Archive for the 'PA – Mediation' Category

COURT ADDRESSES DISCOVERY RE: (1) RESERVES (2) OTHER CLAIMS/DISPUTES; (3) CLAIM LOGS; (4) CLAIM STATUS REPORTS; (5) POLICY AND PROCEDURE MANUALS; (6) EMPLOYEE INCENTIVES; (7) ANTICIPATION OF LITIGATION/WORK PRODUCT; AND (8) OVERBROAD DISCOVERY LANGUAGE (Middle District)

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This case addresses a number of discovery issues in this first party benefit denial breach of contract and bad faith case.

RESERVES (BAD FAITH ON COVERAGE VS. REFUSAL TO SETTLE/VALUE DISPUTES)

Magistrate Judge Carlson observed courts in the Third Circuit are split on whether reserves are discoverable in bad faith cases. He first states that when the bad faith case is about a failure to settle or dispute over a claim’s value, the prevailing view is that reserves are discoverable. “However, when the bad faith claim is based on a denial of coverage and ‘does not involve the value of the claim or [the plaintiff’s] estimation of liability… the reserve information requested is neither relevant nor reasonably calculated to lead to the discovery of admissible evidence.”

The alleged bad faith in this case is based on denying coverage through a biased and unfair review process, and not a dispute over value. Thus, reserves are irrelevant to the bad faith claim, and production is not required.

OTHER MATTERS NOT RELEVANT OR DISCOVERABLE

The alleged basis of the bad faith claim was that the insurer intentionally used a biased peer review organization and doctor to terminate plaintiff’s medical benefits unfairly. Plaintiff served interrogatories concerning virtually all matters in which the same PRO and doctor were selected by the insurer. Magistrate Judge Carlson did not permit this discovery.

The court first looked at prior case law denying discovery on the issue of the size of an adjuster’s case load, finding it both irrelevant and of marginal utility compared to the burden imposed on the insurer to make production. In the present case, Magistrate Judge Carlson found that “the number of times that this PRO and/or doctor decided in favor of the insurer, whether on initial review or on reconsideration, will not necessarily speak to any such bias.” If, e.g., a PRO found for the insurer 98 out of a 100 times, “those 98 claims may very well have been legitimately decided on their merits, which could not be known without an extensive post hoc evaluation of the merits of each claim.”

The court was not going to carry out that kind of evaluation, and observed that “courts in this circuit have held that ‘discovery of other insureds’ claims in bad faith cases is generally improper, as such information is irrelevant.”

ADDITIONAL RULINGS ON CLAIMS LOGS, CLAIMS STATUS REPORTS, ANTICIPATION OF LITIGATION, OVERBROAD DISCOVERY LANGUAGE, EMPLOYEE INCENTIVES, AND POLICY/PROCEDURE MANUALS

Magistrate Judge Carlson made the following additional points and rulings:

  1. Magistrate Judges have broad discretion in resolving discovery disputes.

  2. Plaintiff alleged there was a biased peer review process used to deny medical benefits. The court found the portions of the insurer’s policy manuals on the peer review process, and employee procedures or policies for handling inquiries about insurance policies, must be produced.

  3. A request for “all communications of any nature whatsoever” concerning the complaint are vague and overbroad, as are requests for communications regarding “any matters raised by Plaintiff’s and Defendants’ initial disclosures”.

  4. The work product doctrine kicked in when plaintiff’s counsel wrote to the insurer expressing dissatisfaction with the outcome of the PRO process. Actual suit or even the threat of suit are not required to trigger the insurer’s anticipation of litigation. Thus, claim notes created after the date of that letter received work product protection, but claim notes before that date had to be produced.

  5. Claim log entries indicating an employee simply looked at the file or generically uploaded a document are not protected work product.

  6. The insurer was required to respond to an interrogatory asking for “the nature and amount of any employee incentive to close out insureds’ claims”.

Date of Decision: February 6, 2019

Barnard v. Liberty Mutual Insurance Corp., U. S. District Court Middle District of Pennsylvania Civil No. 3:18-CV-01218, 2019 U.S. Dist. LEXIS 18660 (M.D. Pa. Feb. 6, 2019) (Carlson, M.J.)

DECEMBER 2017 BAD FAITH CASES: MEDIATION PRIVILEGE INAPPLICABLE TO MOST COMMUNICATIONS; REINSURANCE INFORMATION DISCOVERABLE EVEN IF NOT ULTIMATELY ADMISSIBLE (Western District)

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The insured was involved in a deadly motor vehicle accident. The insurer could have settled the case within the $11,000,000 policy limit, but declined to do so. The case was mediated before two different mediators and the judge held a settlement conference. The case went to trial and the jury awarded $32,000,000. The insured sued for breach of contract and bad faith.

During the bad faith litigation, the insured sought discovery concerning the mediations and reinsurance. The insurer asserted the mediation privilege and that the reinsurance documents were not relevant.

The insured argued that the purpose of Pennsylvania’s mediation privilege is to enable the parties to be frank and honest with the mediator and/or opposing parties without fear of reprisal in a subsequent bad faith lawsuit for doing so.” The insurer had the burden in asserting this privilege.

MEDIATION PRIVILEGE

As a practice point, the court observed the insurer “did not specify on its privilege log whether its decision to redact or withhold a document was because a portion of a document was ‘a mediation communication’ or a ‘mediation document’ as those terms are defined. Instead, [the insurer] merely opted to cite the statute and then let this Court attempt to discern what [it] meant by the following entry on its privilege log: ‘Mediation and/or settlement conference privilege pursuant to 42 Pa.C.S. §5949, F.R.E. 408, and/or applicable law.’”

The court then stated that the insurer had reciting the statutory definitions of mediation communication and mediation document and then argued that “‘[a]ll of the documents withheld and/or redacted … and submitted to the Court in camera qualify as mediation documents or mediation communications.’” The court went on to describe this as a lack of pointed argument.

Pertaining to documents redacted or withheld, the court found that “none of the redacted or withheld documents qualify as ‘a mediation document’ under the plain meaning of Pennsylvania’s mediation privilege statute except for” a single document. As to that document, it should only have been “redacted where the mediator … wrote an email ….”

Under 42 Pa.C.S. 5949, “mediation document” is defined as: “Written material, including copies, prepared for the purpose of, in the course of or pursuant to mediation. The term includes, but is not limited to, memoranda, notes, files, records and work product of a mediator, mediation program or party.”

The court then went on to address mediation communications within the documents, which the statute defines as: “A communication, verbal or nonverbal, oral or written, made by, between or among a party, mediator, mediation program or any other person present to further the mediation process when the communication occurs during a mediation session or outside a session when made to or by the mediator or mediation program.”

The court refused to apply the mediation privilege to statements made outside the mediation that did not in some way include the mediator.

The court did protect communication from the insured’s expert consultant relaying something the mediator said. However, it did not protect “redacted statements a mediator or a party may have said during the course of a mediation” in other circumstances.

Specifically, it did not protect these communications where the documents including those statements “are nothing more than reports and/or claims notes. These redacted documents contain statements which were made by a person who may have been present at the mediation session to someone (not the mediator) outside the mediation session.

Thus, they do not meet the plain meaning of the definition of ‘mediation communication’ and therefore, are not protected by Pennsylvania’s mediation privilege.” (Emphasis in original)

REINSURANCE DISCOVERY

On the reinsurance documents, the court observed that there “is no absolute exclusion of reinsurance information, as discovery of such information has been readily permitted,” citing at least one case on the issue of reserves being discoverable in bad faith litigation to support this position.

The court also quoted case law that “the purpose of permitting discovery of the existence of and content of any insurance agreement is to equalize the knowledge of both parties and give the plaintiff ‘assurance that there can be recovery in the event of a favorable verdict to justify the time, effort and expense of preparing for trial.’ … Although the discovered information may not be admissible at trial, it would allow parties to fairly evaluate settlement offers and foster a just, speedy and inexpensive determination.”

Relying on these cases, the court concluded that: “Given the nature of this case, and the allegations brought by Golon, this Court finds that all of [insurer’s] documents which were either withheld or redacted because the document either referenced or discussed reinsurance should be produced in their entirety.

However, this does not guarantee that these documents will be admissible at the time of trial. The Court is ordering them produced so that [the insured] can evaluate what [the insurer] did or did not do, and when [the insurer] took action with its own reinsurer, in relation to the underlying claim.”

The Court subsequently denied two emergency motions for reconsideration.

Date of Decision: December 7, 2017/December 14, 2017

Golon, Inc. v. Selective Ins. Co., No. 17cv0819, 2017 U.S. Dist. LEXIS 201792 (W.D. Pa. Dec. 7, 2017) (Schwab, J.)

Golon v. Selective Ins. Co., No. 17cv0819, 2017 U.S. Dist. LEXIS 213966 (W.D. Pa. Dec. 14, 2017) (Schwab, 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)

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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.

MAY 2015 BAD FAITH CASES – DIETZ & WATSON PART III: ATTORNEY CLIENT PRIVILEGE WAIVED IN BAD FAITH CASE WHERE IT WAS NOT TIMELY ASSERTED, AND WHERE OTHER CONDUCT CONSTITUTED WAIVER (Philadelphia Federal)

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In Dietz & Watson v. Liberty Mutual Insurance Company, Magistrate Judge Rueter continued to address the numerous discovery issues in the context of third party insurance bad faith litigation.  The first case is summarized as to mediation privileges issues here, and as to depositions of attorneys here.

The current discovery disputes involved the insured’s response to document requests, as well as the response of its former counsel to document requests.  The court had previously ordered the insured’s counsel “to review their productions and send a letter to defendants and the court confirming their complete compliance with the discovery requests.”

In response, counsel stated that it did not have to produce certain documents, based on the theory that once the underlying case settled, and new counsel was hired by the insured, the date of settlement “marked the conclusion of the underlying lawsuit and the beginning of a new representation regarding this current [breach of contract and bad faith] action.”

Any communications with new counsel were alleged to be both privileged and beyond the scope of requests for documents concerning the underlying action.

The court rejected the scope of discovery argument, i.e., that the discovery was strictly limited to what occurred in the underlying case. For example, the insurer defendants sought documents relating to “any other contemplated action(s) relating to the Underlying Lawsuit”, communications regarding the decision to file the bad faith case, and those with knowledge concerning the bad faith suit. This clearly went beyond the underlying action as such.

Thus, the more pertinent issue involved the claims related to the attorney client privilege, concerning a smaller subset of the documents requested. The insured and counsel asserted that any communications between them regarding prosecuting the bad faith action were privileged.  The insurers asserted that the attorney-client privilege was waived because the insured failed to assert it “at any time during this protracted discovery process, and/or when [the insured] disclosed other allegedly privileged documents.”  The party asserting waiver bears the burden of proof.

The court ruled in favor of waiver.

On numerous occasions the insured “intentionally waived any claim of attorney-client privilege with respect to the documents at issue”: No objections were asserted in responses to the document requests; nor was the privilege asserted in response to the motion to compel production.

Further, after the “Motion to Compel was filed, [the insured’s] Counsel produced the documents allegedly subject to the privilege, but never objected on the grounds of the attorney-client privilege as to any other documents intentionally withheld that clearly were responsive to the Requests for Production.” The court gave that counsel a final opportunity to review their production and confirm compliance with the Requests for Production, and “for the first time, identified documents that were being withheld on the grounds of scope and attorney-client privilege.” Again, however, the insured did not file a privilege log.

Further even after the court’s ruling over three months earlier, giving the insured and counsel opportunity for further review, they “never properly claimed the privilege by describing the nature of the withheld documents [on a document by document basis] as required by Fed. R. Civ. P. 26(b)(5)(A), 45(e)(2).”  The court continued on with a history that showed some allegedly privileged documents were produced, no privilege was asserted or privilege log produced, and there were no supplemental responses under Rule 26(e).

For all of the foregoing reasons, it found repeated waiver as to improperly withheld documents. The court further cited a litany of case law focused on the untimeliness of asserting the privilege.  It also found that at least some of the conduct at issue was calculated and deliberate.

Date of Decision:  May 5, 2015

Dietz & Watson v. Liberty Mut. Ins. Co., No. 14-4082, 2015 U.S. Dist. LEXIS 58827 (E.D. Pa. May 5, 2015) (Rueter, U.S.M.J.)

MAY 2015 BAD FAITH CASES: CONTRACTUAL AND STATUTORY BAD FAITH MAY BE SUPPORTED BY EVIDENCE THAT AN INSURER MADE A MISREPRESENTATION OR FAILED TO COMMUNICATE WITH INSURED DURING A MEDIATION, IF THAT ACTION OR INACTION CAUSED THE INSURED TO MAKE A PERSONAL CONTRIBUTION TO A SETTLEMENT WITHIN POLICY LIMITS; THOUGH THE INVITATION TO CONTRIBUTE ITSELF WAS NOT ACTIONABLE IN THIS CASE (Western District)

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This is a reposting link for our Saturday May 9, 2015 post.

Chief Judge Conti of the Western District provided a detailed analysis of potential bad faith issues that might arise during settlement negotiations/mediation of a third party claim, where the insured (represented by personal counsel at the mediation) is involved in potentially or actually contributing personal funds toward a settlement, and negotiating with the underlying plaintiff and the insurer to reach a settlement figure.  The court also provided a detailed analysis of contractual (Cowden) bad faith claims where there is no actual excess verdict.

MAY 2015 BAD FAITH CASES: CONTRACTUAL AND STATUTORY BAD FAITH MAY BE SUPPORTED BY EVIDENCE THAT AN INSURER MADE A MISREPRESENTATION OR FAILED TO COMMUNICATE WITH INSURED DURING A MEDIATION, IF THAT ACTION OR INACTION CAUSED THE INSURED TO MAKE A PERSONAL CONTRIBUTION TO A SETTLEMENT WITHIN POLICY LIMITS; THOUGH THE INVITATION TO CONTRIBUTE ITSELF WAS NOT ACTIONABLE IN THIS CASE (Western District)

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In McMahon v. Medical Protective Company, the court decided cross-motions for summary judgment in a case where the insured offered to contribute some of her own money to settle a claim that could lead to a verdict in excess of policy limits if brought to trial.  The insured alleged both contractual bad faith and statutory bad faith.  The court went through a lengthy analysis on the nature of contractual bad faith before reaching a mixed ruling.

A third party filed a dental malpractice lawsuit against the insured (plaintiff in the bad faith case), and her insurance company tendered a defense. In addition to counsel appointed by the insurer, the insured engaged her own personal counsel, who demanded that the case be settled within the policy limits.

The insurer originally believed the claim to be winnable at trial, but later changed it strategy in favor of settlement. Nine days before the scheduled trial date, the parties participated in a mediation with the underlying claimant, following the change in the insurer’s defense strategy to settle the case, rather than defend through trial. The insured was present at the mediation session along with her personal counsel, as well as the insurer’s claims manager, and defense counsel. The negotiations moved slowly because of the large gap between demands and offers, and the insured ultimately agreed to contribute from her own personal funds to facilitate a settlement. The insurer refused to reimburse her.

After the insurer refused to reimburse the insured for her personal contribution, the insured brought claims against her insurer for breach of contract, breach of the implied duty of good faith and fair dealing under that contract, and statutory bad faith. The insured argued that the carrier “acted in bad faith [during the mediation] by not informing her about its internal settlement limits and by inviting her to contribute personally to the settlement.”

The two bases for the breach of contract claim were that (1) the insurer failed to comply with the terms of the insurance policy, and (2) the insurer breached the implied duty of good faith and fair dealing. The insured alleged that the insurer breached the insurance contract by failing to pay the entire settlement amount. In finding for the insurer, the court looked at the plain language of the policy, which read “[t]he Insured shall not contract any expense nor make any … settlement of a claim hereunder, except at the Insured[‘]s own cost and responsibility, without the written authorization of [Insurer].” The court agreed with the insurer that the $50,000 paid by the insured was voluntary, and rejected the insured’s argument that the language did not apply to settlements jointly contracted by the insured and insurer.

On the contractual bad faith claim, sometimes referred to as Cowden bad faith based on the seminal Pennsylvania Supreme Court case, the court observed a lack of clarity on applicable law. The court looked at the Eastern District’s 2007 Dewalt decision, questioning Terletsky’s application to contractual bad faith claims, i.e., that in providing statutory bad faith an insured must (1) prove the insurer’s position was unreasonable and (2) prove at least reckless disregard of that unreasonable position. Rather, Dewalt found that Cowden bad faith could be based upon “an insurer’s negligence or unreasonableness in handling the potential settlement of claims against its insured, and does not require proof of recklessness or purposefulness.” Dewalt did, however, still require prove by clear and convincing evidence for contractual bad faith; the same standard as statutory bad faith.

The court then observed that Cowden bad faith is typically for a failure to settle that results in an excess verdict.  However, the court was not willing to limit contractual bad faith to that scenario only.  It cited to the 2013 Bodnar decision for other examples of contractual bad faith, that went beyond a mere delay in settling and/or paying policy limits on the eve of trial: “failure to conduct a complete and thorough investigation of the facts giving rise to the claim, or the law supporting it, the refusal to enter into good faith settlement negotiations or the conduct of “surface” negotiations undertaken with no genuine intent to find a basis for settlement, the rejection without counterproposal of all offers made by the third party for settlement, the filing and pursuit of actions for declaratory judgment without a reasonable evidentiary basis for doing so, if persisted in for an unreasonable period of time, will state a cause of action for breach of contract and for bad faith even if ultimately, after the insured has been prejudiced by the insurer’s conduct delaying resolution of the claim against it, the insurer pays the policy limits prior to the entry of a verdict.”

The court then examined the insured’s arguments that the insurer acted in contractual bad faith during the mediation session by failing to disclose its full settlement authority to the insured at several points during the mediation, and by inviting the insured to contribute to the settlement. The court observed that under the Pennsylvania Supreme Court’s Birth Center decision “[w]here the insurance company takes control of the decision to settle or litigate actions brought by third parties, the insurance company owes its policyholder a fiduciary duty, among other things, to engage in good faith settlement negotiations.”

However, “the duty of good faith owed by an insurer to its insured does not require the same level of selflessness as an agent-principal fiduciary relationship. Birth Center, when understood in this light, does not require disclosure of “all relevant information” such as its internal settlement authority or negotiation strategy.”  Thus, the court found no absolute fiduciary duty to reveal the insurer’s settlement authority and strategy, consistent with the principle that an insurer cannot place its interests over the insureds, but need not subordinate its interest to the insured either.

The court then identified significant exceptions to this seemingly limited fiduciary duty. “Although there is no requirement that an insurer disclose the upper limit of what it is willing to pay, the insurer may not make misrepresentations about that information to the insured.”  It took this reasoning from a prior case addressing a first party claim, but found the logic applicable to third party claims as well.  The court then added that an insurer’s failure to communicate with an insured can also be evidence that the insurer placed its interests above those of the insureds.

In sum, the court stated: “The court predicts, therefore, that under Pennsylvania law, a bad faith claim may be supported by evidence that an insurer made a misrepresentation to the insured or failed to communicate with the insured, if the misrepresentation or failure to communicate caused the insured to make a personal contribution to a settlement within policy limits.”

On the specific facts at issue, the court found it was a close call with respect to the disclosure issue, and reasoned that a factual dispute existed with regards to whether the insurer acted in bad faith by not revealing to the insured the full settlement authority, even after the insured offered to contribute her own money.  In denying summary judgment to the insurer, the court stated: “A reasonable jury could find that [the insured] acted negligently, given its duty to afford [the insured’s] interests the same consideration as its own, because: (1) [the insurer’s representative] told [the insured’s personal counsel] that [the insurer] would not offer more than $1.3 million, even after the mediation; (2) [the insurer’s representative] did not tell [the insurer’s claims manager] that [the insurer] would consider offering more than $1.5 million after the mediation, if necessary to settle the claim; (3) [the claims manager] told [the insured] and [her personal counsel] that $1.5 million was the limit of his authority; and (4) when [the insured] placed her own money on the table, neither [of the insurer’s personnel] told her that [the insurer] would offer more, if necessary, to settle the case.”  On this basis, “[a] reasonable jury could conclude that these actions or inactions caused [the insured] to contribute her own money to the settlement.”

As to the second basis for contractual bad faith, the court did grant summary judgment to the insurer. The insured alleged that one of the appointed defense attorneys suggested that she contribute her own funds to settle. The court determined that “an insurer’s invitation to contribute to a settlement does not, as a matter of law, constitute bad faith” and moreover, the attorney was not acting as an agent of the insurer. Thus, the only issues remaining for trial on contractual bad faith were whether the insurer “made a misrepresentation or omitted to provide material information and whether that conduct or failure constitutes contractual or statutory bad faith.”

Finally, the court addressed the statutory bad faith claim under 42 Pa.C.S. § 8371.  The insured made the same argument that the insurer “acted in bad faith by not informing her about its internal settlement limits and by inviting her to contribute personally to the settlement.” The court readily granted summary judgment on the invitation to contribute claim, since it had already granted summary judgment on the lower negligence standard on the same issue.

It then stated: “With respect to the alleged misrepresentation about whether [the insurer] was willing to offer more to settle, it is even a closer call whether a reasonable jury could find that this rises to the level of recklessness.” However, based on the details of the negotiations and the settlement numbers discussed between the insurer’s representatives with the insured and her personal counsel, the court found that a reasonable jury might find the insurer’s actions and inactions “to be at least reckless”.

Date of Decision: March 20, 2015

McMahon v. Med. Protective Co., CIVIL ACTION NO. 13-991, 2015 U.S. Dist. LEXIS 35131 (W.D. Pa. Mar. 20, 2015) (Conti, C.J.)

MARCH 2015 BAD FAITH CASES – DIETZ & WATSON PART II: COURT PERMITS DEPOSITIONS OF INSURED’S COUNSEL IN CONNECTION WITH AFFIRMATIVE DEFENSES OF: SETTLEMENT WITHOUT CONSENT, AND ALLEGED UNCLEAN HANDS AND COLLUSION; BUT DENIES DEPOSITION OF INSURER’S COUNSEL WHOSE DECISIONS WERE MADE AFTER NOTICE OF BAD FAITH CLAIM, AND SOME OF THE DISPUTES WERE IN THE NATURE OF DISCOVERY DISPUTES WHICH ARE NOT THE BASIS OF A BAD FAITH CLAIM (Philadelphia Federal)

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In Dietz & Watson v. Liberty Mutual Insurance Company, Magistrate Judge Rueter addressed numerous discovery issues in the context of third party insurance bad faith litigation.  The insurer asserted that documents the insured sought were protected by the mediation privilege and/or the attorney-client privilege or work product doctrine. (This is addressed in a separate blog entry).  Further, the insurer sought the deposition of the insured’s counsel in connection with its affirmative defenses, and the insured sought to depose one of the insurer’s attorneys, discussed below.

The basic factual background involved a third party personal injury claim against the insured.  The insurer had provided a defense under a reservation of rights, reserving the right to disclaim coverage for punitive damages. The case settled for $2.5 Million with the insurer paying $1,750,000 and the insured paying $750,000. In addition, at the time of settlement, the third party’s counsel and the insured’s counsel reached an agreement that the third party’s counsel would represent the insured in a bad faith claim against the insurer; and that the injured third party would receive the first $250,000 of any recovery in that bad faith action.  In addition, at that time, the injured third party withdrew his punitive damages claim against the insured.

During the underlying case, the insurer had assigned defense counsel, and the insured’s corporate counsel had also entered an appearance for the insured in that action.

The primary basis of the bad faith claim was the insurer’s alleged failure to engage in good faith settlement negotiations, by refusing to pay more than $1,750,000, and thus forcing the insured to pay the additional funds out of its own pocket to achieve the settlement.  The insured also asserted bad faith on the alleged basis that the insurer obstructed the insured from investigating and pursuing the bad faith claim, after the settlement had occurred.

  1. Depositions of Insured’s Attorneys

The insurer sought to depose the insured’s current attorney, who was the injured third party’s attorney in the underlying action (as well as two of his partners); and also sought to depose the insured’s corporate counsel.  The insurer argued that these depositions were necessary and permitted to support its affirmative defenses, which alleged that: (1) the policy prohibited the insured from making a voluntary settlement payment without the insurer’s consent; and (2) the insured had “unclean hands” and had colluded with the underlying plaintiff and his attorney.

The court recognized that the insured, as well as the insurer, had a duty of good faith; and that “Pennsylvania law requires that a settlement entered without the insurers’ knowledge or consent must be reasonable and in good faith and non-collusive, even if the insurer breached its duty to defend.” “Indicators” that may be considered in evaluating the insured’s alleged bad faith and alleged collusion “’are unreasonableness, misrepresentation, concealment, secretiveness, lack of serious negotiations on damages, attempts to affect the insurance coverage, profit to the insured, and attempts to harm the interest of the insurer.’”

In this case, the insurer alleged that “at the time of the settlement, [the underlying plaintiff] withdrew his claim for punitive damages, so that it would not appear that [the insured] was paying money … to settle a claim not covered by the terms of the … insurance policy.”

The insurer further claimed it was relevant that the insured was now represented by the underlying plaintiff’s former attorney, and it alleged that the insured “had secretly agreed to pay [the underlying plaintiff] a large portion, i.e., $250,000.00, of any monies received by [the insured] from its bad faith action….”

The court found that if these two defenses could be proven, they would be valid defenses, and that the facts the insurer alleged were “sufficient for it to take discovery into the areas of [the insured’s] alleged voluntary payment made without the consent of [the insurer] and [the insured’s] bad faith.” Thus the court permitted the deposition of counsel who formerly represented the underlying plaintiff “who negotiated the challenged settlement”.

The court further allowed the deposition of the insured’s corporate counsel.  The court did limit the depositions of the two partners, to the extent that if the insurer believed it still needed their depositions after these other depositions occurred, it could apply to the court for such relief.

  1. Deposition of Insurer’s Attorney/Discovery Disputes not Bad Faith

The insured sought the deposition of one of the insurer’s attorneys, concerning her decisions in relation to disclosing litigation and claims files. The insurer had been put on notice of the bad faith claim prior to this attorney’s involvement, and the insurer’s attorney referred the matter to other counsel to evaluate disclosure of the files in light of the bad faith claim, to consider the propriety of their production.  The court stated that such conduct was reasonable.

The insured further claimed that there was bad faith obstruction in producing these files.  However, the insured had eventually obtained the underlying defense litigation files, and had later obtained the claims file with certain redactions for privileged materials. The court denied the motion to compel the deposition of the same attorney on this issue, again observing this all occurred after the bad faith claim had been threatened.

Further, to the extent this was a discovery dispute, the court stated that “Pennsylvania courts have made it clear that an insured may not recover under Pennsylvania’s bad faith statute ‘for discovery abuses by an insurer or its lawyer in defending a claim predicated on its alleged prior bad faith handling of an insurance claim.’”

The insured’s “only claim alleged of post settlement bad faith conduct is [the insurer’s] refusal to turn over its claim file after it was notified it may be sued for bad faith. This is the nature of a discovery violation, which does not constitute bad faith under Pennsylvania law.”

Date of Decision:  January 28, 2015

Dietz & Watson v. Liberty Mut. Ins. Co., No. 14-4082, 2015 U.S. Dist. LEXIS 9815 (E.D. Pa. January 28, 2015) (Rueter, U.S.M.J.)

MARCH 2015 BAD FAITH CASES – DIETZ & WATSON PART I: STATUTORY MEDIATION PRIVILEGE APPLIES TO MEDIATIONS IN UNDERLYING TORT ACTION WHERE DISCOVERY IS SOUGHT FOR SUBSEQUENT BAD FAITH CASE; MEDIATION PRIVILEGE APPLIES TO NON-LAWYER INSURER REPRESENTATIVES; AND COURT INSTRUCTS INSURER TO PROVIDE A MORE DETAILED PRIVILEGE LOG FOR DOCUMENTS OUTSIDE THE MEDIATION PRIVILEGE WHERE THE INSURER SEEKS TO ASSERT THE ATTORNEY CLIENT PRIVILEGE OR WORK PRODUCT DOCTRINE (Philadelphia Federal)

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In Dietz & Watson v. Liberty Mutual Insurance Company, Magistrate Judge Rueter addressed numerous discovery issues in the context of third party insurance bad faith litigation.  The insurer asserted that documents the insured sought were protected by the mediation privilege and/or the attorney-client privilege or work product doctrine.  Further, the insurer had objected to producing one of its attorneys for deposition in connection with producing its litigation and claims files and sought to depose the insured’s attorneys relating to the defense of the Underlying Action  (which are discussed in a separate blog entry).

The basic factual background involved a third party personal injury claim against the insured.  The insurer had provided a defense under a reservation of rights, reserving the right to disclaim coverage for punitive damages. The case settled for $2.5 Million with the insurer paying $1,750,000 and the insured paying $750,000. In addition, at the time of settlement, the third party’s counsel and the insured’s counsel reached an agreement that the third party’s counsel would represent the insured in a bad faith claim against the insurer; and that the injured third party would receive the first $250,000 of any recovery in that bad faith action.  In addition, at that time, the injured third party withdrew his punitive damages claim against the insured.

During the underlying case, the insurer had assigned defense counsel, and the insured’s corporate counsel had also entered an appearance for the insured in that action.

The primary basis of the bad faith claim was the insurer’s alleged failure to engage in good faith settlement negotiations, by refusing to pay more than $1,750,000, and thus forcing the insured to pay the additional funds out of its own pocket to achieve the settlement.  The insured also asserted bad faith on the alleged basis that the insurer obstructed the insured from investigating and pursuing the bad faith claim, after the settlement had occurred.

  1. The Mediation Privilege

The parties agreed that Pennsylvania statutory law on the mediation privilege governed, 42 Pa.C.S. § 5949.  The party asserting the privilege has the burden of establishing its application. In this matter, there had been 5 mediation sessions, with 5 different mediators.  All but one session was covered by the privilege because those sessions “involved ‘[t]he deliberate and knowing use of a third person by disputing parties to help them reach a resolution of their dispute.’”

It did not apply to the other mediation because the insurer did not participate in that session, which only involved the injured third party’s claim against the insured’s co-defendant.

The court rejected the proposition “that the mediation privilege does not apply in a bad faith action alleging an insurer’s failure to engage in good faith settlement negotiations,” and would not allow discovery of the insurer’s “correspondence and claim notes reflecting communications made” during the mediation.

The court stated that the “mediation privilege extends not only to mediation communications of parties, but also to communications ‘by, between or among’ representatives of insurance companies present at the mediation.” The court observed applying the privilege “to participating insurance companies’ representatives is essential to the success of the mediation sessions [because,] [f]requently, adjustors or representatives of insurance companies attend mediation sessions. Indeed, many mediators require their presence, either in person or by telephone.”

Thus, “[f]or mediation sessions to be fruitful, insurance adjustors and representatives must be free to discuss candidly any offers and proposals without fear that such communications may be used against them in future litigation.”

The court specifically rejected the notion that the language of the mediation statute should not apply to mediation over the underlying claim when those communications are being used to support a later bad faith case. The court rejected this argument as both outside the statute’s plain language, and contrary to the public policy behind the mediation privilege.

Lastly, the court noted that the privilege “is limited to communications ‘by, between or among’ the mediator, parties and participants made during the mediation session, or communications made to the mediator or from the mediator outside a session,” and that “’discussions among parties outside the presence of the mediator and not occurring at a mediation proceeding are not privileged.”

Thus, “[w]here the mediator has no direct involvement in the discussions and where the discussions were not designated by the parties to be a part of an ongoing mediation process, the rationale underlying the mediation privilege (i.e., that confidentiality will make the mediation more effective) is not implicated.’”

  1. Attorney-Client Privilege/Work Product

First, under Pennsylvania law, appointed defense counsel is the insured’s attorney, and may be, but is not always, the insurer’s attorney. Thus, when appointed counsel communicated with the insurer on the insured’s defense, the insurer could not assert the attorney-client privilege as against the insured.

However, the insurer in this case was seeking to protect communications from in-house counsel to the insurer’s employees regarding issues of coverage, issuing a reservation of rights letter, and bad faith, in connection with the underlying action.  The court appeared to recognize this distinction in its evaluation.

The court then re-stated the federal work product doctrine in this context: (i) ordinarily a party “’may not discover documents and tangible things that are prepared in anticipation of litigation or for trial by or for another party or its representative (including the other party’s attorney, consultant, surety, indemnitor, insurer, or agent).’”; (ii) “[a] document is prepared in anticipation of litigation when ‘in light of the nature of the document and the factual situation in the particular case, the document can fairly be said to have been prepared or obtained because of the prospect of litigation.’”; (iii) “It has generally been held that the work product doctrine applies to insurance companies confronted with a bad faith claim brought by an insured.”; (iv) “A ‘mere claim of bad faith is not enough to shatter the work-product privilege.’”; and (v) “Courts recognize that ‘[a]t some point in its investigation, . . . an insurance company’s activity shifts from mere claims evaluation to an anticipation of litigation.’”

The court then applied the potential application of these two privileges to documents that were outside the mediation privilege.  The insurer was instructed to “review its privilege log .… and [i]f necessary, [the insurer] shall make a further production and/or amend its privilege log.”

Further, “[t]o the  extent, [the insurer] asserts the attorney-client privilege, or the work product doctrine to exclude production of documents created prior to the settlement of the Underlying Action … [the insurer] shall produce those documents to this court for in camera review ….”

Date of Decision:  January 28, 2015

Dietz & Watson v. Liberty Mut. Ins. Co., No. 14-4082, 2015 U.S. Dist. LEXIS 9815 (E.D. Pa. January 28, 2015) (Rueter, U.S.M.J.)

MAY 2014 BAD FAITH CASES: COURT DENIES INSURER SUMMARY JUDGMENT IN BAD FAITH UIM CASE WHERE ISSUES OF FACT REMAINDED ON REASONS FOR DELAY AND APPROPRIATENESS OF RELIANCE UPON CERTAIN MEDICAL PROVIDERS (Middle District)

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In Strausser v. Merchants Insurance Group, the insured brought a claim for breach of contract and bad faith on a UIM claim. The insured had received payment from the tortfeasor’s carrier.

The insured asserted that the insurer complicated the settlement process by requesting 33 separate authorizations and tax returns in piecemeal fashion over a period of many months; that one of his medical providers, a psychologist who could not assemble her treatment records because of a computer malfunction, was unreasonably subjected to a lawsuit by the insurer that resulted in further significant and unnecessary delay in arbitrating the UIM claim; and that despite an exhaustive investigation spanning 4½ years, the insurer never obtained any evidence to support its position that the insured had been disabled before the accident at issue.

The insurer contended that it investigated the UIM claim and discovered red flags in the form of a prior accident history and pre-existent financial and psychological problems; but ultimately agreed to arbitrate the UIM claim, promptly paid the award once rendered. The insurer contended that the 43 month delay between the insured’s filing the UIM claim and the award was largely the result of the refusal of one of the insured’s medical providers to respond to a subpoena.

The insurer also asserted that there was delay beyond its control because of a mediator’s personal issues. Finally, the insurer described the parties’ impasse of resolving the matter as a disagreement over the claim’s value.

The court observed that the arbitration award was almost four times the carrier’s best offer, which the insurer explained as one of the vagaries inherent in predicting how a factfinder will respond to a complex set of evidentiary factors. The court stated that assessing the bad faith claimed required its review of the various communications that passed back and forth between the insurer and the insured’s counsel during the negotiations that preceded the filing of the complaint.

The court defined the ultimate question as whether at some point before the date of the arbitrator’s award, did the insurer have enough information to appreciate that its final settlement offer was unreasonably low.

The court generally acknowledged the following positions as correct: (1) that the mere negotiation of a disputed claim does not qualify as bad faith; (2) that the fact of a substantial discrepancy between an insurer’s settlement offer and the amount the insurer ultimately pays on a claim does not, in every such instance, indicate bad faith; (3) that it is not always bad faith for an insurer to rely on the results of an independent medical examination; (4) that the mere fact that there is a substantial delay between the time the claim is filed and the time it is ultimately resolved does not necessarily indicate bad faith; and (5) that insurers are not bound by decisions of the Social Security Administration concerning the scope or cause of a claimant’s physical disabilities.

However, the court found itself compelled to observe, on this motion for summary judgment, that award approached four times the insurer’s best offer and there was evidence that the insurer may have unreasonably delayed its investigation and/or disregarded evidence that should have promoted a higher offer in settlement.

Thus, only the finder of fact should pass on the relative credibility of the parties’ arguments, as the court could not unequivocally say that the parties’ submissions are such that reasonable jurors could conclude only that the insurer had a reasonable basis for conducting itself as it did.

Thus, the court found on the record before it that reasonable jurors could conclude that it was unreasonable for the insurer to refuse to submit the matter to mediation before obtaining a psychologist’s records in the context of a claim predicated predominately on physical injuries.

Similarly, reasonable jurors could conclude that the insurer acted unreasonably in relying upon the opinions of an independent medical examiner who never saw the insured until some 57 months after the accident in question.

Finally, reasonable jurors could conclude that the insurer’s piecemeal requests for 33 authorizations over a period of more than one year constituted an effort to pressure the insured into accepting a settlement that bore no resemblance to his actual damages.

The court made clear that its denying summary judgment should not be seen as an indication that the court thought it likely that the plaintiff will prevail at trial, reiterating the standard that the insured would be required to demonstrate the carrier’s bad faith by a heightened clear and convincing evidentiary standard and the insurer would have the benefit of that charge at trial.

Date of Decision: April 7, 2014

Strausser v. Merchs. Ins. Group, Case No. 3:12-CV-1551, 2014 U.S. Dist. LEXIS 47718, (M. D. PA. April 7, 2014) (Conaboy, J.)

OCTOBER 2012 BAD FAITH CASES: COURT REJECTS INSURED’S DISCOVERY REQUEST BECAUSE CARRIER’S ACTIONS AMOUNTED TO “PURE DISCOVERY VIOLATION” RATHER THAN A BAD FAITH EFFORT TO OBSTRUCT LITIGATION (Western District)

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In Mine Safety Appliances Co. v. North River Ins. Co., a Special Discovery Master heard a discovery dispute that arose from questions regarding “the appropriate trigger of coverage for underlying claims involving coal-worker’s pneumoconiosis” that developed during his employment in the insured’s mine.

In April 2012, a Special Discovery Master undertook an analysis of the insured’s motion to compel interrogatory answers from the carrier. Specifically, the insured asked its carrier to set forth the date when it first learned the identity of a witness retained by the carrier in anticipation of litigation. The carrier objected to the insured’s interrogatories on the grounds that the interrogatories sought information protected from disclosure by Rule 26(b)(4), which holds that the insured is precluded from obtaining discovery on an expert whom the carrier retained for trial litigation purposes.

The insured argued that the requested information is relevant to its bad faith claim against the carrier because, based on information and belief (i.e. the timing of the carrier’s hiring of its expert), the carrier may have first learned the identity of the expert from the insured during a confidential mediation session. During that session, the insured disclosed that it had learned that the expert had written papers supporting its theory of the case. The carrier later hired this expert for its defense of the litigation. Therefore, the insured argued that the carrier “improperly took information learned from its own insured during a confidential mediation session for its own use and for use against its insured.”

The carrier disagreed, arguing that the insured was in breach of the mediation agreement entered into between the parties, which the insured violated by purporting to divulge the content of communications made in connection with settlement negotiations. The carrier therefore argued that the insured’s improper conduct and “unclean hands” should not require it to divulge when it first learned the identity of its expert witness.

The Special Master reasoned that, because the expert had since died, Rule 26 in fact protected information related to his work for the carrier. That rule makes confidential any expert testimony used in preparation for litigation. However, the information sought by the insured did “not involve the insurer-insured relationship, but, rather, clearly involved the parties’ relationship as legal adversaries.” Under the Pennsylvania bad faith statute, such information does not constitute evidence of bad faith.

Therefore, the Special Master held, the information requested in the interrogatories is not relevant to the insured’s bad faith claim.

The district court judge affirmed in pertinent part the decision of the magistrate. In two separate opinions, the judge ruled that, “the record contains more than sufficient information to support the Special Discovery Master’s determination the information requested by the insured did not prove that the carrier “acted frivolously with a dishonest purpose and breached its known duty.” It reasoned that the carrier’s actions amounted to a “pure rule violation” that is “beyond the purview of relevant evidence that can establish bad faith.”

A bad faith violation is “analytically distinct” from a rule violation made in an effort to gain an upper hand in ongoing coverage litigation. In order to produce evidence of bad faith, the court concluded, the carrier’s litigation conduct “must be something more than a violation of the operative rules” governing discovery.

Date of Special Master’s Decision: April 24, 2012

Mine Safety Appliances Co. v. North River Ins. Co., 2:09-cv-00348-DSC, 2012 U.S. Dist. LEXIS 132899, U.S. District Court for the Western District of Pennsylvania (W.D. Pa. Apr. 24, 2012) (Penkower, Special Discovery Master)

Date of District Court Decisions: September 18, 2012

Mine Safety Appliances Co. v. N. River Ins. Co., 2:09cv348, 2012 U.S. Dist. LEXIS 132896, U.S. District Court for the Western District of Pennsylvania (W.D. Pa. Sept. 18, 2012) (Cercone, J.)

Decision 1

Decision 2