Archive for the 'PA – Law unsettled' Category

NO BAD FAITH: (1) NO BENEFIT DUE; (2) NO ESTOPPEL UNDER THE UIPA OR UCSP REGULATIONS; (3) AN OVERSIGHT CAUSING DELAY IS NOT BAD FAITH (Philadelphia Federal)

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The court described this as the case of the missing email. The insurance policy at issue covered various cars. The insured emailed its broker to add another vehicle to the policy. The broker claims it never got the email, and thus never asked the insurer to issue an endorsement adding the new car to the policy. As things sometimes go in life, the new car was involved in a collision, damaging another vehicle as well as its own new car.

The insured reported the claim. However, the insured identified its vehicle as one of existing cars listed in the policy, rather than the new unlisted vehicle. The insurer accepted coverage, and even paid damages to the other driver. The insurer later reversed itself on coverage once its appraiser determined the insured’s vehicle was not the car identified in the claim form, and was not covered under the policy.

The police report did list the correct vehicle. The insurer had the police report at the time it initially provided coverage, and only reversed itself when its appraiser realized that the damaged car was not the car on the claim form and was not listed in the policy.

The insured sued for breach of contract and bad faith, among other claims against the insurer as well as the broker. The insurer moved for summary judgment, which the court granted.

There is no breach of contract, or estoppel under the UIPA or UCSP regulations

First, there was no breach of contract, as the vehicle at issue never became part of the policy. The insured argued, however, that the insured was estopped from denying coverage under the Unfair Insurance Practices Act (UIPA) and the Unfair Claims Settlement Practices (UCSP) regulations governing “Standards for prompt, fair and equitable settlements applicable to insurers”. The insured relied on 31 Pa. Code § 146.7(a)(1), which states that, “Within 15 working days after receipt by the insurer of properly executed proofs of loss, the first-party claimant shall be advised of the acceptance or denial of the claim by the insurer.”

Judge Wolson rejected the statutory/regulatory argument for three reasons:

  1. There is no private right of action under the UIPA and UCSP regulations, and only Pennsylvania’s Insurance Commissioner can enforce the UIPA and UCSP regulations.

  2. The policy itself did not incorporate the UIPA or UCSP obligations or impose those obligations on the insurer. “Absent the incorporation of these obligations into the Policy, their potential violation does not breach the Policy.”

  3. The doctrines of waiver or estoppel cannot “create an insurance contract where none existed.”

THERE IS NO BAD FAITH

  1. The broker is not an insurer subject to the bad faith statute

First, the court recognized that there was no sustainable statutory bad faith action against the broker because it was not an insurer.

  1. There is no bad faith where no benefit is denied

Next, as to the insurer, “To prevail on a bad faith claim, a plaintiff must present clear and convincing evidence that, among other things, an insurer ‘did not have a reasonable basis for denying benefits under the policy’ or that an insurer committed a ‘frivolous or unfounded refusal to pay proceeds of a policy.’” Because the insurer had no contractual obligation to pay its refusal could not have been unreasonable, and the claim failed.

  1. The UIPA and UCSP regulations do no prevent changing a coverage decision based on new information

The court rejected another argument based on the UIPA and UCSP regulations cited above. The insured argued the failure to pay was unreasonable once the insurer accepted coverage. The court found, however, the UCSP regulations did not “prevent an insurer from changing a coverage determination based on new information.”

More importantly to the court, the insured adduced no case law adding such a gloss to section 146.7, i.e. a mandate that once coverage was accepted it could never be denied under any circumstances. Thus, it was reasonable for the insurer to interpret that regulation to permit an insurer to revise a coverage decision based on new information.

  1. A Delay based on an Oversight is not the Basis for Bad Faith

Finally, any delay in revising its coverage determination was likewise not bad faith. Citing the 2007 DeWalt decision, the court observed that an “insurer’s actions in allegedly delaying investigation did not constitute bad faith under Pennsylvania law [when] there was no evidence that such delay was deliberate or knowing, or was unreasonable.”

While the carrier “probably could have been more diligent” in determining which vehicle was involved in the collision by looking at the police report earlier, “an insurer ‘need not show that the process used to reach its conclusion was flawless or that its investigatory methods eliminated possibilities at odds with its conclusion.’” There was nothing in the record to establish the insurer “acted with reckless disregard of its obligations or otherwise fell so short that it acted in bad faith.”

Date of Decision: April 1, 2020

Live Face on Web, LLC v. Merchants Insurance Group, U.S. District Court Eastern District of Pennsylvania Case No. 2:19-cv-00528-JDW, 2020 U.S. Dist. LEXIS 56852 (E.D. Pa. April 1, 2020) (Wolson, J.)

Our thanks to attorney Daniel Cummins of the excellent Tort Talk Blog for bringing this case to our attention.  We also note the Tort Talk Blog’s three recent posts on post-Koken motions to sever and stay bad faith claims in the Western District, York County, and Lancaster County.

(1) NO BAD FAITH WHERE COVERAGE LAW UNCERTAIN (2) BAD FAITH POSSIBLE FOR DELAY AND DENIAL OF ALLEGEDLY UNADDRESSED CLAIM (Philadelphia Federal)

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This case involved a highly disputed factual issue on coverage, with no clear guidance in the case law. The court denied summary judgment on the insured’s breach of contract claim, and rendered a split decision on the two bad faith claims.

The Close Coverage Call

Coverage existed if a roof was damaged by wind, allowing water to enter a building. The issue was whether a tarp could be considered part of a roof. The insurer denied coverage on the basis the tarp at issue was a temporary stopgap when blown off during a windstorm. The insured argued the tarp was sufficiently stable and integrated to be part of a roof system when it was blown off.

The court looked at local and national case law on when a tarp might be part of a more permanent structure, and thus part of a roof. The court found the issue highly fact-driven under this case law, and inappropriate for summary judgment. A jury had to decide the issue after hearing the disputed evidence and expert opinions.

The Bad Faith Claims

On the bad faith claims, the court stated that both denial of a benefit and/or improper investigative practices could constitute bad faith.

[As we have written on this Blog ad naseum, the idea that statutory bad faith covers anything other than benefit denials arguably runs contrary to Pennsylvania Supreme Court case law. In the 2007 Toy v. Metropolitan Life decision, Pennsylvania’s Supreme Court strongly appears to state that only denial of a benefit creates a cognizable statutory bad faith action, whereas matters like poor claims handling would be evidence of bad faith. See this article.

A few months later, the Supreme Court seems to confirm this conclusion. In Ash v. Continental Insurance Company, citing Toy, the Supreme Court states, “The bad faith insurance statute, on the other hand, is concerned with ‘the duty of good faith and fair dealing in the parties’ contract and the manner by which an insurer discharge[s] its obligation of defense and indemnification in the third party claim context or its obligation to pay for a loss in the first party claim context.’” (Emphasis added)

While it appears highly likely Pennsylvania’s Supreme Court made clear 13 years ago that section 8371 is limited to claims for denying benefits, numerous subsequent opinions conclude that there can be other bases for statutory bad faith. These cases typically do not address Toy or Ash in reaching this conclusion.]

In the present case, the insured allegedly made two separate claims, 19 days apart. The first had to do with wind damage to roof shingles, and the second addressed the issue concerning the tarp and interior water damage.

Bad Faith Possible for Undue Delay

On the first claim, the insured alleged it gave proper notice of loss, and the insurer failed to respond at all to the claim. The insurer alleged it had no notice, but in any event took the position that its denial letter addressed both the roof shingle and tarp claims.

The court found that there was an issue of whether the insurer had constructive notice of the first claim, even without formal notice. The adjuster was made fully aware of the event, but it is unclear if the insurer thought of this as a distinct event or just part of the continuum in a single claim. It was also unclear whether the denial letter actually addressed the shingle damage as such.

Thus, bad faith had to go to the jury. “If a jury were to conclude that Defendant was aware that Plaintiff had made a claim for the April damage, but ignored it, that could be seen as an objectively unreasonable, frivolous, intentional refusal to pay (or to otherwise resolve the claim in a timely fashion).”

[While there are certainly claims handling issues here regarding delay and responsiveness to an insured, this claim ultimately includes the denial of a benefit. Thus, the issue of whether there can be statutory bad faith without the denial of a benefit is not actually before the court.]

No Bad Faith where Governing Law is Uncertain

As to the second claim, the insurer won summary judgment. This gets back to the dispute over whether the tarp constitutes a roof. “An insurer who makes a reasonable legal conclusion based on an uncertain area of the law has not acted in bad faith.” Thus, “[w]ith no binding guidance from the Pennsylvania Supreme Court or the Third Circuit, and numerous fact-intensive cases on the subject, Defendant reasonably interpreted the membrane, and not the tarp, to be the roof. Even if that call is ultimately found to have been incorrect, Defendant did not act in bad faith by denying the claim.”

Date of Decision: March 18, 2020

Harrisburg v. Axis Surplus Ins. Co., U.S. District Court Eastern District of Pennsylvania CIVIL ACTION NO. 19-1213, 2020 U.S. Dist. LEXIS 48115 (E.D. Pa. Mar. 18, 2020) (Beetlestone, J.)

AUGUST 2017 BAD FAITH CASES: BASIS FOR DENYING CLAIM RELEVANT TO BOTH BAD FAITH AND BREACH OF CONTRACT CLAIMS, SUPPORTING COURT’S CERTIFYING CASE FOR IMMEDIATE APPEAL (Philadelphia Commerce Court)

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In a lengthy opinion, the court ruled against the insurer on how to interpret the meaning of “actual cash value” under the policy. The issue was sufficiently significant that the Commerce Court certified its decision as a final appealable order to the Superior Court.

The case also involved a bad faith claim, which came into play when determining whether to certify the appeal. The interpretation of pertinent policy language was intertwined with the issue of whether the insurer had a reasonable basis to deny benefits and/or recklessly disregarded the potential lack of a reasonable basis to deny benefits. The “statutory bad faith analysis is quite clearly related to whether plaintiff is entitled to damages on its breach of contract claim.”

Later, the court stated that “immediate appellate review promotes judicial economy because appellate analysis will provide instruction, one way or the other, on open trial level issues relating to both class certification and bad faith. Pre-trial review in the event of affirmance is expected to be extensive and should be provided only after the threshold legal question is settled.”

Date of Decision: July 21, 2017

Kurach v. Truck Insurance Exchange, July Term 2015, No. 339, 2017 Phila. Ct. Com. Pl. LEXIS 228 (C.C.P. Phila. July 21, 2017) (Djerassi, J.) (Commerce Court)

APRIL 2017 BAD FAITH CASES: (1) INSURER INTERPRETS POLICY CORRECTLY, SO NO BAD FAITH; (2) NO BAD FAITH WHERE INSURER AGREED TO DEFEND ONLY COVERED CLAIMS, BECAUSE OF NOVEL ARGUMENT THAT USUAL RULE DID NOT APPLY TO TITLE INSURANCE (Philadelphia Federal)

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This dispute arises out of a Title Insurance Company’s initial refusal to defend its insured against a third party claim. The plaintiff in the underlying action proceeded pro se, and filed three different complaints before obtaining counsel. Based on the confusing and unclear language in the complaints, the insurer denied coverage.

It was not until a fourth Complaint was filed that the insurer provided a defense under a reservation of rights. Notably, however, the insurer only agreed to defend the covered claims, and refused to provide a defense for the uncovered claims. The insurer’s position went against well-established Pennsylvania case law requiring insurers to defend against both covered and uncovered claims until all potentially covered claims had been dismissed or resolved.

The insured brought suit alleging that the insurer acted in bad faith by delaying its defense, and by refusing to defend against all claims as required under Pennsylvania law. In determining that there was no bad faith, the Court reviewed the policy and held that the insurer correctly determined that its duty to defend was not triggered until the filing of the fourth Complaint. Because the insurer’s refusal to defend was based on a correct interpretation of the policy, its denial of benefits was not unreasonable, and the plaintiff was unable to satisfy the first element of bad faith.

With regard to insurer’s refusal to defend all claims, the court observed that the general rule that if any claim is covered, then under Pennsylvania law, the insurer must defend all claims, i.e., both covered and uncovered claims. The title insurer argued, however, “that title insurance policies should be construed differently, to extend the duty to defend only to those claims within the contours of the policy.” The title insurer relied upon case law from other jurisdictions and the title policy language; and the insured relied upon Pennsylvania public policy as set forth in case law. The court determined that it should rely upon Pennsylvania precedent, and rejected the title insurer’s argument.

As to bad faith, however, the court held that the insurer’s position was not taken in bad faith for two reasons. First, although unsupported by any Pennsylvania case law, this title insurance exception was an issue of first impression and had apparently never been presented before a Pennsylvania court. Second, the insurer’s position was supported by case law from other jurisdictions that had carved out similar exceptions for Title Insurance Companies.

Date of Decision: March 27, 2017

Lupu v. Loan City, LLC, No. 12-4556, 2017 U.S. Dist. LEXIS 45135 (E.D. Pa. Mar. 27, 2017) (Rufe, J.)

MARCH 2017 BAD FAITH CASES: SPLIT IN RELEVANT CASE LAW IS NOT AN ABSOLUTE DEFENSE TO A BAD FAITH INTERPRETATION OF POLICY LANGUAGE CLAIM, AS REASONABLENESS REMAINS THE MEASURE (Philadelphia Federal)

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The interesting part of this case involved the court’s subtle distinction when lack of clarity in the relevant case law on how to interpret the insurance policy language at issue provides a bad faith defense. The specific issue was application of an intentional act exclusion to a violent assault fact pattern, where the insured claimed he was too drunk to know what he was doing.

The insurer argued “that an insurer does not act in bad faith if it relies on a reasonable interpretation of unsettled case law,” and cited at least three opinions supporting its position that the exclusion applied to the fact pattern at issue. The court described this argument as “incomplete”.

The court stated: “Supporting authority, though highly relevant, does not automatically defeat a bad faith claim. This was made clear by J.H. France Refractories Co. v. Allstate Insurance Co., 534 Pa. 29, 626 A.2d 502 (1993). There, the Pennsylvania Supreme Court found that [the insurer] had not acted in bad faith in denying coverage where it had relied on an ‘excessive pluralism and disparity . . . in the decisions of the many courts which ha[d] entertained similar litigation.’ …. But the Court did not hold that the mere existence of disparate decisions precluded bad faith—instead, it took care to note both that it did ‘not regard the issues presented in this case as simple ones’ and that each of the varying approaches other courts had taken ‘seem[ed] reasonable from some point of view.’ …. Indeed, bad faith claims are highly ‘fact specific,’ … and their touchstone—‘reasonableness’—only ‘has meaning in the context of each case[.]’”

After observing this subtle distinction in how to analyze the effect of disparate case law on bad faith claims, the court still ruled in the insurer’s favor, finding its position reasonable. Thus, there was no bad faith.

Date of Decision: March 13, 2017

Allstate Ins. Co. v. Lagreca, No. 13-6039, 2017 U.S. Dist. LEXIS 35197 (E.D. Pa. Mar. 13, 2017) (McHugh, J.)

OCTOBER 2015 BAD FAITH CASES: ASSUMING THAT SUBJECTIVE BAD FAITH IS THE STANDARD OF REASONABLENESS, THE INSURER’S INTERPRETATION OF GOVERNING CASE LAW DURING LITIGATION WAS REASONABLE, EVEN IF WRONG (Middle District)

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In Douglas v. Discover Property & Casualty Insurance Company, Judge Mariani again identified the issue that there is a split in authority on whether an objectively reasonable basis to deny coverage can per se defeat the first prong of a plaintiff’s statutory bad faith claim, and preclude such a claim from going forward on an “objective” basis.  Put another way, if an insurer delays in paying a claim or denies a claim based on specific reasoning which is incorrect, but it is later determined that no coverage was due under the policy for a different reason, is it still possible to bring a bad faith claim even though no coverage was ever due under the policy.

The majority of cases stated stand for the proposition that a bad faith claim could not be pursued in those circumstances, because there is an objectively reasonable basis for denying coverage; and thus the plaintiff/insured cannot meet the first prong of the Terletsky test.  However, as in the prior cases identifying this issue, the court did not have to decide the issue, because there was no actionable bad faith claim in any event, and summary judgment was granted to the insurer on the basis that the insured could not even establish subjective unreasonableness.

In that UIM case the insured argued that the insurer relied upon a rejection form it knew to be invalid in denying coverage.  However, the insurer had other independent justifications for denying coverage even if the form was invalid.  Further, although an earlier decision went against the insurer on this issue, under the Superior Court’s Vaxmonsky decision, the insurer’s arguments distinguishing that case as to the form’s validity, asserted repeatedly during the litigation process, was not unreasonable.

On the later point, the court stated: “It does not matter that these arguments have been unsuccessful in court so far. ‘[T]o recover under a claim of bad faith, the plaintiff must show that the defendant did not have a reasonable basis for denying benefits under the policy and that defendant knew or recklessly disregarded its lack of reasonable basis in denying the claim,’ which requires some sort of dishonest purpose on the part of the Defendant. …. The record contains no reason to believe that Defendant’s legal arguments have been raised dishonestly. Instead, it simply appears that Defendants have hewn to good faith but unavailing legal theories. This does not qualify as bad faith conduct under the standards set forth above.”

Date of Decision: September 29, 2015

Douglas v. Discover Prop. & Cas. Ins. Co., 3:08-CV-01607, 2015 U.S. Dist. LEXIS 131601 (M.D. Pa. September 29, 2015) (Mariani, J.)

MARCH 2015 BAD FAITH CASES: EVEN WHERE COURT RULES AGAINST INSURER’S INTERPRETATION OF POLICY LANGUAGE, NO BAD FAITH CAN EXIST WHERE THAT INTERPRETATION IS REASONABLE (Middle District)

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In Gray v. Allstate Indemnity Company, the insured asserted breach of contract claim and bad faith claims due to the insurer’s alleged wrongful denial and refusal to pay insurance benefits for his fire loss claim, which was the result of vandalism.  The insurer asserted that the property was vacant and unoccupied from the time the last tenant left the property until the time of the vandalism and resulting fire, and therefore, as a matter of law, no coverage was due.  It moved for summary judgment on both claims.

The insurer relied upon a policy exclusion providing: “Vandalism. However, we do cover sudden and accidental direct physical loss caused by fire resulting from vandalism unless your dwelling has been vacant or unoccupied for more than 90 consecutive days immediately prior to the vandalism.”  It further relied upon a policy endorsement which provided that the insurer “shall not be liable for loss occurring [] while a described building, whether intended for occupancy by owner or tenant is vacant or unoccupied beyond a period of [60] consecutive days.”  The insured claimed to have periodically done work on the property, within the 60 and 90 day periods before the vandalism and fire.

The court found the policy terms “vacant” and “unoccupied” to be ambiguous, relying on Third Circuit precedent. It concluded that there were disputed facts “as to whether plaintiff was sufficiently present at the subject property after the tenants moved out … to personally rehabilitate and rebuild parts of the property such that the property was neither vacant nor unoccupied for purposes of the policy.” Thus summary judgment on the breach of contract claim was denied.

As to the bad faith claim, the court reiterated the principles that an insurer “need not demonstrate its investigation yielded the correct conclusion, or that its conclusion more likely than not was accurate.” Nor is an insurer “required to show that ‘the process by which it reached its conclusion was flawless or that the investigatory methods it employed eliminated possibilities at odds with its conclusion.’” Rather, “an insurance company must show it conducted a review or investigation sufficiently thorough to yield a reasonable foundation for its action.” Moreover, it is the plaintiff-insured that must provide clear and convincing evidence of bad faith, i.e., “that

the evidence is so clear, direct, weighty and convincing as to enable a clear conviction, without hesitation, about whether or not the defendants acted in bad faith,” a standard that likewise applies at the summary judgment stage.  Under that standard, summary judgment is proper “when there is no clear and convincing evidence that the insurer’s conduct was unreasonable and that it knew or recklessly disregarded its lack of a reasonable basis in denying the claim.”

In this case, the insured’s bad faith claim amounted to an argument that the insurer drafted an ambiguous policy, and then construed the ambiguous language to deny coverage.  The court rejected that argument because the record showed that the insurer “had a factual basis to conclude that the subject property was vacant or unoccupied for more than the specified number of days before the vandalism, and that [the insurer] had a reasonable basis for denying plaintiff’s claim for coverage of the fire loss caused by the vandalism.”

Moreover, as to the policy language, while the court ruled against the insurer’s interpretation of the terms “vacant” and “unoccupied”, the insurer’s interpretation was still reasonable.  In this regard, the court also “found that relevant Pennsylvania state law is unsettled on the matter,” and “[b]ad faith cannot be found where the insurer’s conduct is in accordance with a reasonable but incorrect interpretation of the insurance policy.” A reasonable basis is sufficient to defeat a bad faith claim. Thus, summary judgment was granted to the insurer on the bad faith claim.

Date of Decision:  February 23, 2015

Gray v. Allstate Indem. Co., CIVIL ACTION NO. 3:13-CV-1232, 2015 U.S. Dist. LEXIS 21109 (M.D. Pa. February 23, 2015) (Mannion, J.)

NOVEMBER 2014 BAD FAITH CASES: EXCESS INSURER HAD NO DUTY TO POST APPEAL BOND AND COULD NOT BE LIABLE IN BAD FAITH FOR FAILING TO DO SO; COURT OBSERVES THAT PROOF OF BAD FAITH IS MORE DIFFICULT WHERE LAW AT ISSUE ON COVERAGE IS UNSETTLED (Philadelphia Federal)

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In the most recent decision in Charter Oak Ins. Co. v. Maglio Fresh Food, which has been discussed at length in previous postings in 2013 and 2014, the Court addressed claims against the excess insurer after holding a short non-jury trial.  It concluded that under the unique circumstances of that case, the excess insurer did not owe a duty to post a supersedeas bond for purposes of the insured’s taking an appeal of a jury verdict that would likely put the insured out of business.

The court found that any duty to post a bond was not clearly either within the realm of the duty to defend or the duty to indemnify, being a kind of hybrid.  However, the larger issue was that the excess insurer’s duty to make any payment was not triggered, because even though underlying carrier paid out its full policy limits, it did not do so in connection with the one covered claim.

Thus, its full limit was not exhausted for purposes of triggering the excess insurer’s duties concerning the covered claim.

The court discussed bad faith throughout its opinion, in dicta and on the issue at hand.  As to the latter, as no duty was triggered to post the bond, there could be no bad faith in refusing to do so.

The Court also observed that because the lawsuit presented questions of unsettled law, this made it more difficult for the insured to show bad faith because “an insurer’s denial of a claim does not constitute bad faith if it is based on a reasonable legal position in an unsettled area of the law.”

The Court more generally provided its observations on the differences and commonalities between contract based bad faith claims and statutory bad faith, which is tort based in nature.

Date of Decision:  September 9, 2014

Charter Oak Ins. Co. v. Maglio Fresh Food, CASE NO. 12-3967, 2014 U.S. Dist. LEXIS 125621 (E.D. Pa. September 9, 2014) (Baylson, J.)

APRIL 2014 CASE ON DECLARATORY JUDGMENT ACTIONS: THIRD CIRCUIT PUTS SOME BRAKES ON DISTRICT COURTS’ ABSTAINING IN FEDERAL DECLARATORY JUDGMENT ACTIONS INVOLVING INSURANCE COVERAGE (Third Circuit)

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In Reifer v. Westport Insurance Corporation, the Third Circuit issued its most important decision on the exercise of federal jurisdiction in insurance declaratory actions since its 2000 decision in State Auto Ins. Co. v. Summy, 234 F.3d 131 (3d Cir. 2000).

For practical purposes, the most important statement in the new Opinion may be that: “While we sympathize with our district courts’ apparent frustration over the volume of such cases, we, like our sister circuit, ‘know of no authority for the proposition that an insurer is barred from invoking diversity jurisdiction to bring a declaratory judgment action against an insured on an issue of coverage.’”

The Court painstakingly went over the law in other circuits, and detailed the factors that District Courts should consider in weighing the abstention issue. The lesson is clear that there is no bright line rule permitting abstention by which the District Courts can forego this weighing of factors; and there is clearly no rule that would allow for automatic abstention in the absence of a federal legal issue, independent of whether the state law is settled.

The Third Circuit upheld the District Court’s abstention order in this case, which had been issued sua sponte after a Magistrate Judge had provided a lengthy Report and Recommendation solely on substantive issues. A key focus was the presence of a potentially important, but undecided, issue of substantive state law; which should be decided by a state court rather than a federal court in the first instance.

The Court’s Opinion thus indicates that the unsettled nature of the state law at issue is going to bode in favor of abstention; but that if the state law to be applied is settled, this can be as readily applied by a federal court as a state court. The Court made clear that the District Court’s decision was to be reviewed under an abuse of discretion standard, and any prior Third Circuit decisions requiring more stringent review had been overruled by the Supreme Court on this issue.

Date of Decision: April 29, 2014 (Issued as a Precedential Opinion)

Reifer v. Westport Insurance Corporation, No. 13-2880, 2014 U.S. App. LEXIS 8014 (3d Cir. April 29, 2014) (Van Antwerpen, J.)

OCTOBER 2013 BAD FAITH CASES: COURT REJECTS CARRIER’S MOTION FOR JUDICIAL NOTICE OF POINTS CONSTITUTING “LEGISLATIVE FACTS” RATHER THAN “ADJUDICATIVE FACTS” AS BASIS TO CREATE PREDICATE FOR DEFENSE JUDGMENT ON BAD FAITH; AMBIGUITY IN LAW REGARDING COVERAGE ISSUE IS NOT A DEFENSE TO BAD FAITH UNLESS INSURER ACTUALLY INCLUDED CONSIDERATION OF THAT AMBIGUITY IN ITS DECISION MAKING (Middle District)

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In Bodnar v. Nationwide Mutual Insurance Company, the carrier used a somewhat innovative to establish a predicate for a later finding that it did not act in bad faith.  The carrier brought a motion asking the Court to take judicial notice of three items, under Federal Rule of Evidence 201(a):

1. During all relevant times, there has been a split in case law authority as to the definition of “employee” in Pennsylvania;

2. During all relevant times, there has been no “hard and fast” rule under Pennsylvania law for determining whether a particular relationship is that of employer-employee; and

3. During all relevant times, this Court had determined that the definition of “temporary worker” used in the insurance policy at issue is not ambiguous.

First, the Court found that these were legislative facts and not adjudicative facts; and therefore inappropriate for judicial notice.  Rather, these legal issues should be decided through the normal “adversarial process of litigation.”

Second, the Court found that even if it assumed these “facts” to be true, the bad faith issue would yet remain open.  Assuming that ambiguity in the law would create a reasonable basis for withholding coverage, the carrier would still have to show that this ambiguity actually influenced its decision.  Put another way, if the insurer actually acted unreasonably, it cannot escape bad-faith liability just because an ambiguity exists in a general sense which caused a lack of clarity or predictability in the applicable law. There would have to be a showing that the insurer actually considered the law ambiguous and that such ambiguity motivated or at least substantially influenced its decision regarding whether to afford or deny coverage, and after initially denying coverage, whether to adhere to this decision and to support it through continued declaratory judgment litigation for the period prior to the settlement of the claim.

Such facts remain to be determined, and could not be resolved in whole or in part through a grant of judicial notice. The court stated that this would be true even if the facts the carrier sought to have judicially noticed were actually “adjudicative facts”, which they were not.

Date of Decision: October 15, 2015

Bodnar v. Nationwide Mutual Insurance Company, 3:12-CV-01337, 2013 U.S. Dist. LEXIS 148343 (M.D. Pa. October 15, 2013) (Mariani, J.)