Archive for the 'PA – Late notice' Category

AN INSURER DOES NOT ACT IN BAD FAITH WHEN IT DOES NOT BREACH A DUTY TO DEFEND OR INDEMNIFY, EVEN WHEN DENIAL IS BASED ON LATE NOTICE (Western District)

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This case involves two bases for coverage denials: (1) late notice resulting in prejudice, and (2) first party claims are not covered under a commercial general liability policy.

The bad faith plaintiff is a general contractor. It was named as an additional insured on a subcontractor’s policy with the defendant insurer.

There was an explosion resulting in personal injury to a third party, and first party property damage to the contractor. The contractor was named as a defendant in the personal injury action, and claimed over against other parties, including the named insured subcontractor. The contractor also brought a property damage suit against others, including the subcontractor, for its own property damages.

Nearly 3½ years into the personal injury suit, the parties mediated a settlement. The contractor did not request a defense or indemnity from the insurer in the personal injury action until the day that suit settled. For the first time, during that mediation, the additional insured contractor orally requested a defense and indemnification from the defendant insurer.

A representative of the contractor’s own primary insurer was present at the mediation as well as a representative of the defendant insurer. However, the defendant insurer’s representative had only come to the mediation to represent the subcontractor’s interests, not the contractor’s interests.

There is no bad faith when the claim is plainly outside the scope of coverage.

The court readily found no coverage due for the contractor’s own property damage claims. The contractor was seeking coverage as an additional insured under the subcontractor’s CGL policy. CGL policies only apply to property damage claims raised by others against an insured, not to the insured’s own property damages.

An “insurer does not act in bad faith when the insurer does not breach its duty to defend or indemnify.” The property damage claim “was plainly outside the scope of coverage”. Thus, as there was no duty to defend or indemnify there could be no bad faith, and summary judgment was granted on both the first party property damage coverage and bad faith claims.

There could be no bad faith where late notice and prejudice also resulted in a coverage denial.

After extensive analysis, Judge Hornak concluded that there was no coverage due in the personal injury action because of the contractor’s late notice, and the actual prejudice resulting from the late notice. He granted the insurer’s summary judgment motion on any duty to defend or indemnify. The insurer lost the opportunity to retain counsel and pay a fee structure significantly less expensive than what was charged by the contractor’s counsel; lost “the opportunity to take control of the matter at an early stage and resolve it prior to the accumulation of those expenses”; lost the opportunity to advance potential defenses; and “was indisputably prejudiced by its inability to control [the] defense, or the costs incurred in furtherance of it, until the end of the underlying litigation—when [the contractor] expected payment for all of the expenses that they had accumulated up to that point along with what it ‘fronted’ for settlement.”

Absent that late notice and prejudice, there is no question the insurer had a duty to defend the personal injury claim against the contractor. Still, as no coverage was due because of the late notice and prejudice, there could be no bad faith under the same principles used in rejecting the bad faith claim on property damage, i.e., no coverage due = no bad faith.

However, the court went on to analyze the personal injury bad faith claim, assuming arguendo what would have happened if it allowed the issue of prejudice to go to the jury instead of granting summary judgment. Judge Hornak concluded that even under those circumstances, he would have rejected the bad faith claim. There was simply no basis in the record to show the insurer’s refusal to step in at the mediation, or its ongoing refusal to pay the contractor, was frivolous or unfounded.

The following facts were undisputed, and showed the insurer acted reasonably in believing it was prejudiced by late notice and would not have to provide any defense or indemnity payments. It did not choose counsel; the contractor had amassed years of legal fees and expenses over which the insurer had no control; the insurer “was not provided an accounting of the defense costs for which it would potentially have to indemnify” the contractor; the insurer “did not participate in early investigation or settlement discussions”; and the insurer “had no reason, until the moment that the oral demand was made, to believe that [the contractor] desired a defense or expected indemnification”.

The court also found it nonsensical to conclude the insurer could have made a decision in the midst of the mediation to provide indemnification and pay a settlement, or even could have stopped the mediation at which it was protecting the named insured’s interests. This was highlighted by the fact that the case had been going on for years, and the contractor had never before asked for defense or indemnification. Moreover, at that moment in time there remained legitimate coverage issues reasonably justifying a refusal to pay on demand.

Finally, the insurer’s ongoing refusal to pay for the subcontractor’s legal fees and settlement payment also had a reasonable foundation, and could not be deemed frivolous or unfounded. Thus, summary judgment on bad faith was granted even assuming it would not have been granted on the coverage claim.

Date of Decision: March 1, 2019

NVR, Inc. v. Motorists Mutual Insurance Co., U. S. District Court Western District of Pennsylvania No. 2:16-cv-00722, 2019 U.S. Dist. LEXIS 32802, 2019 WL 989393 (W.D. Pa. Mar. 1, 2019) (Hornak, J.)

JULY 2018 BAD FAITH CASES: (1) DENIAL FOR LATE NOTICE, WITHOUT A SHOWING OF PREJUDICE, CAN BE THE BASIS FOR BAD FAITH; (2) NO BAD FAITH WHERE NO COVERAGE DUE (Western District)

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Today we discuss two opinions issued by Western District Judge Hornak on July 17th and 18th.

The key issue in the FAPD bad faith case was the carrier’s coverage denial based on late notice. The insured argued that the insurer had to show prejudice before denial, but the insurer argued that prejudice was only relevant to coverage, not bad faith. Judge Hornak of the Western District disagreed, and found that a coverage denial based on late notice that did not create prejudice could be a basis to assert that the denial was unreasonable, meeting the first element of a statutory bad faith claim.

The complaint further stated a plausible claim that this denial was knowing or reckless. A key factor was the alleged failure to adequately investigate the loss before denying the claim. Thus, the court refused to dismiss the bad faith claim.

As background before wrestling with the late notice/prejudice issue, the court included the statement that “the insured must ultimately show that the insurer breached its duty of good faith through some motive of self-interest or ill will.” The Supreme Court has made clear that while showing self-interest or ill-will may provide evidence to support a bad faith claim, these are not required elements of a bad faith claim.

The court also gave a list of some conduct that could constitute bad faith: “an unreasonable delay in handling claims; a frivolous or unfounded refusal to pay; a failure to communicate with the insured; acting in a dilatory manner . . . . A bad faith claim may also arise when an insurance company conducts an inadequate investigation.” As noted many times on this blog, there is a real question whether conduct that does not deny or delay a benefit can be bad faith standing alone.

This is consistent with Judge Hornak’s opinion issued the following day in Campbell, stating: In light of the dismissal of the Breach of Contract claim, the Bad Faith claim cannot survive. Frog, Switch & Mfg. Co. v. Travelers Ins. Co., 193 F.3d 742, 751 n.9 (3d Cir. 1999) (“[W]here there was no duty to defend, there was good cause to refuse to defend against a suit.”).
Dates of Decision: July 17, 2018 and July 18, 2018

FAPD, LLC v. Auto-Owners Insurance Co., No. 2:18-cv-00428, 2018 U.S. Dist. LEXIS 118776 (W.D. Pa. July 17, 2018) (Hornak, J.)

Campbell v. State Farm Fire & Cas. Co., 2:18-cv-00292, 2018 U.S. Dist. LEXIS 119973 (W.D. Pa. July 18, 2018) (Hornak, J.)

JANUARY 2017 BAD FAITH CASES: COURT REFUSED TO DISMISS BAD FAITH CLAIM AT PLEADING STAGE ON THE BASIS OF COVERAGE AND LATE NOTICE ARGUMENTS (Western District)

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This case involved claims arising out of construction work. The carrier argued it was not required to defend or indemnify on late notice grounds, as well as a defense that coverage was not due under the policy language. The insured brought breach of contract and bad faith claims, and the carrier moved to dismiss.

Reading the complaint in the light most favorable to the plaintiff insured, the court denied motions to dismiss the contract and bad faith claims. As to the bad faith claim, the court stated the complaint was sufficient to overcome a late notice defense.

The court found it relevant that plaintiff alleged the carrier had “refused to provide coverage in the underlying cases without any legal or contractual justification despite the fact that [it] was aware of the [underlying] cases and had set aside a litigation budget for them, and that [the insurer] continued in its refusal after both [the insured] and a mediator informed [the insurer] of its purported obligation.” Thus, the insurer’s “unsupported assertion that it was correct in its refusal to provide coverage is not sufficient for the dismissal of … well-pled claims of insurance bad faith without the opportunity for discovery.”

As to the governing law, the court stated that “a claim of insurance bad faith arises where an insurer refuses—without good cause—to defend or indemnify where the policy provides for coverage. Frog, Switch & Mfg. Co. v. Travelers Ins. Co., 193 F.3d 742, 750-51, n.9 (3d Cir. 1999). Such a claim may be supported by allegations showing a frivolous or unfounded refusal to pay, a lack of investigation into the facts, or a failure to communicate with the insured. … Mere negligence or bad judgment does not constitute bad faith, but actual knowledge or reckless disregard of a lack of a basis for the denial of coverage may.”

Date of Decision: November 28, 2016

NVR, Inc. v. Motorist Mut. Ins. Co., No. 2:16-cv-00722, 2016 U.S. Dist. LEXIS 163351 (W.D. Pa. Nov. 28, 2016) (Hornak, J.)

FEBRUARY 2013 BAD FAITH CASES: COURT DENIES BAD FAITH CLAIM BECAUSE INSURED’S POOR ENGLISH SKILLS DID NOT EQUATE TO DECEPTIVE CONDUCT BY CARRIER, WHICH WOULD REQUIRE COURT TO LOOK BEYOND PLAIN MEANING OF POLICY IN A REASONABLE EXPECTATIONS ANALYSIS (Philadelphia Federal)

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In Mabrat v. Allstate Ins. Co., the court heard cross motions for summary judgment filed by an insured and his homeowner’s insurance carrier in a suit for breach of contract and bad faith. The dispute arose after a fire damaged the second floor of a property owned by the insured. The carrier denied coverage because the insured rented the unit to a third-party and coverage was conditioned upon the building’s use as the insured’s primary residence.

However, the insured was an Ethiopian immigrant with poor English skills, who applied for insurance through his real estate broker and was unable to read the language of the policy. The insured claimed that the carrier’s deceptive practices should force the court to look past the plain meaning of the policy and effectuate his reasonable expectations.

The court disagreed, finding that the insured’s lack of English proficiency and the carrier’s knowledge that two units existed in the insured’s property were not sufficient to look past the plain meaning of the policy. Moreover, the court ruled that the carrier’s residency requirement was not a hidden term in the policy such that the insured’s reasonable expectations should apply to the policy.

The court also ruled that the Brakeman Doctrine, which precludes the denial of coverage for late notice of a claim, was inapplicable.

Because the insured was unable to succeed on the coverage action, summary judgment was entered on his bad faith claim.

Date of Decision: December 12, 2012

Mabrat v. Allstate Ins. Co., NO. 12-1293, 2012 U.S. Dist. LEXIS 176386, U.S. District Court for the Eastern District of Pennsylvania (E.D. Pa. Dec. 12, 2012) (Baylson, J.)

MAY 2007 BAD FAITH CASES
INSURED ENTITLED TO CONSEQUENTIAL DAMAGES ALTHOUGH NO BAD FAITH FOUND ON PART OF INSURER (Philadelphia Commerce)

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The Philadelphia Court of Common Pleas, Commerce Court, issued a written opinion relative to the cross appeals of plaintiff and defendant of the court’s order denying plaintiff’s post trial motions for pre-judgment interest, punitive damages and attorneys fees.  The court had previously granted defendant’s motion for remittitur and ordered plaintiff’s damages reduced from $4 million to $2,049,000.  Plaintiff also appealed that order.

The case arises from plaintiff’s ownership of an office building, which defendant insured.  Plaintiff leased the building to Medic.  Medic made structural changes to  the building to accommodate a CT scanner and MRI unit.  Plaintiff also spent $1.4 million to renovate the building to accommodate this equipment.  Upon termination of the lease, Medic was required to either leave the equipment in working order, replace it with like kind or restore the building to its original conditions.

In November 1998, Tenant took over Medic’s lease with Plaintiff.  In November 2000, Tenant notified Plaintiff it planned to terminate the lease on March 30, 2001.  When a principal of the Plaintiff visited the building on March 15, 2001, Tenant had abandoned the property but did not remove the MRI unit and CT scanner.  Tenant had left the property in a shambles and the building was then vandalized and the equipment stolen.  Tenant ceased paying rent on April 1, 2001.  Plaintiff attempted to re-let the building, but was unsuccessful.

Plaintiff filed suit against Tenant for damages, but before it was able to recover from this suit, the property was foreclosed upon.  At sheriff’s sale, the building sold for $1.8 million.  On May 30, 2003 the jury awarded damages to the Plaintiff, but the amount awarded was well short of  the amount necessary to cover Plaintiff’s losses.  Plaintiff, therefore submitted a claim to Defendant insurance carrier.

Defendant denied coverage and Plaintiff instituted a claim for bad faith and damages.  A jury awarded Plaintiff $4 million dollars in damages.  A bench trial was held regarding Plaintiff’s bad faith claims and the court held that although it felt the Defendant had not acted appropriately, it denied Plaintiff’s bad faith claim.

In post trial motions, the court found that Defendant was not entitled to a new trial based on Plaintiff’s expert’s testimony regarding Defendant’s alleged bad faith.  In addition, the court held that Defendant was not entitled to a new trial based on the jury’s award of $4 million in damages although Plaintiff only asked for $3.3 million.

The court found that in a first-party insurance claim, the insured Plaintiff is not denied the right to obtain consequential damages.  The court relied on the fact that the defendant was so close to acting in bad faith that Plaintiff was entitled to consequential damages.

In addition, the court held that Plaintiff’s claim was not barred for failure to promptly notify Defendant of the loss.  Although the Plaintiff waited over a year to notify Defendant of the loss, the court found that the late notice did not prejudice Defendant.

The court also found that Plaintiff’s claims were not barred for failure to institute suit within the two year time limit specified by the policy as Plaintiff was induced to forbear bringing a lawsuit within the two year period because Defendant was still investigating the claim.

Finally the court found that Plaintiff was not entitled to pre-judgment interest, punitive damages or attorneys fees because the damages were not specific enough to warrant an award of pre-judgment interest and because the court did not make a finding of bad faith.

Date of Decision:  April 26, 2007

Prime Medica Associates v. Valley Forge Insurance Company, November Term 2004, No. 621, No. 0621, 2007 Phila Ct. Com. P. LEXIS 122  (C.C.P. Philadelphia April 26, 2007)(Sheppard, J.) (Commerce Program)