Archive for the 'PA – Law unsettled' Category

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.)

SEPTEMBER 2012 BAD FAITH CASES: COURT RULES THAT LIMITATIONS PERIOD FOR COMMON-LAW BAD FAITH CLAIM STARTS WHEN VERDICT IN UNDERLYING CLAIM IS RENDERED, NOT WHEN THE RIGHT TO INSTITUTE A SUIT AGAINST CARRIER ARISES, AND THEN REJECTS CLAIM AS CARRIER HAD REASONABLE BASIS NOT TO SETTLE (Philadelphia Federal)

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In Katzenmoyer v. Allstate Ins. Co., the court heard cross-motions for summary judgment stemming from an insurance dispute. A person was injured while driving with the insured in his ATV. Suit was brought and a jury verdict was entered against the insured. The insured eventually assigned his claims against his homeowners insurance carrier to the injured passenger, after a long period of litigation. The assignee brought a breach of contract/common law bad faith claim against the insurer, as assignee, for failure to settle at a policy limits demand. The insurer had taken the position that the accident occurred in a woods near the home, not on the premises of the home, and so there was no coverage.

The case history is over a decade long, and it was almost that long before the assignment actually occurred.

The injury occurred in 2001. The injured party requested the $100,000 policy limit of the insured homeowner’s insurance policy with the carrier, and subsequently filed a personal injury action in 2002 against the insured party, who unsuccessfully asked the carrier to settle the claim. In 2003, the carrier filed a declaratory judgment action in District Court, and the Court ruled on summary judgment that the carrier had no duty to defend or indemnify the insured in the underlying personal injury action. An appeal was taken to the Third Circuit.

In 2004, while that appeal was pending, the Pennsylvania Superior Court heard a case with similar facts and ruled against the carrier. Using this case as leverage, the assignee unsuccessfully sought to settle and against made a policy limits demand for a full release, which was rejected on various bases, including an alleged material difference in the facts and that a petition for allocator was pending on the Superior Court decision.
Soon after, the Third Circuit vacated the declaratory judgment in favor of the carrier on the basis of the related Superior Court decision and remanded: and after that allocator was denied on the Superior Court’s decision.

After the trial judge on remand indicated she was likely to rule against the carrier on the remand, the carrier thereafter offered the limits of the insured’s policy, i.e., $100,000, to the assignee, but the assignee declined the offer. In 2005, the trial judge ruled that the carrier had a duty to defend and indemnify, and the assignee demanded $750,000 to settle while an appeal to the Third Circuit was pending, which the carrier rejected. The Third Circuit affirmed, the insurer again offered the $100,000 and the assignee again demanded $750,000.

In 2009, a state court jury in the underlying personal injury case rendered a verdict against the insured party for $1,500,000. The carrier requested a release of all claims in exchange for the insured’s policy limits, but the parties again failed to settle. In 2010, the insured assigned all claims or rights to the claimant in this action. The carrier thereafter tendered the $100,000 policy limits to the assignee. However, the assignee bought a common-law bad faith claim against the carrier, prompting the parties to file competing summary judgment motions.

The carrier defended against the assignee’s bad faith claims on timeliness grounds, claiming that the four-year limitations period for common-law bad faith claims had expired. Specifically, the carrier argued that the claim was time-barred because the limitations period began when that party rejected the insured’s 2004 settlement offer. The assignee disagreed, arguing that the limitations period started after the 2009 jury verdict in the underlying personal injury suit.

The court ruled that the limitations period began when the jury rendered its verdict in the underlying state court action, not when the carrier declined the assignee’s settlement offer. The assignee could not have maintained a suit for common law contractual bad faith in 2004 because he had not yet suffered any damages. While the court acknowledged that Pennsylvania law is unclear on this issue, it nevertheless ruled that the limitations period could not have begun until 2009.

With respect to the common-law bad faith claim itself, however, the court ruled that the assignee failed to show that the carrier had acted in bad faith. In common law, Cowden, bad faith, a contract claim for bad faith requires evidence that an insurer acted negligently or unreasonably in handling the potential settlement of claims against its insured, and that . dven questionable conduct giving the appearance of bad faith is not sufficient to establish it so long as the insurer had a reasonable basis to deny coverage. An insured must prove its bad faith claim by clear and convincing evidence.

Essentially, the court reasoned, the carrier could not have acted unreasonably in denying the assignee’s settlement offers because it had no way of knowing that the Third Circuit would overturn its favorable district court ruling. The carrier was acting under a “bona fide belief” that it would win the suit and was justified in not settling the case. The court therefore granted the carrier’s motion for summary judgment. It also granted the assignee leave to amend, but stated that it would “not change the decision of the court.”

Date of Decision: August 30, 2012

Katzenmoyer v. Allstate Ins. Co., No. 11-3427, 2012 U.S. Dist. LEXIS 123483, U.S. District for the Eastern District of Pennsylvania (E.D. Pa. Aug. 30, 2012) (Shapiro, J.)

MARCH 2011 BAD FAITH CASES
COURT FORGOES SUMMARY JUDGMENT RULING ON BAD FAITH CLAIM ON REMAND WHEN IT CANNOT DETERMINE WHETHER OR NOT DEFENDANT INSURER EXHIBITED BAD FAITH AS A MATTER OF LAW (Philadelphia Federal)

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A partnership (“Franklin Mills”) began developing the Franklin Mills Mall in 1988.  Franklin Mills entered into a Master Declaration and Agreement that governed all stores in the mall, under which occupants could not use or permit the use of their property for anything detrimental to the operation of the mall (for example, uses which emitted obnoxious odors or noises, uses that physically damage any part of the mall property, or and creating a nightclub on the premises).

Around two months after the Master Declaration was signed, a company named PMI Associates purchased a parcel of the Mall from Franklin Mills.  The parties signed a Declaration of Restrictions, which included an Operating Covenant that required the property to be operated as a general merchandise retail store/pharmacy for three years after opening the business on the property.  After three years, the buyer could use the property for more general retail uses, as long as the use was permitted under the Master Declaration.  Another provision in the Declaration of Restrictions gave Franklin Mills the option to repurchase the property if, after the three-year covenant expired, the buyer  “desire[d] to cease conducting business to the public in its building.”

In 2001, PMI took out a $3.5 million loan from Nationwide Life Insurance Company (“Plaintiff”), using the property at the mall as security.  In connection with the mortgage, Plaintiff purchased a title insurance policy from Commonwealth Land Title Insurance Company (“Defendant”).  The policy covered Plaintiff against various losses and damages, but it contained an exception for damages caused by breaching the Master Declaration or Declaration of Restrictions.

PMI eventually defaulted on its loan, and in 2003, it conveyed the property to Plaintiff.  Plaintiff then attempted to recoup its losses by selling the property to another entity for $3.8 million.  The new buyer had planned to lease the property to a tenant that would open a technical school.  Franklin Mills, however, did not consent to the sale of the property because the prospective buyer’s plans would violate the Declaration of Restrictions.  After unsuccessfully attempting to sell the property to other buyers and attempts to sell the property back to Franklin Mills, Plaintiff submitted a claim to Defendant, alleging that Franklin Mills’ rights of refusal were covered restrictions that made the property unusable and unsalable.

After Defendant denied its claim, Plaintiff filed a lawsuit seeking declaratory judgment and damages.  The District Court dismissed the litigation, holding that the policy expressly excepted any loss or damage arising from the Declaration of Restrictions.  The Third Circuit reversed the decision, reinterpreting the policy to consider its purpose and industry custom/practice.  Plaintiff then filed an Amended Complaint to the District Court, alleging claims for breach of contract and bad faith, and both parties filed motions for summary judgment.

The court’s lengthy opinion discussed many issues, but it ultimately reached to a few important conclusions.  It determined that the policy issued to Plaintiff “covers- without exclusion- the loss suffered . . . as a result of its inability to sell the subject Property.”  Therefore, it granted Plaintiff summary judgment on its breach of contract claim and entered a declaratory judgment in favor of Plaintiff.  It was unable to precisely determine the amount of damages available at this stage, however, as there were still many issues of material fact.

With respect to the bad faith claim, Plaintiff had alleged that Defendant deviated from its standard practices when it denied Plaintiff’s claim based on its interpretation of the policy’s exceptions.  Defendant responded by asserting that the Third Circuit only held that its interpretation of the policy was incorrect, and it did not mention that it was unreasonable.

The court first recognized the “clear and convincing standard” under Pennsylvania’s Bad Faith Statute, 42 Pa.C.S. § 8371.  The statute requires an insured to show clear and convincing evidence that the insurer (1) lacked a reasonable basis for denying coverage, and (2) knew or recklessly disregarded its lack of a reasonable basis.

Applying the bad faith standard to this case, the court held that neither party could prevail as a matter of law at the present stage.  The fact that the district court agreed with Defendant’s interpretation of the policy and the Third Circuit agreed with Plaintiff’s showed that this case presented a “novel issue of law,” and no party was unreasonable in its interpretation of the contract.  Because it could not find any evidence of bad faith or any evidence of an absence of bad faith by Defendant, the court decided to forgo a summary judgment ruling with respect to the bad faith claim.

Date of Decision:  February 17, 2011

Nationwide Life Ins. Co. v. Commonwealth Land Title Ins. Co., Civil Action No. 05-281, United States District Court for the Eastern District of Pennsylvania, 2011 U.S. Dist. LEXIS 16446, (Feb. 17, 2011) (Buckwalter, S.J.)

Judge Buckwalter denied a Motion for reconsideration on March 23, 2011 (2011 U.S. Dist. LEXIS 29692).