDS; (3) RETROACTIVE GUESSING TO RECREATE TIME OF OTHERS OVER A PERIOD OF YEARS, AND FAILURE TO EXPLAIN HOURLY RATE, ADMONISHED AND (5) MATTER REFERRED TO DISCIPLINARY BOARD (Middle District)

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This is a very lengthy opinion, focusing on a successful bad faith plaintiff’s pursuit of statutory interest, attorney’s fees, and costs. The total sought was over 9 times greater than the UIM and bad faith recovery, and the Court scrutinized each time entry invoiced in determining the outcome, which included the Court’s referral of the matter to the Disciplinary Board.

The insured received a $25,000 settlement on his UIM claim, and a $100,000 punitive damages verdict on his bad faith claim. After that verdict, the plaintiff pursued attorney’s fees, statutory interest and costs under the Bad Faith Statute, totaling $1,122,156.43.

Regarding interest, the insured argued that the unpaid balance of $125,000 should bear interest from April 1, 2010 (the date the insured’s claim began) through November 6, 2015 (the date of the jury’s verdict). The insured sought $175,630.70 in total interest.

The Court found this calculation flawed for multiple reasons. (1) The Court had previously found that the appropriate timeframe was June 21, 2011 through June 20, 2014. (2) The insured sought interest on the $100,000 punitive damage award, in addition to the $25,000 UIM payment. Such a request for interest on punitive damages is improper, as “there is no support either in the statute or in the applicable case law for such interest.” (3) The insured’s counsel failed to deduct the principal balance in calculating interest. (4) Using the prime rate of 3.25%, plus 3% statutory super-interest on the underlying UIM claim, the Court awarded $4,986.58 for interest.

In addressing attorney’s fees and litigation expenses, the Court reiterated that the purpose of an award of attorneys’ fees under § 8371 is “to make the successful plaintiff whole by allowing the plaintiff to recoup funds unnecessarily expended to force an insurance company to pay that which it should have paid.”

In reviewing the request for fees and costs, the Court found that billing records were not properly maintained. Rather, one attorney reconstructed all time entries for every attorney, paralegal, and IT staff member billing time on the matter over a six-year period. This attorney did so by guessing as to how long each task took. The Court repeatedly referenced the word “guess” in the Opinion. (E.g., the Court stated: “In addition to the unconscionable number of vague entries which have been billed for (or more accurately guessed about) by the plaintiff’s counsel, there also appear to be a number of duplicative entries in the bad faith time logs for which no explanation is provided.”)

The Court scrutinized every entry billed, finding “that a vast number of the entries for paralegal services on the UIM claim should be disallowed as vague, excessive, duplicative or unnecessary.” Thus, the Court disallowed 84 hours out of a total of 106.5 hours submitted for paralegal services on the UIM claim, a 79% reduction.

The Court found the same problems with respect to the paralegal hours billed for the bad faith claim, and disallowed 177.75 hours out of a total of 198 hours submitted, for a 90% reduction.

The Court found that entries submitted for the attorneys’ services also suffered from problems of vagueness and being duplicative. The Court stated that the “[insured’s] counsel . . . failed to meet even the most basic burden of providing the rate(s) charged for the[] entries, let alone establishing the reasonableness of such rate(s).” For the UIM claim, the Court disallowed all but 4 attorney hours from the 99 submitted, a 96% reduction. With respect to the bad faith claim, counsel submitted 1,984 attorney hours. The Court disallowed 1,662.5 of those hours, an 84% reduction. The Court additionally reduced the hours billed by the IT staff by 71%.

Lastly, the Court admonished counsel for failing to provide any justification for an hourly rate of $420. The Court forwarded a copy of its opinion to the Disciplinary Board of the Supreme Court of Pennsylvania.

The District Court’s decision to award no fees at all because of the excessively outrageous fee request was affirmed by the Third Circuit, on September 12, 2018.

Date of Decision: August 29, 2017

Clemens v. New York Cent. Mut. Fire Ins. Co., No. 3:13-2447, 2017 U.S. Dist. LEXIS 138557 (M.D. Pa. Aug. 29, 2017) (Mannion, J.)