Archive for the 'PA – No coverage due, bad faith still possible' Category

1. GOOD NEWS AND BAD NEWS IN DEFINING SCOPE OF STATUTORY BAD FAITH; 2. MOTION TO SEVER AND STAY DENIED; 3. COURT OUTLINES PROPER PRIVILEGE LOG AND CHALLENGE PROCESS (Middle District)

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The good news: The court in Ferguson v. USAA General Indemnity takes on the issue of whether a statutory bad faith claim can survive if the insured’s breach of contract claim fails, and does an historical analysis of the statute and case law to reach a conclusion.

The bad news: The court does not address the Pennsylvania Supreme Court’s decision in Toy v. Metropolitan Life. As we have observed over the years, Toy requires the denial of a benefit as a necessary predicate for statutory bad faith claims. Yet, numerous courts have applied pre-Toy case law, or cases rooted in pre-Toy case law, in holding that bad faith might exist outside of that context, e.g., solely for unfair claims handling or unreasonable failures to communicate. These courts have not directly addressed the argument that Toy apparently rejected that possibility, and that poor conduct may be evidence of bad faith, but not cognizable bad faith in itself where no benefit is denied.

We are not speaking of the situation where there is a contractually due benefit that the insurer belatedly pays. As Toy itself makes clear, there is little dispute that delay in paying a benefit can still support a bad faith case on the basis that this denies a benefit. Rather, we are speaking of the situation where there is no indemnity or defense of any kind contractually due, and the insurer prevails on the breach of contract count. Attached here is an article addressing Toy’s distinction between bad faith conduct that is necessary to make out a cognizable cause of action, and bad faith conduct that is only evidentiary in nature.

The Ferguson court, and similar cases, are concerned with dishonest claims handling and unreasonable delay even in cases where no coverage was ultimately due. They may want to inhibit poor conduct on the claims handling end that is driven by a presently unsubstantiated hope that there will be no coverage at the end of the day. In the court’s words, statutory bad faith exists to “generally regulate dishonest conduct by insurers….” This dishonest conduct still can be punished even if no coverage is due because “[h]olding otherwise could potentially result in insurers taking the gamble that a denial based on a cursory review will be rescued by a clever trial lawyer.”

Arguably, this interpretation runs counter to the Supreme Court’s decision in Toy, which concludes that there must be a denial of a benefit accompanying such poor claims handling. This reading of Toy implies that dishonest conduct where no coverage is due and no benefit denied is left to regulation by the Insurance Commissioner, not the courts.

In one of the few cases addressing this aspect of Toy, previously summarized on this Blog, another district court states:

Even assuming that the bad faith denial of the benefits claimed by plaintiff was properly alleged in the Complaint, plaintiff’s argument fails because plaintiff does not allege the denial of any benefits within the meaning of the statute. “‘[B]ad faith’ as it concern[s] allegations made by an insured against his insurer ha[s] acquired a particular meaning in the law.” Toy v. Metro. Life Ins. Co., 593 Pa. 20, 928 A.2d 186, 199 (Pa. 2007). Courts in Pennsylvania and the Third Circuit have consistently held that “[a] plaintiff bringing a claim under [§ 8371] must demonstrate that an insurer has acted in bad faith toward the insured through ‘any frivolous or unfounded refusal to pay proceeds of a policy.'” Wise v. Am. Gen. Life Ins. Co., 459 F.3d 443, 452 (3d Cir. 2006) (emphasis added); see also Nw. Mut. Life Ins. Co. v. Babayan, 430 F.3d 121, 137 (3d Cir. 2005); Toy, 593 Pa. at 41. None of the “benefits” that defendant allegedly denied plaintiff concern the refusal to pay proceeds under an insurance policy. To the contrary, plaintiff concedes that he “does not allege bad faith for refusal to pay benefits.”

Motion to sever claims and stay discovery denied

As stated, the Ferguson court determined a bad faith claim could proceed independently of the breach of contract claim, even if the breach of contract claim failed. The court reached this conclusion in the context of a motion to stay discovery and sever the breach of contract and bad faith claims. After reaching this conclusion, the court reviewed and denied the motion to sever and stay.

Even if conceptually distinct, the breach of contract and bad faith claims are “significantly intertwined from a practical perspective.” By way of example, the court states that both claims will involve discovery on “the nature of Plaintiffs’ injuries; and … what efforts did the insurer make to investigate Plaintiffs’ injuries.”

Trying to separate the two claims and stay discovery “would potentially create a discovery mess, requiring truncated depositions, interrogatories, and requests for production, only to have them all re-started following the conclusion of the first leg. This risk of judicial inefficiency warrants denial of Defendant’s request.” In sum, “Defendant’s request is, at root, asking the court to manipulate this case’s procedural framework in a way that will make litigation convenient for insurers, which the court will not do.”

This is how to handle the privilege and work product process

The court did observe there might still be legitimate attorney client privilege or work product issues. The court outlined how the parties should address this issue:

“This issue, however, is not properly before the court at this time. Defendant has not filed a protective order, nor has Plaintiff yet moved to compel. While Plaintiffs have requested the court conduct an in camera review of Defendant’s claims file, it will only do so if Plaintiffs show which parts of the claims file they may legally be entitled to. While Plaintiffs’ brief fails to do as much, they were unable to in part because Defendant has not provided an adequate privilege log.”

An adequate privilege log requires the party asserting the privilege to set forth sufficient facts as to each document at issue, and is further required to “establish each element of the privilege or immunity that is claimed. The focus is on the specific descriptive portion of the log, and not on conclusory invocations of the privilege or work-product rule.”

The court instructed the insurer “to provide an amended privilege log supplying some of the underlying factual bases for its privilege and work product claims—but not so much that it effectively discloses any such privileged information—so that Plaintiffs may raise, by brief, the parts of the privilege log they believe Defendant has failed to show are privileged.” After these steps are taken, the “court can then decide whether to conduct an in camera inspection of certain portions of the insurer’s claim file.”

Date of Decision: December 5, 2019

Ferguson v. USAA General Indemnity Co., U. S. District Court Middle District of Pennsylvania Civil No. 1:19-cv-401, 2019 U.S. Dist. LEXIS 209579 (M.D. Pa. Dec. 5, 2019) (Rambo, J.)

COURT ALLOWS FOR POSSIBILITY OF STATUTORY BAD FAITH, EVEN WHERE NO BENEFIT DUE – BUT STILL DENIES CLAIM (Western District)

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The court determined no coverage was due under a policy exclusion in this water damage case. Thus, there could be no statutory bad faith claim on the basis coverage was improperly denied.

However, even though no benefit was denied under the policy, the court concluded that denial of a benefit was only one type of statutory bad faith. Under this view, failures to investigate facts, communicate with insureds, or do proper legal research could still create actionable bad faith claims even if no duty to indemnify or defend exists under the policy. [Note: As this Blog has set forth on many occasions, this view is questionable, i.e., the denial of a benefit is a sine qua non of statutory bad faith, and poor investigation or communication are only evidence of bad faith where a benefit has been denied, and cannot be a stand-alone basis for bad faith claims where no benefit is denied.]

Even under this broader standard, the court granted the insurer summary judgment. The insured asserted inadequate investigation bad faith concerning the cause of water damage in this case. It alleged the investigation was too brief, the inspector did not investigate all areas of the property, and did not communicate with the insured about the loss. The plaintiff admitted the adjuster did investigate a burst public water supply pipe from which all of the alleged property damage originated.

The court found because the policy excluded losses originating from a burst water supply pipe, there was in fact no need for any further investigation. “Under these circumstances, any additional investigation would not have changed the outcome of [the] decision to deny [the insured’s] claim.” Thus, there was insufficient “evidence from which a reasonable jury could find by clear and convincing evidence that [the insurer] performed an inadequate investigation or otherwise acted in bad faith in its handling [the] claim.” [Note: It is clear that the policy’s coverage language defining benefits due informed the court’s decision on what constituted a reasonable investigation.]

Thus, summary judgment was granted on the bases that there was no improper benefit denial, and no bad faith investigation.

Date of Decision: November 21, 2019

Sypherd Enterprises, Inc. v. Auto-Owners Insurance Co., U. S. District Court Western District of Pennsylvania 2022102:18-CV-00141-MJH, 2019 U.S. Dist. LEXIS 202210 (W.D. Pa. Nov. 21, 2019) (Horan, J.)

It is interesting to compare this case to the statement of principles governing actionable statutory bad faith claim in last week’s post on Judge Beetlestone’s Purvi decision.

BAD FAITH CLAIM BIFURCATED AND STAYED; REQUEST TO DEPOSE INSURER’S COUNSEL QUASHED AS COVERAGE COUNSEL COMMUNICATING WITH INSURED IS COMMONPLACE AND DOES NOT MAKE COUNSEL A FACT WITNESS (Middle District)

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In this first-party property damage case, Judge Conner addressed a motion to sever and stay a bad faith claim, as well as a motion for a protective order to quash the deposition of the carrier’s coverage counsel, who was also defending the breach of contract and bad faith action.

Motion to Sever and Stay Results in Bifurcation and Stay

Judge Conner first noted the difference between a Rule 21 motion to sever and stay, and a Rule 42 motion to bifurcate, observing that severance results in two separate and distinct actions, resulting in separate judgments. In this case, the insurer had moved to sever, but also included in its motion bifurcation as a form of relief.

“Severance is appropriate when the claims are ‘discrete and separate,’ each capable of resolution without dependence or effect on the other.” Factors include whether the two claims will require different evidentiary proof, judicial economy, and party prejudice. Judge Conner observed the wealth of case law addressing severance and bifurcation in insurance bad faith cases, but noting that the cases go both ways.

As in other cases, the insurer here argued, “irreparable prejudice from premature and potentially unnecessary disclosure of otherwise privileged information, inefficiency in litigating a secondary claim of bad faith that may be mooted by resolution of the coverage claim, and jury confusion and the potential loss of [the insurer’s] chosen counsel if the claims proceed together.”

  1. The court agreed that the breach of contract claim and bad faith claim are separate and distinct, with only minor overlap. For example, “[i]nformation concerning how [the insurer] investigated and evaluated the coverage claim, its claims-handling policies, and its attorney and personnel communications regarding denial of coverage … are simply immaterial to the issue of whether coverage is required under the policy.”

  2. The court also found the prejudice element favored the insurer’s position. The insurer focused on revealing its attorneys’ advice, opinions and strategy as providing an undue advantage in the insured’s contract case, where such information would not otherwise be discoverable. The insured focused on increased litigation expenses.

Judge Conner found “that although both parties have proffered potential prejudice, [the insurer’s] likely injury from denying separation of these claims outweighs the possible increased costs identified by [the insured]. As [the insurer] correctly notes, attorney-client privilege and the work product doctrine are long-held, venerated components of our legal system. …. Such protections are not absolute, but they should not be disregarded lightly. We do not dismiss [the insured’s] legitimate concern regarding litigation costs, but ultimately conclude that this factor also favors [the insurer].”

  1. On the judicial economy element, the court rejected the notion that a ruling denying coverage would moot the bad faith claim; instead observing that a bad faith claim can exist independently of a coverage denial. [Note: As recently reiterated on this Blog, there is a longstanding issue as to whether statutory bad faith can be pursued in Pennsylvania simply for poor claims handling, if there is no benefit due under the policy.] The court also rejected the notion that the likelihood of more complex discovery disputes if both actions are litigated together requires severance.

After weighing all factors, Judge Conner chose to bifurcate, rather than sever; and to stay discovery on the bad faith claim. He recognized other courts had ruled differently in insurance bad faith cases, but highlighted the fact that each case is unique, that judges have broad discretion, and that in “this” case bifurcation and stay were warranted.

Court denies insured’s request to depose the insurer’s counsel

The insured sought to depose the insurer’s defense counsel in the case, who was also involved in the underlying coverage dispute. The insurer moved to quash the deposition. As the only pending case was now the breach of contract claim, Judge Conner viewed the issue through that prism.

The insured argued that counsel acted as a claim investigator, and was thus a fact witness. However, it offered no support for that position. It sought to depose counsel to obtain his: “’thoughts and reasoning as to why certain information was or was not included in the denial letters,’ knowledge of the cause and extent of the loss, and reasons why ‘certain information was disregarded” and the claim ultimately denied.’” The court found this “either irrelevant to the breach of contract claim, privileged, discoverable through other means, or a combination thereof.”

“Furthermore, that [the insurer’s counsel] authored letters denying coverage and setting forth [the insurer’s] reasons for its denial has no bearing on whether his deposition is necessary on the breach of contract claim. The practice of insurers consulting with their attorney regarding coverage and having their attorney communicate with the insured is quite commonplace and does not transform [coverage counsel] into a fact witness.”

The court further recognized the potential issue that the deposition could result in counsel’s disqualification. This was another reason to quash the deposition in connection with the contract claim. Judge Conner did leave the door open for the insured to reassert its request to depose counsel in the bad faith case.

Dated: July 25, 2019

McFarland, LP v. Harford Mutual Insurance Cos., U. S. District Court Middle District of Pennsylvania CIVIL ACTION NO. 1:18-CV-1664, 2019 U.S. Dist. LEXIS 124038 (M.D. Pa. July 25, 2019) (Conner, J.)

Our thanks to Dan Cummins of the excellent Tort Talk Blog for bringing this case to our attention.

BAD FAITH STATUTE OF LIMITATIONS NOT TOLLED, OR RENEWED, BY CHANGE IN THE LAW ON COVERAGE; NO PLAUSIBLE CLAIM PLEADED; BAD FAITH POSSIBLE EVEN IF BENEFIT NOT DUE (Philadelphia Federal)

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This UIM case was stimulated by the Pennsylvania Supreme Court’s recent decision reversing precedent on the household vehicle exclusion. In dismissing the bad faith claim, the court found:

  1. The two-year statute of limitations was not tolled by a change in the law.

  2. The change in the law, which resulted in the insured renewing her demand for coverage, did not re-start the statute of limitations.

  3. Alternatively, the insured failed to plead sufficient facts to set forth a plausible bad faith claim; rather she only made a few conclusory allegations.

The court did have a significant footnote, which addresses the long-standing debate over whether there can be statutory bad faith where no coverage is due. Judge Pappert clearly comes down on the side that bad faith can still exist, noting that “a claim for bad faith pursuant to 42 Pa. C.S. § 8371 is a separate and distinct cause of action and is not contingent on the resolution of the underlying contract claim. … Thus, if bad faith is asserted as to conduct beyond a denial of coverage, the bad faith claim is actionable as to that conduct regardless of whether the contract claim survives.” As we have noted before on this blog, other courts dispute this view.

Date of Decision: July 3, 2019

O’Brien v. GEICO Employees Insurance Co., U. S. District Court Eastern District of Pennsylvania CIVIL ACTION NO. 19-01920, 2019 U.S. Dist. LEXIS 110914 (E.D. Pa. July 3, 2019) (Pappert, J.)

BAD FAITH CLAIM BROUGHT MORE THAN TWO YEARS AFTER NOTICE OF DENIAL DISMISSED ON STATUTE OF LIMITATIONS GROUNDS (Philadelphia Federal)

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A property loss coverage claim was dismissed under the policy’s two-year suit limitation provision, requiring that any suit be brought within two years of the date of loss. In dismissing this breach of contract claim, the court reiterated the Third Circuit’s holding that an insurer does not have to show prejudice in enforcing a suit limitation provision.

The insured also brought a statutory bad faith claim, and a breach of the covenant of good faith and fair dealing count. The insurer moved to dismiss the bad faith claim on statute of limitations grounds, arguing that the policy benefit was denied more than two years prior to suit. (It is well established that the bad faith limitations period is two years).

The insurer relied on a notice of denial, attached to its answer, in moving to dismiss. The insured asserted because this document was not attached to the complaint, it could not be considered on a motion to dismiss. Under the circumstances of this case, the court disagreed.

The court observed that courts handling motions to dismiss “may consider an undisputedly authentic document that a defendant attaches as an exhibit to a motion to dismiss if the plaintiff’s claims are based on the document.” Absent this exception, plaintiffs with legally deficient claims could simply omit attaching a document to avoid dismissal of claims that should be dismissed.

The court found the denial referenced in the complaint to be based on this notice of denial  document, and so considered it on the motion to dismiss.  The notice of denial was issued over two years before suit. Thus, the bad faith claim was independently time barred, and was dismissed on that basis.

[Note: This court ruled two weeks earlier that a bad faith claim could proceed even when the underlying breach of contract was dismissed because of a suit limitations provision, i.e., the bad faith claim could proceed even though no coverage was due. A link summarizing that opinion, and the viability of bad faith claims when no coverage is due, can be found here.]

Finally, the court dismissed the breach of the covenant of good faith and fair dealing as being subsumed within the breach of contract claim.

Date of Decision: May 23, 2019

Mail Quip, Inc. v. Allstate Insurance Co., U. S. District Court Eastern District of Pennsylvania CIVIL ACTION No. 19-223, 2019 U.S. Dist. LEXIS 87923 (E.D. Pa. May 23, 2019) (Kenney, J.)

BAD FAITH CLAIM CAN PROCEED AFTER COVERAGE CLAIM DISMISSED AS UNTIMELY; PRO SE PLEADING ADEQUATE TO AVOID DISMISSAL (Philadelphia Federal)

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As we have discussed on this Blog for many years, case law is divided on whether statutory bad faith can exist if no coverage is due. We addressed this in some detail within this October 2018 post, summarizing a federal case where the court stated that Pennsylvania law allows for statutory bad faith even in the absence of any coverage obligation. In that October 2018 post, we additionally noted the presence of case law that would allow a bad faith claim to proceed where coverage is not due for procedural reasons, e.g., an otherwise covered claim is barred by a contractual limitations period. By contrast, this even more recent post summarizes an opinion, from the same federal court, finding there can be no bad faith if no coverage is due.

Linked here is a detailed article addressing whether Pennsylvania’s bad faith statute only addresses bad faith coverage denials and refusals to defend, and does not provide relief for poor claims handling or the like when these underlying benefits are not due. Under this view, poor claims handling or communications failures are evidence of statutory bad faith in denying benefits, but such conduct is not actionable (cognizable) statutory bad faith in itself.

BAD FAITH CLAIM CAN PROCEED EVEN IF COVERAGE NOT DUE UNDER CONTRACTUAL LIMITATIONS PROVISION

In the present case, arising out of the very same federal court as the aforementioned cases, the insured’s breach of contract claim was dismissed as time-barred by the policy’s suit limitation clause. The court, however, permitted the bad faith action to proceed. Specifically, the court stated: “Because Plaintiff asserts bad faith as to conduct beyond [the carrier’s] denial of coverage, the Court must consider the sufficiency of Plaintiff’s bad faith claim even though Plaintiff’s breach of contract claim is time-barred.”

The court quoted from footnote 3 of the 2017 Dagit case: “It is well established that a claim for bad faith brought against an insurer pursuant to 42 Pa. C.S. § 8371 is a separate and distinct cause of action and is not contingent on the resolution of the underlying contract claim. Thus, if bad faith is asserted as to conduct beyond a denial of coverage, the bad faith claim is actionable as to that conduct regardless of whether the contract claim survives.”

[Note: Dagit relies on cases such as Doylestown Electric Supply Co. v. Maryland Casualty Insurance Co., 942 F. Supp. 1018 (E.D. Pa. 1996), March v. Paradise Mutual Insurance Co., 646 A.2d 1254 (Pa. Super. Ct. 1994), and the Third Circuit’s unpublished opinion in Gallatin Fuels, Inc. v. Westchester Fire Ins. Co., 244 F. App’x 424 (3d Cir. 2007). As in the present case, Doylestown Electrical and March involved contractual suit limitations provisions barring coverage, and not lack of coverage under substantive policy provisions. Gallatin Fuels addressed the extraordinary situation where the policy was not in effect at the relevant time, but the court held the bad faith statute still applied because the insurer believed it had a policy in effect and acted poorly while holding that belief. These cases are addressed in the article linked here and above.]

INSURED ADEQUATELY PLEADS BAD FAITH

After finding the bad faith claim could proceed, the court still had to address the complaint’s adequacy. It found the bad faith claim adequately pleaded, stating:

[The insurer] argues that [the insured] does not provide any facts to support his allegation that [the insurer] acted in bad faith by denying him coverage under the insurance policy for the damage sustained to his home by the snowstorm. … To the contrary, [the insured] sets forth a myriad of facts to support his claim. For example, [the insured] alleges he was given contradictory information by [the insurer’s] agents as to the coverage of his policy and how he could collect under his policy and subsequently appeal [the insurer’s] denial of that coverage, which he relied upon to his detriment. … [The insured] also alleges that he was instructed to file multiple claims, which caused him to pay multiple deductibles and which ultimately discredited his claim. … In holding [the insured’s] Second Amended Complaint to a “less stringent standard,” as required of the Court in light of [his] pro se representation, the Court finds that [the insured] sufficiently alleged a claim for bad faith and Defendant’s Motion to Dismiss is denied as to this claim.

Date of Decision: May 10, 2019

Nguyen v. Allstate Insurance Co., U. S. District Court Eastern District of Pennsylvania CIVIL ACTION NO. 18-5019, 2019 U.S. Dist. LEXIS 79822 (E.D. Pa. May 10, 2019) (Kenney, J.)

COURT PERMITS BAD FAITH CLAIM TO PROCEED EVEN THOUGH NO COVERAGE IS DUE BECAUSE OF CONTRACTUAL LIMITATIONS PERIOD (Middle District)

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While the Court granted summary judgment on the breach of contract claimed based on a contractual limitations period, and reiterated its earlier position that the bad faith statute does not allow for actual or consequential damages, the court did allow the statutory bad faith claim to proceed.

The court looked to the Third Circuit’s 2015 Wolfe opinion, finding a statutory bad faith claim viable even if the underlying claim was fully paid, where a delay in making that payment arose from bad faith claims handling. If bad faith delays were not actionable, an insurer could consistently act in bad faith with no consequences, i.e., take an unreasonable position on coverage, knowingly or recklessly disregard its unreasonableness in delaying payment, and then finally relent in paying to obviate itself from the consequences of the bad faith delays in paying a valid claim.

Further, Wolfe observes that courts will deem nominal damages to exist if there is a breach of contract, which can then form the basis for statutory remedies under section 8371.

Under both of these theories, an injured plaintiff can still pursue statutory interest, punitive damages, and attorneys’ fees under the bad faith statute, even if no compensatory damages are due.

[Note 1: In this case, unlike the Wolfe scenario, there was no breach of contract and no coverage due. Thus, there is a genuine issue as to whether the Third Circuit’s reasoning in Wolfe applies, as it is premised on the principles that (1) coverage was due and there was a bad faith delay in payment, and that (2) there was a breach of contract for which nominal damages are due. Neither circumstance exists in this case. That being said, there has been at least some older case law allowing a bad faith claim to proceed where the contract claim is denied on procedural grounds like the statute of limitations, rather than on the substantive policy language, an argument that is not put forward in this opinion.]

[Note 2: Although the court observed that compensatory and consequential damages are not available under the bad faith statute, this opinion implicitly recognizes such damages can be available under other, common law, theories. These are not detailed, but the Supreme Court’s Birth Center case is cited in Pratts, which allows compensatory or consequential damages under breach of contract bad faith theories in certain circumstances.]

Date of Decision: May 2, 2019

Pratts v. State Farm Fire & Casualty Co., U. S. District Court Middle District of Pennsylvania NO. 3:16-CV-2385, 2019 U.S. Dist. LEXIS 74141 (M.D. Pa. May 2, 2019) (Caputo, J.)

The court’s earlier ruling in Pratts can be found here.

DECEMBER 2018 BAD FAITH CASES: NO BAD FAITH WHERE NO COVERAGE DUE, CLAIMS HANDLING WAS REASONABLE, AND BAD FAITH DISCOVERY WAS NOT PURSUED (Middle District)

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The insurer denied disability benefits because the source of plaintiff’s amputation was diabetes, rather than injury. The insured brought breach of contract and bad faith claims. The court allowed the contract claim to proceed, but granted summary judgment on the bad faith claim.

The court found the insurer “clearly had a reasonable basis” to deny the claim. The insurer had investigated the claim, and this investigation clearly showed that diabetes contributed to the amputation, which provides a reasonable basis to refuse paying the claim. The court did address the argument that bad faith could go beyond the proper denial of a benefit, if there was an inadequate or biased investigation. In this matter, however, the record showed no such inadequacy or bias during the investigation.

It was also significant to the court that the insured never deposed any of the insured’s employees, never requested a copy of the insurer’s claims handling guidelines or standards, and did not seek any admissions concerning how the claim was handled. In short, the insured did not pursue any evidence to establish a bad faith claim.

Date of Decision: November 27, 2018

Long v. Transamerica Life Ins. Co., U.S. District Court Middle District of Pennsylvania CIVIL NO.: 4:16-CV-00139, 2018 U.S. Dist. LEXIS 200451, 2018 WL 6178944 (M.D. Pa. Nov. 27, 2018) (Schwab, M.J.)

OCTOBER 2018 BAD FAITH CASES: COURT FINDS BAD FAITH POSSIBLE EVEN WHEN NO COVERAGE IS DUE (BUT OVERALL, THE LAW ON THIS ISSUE REMAINS UNCLEAR) (Philadelphia Federal)

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This case may provide the clearest statement of the view that Pennsylvania permits statutory insurance bad faith claims to proceed where no benefit is due under the policy. As we have observed previously on this Blog, there is an argument that the Supreme Court’s Metropolitan v. Toy case requires that a benefit be denied as a predicate to bringing a statutory bad faith claim. There are some rare cases where no benefit is due for a purely procedural reason and bad faith claims were permitted to proceed, e.g., the contract claim was time barred. However, the principle set forth in this case, and others like it, appears to go beyond that narrow proposition.

Specifically, the court in this case did a choice of law analysis between Pennsylvania and Wisconsin law. It found a conflict because Wisconsin law requires that “first-party bad faith cannot exist without some wrongful denial of benefit under the insurance contract.” Looking at Pennsylvania law, the court stated, “On the other hand, Pennsylvania’s bad faith statute, 42 Pa. C.S.A. § 8371, has been interpreted to provide that when ‘bad faith is asserted as to conduct beyond a denial of coverage, the bad faith claim is actionable as to that conduct regardless of whether the contract claim survives.’”

The court summed up: “So, while a party may bring a viable bad faith claim under Pennsylvania law based on the insurer’s lack of investigation or failure to communicate even when the purported insured is not covered by the policy see Frog, Switch & Mfg. Co. v. Travelers Ins. Co., 193 F.3d 742, 751 n.9 (3d Cir. 1999), such a claim is not viable under Wisconsin law ….” By contrast, in another recent district court case finding no breach of the insurance contract, the court found no bad faith possible, likewise citing Frog Switch: “Count II of Plaintiff’s Amended Complaint … for Insurance Bad Faith is hereby dismissed. In light of the dismissal of the Breach of Contract claim, the Bad Faith claim cannot survive. Frog, Switch & Mfg. Co. v. Travelers Ins. Co., 193 F.3d 742, 751 n.9 (3d Cir. 1999) (‘[W]here there was no duty to defend, there was good cause to refuse to defend against a suit.’).”

Under the categories “No coverage due, bad faith still possible” and “No coverage duty, no bad faith”, we list summaries of cases addressing the split on this issue, and a few general comments concerning that split.

In the present case, the court determined Wisconsin law applied, and that there could be no bad faith because no coverage was due under the contract.

Date of Decision: October 22, 2018

Achenbach v. Atlantic Specialty Insurance Co., U. S. District Court for the Eastern District of Pennsylvania CIVIL ACTION NO. 17-534, 2018 U.S. Dist. LEXIS 181146 (E.D. Pa. Oct. 22, 2018) (Beetlestone, J.)

SEPTEMBER 2018 BAD FAITH CASES: COURT DISMISSES AMENDED COMPLAINT WITH PREJUDICE, AFTER GIVING INSURED ANOTHER OPPORTUNITY TO PLEAD AN ACTIONABLE BAD FAITH CLAIM (Middle District)

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In some contrast with today’s earlier post, this district court reiterated its prior legal restatement of bad faith law, that in addition to coverage denial being a basis for bad faith, “a plaintiff may also make a claim for bad faith stemming from an insurer’s investigative practices, such as a lack of a good faith investigation into facts, and failure to communicate with the claimant.” Even under that standard, the case was dismissed.

The court had previously dismissed the bad faith claims, with leave to amend. The amended complaint only added conclusory allegations. Thus, relying on the same principles set forth in its first opinion, the Court now dismissed the bad faith claim with prejudice. The court stated:

“The allegations of bad faith are virtually identical to those that I previously found insufficient. Again, Plaintiffs do not plead any facts to support a finding of bad faith. Instead, they rely solely on “bare-bones” conclusory allegations which are not sufficient to state a bad faith claim. … Moreover, insofar as the claim is predicated on Nationwide’s purported bad faith in soliciting the purchase of the insurance policy at issue, those allegations do not state a claim to relief under § 8371. … Since Plaintiffs fail to plead a plausible basis to support a finding of bad faith, that claim will be dismissed with prejudice.”

Date of Decision: September 4, 2018

Frantz v. Nationwide Insurance Company, U. S. District Court Middle District of Pennsylvania NO. 3:18-CV-0509, 2018 U.S. Dist. LEXIS 149898 (M.D. Pa. Sept. 4, 2018) (Caputo, J.)