Archive for the 'PA – Manuals' Category

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)

Print Friendly, PDF & Email

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 ADDRESS DISCOVERY OF RESERVES, SETTLEMENT AUTHORITY, CLAIMS MANUALS, AND THE RULES FOR ORGANIZING DOCUMENT PRODUCTION (Philadelphia Federal)

Print Friendly, PDF & Email

This case involved the adjustment of a fire loss claim. The insurer made over $1 Million in payments during a two-year period. The insured brought a bad faith action over claims handling and payment during that two-year period. This opinion addresses the insured’s motion to compel discovery.

Once the party seeking discovery meets its initial burden by showing relevance, “the burden then shifts to the party opposing discovery to articulate why discovery should be withheld.”

“The party resisting production must demonstrate to the court ‘that the requested documents either do not come within the broad scope of relevance defined pursuant to Fed. R. Civ. P. 26(b)(1) or else are of such marginal relevance that the potential harm occasioned by discovery would outweigh the ordinary presumption in favor of broad disclosure.’”

  1. Organization of Document Production

3,200 pages of documents were provided on an unsearchable pdf. The plaintiff objected that the documents were not as kept in the usual course of business or referenced to particular document requests. The insurer responded they were provided as kept in the ordinary course of business.

The Court stated that “the producing party has the choice to either produce documents as they are kept in the ordinary course of business or to label them to correspond with the request categories.” Thus, “labeling is not required where the party otherwise complies with the rule by producing the documents as they are kept in the normal course of business.”

The Court accepted the insurer’s “representation that the documents were produced as kept in the usual course of business.” The insurer offered “some narrative explanation of what was produced, and how it was produced.” The Court would not require the insurer “to label the documents to correspond to [the] requests,” where it had “sufficiently described its document production as containing emails, claims notes,  and correspondence—all of which are pieces of the entire file that Plaintiff requested.”

In asserting that the documents were “not produced … as kept in the usual course of business,” the insured’s argument was “devoid of any particularized factual basis for this claim.” Thus, this aspect of the motion to compel was denied.

  1. Discovery of Reserves and Settlement Authority

The Court first observed the split in authority on discovery of reserves. It “ordered in camera inspection of the loss reserves ‘to the extent that those documents contain information other than specific amounts set for loss reserves.’”

The Court stated that “the reserve information may be relevant to Plaintiffs bad faith claim based on the timeline of this case. For instance, Plaintiff alleges that Defendant insisted on a release before issuing payments because Defendant knew it was offering less than what it owed; that Defendant knowingly delayed the payment of claims to save money and to injure Plaintiff; and that the release is invalid.”

The Court cited authority for the proposition that “reserve information relevant to whether insurer acted in bad faith in not settling case within policy limits before trial” could be discovered. “Accordingly, to the extent employees or agents of the company discussed the value of Plaintiffs claim or other factual information regarding the claim in connection with setting the reserves, such information may be relevant.”

Still the Court did not order direct production of previously redacted material, but ordered the insurer to “produce unredacted copies of the reserve and settlement authority information to the Court for in camera inspection.”

  1. Discovery of Claims Manuals

“Courts within this district have found that limited portions of claims manuals are relevant in bad faith insurance cases.” The Court observed thatEastern District Judges “have typically found that information contained in claims manuals is discoverable to the extent that it concerns employee procedures for processing claims.”

The insured sought “[t]he portion of the claims manual regarding any portion of the Policy relied upon by you in making a coverage decision on plaintiff’s claim.” The specific bad faith claim involved the manner and timing of payment.   The Court found the document request overly broad, and that it went further than the bad faith claim as asserted.

The Court did disagree with the insurer’s argument that discovery can only be permitted for a total denial of coverage.

The Court limited the document request “to include only portions of the claims manuals that discuss policies relating to valuation of claims, and the timing of claims payments.”

Date of Decision: August 9, 2017

Bala City Line, LLC v. Ohio Sec. Ins. Co., CIVIL ACTION No.: 16-cv-4249, 2017 U.S. Dist. LEXIS 126579 (E.D. Pa. Aug. 9, 2017) (Sitarski, M.J.)

MAY 2017 BAD FAITH CASES: COURT DISCUSSES STAY AND SEVERANCE OF BAD FAITH CLAIMS, IN CONTEXT OF SETTING STANDARD FOR DISCOVERY OF EXTRINSIC EVIDENCE ON COVERAGE/CONTRACT CLAIMS (Middle District)

Print Friendly, PDF & Email

This exhaustive opinion on discovery of extrinsic evidence sets forth a working standard for determining permissible discovery in declaratory judgment insurance coverage contract actions. After a detailed overview of pertinent case law and the 2015 rule amendments focusing on proportionality, the court held that “litigants who wish to discover extrinsic evidence in a contract interpretation case must (1) point to specific language in the agreement itself that is genuinely ambiguous or that extrinsic evidence is likely to render genuinely ambiguous; and (2) show that the requested extrinsic evidence is also likely to resolve the ambiguity without imposing unreasonable expense.”

In this case, the discovery sought did not fall within those aims and a motion to compel was denied.

To provide context by contrast, the court included an analysis of discovery in bad faith cases within its overall discussion. In instances where a plaintiff seeks underwriting files and claims manuals, the presence of a bad faith claim makes their “discoverability more likely, yet it by no means guarantees it.” In that context, “[t]he issue in a bad faith case is whether the insurer acted recklessly or with ill will towards the plaintiff in a particular case, not whether the defendants’ business practices were generally reasonable.”

By contrast, under Pennsylvania law, declaratory judgment actions for coverage are contract-based claims controlled by the express language in the contract, and the language of such integrated contracts will “often will suffice to dictate the proper outcome without reference to any external sources.”

To provide further contrast, the court looked at district court case law in the Third Circuit on stays, and severance of bad faith claims from coverage actions, where courts bifurcated the two claims and the different discovery related to them. These cases observe the differences between discovery and proof in bad faith cases and coverage cases, and that the coverage/contract claims can require less discovery in reaching resolution. [The court in this case had previously dismissed plaintiff’s bad faith claim].

Date of Decision: May 12, 2017

Westfield Insurance Company v. Icon Legacy Custom Modular Homes, No. 15-539, 2017 U.S. Dist. LEXIS 72624 (M.D. Pa. May 12, 2017) (Brann, J.)

 

MARCH 2017 BAD FAITH CASES: FINEMAN, KREKSTEIN & HARRIS OBTAINS SIGNIFICANT VICTORY FOR INSURER IN DEFEATING UIM BAD FAITH CLAIM AT TRIAL IN PHILADELPHIA’S COMMERCE COURT (Philadelphia Commerce Program)

Print Friendly, PDF & Email

In a bad faith case that actually went to trial, in Philadelphia’s Commerce Court, Fineman, Krekstein & Harris won a finding in favor of the insurer in a hard fought case, involving a myriad of bad faith issues. The court issued a 37 page Findings of Fact and Conclusions of Law, vindicating the positions argued and case presented for the insurer.

The insureds argued, among other things, that there were undue delays in claims handling, adjusters did not keep claims files in accordance with policy manuals, and reserves were improperly set. Among other things, the insurer focused its arguments on the timing of the insureds first making a demand for payment; reliance upon competent counsel in reaching decisions; and that the insureds’ original demand for the $1,000,000 policy limits was never lowered through the course of the UIM case.

In its conclusions, among other things, the court observed there is no heightened duty to insureds in the UIM context, and that even negligence or bad judgments do not equate to bad faith. The court made clear that delay is not bad faith per se, and that evaluating delay includes an analysis of the reasonableness of denying a claim. Moreover, even if unreasonable, to constitute bad faith the delay must be knowing or reckless. Bad faith is measured from the time demand is made.

The court also stated that undervaluing a claim is not bad faith if there is a reasonable basis for the valuation. Thus, a low but reasonable valuation is not bad faith. A settlement offer in the insurer’s low range of estimated value also is not bad faith. On the facts of this case, the court observed that the insurer never took the position that it would pay nothing on the claim, and as described below, made a number of offers.

The court found it was reasonable under the circumstances for the insurer to decline mediation two weeks before the arbitration was to take place. The insurer’s counsel testified that it was too late to mediate, and that there was no indication the insureds would lower their demand. The court observed that in evaluating bad faith, courts weigh the insureds’ decision not to negotiate down from a policy limit demand, even though the insured is not required to negotiate. The court found that settlement almost always requires a mutual give and take, which did not occur in this case.

The insurer was required to pay $600,000 under the UIM arbitration award. The court found, however, there was no evidence the insureds would have accepted $600,000 to settle the case prior to arbitration.

The court also took into consideration the actual difference between the ultimate UIM arbitration award, the insurer’s final offer, and the insured’s demand. In this case, the insured’s final offer was approximately $182,000 below the ultimate award, but the insureds’ policy limit demand was $400,000 greater than the award. The court found the insurer’s final settlement offer was reasonable, and that earlier offers for lesser sums were permissible interim offers. The court explained the reasonableness of each offer in its context.

Among other facts addressed in the court’s conclusion of law, the court gave weight to the fact that the insurer’s UIM defense counsel received a report from his own expert that counsel had not requested. Furthermore, defense counsel disagreed with the report’s conclusions. However, instead of withholding the report, counsel and the insurer’s representatives produced it to the insureds.

Moreover, the insurer used a high-end number from this same report in coming up with the basis for its final offer. The arbitration panel also used that number, rather than the insureds’ expert’s even higher number, in coming up with its arbitration award. The court stated that the insurer did not have to base its decision upon the insured’s expert rather than the insurer’s own expert.

The court found the insurer’s investigation was lengthier than it should have been, but did not constitute bad faith. The court found the insurer’s request for an independent medical examination was not evidence of bad faith. Nor was this a case of setting a reserve and never moving from that number during the course of the claim. The court found no discrepancy in the manner of setting reserves and the nature of the investigation that showed intent or recklessness in undervaluing the claim. As to the claims handling, even if unduly lengthy or negligent, this did not constitute bad faith.

The court further found that the carrier’s representatives sought UIM defense counsel’s advice in good faith, and that counsel was competent to give advice on defense and valuation of the claim. Although this was not a strict advice of counsel defense, since the insurer’s representatives ultimately made their own decisions, the thorough nature of counsel’s advice, when considered as a component of their decision making, supported the reasonableness of their claims handling decisions.

Date of Decision: March 21, 2017

Richman v. Liberty Insurance Underwriters, Sept. Term 2014, No. 1552, Court of Common Pleas of Philadelphia (C.C.P. Phila. Mar. 21, 2017) (McInerney, J.) (Commerce Program)

S. David Fineman of Fineman, Krekstein & Harris was lead defense counsel.

MARCH 2017 BAD FAITH CASES: INSUREDS ALLOWED DISCOVERY OF UNDWRITING MANUAL AND FILES, BUT NOT PERSONNEL FILES (Western District)

Print Friendly, PDF & Email

This case involves cross actions for declaratory judgments on a lawyer’s professional liability policy, and bad faith claims by the attorneys against the carrier. The attorneys moved to compel production of the insurer’s underwriting manual and the underwriting files, as well as the personnel files of three employees identified as having worked on the coverage file.

There was no clear case law on production of underwriting files, though the 2011 Consugar case decided by Judge Munley in the Middle District had some relevance. Thus, as with most discovery issues, the court looked at the particulars of the case before it.

The court found that production of the underwriting materials was proper. Although the insured did not bring any underwriting claims, the court observed that in supporting their bad faith claim, the attorneys argued that there were premium increases imposed by the insurer relating to commencement of the underlying litigation. Thus, “[g]iven the bad faith claim and the related allegations, the underwriting materials may well be relevant.” [Note: The opinion does not indicate whether the bad faith claims are under section 8371, common law contractual bad faith, or both. Thus, the question as to whether a premium increase can constitute the actionable denial of a benefit under a statutory bad faith claim is not clear.]

The insureds were not successful in obtaining the personnel files. They argued they were entitled to the information in the personnel files to gain knowledge about “the insurer’s corporate policy, standards, and procedures … relating to [the insurer’s] state of mind and relationship with its employees, and information regarding the relationship between the corporate policies and the training of the claims employees”

“Because there is a strong public policy against disclosure of personnel information, such requests are subject to a heightened relevancy standard.” Again, there was no clear case law, and the court stated it must look at the particular facts of the case. Relevant factors in the discovery of personnel files include “whether there is another way for the requesting party to obtain the information sought … whether there is other evidence suggesting the personnel files are likely to include relevant information … how broad the request is … and how closely the personnel files relate to the requesting party’s claims.”

The balance weighed against production. Although the “request is relatively narrow in that it asks for only the files of the employees who worked on its claim and has agreed to a number of redactions, the other factors do not meet the heightened relevancy requirement.” “The reasons supplied … for wanting the personnel files such as whether the claims employees had some incentive to deny its claim and the nature of the relationship between the company and its employees could likely be obtained through the depositions of those employees.” “Likewise, [the insured] has not presented any other evidence to support the[] theory that the personnel files are likely to include information relevant to their claims.” Thus, the insureds could not meet the heightened standards in obtaining personnel files.

Date of Decision: March 7, 2017

Westport Ins. Corp. v. Hippo Fleming & Pertile Law Offices, NO. 15-251, 2017 U.S. Dist. LEXIS 31659 (W.D. Pa. Mar. 7, 2017) (Gibson, J.)

 

2015 BAD FAITH CASES: THIRD CIRCUIT FINDS (1) INSURER HAS NO DUTY TO CONSIDER POTENTIAL FOR PUNITIVE DAMAGES WHEN NEGOTIATING SETTLEMENT OF UNDERLYING CASE; (2) PUNITIVE DAMAGES AGAINST INSURED MAY NOT BE CONSIDERED IN EVALUATING BAD FAITH CLAIMS AGAINST INSURER; BUT (3) CONTRACTUAL BAD FAITH CLAIM MAY PROCEED ON THEORY OF ENTITLEMENT TO NOMINAL DAMAGES; AND (4) STATUTORY BAD FAITH CLAIM MAY PROCEED EVEN IF NO COMPENSATORY DAMAGES DUE ON BREACH OF INSURANCE CONTRACT CLAIM (Third Circuit)

Print Friendly, PDF & Email

In Wolfe v. Allstate Property & Casualty Insurance Company, the Third Circuit was presented with the question of “whether punitive damages awarded against an insured in a personal injury suit are recoverable in a later breach of contract or bad faith suit against the insurer.” The Court predicted that Pennsylvania’s Supreme Court would rule consistent with Pennsylvania public policy that “insurers cannot insure against punitive damages” either directly or indirectly through a later bad faith claim.

However, the Court did give more leeway on pursuing bad faith claims, even in the absence of any damages for unpaid benefits in breach of the insurance contract.

The insured was highly intoxicated at the time he injured the plaintiff in a motor vehicle collision. The insured had $50,000 in insurance, and his insurer defended him against the injured plaintiff’s claims. There were settlement negotiations where the injured plaintiff demanded $25,000 and the insurer offered less than $1,500. Two judges valued the case at $7,500, but the injured plaintiff would not reduce his demand below $25,000, and the insurer would not increase its offer unless the demand was reduced.

During the litigation, the injured plaintiff added a claim for punitive damages in light of the insured’s level of intoxication at the time of the collision, and his prior driving history.  Also during the course of the matter, the insurer gave notice to the insured that the insured could be liable personally for any verdict in excess of the $50,000 policy limit; and that there was no insurance coverage at all for punitive damages, which were not covered under the policy.

The jury awarded less than $50,000 in compensatory damages, which the carrier paid; and $50,000 in punitive damages, which the carrier refused to pay as these were not covered under the policy.  The insured assigned his breach of contract and bad faith claims to the injured plaintiff.  [This is the same litigation in which the Third Circuit certified to the Supreme Court the question of whether bad faith claims could be assigned, which the Supreme Court answered in the affirmative.]

The Court faced two general issues concerning punitive damages: (1) was it error to allow evidence of the punitive damages award from the underlying personal injury suit to establish damages in the bad faith case; and (2) did the insurer have any duty to consider the potential for punitive damages in evaluating settlement of the underlying personal injury suit, as part of how it valued the compensatory damage claim, where the compensatory damages award was paid in full.

The Court found that “in an action by an insured against his insurer for bad faith, the insured may not collect as compensatory damages the punitive damages awarded against it in the underlying lawsuit. Therefore, the punitive damages award was not relevant in the later suit and should not have been admitted.”

In reaching this conclusion, the Court looked to both Pennsylvania principles against insuring punitive damages, and to how other states addressed the issue on potentially indemnifying an insured for punitive damages at this second stage of litigation.  “California, Colorado, and New York have similar prohibitions on the indemnification of punitive damages, and those states’ highest courts have similarly held that an insured cannot shift to the insurance company its responsibility for the punitive damages in a later case alleging a bad faith failure to settle by the insurer.”

The Court specifically rejected the argument that if an insurer breached a common law contractual duty of good faith to settle within policy limits, and the case proceeded with a jury awarding punitive damages, then the punitive damages should be considered as consequential damages from the bad faith breach of an insurance contract. Rather, the Court ruled that punitive damages awarded in the underlying case are not properly considered compensable damages in the breach of contract claim against the insurer.

In sum, “an insurer has no duty to consider the potential for the jury to return a verdict for punitive damages when it is negotiating a settlement of the case. To impose that duty would be tantamount to making the insurer responsible for those damages, which … is against public policy.”

However, these rulings did not result in summary judgment on the contractual and statutory bad faith claims against the insurer.

The Court first looked at the contractual bad faith claim, citing to the leading Pennsylvania Supreme Court cases of Cowden and Birth Center. Looking to Cowden, the Court observed that an insurer “must consider in good faith the interest of the insured as a factor in deciding whether to settle a claim.” (Internal quotes omitted) Citing both cases, the Court further observed that only bad faith, not bad judgment, proven by clear and convincing evidence, can allow an insured to recover the “the known and/or foreseeable compensatory damages of its insured that reasonably flow from the bad faith conduct of the insurer.”

Even after eliminating punitive damages from this equation, the Court found that “if a plaintiff is able to prove a breach of contract but can show no damages flowing from the breach, the plaintiff is nonetheless entitled to recover nominal damages.” This makes summary judgment generally improper if sought solely on the basis that no damages can be proved. “Therefore, even without compensatory damages, an insurer can be liable for nominal damages for violating its contractual duty of good faith by failing to settle,” and summary judgment was properly denied on that ground as to the breach of contract claim.

On the statutory bad faith claim, the Third Circuit treaded onto the ground of whether bad faith claims can still exist when there is no contractual payment obligation remaining.

[Note: There are two general circumstances when this can occur. First, when the insurer eventually provides a benefit due, but has delayed in doing so in bad faith; second, when the insurer owes no benefit, e.g., because coverage is excluded, but has allegedly acted in bad faith in the manner it went about denying coverage. We have previously raised the issue of whether section 8371 was designed to provide a remedy in the second scenario. In this case the Third Circuit, as discussed below, appears to be focusing on the possibility that the insurer has unduly and in bad faith delayed in providing a benefit due, and that if there were no bad faith claim available in such circumstances, then a statutory goal of deterring intentional delays in providing reasonably known benefits due would fail.]

The Court cited the Superior Court’s Berg decision for the proposition that 42 Pa.C.S. § 8371 “sets forth no . . . requirement to be entitled to damages for the insurer’s bad faith,” and that “the focus in section 8371 claims cannot be on whether the insurer ultimately fulfilled its policy obligations, since if that were the case then insurers could act in bad faith throughout the entire pendency of the claim process, but avoid any liability under section 8371 by paying the claim at the end. . . . [T]he issue in connection with section 8371 claims is the manner in which insurers discharge their duties of good faith and fair dealing during the pendency of an insurance claim, not whether the claim is eventually paid.” (Emphasis in original)

Thus, “the policy behind section 8371—deterring insurance companies from engaging in bad faith practices—is furthered by allowing a statutory bad faith claim to proceed even where the insured has alleged no compensatory damages resulting from that conduct.” Under these principles, “removal of the … punitive damages award as damages in this suit has no bearing on the damages that can be awarded under the statutory bad faith claim.”

The Court then provided a footnote to further explain its position:

Recovery on [the] breach of contract claim and [the] statutory bad faith claim are entirely independent of one another. Section 8371 allows punitive damages awards even without any other successful claim. … (“[Because] claims under section 8371 are separate and distinct causes of action and as the language of section 8371 does not indicate that success on the contract claim is a prerequisite to success on the bad faith claim, . . . an insured’s claim for bad faith brought pursuant to section 8371 is independent of the resolution of the underlying contract claim.”)…. Furthermore, [the] claim under section 8371 does not affect [the insured’s] ability to obtain compensatory damages, if they exist, under a breach of contract claim. “The statute does not prohibit the   award of compensatory damages. It merely provides an additional remedy and authorizes the award of additional damages.  ….

The Court further observed that compensatory damages are not required to succeed on a statutory bad faith claim, which only permits recovery of punitive damages, interest, and costs.

In sum, the Court denied summary judgment on the statutory bad faith claim because the inability to collect punitive damages as compensatory damages, standing alone, does not preclude recovery on the bad faith claim.

Date of Decision: June 12, 2015

Wolfe v. Allstate Prop. & Cas. Ins. Co., No. 12-4450, 2015 U.S. App. LEXIS 9876 (3d Cir. June 12, 2015) (Rendell, Jordan, Lipez, JJ.)

JUNE 2015 BAD FAITH CASES: ALTHOUGH NO BAD FAITH ASSERTED, JUDGE NEALON PROVIDES EXCELLENT OVERVIEW OF BAD FAITH DISCOVERY LAW AS BASELINE FOR HIS RULINGS (Lackawanna Common Pleas)

Print Friendly, PDF & Email

In Sharp v. Travelers Personal Security Insurance Co., although no bad faith claim was filed, the court used comparisons to discovery in insurance bad faith cases repeatedly throughout this detailed opinion.

On the issue of reserves, the court cited numerous opinions, pro and con, on the proposition that “insurance reserves are discoverable in bad faith litigation against insurers, where liability for the underlying claim has already been established, since such information may be relevant to the issue of whether the insurer acted in bad faith in failing to settle or pay the original claim.”  However, “[n]o Pennsylvania court has permitted discovery of insurance reserves in litigation not involving a bad faith liability claim against an insurer.”

On claims manuals, policy manuals, and training materials, the insurer argued that training and policy manuals have only been deemed discoverable in bad faith actions. The court stated: “It is beyond cavil that an insurer’s claims practice manual setting forth its procedures and guidelines for handling claims is relevant evidence in a bad faith action against an insurer.”

On the issue of claim representative personnel files, in general, there is a heightened standard of review for relevance. Further, “[p]roduction of personnel files has only been deemed appropriate in bad faith litigation where earlier discovery conducted by the parties has established a sufficient nexus between the personnel file and the bad faith claim.”

And even in bad faith cases, the requests are often denied. “Those courts have rejected such discovery on the ground that the insureds may obtain the information sought through less invasive and burdensome means by deposing the claims representatives in question and their supervisors.”

On the issue of other litigation or administrative complaints involving medical expense benefit claims, “[s]everal federal district courts have denied discovery requests for ‘similar claims evidence,’ even in bad faith litigation, and have reasoned that evidence of other lawsuits or claims is irrelevant since they presumably involve different facts and circumstances.” “Some of those courts have also concluded that production of information concerning other bad faith suits or complaints would be unduly burdensome and cost prohibitive.”

“The only state appellate authority addressing the discoverability of ‘similar claims evidence’ allowed such discovery, provided that it was restricted to the same type of claims at issue in the pending litigation.”  “More recent federal rulings have likewise determined that ‘other litigation’ evidence could lead to the discovery of admissible evidence and may uncover relevant ‘pattern and practice’ proof, so long as the discovery is confined ‘to those practices employed in handling plaintiff’s claim….’” “Such discovery may also unearth earlier depositions or statements by … claims personnel that may be pertinent to the issues in this case.”

Date of Decision: March 7, 2014

Sharp v. Travelers Personal Security Insurance Co., NO. 12 CV 6483, COMMON PLEAS COURT OF LACKAWANNA COUNTY, PENNSYLVANIA, 2014 Pa. Dist. & Cnty. Dec. LEXIS 282 (C.C.P. Lackawanna March 7, 2014) (Nealon, J.)

A copy of Judge Nealon’s exhaustive opinion, including voluminous authority on these discovery issues, can be found at the link of this page of the excellent Tort Talk blog.

JUNE 2015 BAD FAITH CASES: (1) ATTORNEY CLIENT PRIVILEGE AND WORK PRODUCT DOCTRINE PROTECT AGAINST PRODUCTION OF CLAIMS FILES; (2) COURT WILL NOT PRESUME COUNSEL IS MISREPRESENTING NATURE OF REDACTED MATERIALS AS BASIS TO CONDUCT IN CAMERA INSPECTION; (3) COURT RELIES ON PRIVILEGE LOG IN MAKING RULINGS; (4) RESERVES NOT DISCOVERABLE AS INSURED FAILED TO SHOW GOOD CAUSE FOR PRODUCTION; (5) PRESENCE OF BAD FAITH CLAIM ALONE CANNOT AUTOMATICALLY REQUIRE PRODUCTION OF ATTORNEY MATERIALS (Middle District)

Print Friendly, PDF & Email

In Lane v. State Farm Mutual Automobile Insurance Company, the court provided a detailed discussion of the work product doctrine, in the context of a UM-bad faith claim against the insurer.  The court addressed three sets of materials on the insured’s motion to compel:

(1) whether the mental impressions of insurers employees recorded after the filing of the Complaint constitute protected work product;

(2) whether the reserve history for plaintiff’s claim and the procedures for setting reserves are irrelevant, confidential and privileged; and

(3) whether portions of the insurer’s “Auto Injury Evaluation” containing the mental impressions of defense counsel are protected by attorney-client privilege and attorney work product doctrine.

WORK PRODUCT AND ATTORNEY CLIENT PRIVILEGE

The court first addressed the work product issues, under Federal Rule of Civil Procedure 26(b)(3), and questions of attorney client privilege.

Redactions and Attorney Client Privilege

The court rejected plaintiff’s efforts to have the judge review redacted documents in camera.  Contrary to plaintiff’s assertions, the insurer’s privilege log adequately described the nature of the information being redacted, so that it could be addressed on the discovery motion.

Moreover, the vast majority of redactions were on billing invoices for legal services or correspondence between the insurer and privately-retained or in-house counsel, which the court concluded “very clearly involve classic cases of attorney-client privilege.”

The court was vehement in its response to plaintiff’s arguments that the insurer’s counsel may not have been forthcoming in claiming the redacted materials were what was purported: “But the hypothetical possibility that representations made by a duly licensed attorney and officer of this court could be found to be utter fabrications is insufficient to carry Plaintiff’s burden in overcoming the privilege. Nor does this Court believe it is appropriate to order the Defendant to submit these redacted materials for in camera inspection simply because the Plaintiff does not trust counsel’s representations. In the absence of any evidence that the statements made before this Court are fraudulent, we shall accept them as true.”

Claims File and Privilege Logs

As to the claims file, the insured sought production of items recorded after the complaint was filed, which the insurer redacted as containing protected mental impressions of its employees,  mental impressions of defense counsel or other attorney client privileged information or attorney work product. The insurer’s privilege log also included items created before suit was filed against the insurer, on the same bases.

A party claiming that documents were created in anticipation of litigation and are thus protected, may carry its initial burden by submitting a properly documented privilege log.  Such a privilege log “should identify each document and the individuals who were parties to the communications, providing sufficient detail to permit a judgment as to whether the document is at least potentially protected from disclosure.” (internal quotations omitted).  In this case, the privilege log was “just barely sufficient to meet Defendant’s initial burden that a privilege potentially applies[, because] [t]he Log identifies the documents, states that they were created by [the insurer’s] employees (albeit without naming those employees), and states that these documents were created as to Plaintiff’s claim file after the date on which a civil Complaint on this very matter was filed. While these representations do not contain detailed factual support, they are enough to carry the burden of proof that the documents were work product created in anticipation of (then-ongoing) litigation.”

Bad Faith Claims Alone Do Not Pierce Privilege

The insured argued it was still entitled to the discovery because post complaint mental impressions are necessarily relevant to the bad faith case. This argument was based on the theory that the “insurer had a continuing duty to investigate the insured’s [UM] claim even after suit was filed.”  The court rejected this argument for a number of reasons: (1) the insured did not provide any plausible justifications as to how the post-Complaint mental impressions could actually be relevant to the facts of his specific bad faith claim, as opposed to asserted an abstract proposition; (2) “the mere fact that Plaintiff has asserted a bad faith claim does not by itself overturn the work-product privilege” (no advice of counsel defense had been asserted); and (3) independently, the insured never addressed how he could not obtain the substantial equivalent by other means without undue hardship, as required under Rule 26(b)(3). Moreover, this plaintiff did have the opportunity to take bad faith discovery, which would include deposing claims adjusters.

Pre-Complaint Materials

This involved attorney client communications and attorney work product, and the court was not going to pierce these privileges under the circumstances.  The insured argued that the attorney materials can be discovered when they are placed at issue, but the court found they were not placed in issue, i.e., no advice of counsel defense was being asserted.  Further, “the mere fact that attorney-client communications may relate to the lawsuit does not expose them to discovery. Quite the contrary: it is in exactly these situations where attorney-client privilege is most properly invoked.”

Reserves

The insurer redacted reserve amounts, and refused to produce manuals and procedures for setting reserves. The court observed that: “Pennsylvania law requires casualty insurance companies to ‘maintain a claim reserve for incurred but unpaid claims and an active life reserve which shall place a sound value on its liabilities and be not less than the reserve according to appropriate standards set forth in regulations issued by the Insurance Commissioner.’”

The insured argued reserve information was relevant regarding the value of the claim and how it was being processed. However, the court found that “[t]he mere fact that Plaintiff’s Complaint alleges a bad faith refusal to pay his policy proceeds does not by itself indicate relevance, because the reserve history and procedures do not ipso facto have any necessary connection to the alleged bad faith.”  The court did not reject the notion that reserve information could be discoverable upon a showing of good cause, but this was a case specific matter; and here, the plaintiff provided “no explanation for how the reserve history is relevant or reasonably calculated to lead to the discovery of admissible evidence in connection with the issues presently before” the court.

Date of Decision:  May 18, 2015

Lane v. State Farm Mut. Auto. Ins. Co., 3:14-CV-O1045, 2015 U.S. Dist. LEXIS 64679 (M.D. Pa. May 18, 2015) (Mariani, J.)

JUNE 2015 BAD FAITH CASES: SUPERIOR COURT VACATES JUDGMENT ON BAD FAITH CLAIM AFTER CLOSE FACTUAL ANALYSIS; AND DIRECTS TRIAL COURT ON REMAND TO ALLOW EXPERT TESTIMONY CONCERNING ADJUSTER’S OBLIGATION TO CLARIFY LEGAL INTERPRETATION OF POLICY TERMS, BUT NOT TO CONSIDER INSURED’S POST-DENIAL CONDUCT (Superior Court)

Print Friendly, PDF & Email

In Mohney v. American General Life Insurance Company, the Superior Court reversed the trial court, and remanded the insured’s statutory bad faith case against his disability insurer for a new trial.  At the time of this decision, the case had been pending in some form for 20 years.

The insurer originally paid total disability benefits, based upon policy definitions of the insured’s “total disability”.  The insurer’s adjuster later made the decision, on his own understanding, to terminate benefits on the basis that the insured’s doctor stated the insured could work in some limited capacity.  However, the doctor’s statements upon which the adjuster based his decision were in fact equivocal and highly qualified as to whether the insured could perform alternative work in the future.

In an earlier trial on the breach of contract claim, the court found the insurer breached its contract. In a second trial, on bad faith, the trial court found there was no bad faith. While the insurer was incorrect in terminating benefits, it had not been unreasonable in its position or investigation, nor had it knowingly or recklessly disregarded that fact.  The appellate court disagreed.

The Superior Court stated that “bad faith” encompasses a variety of possibilities including “a frivolous or unfounded refusal to pay the proceeds of a policy done with dishonest purpose, motivated by self-interest or ill will”, conduct “lack[ing a] good faith investigation into facts, and failure to communicate with the claimant”, “where the insurer intransigently refused to settle a claim that could have been settled within policy limits, where the insurer lacked a bona fide belief that it had a good possibility of winning at trial, thus resulting in a large damage award at trial”, and it “may also extend to the insurer’s investigative practices”.

The appellate court recited the bad faith standards: proof must be by clear and convincing evidence, the insurer’s position must have been unreasonable, and the insurer must have knowingly or recklessly disregarded the unreasonable nature of its position.

In a clarifying footnote, the court reiterated its rulings in Nordi (2010) and Greene (2007) that the insured is not required to prove a motive of self-interest in or ill will as a third element of statutory bad faith; rather, evidence of self-interest or ill will are probative of the second element, i.e., that the insurer knew or recklessly disregarded the unreasonableness of its position.

The Superior Court then firmly rejected the trial court’s factual conclusion that the insurer’s termination of benefits was reasonable; thus, the insured met the burden on the first prong of the bad faith test.  The court went into an extremely detailed analysis of the factual record in reaching this conclusion.

As to the second prong, the appellate court likewise drilled down into facts going to the insurer’s state of mind.  It approved a standard that the insurer “’was required to conduct an investigation sufficiently thorough to provide it with a reasonable foundation for its actions.’”

The absence of a reasonable basis to deny coverage was the cornerstone of undermining the insurer on the knowing or reckless disregard standard.  The appellate court found that the trial court largely ignored substantial evidence that the insurer’s investigation “was not sufficiently thorough to obtain the necessary information regarding [the insured’s] ability to work.”

The appellate court also referenced evidence from the record that could establish knowing or recklessly culpable conduct by the insurer, in the nature of misrepresentations of fact in terminating the benefits, and conduct constituting a lack of honest or objective review.

Thus, the Superior Court rejected the trial court’s conclusion that there was no evidence supporting the second bad faith prong.  However, it did not automatically then rule for the insured.  Rather, it held that “while [the] misrepresentations are evidence of bad faith, they do not without more establish knowing or reckless misconduct as a matter of law by clear and convincing evidence on the record before us.” That issue could not be decided on appeal.

The insurer argued that the adjuster making the decisions on the claim at issue had broad discretion, within his experience, to evaluate the claim based on available medical records and his common sense. In the insurer’s training practices, the key policy term “total disability” was left to the adjuster’s common sense interpretation, based on his prior experience.

While the adjuster could seek advice from an attorney, he did not do so “because he did not believe that any additional legal construction of the term ‘total disability’ was necessary. Instead, he applied a plain and common sense meaning to the certificates’ definition of ‘total disability.’”

The appellate court had already ruled that the adjuster’s interpretation was contrary to the policy language itself, as well as Pennsylvania appellate law.Thus, the court stated that “in the absence of a standard policy manual or other specific guidance, it was left solely to [the adjuster’s] ‘common sense’ and discretion to decide whether it was necessary to consult with legal counsel on the proper (legal) interpretation of the policy term at issue.”

There was no evidence in the record of industry standards on training adjusters in legal interpretations of policy language, or providing adjusters guidance of when to seek guidance from staff attorneys.

Prior to trial, the insured did provide an expert report stating, among other things, that insurers and their professionals “be informed on the established law which they would be expected to apply in the course of handling claims, specifically including the law regarding the interpretation of policy provisions and definitions.”

That expert’s trial deposition also stated that there was a “need for adjusters to be trained in the proper application of established case law on applicable policy terms.” However, the expert report and testimony were excluded at trial, on the basis that they “consisted of legal conclusions that were improper and inadmissible, the facts underlying [the] bad faith claim were ‘readily ascertainable by the Court without the aid of expert testimony,’ and [the expert’s] testimony would not assist in the resolution of [the] bad faith claim.”

The Superior Court found this was an abuse of discretion because: “The issue in question, involving the standards in the insurance industry for the training of claims adjusters in applying legal precedent when deciding insurance claims, is sufficiently complex to permit the introduction of expert testimony. The … Trial Court’s written decision does not reflect that it had any specific knowledge of the industry standards in this area. Instead, the … Trial Court merely accepted [the adjuster’s] testimony that there was no need to consult with staff attorneys in this case, and in the absence of expert testimony … [the insured] had no ability to offer contradictory evidence to rebut [the adjuster’s] testimony.”

Thus, the lower court’s ruling on bad faith was vacated, and the case remanded for a new trial.

On remand, the Superior Court instructed that the trial court was not to consider evidence of the insured’s post denial conduct, which it had earlier done.  Further, the trial court had precluded the insurer’s expert report as a sanction, and the appellate court left it to the trial court as to whether it would revisit that sanction; but it did not vacate the sanction itself.

Finally, the appellate court upheld the trial court’s decision not to allow an amended complaint to add bad faith allegations based upon litigation conduct, as being so untimely as to be prejudicial; but the appellate court did note that the insured never raised the more general argument that the insurer’s litigating this matter for 20 years, when there was no reasonable basis to do so, could conceivably be the basis for a bad faith claim.

Date of Decision: May 8, 2015

Mohney v. American General Life Insurance Company, No. 2030 WDA 2013, SUPERIOR COURT OF PENNSYLVANIA, 2015 Pa. Super. LEXIS 250 (Pa. Super. Ct. May 8, 2015) (Donahue, Allen, and Strassburger, JJ.)

MAY 2015 BAD FAITH CASES: COURT ADDRESSES DISCOVERY DISPUTES OVER (1) CLAIMS MANUALS; (2) PERSONNEL FILES; AND (3) OTHER LAWSUITS, NARROWING DISCOVERY IN SOME INSTANCES TO SPECIFIC ADJUSTER WHOSE CONDUCT WAS AT ISSUE, AND NARROWING TIME PERIODS (Middle District)

Print Friendly, PDF & Email

In Stephens v. State Farm Fire & Casualty Company, the insured under a homeowners policy brought breach of contract and bad faith claims for failure to pay benefits, and an Unfair Trade Practices and Consumer Protection Law claim for termination of the policy.

The court addressed various discovery disputes concerning the bad faith claims involving: (1) claims manuals, guidelines and instructions materials relating to insurance claims like those made by the plaintiffs, covering a four year period;  (2) access to performance reviews and performance incentive review programs for all of the defendants’ employees who played a role in insurance company decisions for a similar period; and (3) a demand that (i) the insurer compile information relating to other insurance lawsuits brought against the insurer involving theft, vandalism and water damages claims, as well as (ii) all lawsuits or complaints regarding the conduct of the particular claims adjuster whose conduct was at issue in the case at hand, again  for periods ranging between four and five years.

CLAIMS MANUALS AND INSTRUCTIONS

The court stated that “it is well-settled that manuals and other training materials are relevant in bad faith insurance litigation where they contain instructions concerning procedures used by employees in processing claims.” However, “[o]nly those portions ‘relevant to processing the claim in question’ are discoverable, as they may show inter alia that agents of an insurance company recklessly disregarded standard interpretations of a particular contractual provision in denying coverage or deliberatively omitted certain investigatory steps.”

The court noted that it “has frequently granted such requests for discovery in the past, reasoning that agency claims processing policies, and non-compliance with those policies, may be relevant to a bad faith claim like the claim made by the plaintiffs in this case.”  The court ruled that the insurer was “entitled to have some topical and temporal limitations set on this disclosure, narrowing its scope somewhat.” Thus,  it “direct[ed] the disclosure of those portions of the claims manuals, guidelines and instructions materials relating to insurance claims like those made by the plaintiffs,” but only for the two years at issue in the complaint, not the four to five year period the insured sought.

PERSONNEL FILES AND INCENTIVE PROGRAMS

The insureds sought performance reviews and incentive review programs for all of the insurer’s employees who played a role in decision making in the case for a 5 year period.  The court first stated there is a strong public policy against disclosing personnel information, and thus the insured’s demands were “far too sweeping in their scope in terms of both personnel covered, files sought, and duration of the demanded disclosure.”  With one exception, these discovery requests were denied.

As to the exception, the court stated: “The conduct of the adjuster in this case is squarely at issue in this litigation[, and] [t]o the extent that the personnel files of the adjuster contain disciplinary findings or other material relevant to other claims of bad faith conduct by that adjuster, these materials should be provided to the court by the defendant for … in camera inspection to determine whether they are relevant to the issues in this litigation. If a review of the claims adjuster’s personnel file reveals no such information, the defendant shall certify that no such material exists.”

OTHER LAWSUITS

As to the demand that the insurer “compile information relating to other insurance lawsuits involving theft, vandalism and water damages claims, as well as all lawsuits or complaints regarding the conduct of this particular claims adjuster, for periods ranging between four and five years[,]”, the court found it had to balance two competing principles.

On the one hand, “it is clear that in some instances examples of similar, wrongful conduct in the processing other insurance claims may permit an inference that there is a pattern or practice of misconduct on a defendant’s part.” On the other hand, “it is equally clear that dissimilar conduct involving disparate claims would not be relevant or admissible in insurance bad faith litigation.”  The court observed: “Because the relevance and admissibility of this proof often turns on the degree of similarity between the other cases and the instant lawsuit, courts have frequently rejected sweeping demands for wholesale disclosure of other litigation over the span of many years, like the discovery demands made here.”

The court denied the request “for wide-ranging disclosure of all other lawsuits involving [the insurer] over four to five year periods….” However, “the request for information pertaining to the claims adjuster in this particular case may have greater relevance to the issues in this lawsuit.” Again, the demands were denied with the one exception of the adjuster at issue. Thus, “prior lawsuits or complaints alleging bad faith by this particular claims adjuster in the two years preceding this incident [at issue …] may be relevant to this action, [and] to the extent that this information exists, these materials should be provided to the court by the defendant for our in camera inspection to determine whether the information is relevant to the issues in this litigation. If a review reveals no such information, the defendant shall certify that no such material exists.”

Date of Decision: April 13, 2015

Stephens v. State Farm Fire & Cas. Co., Civil No. 1:14-CV-160, 2015 U.S. Dist. LEXIS 48024 (M.D. Pa. April 13, 2015) (Carlson, U.S.M.J.)