Archive for the 'PA – No coverage duty, no bad faith' Category
This case involves attorney malpractice insurance, and when a carrier is estopped from denying coverage for failing to issue a timely reservation of rights letter.
The underlying plaintiff brought two actions against the attorney arising out of the same underlying medical malpractice action: (1) a 2017 legal malpractice action and (2) a 2019 disgorgement action seeking return of a referral fee paid to the insured attorney.
As to the 2019 claim, the underlying plaintiff had demanded return of the referral fee even prior to the disgorgement action. The record indicates that at some point prior to the disgorgement action being filed, the carrier issued a reservation of rights letter, stating the attorney would not be covered for any disgorgement. Another reservation of rights letter was issued after the 2019 suit was filed. The carrier defended the disgorgement action, but refused to indemnify after judgment was entered against the attorney, who had to disgorge his referral fee and pay treble damages.
The carrier brought a declaratory judgment action seeking a ruling that it had no duty to indemnify either the 2017 or 2019 actions. The insured counterclaimed for coverage, based on estoppel, and bad faith. The underlying plaintiff, a party to the case, also asserted estoppel.
The present posture involved cross-motions for summary judgment.
Carrier estopped from denying coverage for failing to issue timely reservation of rights letter
As to the 2017 case, the malpractice carrier defended the first action without timely issuing any reservation of rights letter. Thus, the court held the insurer was estopped from later denying coverage in the 2017 malpractice action.
In reaching this conclusion, Judge Kearney provides a detailed analysis of when an insurer may be estopped from denying coverage for failing to issue a reservation of rights letter, which is worth reading in detail for any attorney doing coverage work. Without reciting every detail, Judge Kearney outlines the basic issues as follows:
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To estop an insurer from denying defense or coverage, the insured must show the insurer induced a belief in facts on which the insured relied to his detriment.
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In determining detrimental reliance, courts will assess whether the insured suffered actual prejudice.
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“Actual prejudice occurs when an insurer assumes the insured’s defense without timely issuing a reservation of rights letter asserting all possible bases for a potential denial of coverage.”
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“When an insurer receives notice of a claim, it has a duty ‘immediately to investigate all the facts in connection with the supposed loss as well as any possible defense on the policy.’”
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“[The insurer] cannot play fast and loose, taking a chance in the hope of winning, and, if the results are adverse, taking advantage of a defect in the policy.”
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“The insured loses substantial rights when he surrenders, as he must, to the insurance carrier the conduct of the case.”
No estoppel in second action and no bad faith
Earlier in the case, the court dismissed the insured’s bad faith counterclaims on the 2017 action, but had allowed the bad faith counterclaims on the 2019 action to proceed.
As to the 2019 action, the insurer promptly issued a reservation of rights and denial of coverage when it learned of the potential disgorgement claim. Moreover, it had even informed the insured prior to the second action’s actual filing that there was no coverage for disgorgement claims.
The court found the carrier was not estopped from asserting it owed no duties in the second action. Judge Kearney especially focused on the absence of prejudice to the insured. Clearly, the court further agreed that the carrier had no indemnification duty toward the insured in the 2019 case, absent an effective estoppel argument.
As to bad faith, once the court found the insurer had reserved its rights and properly denied coverage in the second action, it rejected the bad faith claim.
Judge Kearney observed there is no common law bad faith claim in Pennsylvania, only statutory bad faith and the contractual breach of the implied duty of good faith and fair dealing. In this case, the insured did not raise statutory bad faith, so the court solely looked at the contractual duty of good faith and fair dealing claim.
“An insurer violates its implied contractual duty to act in good faith when it gives a ‘frivolous’ or ‘unfounded’ excuse not to pay insurance proceeds. As we find [the insurer] has no duty to defend or indemnify [the insured attorney], we cannot find its decision not to do so ‘unfounded’ or ‘frivolous.’”
Finally, the court found the underlying plaintiff had no standing to bring an estoppel counterclaim, even if she did have standing to argue for coverage.
Thus, the insured won summary judgment on coverage in the 2017 claim, but the insurer was successful on the 2019 claim.
Date of Decision: October 8, 2020
Westport Insurance Corporation v. McClellan, U.S. District Court Eastern District of Pennsylvania No. 20-1372, 2020 WL 5961047 (E.D. Pa. Oct. 8, 2020) (Kearney, J.)
This case centers on a dispute between the insureds and their homeowners carrier over whether the carrier had agreed to policy limit increases based on a multi-million dollar renovation. The court details a series of alleged telephone communications between the insureds and the carrier, which the insureds claim committed the carrier to the policy limit increases. This all occurred before the fire loss at issue.
In addition, the policy included a provision for “Home Protection Coverage”. This provision provides for a 25% coverage extension on existing policy limits. “Essentially, the Home Protector Coverage’s purpose is to provide extended coverage in the event a homeowner’s losses exceed the policy’s coverage limits.” The insureds also they did everything necessary for the Home Protection Coverage to be in place at the time of their fire loss.
The carrier asserted to the contrary that there was both no evidence properly documenting an increase in policy limits, or that the insureds met the requirements needed to receive the Home Protection Coverage. The insurer rejected claims for the higher limits and the Home Protection Coverage, and the insureds sued for breach of contract, statutory bad faith, promissory estoppel, and violation of the Unfair Trade Practices and Consumer Protection Law (UTPCPL).
Breach of Contract Claims Partially Survive
The court dismissed the breach of contract claim for extended policy limits, without prejudice. There was no plausible claim that a contract existed as such or through the reasonable expectations doctrine.
However, the court found the breach of contract claim for the “Home Protection Coverage” stated a plausible claim. The court held that to find otherwise would make the relevant policy language illusory.
BAD FAITH
The court set forth various principles on statutory bad faith, though incorrectly stating that the insured must demonstrate some motive of self-interest or ill will.
Plausible Bad Faith Claim Stated for Pursuing Argument that would make Coverage Illusory
The court found the insureds stated a plausible bad faith claim as to the denial of Home Protection Coverage. The insureds alleged they paid their premiums, gave notice of renovations, and timely submitted their coverage claims. “Plaintiffs thus assert that Defendant ‘unreasonably denied the benefits’ and ‘had knowledge of their lack of reasonable basis for denying benefits.’”
More specifically, at the pleading stage, the Court had already “rejected carrier’s interpretation of the Home Protector Coverage … and thus cannot accept Defendant’s argument that its basis for denial of Home Protector Coverage was reasonable because Plaintiffs ‘could not show that their property was fully insured for replacement cost at policy inception.’ …. Such an interpretation would construct an illusory promise of coverage, which the Court has already determined it should not entertain.”
Failure to State Plausible Bad Faith Claim where no Coverage is Due
As to the bad faith claims concerning extending the policy limits, the Complaint did not set out a plausible claim. As stated above, the court ruled the insureds failed to plead a plausible claim for breach of contract on extending policy limits through the various telephone communications or failing to reschedule an inspection. “As such, the Court agrees with Defendant that in ‘the absence of insurance coverage, there can be no bad faith by the insurer as a matter of law.’” As with the contract claim, dismissal was without prejudice.
Promissory Estoppel and UTPCPL
The court rejected that promissory estoppel could create or increase insurance coverage. It allowed the claim to proceed, but solely as to amending allegations that could go to the breach of contract claims.
The court agreed that the UTPCPL could not create liability for claims handling. It was not clear to the court, however, whether the alleged deceptive conduct occurred at times other than during claims handling.
The court then carries out a fairly detailed analysis of significant UTPCPL concepts such as malfeasance vs. nonfeasance, pleading intent, pleading with particularity, and whether the gist of the action doctrine might apply.
The court concludes, “while Plaintiffs’ averments of deceptive conduct are not categorically barred by the UTPCPL to the extent set out above, Plaintiffs have not pled their claim with the level of particularity required by Pennsylvania law. Accordingly, the Court grants Defendant’s Motion to Dismiss … without prejudice and with leave to amend.”
Date of Decision: September 24, 2020
Luketich, v. USAA Casualty Insurance Company, U.S. District Court for the Western District of Pennsylvania No. 2:20-CV-00315, 2020 WL 5669017 (W.D. Pa. Sept. 24, 2020) (Hornak, J.)
A putative additional insured brought breach of contract and bad faith claims. The insurer denied a defense and indemnification on the basis that the policy did not cover the additional insured. The court agreed, and then granted the carrier summary judgment on all claims.
As to the bad faith claim, the plaintiff’s“sole argument for its bad faith claim is based on the lapse in time between [the] request … for coverage in the [underlying] action on May 23, 2018 and [the] response denying coverage on October 22, 2018.” The court observed that while delay can be “’a relevant factor in determining whether bad faith has occurred … a long period of time between demand and settlement does not, on its own, necessarily constitute bad faith.’” “’Rather, courts have looked to the degree to which a defendant insurer knew that it had no basis to deny the claimant; if delay is attributable to the need to investigate further or even to simple negligence, no bad faith has occurred.’”
While these are significant points in measuring delay if a payment is due or defense owed, the court never had to reach the delay issue because the bad faith claim lacked merit once coverage was denied. “There cannot be a bad faith claim against an insurer if that insurer had no duty to defend.” The court relied on 631 N. Broad St., LP v. Commonwealth Land Title Ins. Co. for this principle.
Thus, there was no evidence of bad faith under the circumstances. Rather, the undisputed evidence established that the insurer “correctly refused to defend and indemnify” the putative additional insured.
Date of Decision: September 15, 2020
Eastern, LLC v. Travelers Casualty Insurance Co. of America, U.S. District Court Eastern District of Pennsylvania No. CV 19-5283, 2020 WL 5534060 (E.D. Pa. Sept. 15, 2020) (Bartle, J.)
The insured failed to plead a plausible bad faith claim in this first party property loss case.
We will address two things about this case. First, the details in the court’s decision granting the motion to dismiss. Second, the court’s finding that statutory bad faith can consist of more than the denial of first party benefits or the denial of a defense and indemnification in third party claims.
Failure to Plead a Plausible Bad Faith Claim
As discussed many times by the federal district courts addressing bad faith claims, conclusory allegations simply carry no weight in adequately pleading a bad faith claim. Courts will parse the complaint to determine what non-conclusory facts have actually been pleaded, what allegations are merely conclusory boilerplate and can be disregarded, and whether facts left standing after that process can support a plausible bad faith claim.
In this case, the facts pleaded only included the location of covered property, that a peril covered under the policy caused direct physical loss and damage to the property, that prompt and timely notice of loss was given to the carrier, and that the insured fully complied with all necessary policy terms and conditions.
The complaint went on to aver generically 13 forms of bad faith behavior, with no factual detail (listed below). The court readily found these allegations conclusory.
The court gave particular attention to a few of these conclusory allegations. For example, the complaint alleges the carrier “’misrepresent[ed] pertinent facts or policy provisions relating to coverages at issue’ and ‘sen[t] correspondence falsely representing’ that Plaintiff was not entitled to benefits under the Policy….” However, the complaint failed “to explain what those misrepresentations may have been.”
Plaintiff also averred that the insurer “’fail[ed] to fairly negotiate the amount of [Plaintiff’s] loss” … but provides no details describing what was unfair about the negotiations.” Judge Padova added that “[t]he Complaint’s remaining bad faith allegations merely assert that [the insurer] was not prompt, thorough, fair, or reasonable in how it handled or denied the claim, but does not provide any facts explaining how [it] was not prompt, thorough, fair, or reasonable.”
The Complaint was dismissed with leave to amend.
Can Courts Rely on the Superior Court’s 2006 Condio Decision to Determine the Scope of the Bad Faith Statute after the 2007 Supreme Court Decision in Toy v. Metropolitan Life
Though not ultimately relevant to the court’s decision, the opinion states that:
“‘[S]ection 8371 is not restricted to an insurer’s bad faith in denying a claim. An action for bad faith may [also] extend to the insurer’s investigative practices.’” Greene v. United Servs. Auto. Ass’n, 936 A.2d 1178, 1187 (Pa. Super. Ct. 2007) (alterations in original) (quoting Condio, 899 A.2d at 1142). Indeed, the term bad faith “‘encompasses a wide variety of objectionable conduct’” including “‘lack of good faith investigation into facts, and failure to communicate with the claimant.’” Id. at 1188 (quoting Condio, 899 A.2d at 1142).
The Superior Court decided Condio in 2006.
In the 2007 Supreme Court Toy v. Metropolitan Life decision, Chief Justice Cappy, writing for the majority, observed that at the time of the Bad Faith Statute’s 1990 enactment, “the term ‘bad faith’ concerned the duty of good faith and fair dealing in the parties’ contract and the manner by which an insurer discharged its obligations of defense and indemnification in the third-party claim context or its obligation to pay for a loss in the first-party claim context.” “In other words, the term captured those actions an insurer took when called upon to perform its contractual obligations of defense and indemnification or payment of a loss that failed to satisfy the duty of good faith and fair dealing implied in the parties’ insurance contract.”
Justice Eakin, writing in concurrence, found this reading too narrow. In their competing opinions, Justices Cappy and Eakin specifically debate the meaning and application of Condio in statutory bad faith actions. Justice Eakin cites Condio, among other Pennsylvania Superior Court cases, to argue the majority’s interpretation of the bad faith statute is too narrow.
In response, Chief Justice Cappy does not reject the Condio opinion, but states that Condio is addressing a different aspect of “bad faith” than what the court had to decide that day.
Justice Cappy finds there are two aspects to “bad faith” in the context of section 8371. “As we observe in footnotes 17 and 18, we do not consider what actions amount to bad faith [conduct], what actions of an insurer may be admitted as proof of its bad faith, whether an insurer’s violations of the UIPA are relevant to proving a bad faith claim or whether the standard of conduct the Superior Court has applied to assess an insurer’s performance of contractual obligations in bad faith cases is the correct one.” Rather, “[i]n this area, the term ‘bad faith’ refers not only to [1] the claim an insured brings against his insurer under the bad faith statute, but also, [2] to the conduct an insured asserts his insurer exhibited and establishes that it is liable. These matters although related, are nonetheless, separate and distinct. We write to the former. The concurrence appears to write to the latter.”
Justice Cappy specifically describes the issue in Condio, and other Superior Court cases cited by Justice Eakin, as “whether the evidence offered at trial by the insured as to the insurer’s behavior was sufficient to prove the bad faith claim and/or admissible in a § 8371 action.” Thus, it appears, Condio does not address the scope of what claims are cognizable under the Bad Faith Statute in the first instance, but addresses the adequacy of evidence in proving bad faith.
In light of (1) this distinction raised by the Toy Majority between the two uses of the term “bad faith”, (2) in direct response to Justice Eakin’s argument that statutory bad faith claims should broadly encompass the kind of behavior identified in Condio, and that such claims not be limited to “the manner by which an insurer discharged its obligations of defense and indemnification in the third-party claim context or its obligation to pay for a loss in the first-party claim context,” then (3) it is questionable that Condio, and other pre-Toy Superior Court cases, can expand the category of cognizable claims under the Bad Faith Statute to include conduct beyond “the manner by which an insurer discharged its obligations of defense and indemnification in the third-party claim context or its obligation to pay for a loss in the first-party claim context….”
See this article for a more detailed discussion.
Date of Decision: August 4, 2020
HARRIS v. ALLSTATE VEHICLE AND PROPERTY INSURANCE COMPANY, U.S. District Court Eastern District of Pennsylvania No. CV 20-1285, 2020 WL 4470402 (E.D. Pa. Aug. 4, 2020) (Padova, J.)
Conclusory allegations in the Complaint
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by sending correspondence falsely representing that Plaintiff’s loss [was not] caused by a peril insured against under the Policy [and that Plaintiff] was not entitled to benefits due and owing under the Policy;
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in failing to complete a prompt and thorough investigation of Plaintiff’s claim before representing that such claim is not covered under the Policy;
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in failing to pay Plaintiff’s covered loss in a prompt and timely manner;
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in failing to objectively and fairly evaluate Plaintiff’s claim;
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in conducting an unfair and unreasonable investigation of Plaintiff’s claim;
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in asserting Policy defenses without a reasonable basis in fact;
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in flatly misrepresenting pertinent facts or policy provisions relating to coverages at issue and placing unduly restrictive interpretations on the Policy and/or claim forms;
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in failing to keep Plaintiff or [her] representatives fairly and adequately advised as to the status of the claim;
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in unreasonably valuing the loss and failing to fairly negotiate the amount of the loss with Plaintiff or [her] representatives;
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in failing to promptly provide a reasonable factual explanation of the basis for the denial of Plaintiff’s claim;
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in unreasonably withholding policy benefits;
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in acting unreasonably and unfairly in response to Plaintiff’s claim;
m. in unnecessarily and unreasonably compelling Plaintiff to institute this lawsuit to obtain policy benefits for a covered loss, that Defendant should have paid promptly and without the necessity of litigation.
Anyone following this blog has been made aware, ad naseum, that courts are divided on whether statutory bad faith can exist where no benefit is denied. In this context, denial of a benefit includes a bad faith delay in providing a benefit owed. Thus, the issue is not whether a belated payment or defense can constitute bad faith. Rather, the issue is whether a statutory bad faith claim is cognizable if an insurer owes no duty to indemnify in a first party case, or to defend or indemnify against a third party claim.
We have pointed out that the 2007 Pennsylvania Supreme Court decision in Toy v. Metropolitan Life strongly appears to have answered this question: There is no statutory bad faith possible if no benefit is denied. Thus, if no benefit is due, it would appear section 8371 is not the remedy for poor claims handling practices, standing alone.
Last week, Eastern District Judge McHugh ruled in a case that no coverage was due under the policy at issue. After so ruling, he then addressed the bad faith claim in one sentence. “Because I have concluded that [the insurer] acted in accordance with the terms of the policy, it cannot be deemed to have acted in bad faith.” Hemphill v. Landmark Insurance Company. Another example of this principle is found in Judge DuBois’ 2019 Buck decision, which specifically cites Toy.
One day earlier, Lackawanna County Common Pleas Judge Nealon concluded that statutory bad faith did not require denial of a benefit. In fact, a carrier could win summary judgment that no coverage was due under an insurance policy, but still be subject to a statutory bad faith claim. Farber v. Erie Insurance Exchange.
Judge Nealon states that the success of a statutory bad faith claim does not depend on the success of the underlying contract claim. Citing a 1999 Superior Court opinion, he adds that “because ‘[a] bad faith action under Section 8371 is neither related to nor dependent on the underlying contract claim against the insurer,’ [the insured] is ‘not required to await a judicial determination of the coverage issue’ before pursuing a bad faith claim….”
There are numerous cases out of Pennsylvania’s Superior Court and Federal Courts finding there is a subset of statutory bad faith claims that do not require the denial of a benefit. Despite Toy’s importance on this issue, these cases typically do not cite Toy. Of course, some of the cases were decided before Toy, but many are not. Rather, these post-Toy cases cite case authority that ultimately relies on pre-Toy precedent.
The Farber opinion cites Superior Court case law relying on authority from the 1990s, as well as Middle District Judge Rambo’s 2019 Ferguson opinion. In Ferguson, Judge Rambo addressed the issue head on, and concluded that there are cognizable statutory bad faith claims that do not require denial of a benefit. Unfortunately, Ferguson does not consider the Toy opinion in reaching this conclusion.
Dates of Decision: July 8, 2020 and July 9, 2020
Farber v. Erie Insurance Exchange, Court of Common Pleas of Lackawanna County, No. 19 CV 2302 (July 8, 2020) (Nealon, J.)
Hemphill v. Landmark Insurance Company, U.S. District Court Eastern District of Pennsylvania CIVIL ACTION No. 19-5260, 2020 U.S. Dist. LEXIS 120447 (E.D. Pa. July 9, 2020) (McHugh, J.)
Our thanks to attorney Daniel Cummins of the excellent and valued Tort Talk Blog for bringing the Farber case to our attention.
This case centered on whether the insurer’s notices of lapse and termination were effective to terminate the policy. The policy required the carrier to “send” these notices. There was no dispute that the insurer caused the required notices to be mailed, but the insured denied ever receiving them.
The insurer argued mailing alone was sufficient to meet the “send” requirement, but the insured argued the policy further required that the notices actually be received. The term “send” was not defined in the policy. Judge Wolson looked to dictionary meaning of “send,” along with case law on mailing required documents. He concluded that “send” did not mean sent and received. Thus, the insurer’s mailings alone were sufficient to terminate the policy, whether or not the insured received the notices.
The insured also alleged bad faith in terminating the policy. Judge Wolson rejected this claim on the simple ground that there was a reasonable basis to terminate the policy, stating:
Pennsylvania’s law creates a cause of action against an insurance company “if the court finds that the insurer has acted in bad faith toward the insured.” 42 Pa.C.S. § 8371. Pennsylvania courts have defined “bad faith” as “any frivolous or unfounded refusal to pay proceeds of a policy.” Rancosky v. Washington National Ins. Co., 642 Pa. 153, 170 A.3d 364, 365 (Pa. 2017) (quotation omitted). A threshold question in a bad faith action is whether the employer had a reasonable basis for denying benefits under the policy. See Condio v. Erie Ins. Exch., 2006 PA Super 92, 899 A.2d 1136, 1143 (Pa. Super. Ct. 2006). As discussed above, [the insurer] had a reasonable basis for denying benefits. Thus, [the insured’s] bad faith claim fails.
Date of Decision: May 20, 2020
Wetty v. AXA Equitable Life Insurance Co., U.S. District Court Eastern District of Pennsylvania Case No. 2:18-cv-04756-JDW, 2020 U.S. Dist. LEXIS 88550 (E.D. Pa. May 20, 2020) (Wolson, J.)
“When an insurer’s coverage denial was reasonable ‘on the basis of the plain meaning of the Policy and relevant exclusions and definitions,’ there can be no ‘bad faith’ as a matter of law.”
Unlike the Eastern District’s recent decision in Smith v. AAA Interinsurance Exchange, the Pennsylvania Supreme Court’s decision in Gallagher v. Geico did not void the household exclusion under the facts of this case. The court thus found no UIM coverage due, and because the auto insurer “properly denied coverage, Plaintiffs’ tag-along claims for bad faith and violations of the Pennsylvania Unfair Trade Practices and Consumer Protection Law, 73 Pa. Stat. Ann. § 201-1, et seq., also fail.”
The insured was injured on a motorcycle she owned. The motorcycle was covered by Progressive. The insured owned two other vehicles covered by Mid-Century, the present defendant. The insured waived UIM coverage under the Progressive policy. She still sought coverage under the Mid-Century policy, relying on Gallagher, because she had not executed a stacking waiver in connection with the Mid-Century policy.
Gallagher does not apply where stacking is not at issue
The insured’s claim against Mid-Century failed. Gallagher stands for the proposition that the household exclusion cannot limit stacking without a stacking waiver. In this case, however, the insured had waived UIM coverage under her Progressive policy, so there was no stacking at issue. Rather, she was seeking primary UIM coverage against Mid-Century. Thus, Gallagher did not apply, and Mid-Century properly relied on the household exclusion to deny coverage.
No coverage due means no bad faith by definition
In dismissing the bad faith claim, the court found plaintiffs could not make out the first prong of the bad faith test, i.e., that the denial was unreasonable. “When an insurer’s coverage denial was reasonable ‘on the basis of the plain meaning of the Policy and relevant exclusions and definitions,’ there can be no ‘bad faith’ as a matter of law.” “Put differently, if Mid-Century properly denied coverage, which the Court finds it did, it could not, by definition, have acted in bad faith by denying coverage.”
Any other putative bad faith claims were dismissed for merely making conclusory allegations.
UTPCPL claim fails for variety of reasons
Lastly, the court dismissed plaintiffs’ Unfair Trade Practices and Consumer Protection Law (UTPCPL) claims for a variety of reasons. First, there was no improper conduct. Next, even if there was misconduct, the UTPCPL only applies to conduct in connection with issuing the insurance policy, not the performance of the insurer’s obligations under the policy after it is issued. Third, even assuming arguendo the plaintiffs could have overcome these two hurdles, they solely pleaded nonfeasance, and the UTPCPL only applies to claims of malfeasance.
No leave to amend was given, and judgment on the pleadings was entered for the insurer.
Date of Decision: May 19, 2020
Dunleavy v. Mid-Century Insurance Company, U.S. District Court Western District of Pennsylvania No. 2:19-cv-1304, 2020 U.S. Dist. LEXIS 88024 (W.D. Pa. May 19, 2020) (Ranjan, J.)
Our thanks to Attorney and Mediator Daniel Cummins of the excellent Tort Talk Blog for bringing this case to our attention.
In this case, the court makes clear that “Bad faith claims cover a range of conduct relating to the improper denial of benefits under the applicable contract.” The court quotes the Pennsylvania Supreme Court’s decision in Toy v. Metropolitan Life Ins. Co., 593 Pa. 20, 928 A.2d 186, 199 (Pa. 2007), to highlight the point that statutory bad faith claims must relate to a denial of benefits: “’In other words, the term [bad faith] captured those actions an insurer took when called upon to perform its contractual obligations of defense and indemnification or payment of a loss that failed to satisfy the duty of good faith and fair dealing implied in the parties’ insurance contract.’”
This first party property damage case centered on a policy endorsement changing the scope of coverage for access work done to repair leakage.
In 2015, the insureds had a homeowners policy with the carrier. In August 2015, while the policy was in effect, the carrier provided the insureds with notice of a new endorsement that would take effect on September 27, 2015. The notice stated that the new endorsement would potentially reduce coverage, and that “[a]lthough not intended to change coverage, this change could potentially reduce or eliminate coverage depending on how it is interpreted and, in that regard, should be viewed as either an actual or potential reduction in or elimination of coverage.”
The insureds renewed their homeowners policies in the ensuing years, apparently without ever questioning this endorsement. The property damage at issue occurred in September 2018, when the insured homeowners had their plumber do certain repair work to fix a leak, including access work to get to damaged plumbing. The insureds allege that the carrier improperly refused to pay the full bill for the access work, while the carrier relied on the 2015 endorsement in justifying its lower than hoped for payment.
The homeowners brought individual and class action counts, seeking declaratory relief, as well as claims for breach of contract, violations of the Unfair Trade Practices and Consumer Protection Law (UTPCPL), the Unfair Insurance Practices Act (UIPA), Pennsylvania’s Unfair Claims Settlement Practices regulations (UCSP), and for statutory bad faith. The insurer moved to dismiss all claims.
Declaratory judgment and contract claims dismissed without prejudice
The insureds argued the 2015 endorsement was unconscionable and should be rendered void; but even if enforceable, it still required greater payment than the carrier made for the cost of the access work. The court, however, dismissed the declaratory judgment claim and breach of contract claim on these grounds, but without prejudice if plaintiffs could plead additional facts to support these claims.
Bad faith claim dismissed without prejudice
The essence of the insureds’ bad faith claims is that the notice accompanying the 2015 endorsement promised greater coverage, but gave less coverage. The court found this could not state a bad faith claim because these claims did not involve the denial of a benefit. “Section 8371 encompasses a variety of insurer conduct, but such conduct must be related to the denial of benefits.” Though “’the alleged bad faith need not be limited to the literal act of denying a claim, the essence of a bad faith claim must be the unreasonable and intentional (or reckless) denial of benefits.’”
In this case the “Plaintiffs’ allegations do not relate to the denial of coverage of the access bill, they relate to the Endorsement notice’s language and how Defendant engaged in alleged misrepresentation because of the purportedly confusing notice.” A “claim that the drafting of policy language was in bad faith is not actionable under Pennsylvania law….” In making this point, the court relied on Mitch’s Auto Service Center, Inc. v. State Automobile Mutual Insurance Co. As stated above, it relied on Toy v. Metropolitan Life for the fundamental point that statutory bad faith claims must include the denial of a benefit.
The court also specifically observed the complaint was “devoid of any facts indicating Defendant lacked a reasonable basis for denying benefits under the policy.” Likewise, there were no plausible allegations that the insurer “knew or recklessly disregarded its lack of reasonable basis.” The insureds argued that the 2015 notice language could be the basis of a bad faith claim. The court failed to see, however, “how that notice, provided to Plaintiffs three years prior to the water damage here, shows that Defendant knew or recklessly disregarded its alleged lack of reasonable basis in denying Plaintiffs’ entire costs for the plumber’s access bill.”
Still, the court dismissed without prejudice if the insureds could replead a plausible bad faith claim.
UIPA and UCSP regulations claims dismissed with prejudice
UTPCPL claim dismissed without prejudice
The court dismissed the UTPCPL claim without prejudice, finding the 2015 notice did not constitute a deceptive act, because “the notice’s language explicitly states that the policyholder should treat the change as a reduction in coverage.” The court further found justifiable reliance was not pleaded, as there were no allegations that the insureds relied on any alleged misconduct causing them to purchase the policy.
Dates of Decision: March 27, 2020 (Report and Recommendation) and April 22, 2020 (District Court Order)
Velazquez v. State Farm Fire & Casualty Co., U.S. District Court Eastern District of Pennsylvania CIVIL ACTION NO. 19-cv-3128, 2020 U.S. Dist. LEXIS 55854 (E.D. Pa. Mar. 27, 2020) (Sitarski, M.J.) (Report and Recommendation), approved and adopted by the District Court (April 22, 2020) (Quiñones Alejandro, J.)
Published on
April 14, 2020 in
PA - Agents and Administrators, PA - Bifurcate/Sever & Stays, PA - Claims Handling (reasonable), PA - Coverage Issues, PA - Delay (Investigation/Claims handling), PA - Insurer wrong, but reasonable, PA - Law unsettled, PA - Negligence not bad faith, PA - No coverage duty, no bad faith, PA - UIPA & UCSP and PA - Who is an Insurer?.
The court described this as the case of the missing email. The insurance policy at issue covered various cars. The insured emailed its broker to add another vehicle to the policy. The broker claims it never got the email, and thus never asked the insurer to issue an endorsement adding the new car to the policy. As things sometimes go in life, the new car was involved in a collision, damaging another vehicle as well as its own new car.
The insured reported the claim. However, the insured identified its vehicle as one of existing cars listed in the policy, rather than the new unlisted vehicle. The insurer accepted coverage, and even paid damages to the other driver. The insurer later reversed itself on coverage once its appraiser determined the insured’s vehicle was not the car identified in the claim form, and was not covered under the policy.
The police report did list the correct vehicle. The insurer had the police report at the time it initially provided coverage, and only reversed itself when its appraiser realized that the damaged car was not the car on the claim form and was not listed in the policy.
The insured sued for breach of contract and bad faith, among other claims against the insurer as well as the broker. The insurer moved for summary judgment, which the court granted.
There is no breach of contract, or estoppel under the UIPA or UCSP regulations
First, there was no breach of contract, as the vehicle at issue never became part of the policy. The insured argued, however, that the insured was estopped from denying coverage under the Unfair Insurance Practices Act (UIPA) and the Unfair Claims Settlement Practices (UCSP) regulations governing “Standards for prompt, fair and equitable settlements applicable to insurers”. The insured relied on 31 Pa. Code § 146.7(a)(1), which states that, “Within 15 working days after receipt by the insurer of properly executed proofs of loss, the first-party claimant shall be advised of the acceptance or denial of the claim by the insurer.”
Judge Wolson rejected the statutory/regulatory argument for three reasons:
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There is no private right of action under the UIPA and UCSP regulations, and only Pennsylvania’s Insurance Commissioner can enforce the UIPA and UCSP regulations.
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The policy itself did not incorporate the UIPA or UCSP obligations or impose those obligations on the insurer. “Absent the incorporation of these obligations into the Policy, their potential violation does not breach the Policy.”
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The doctrines of waiver or estoppel cannot “create an insurance contract where none existed.”
THERE IS NO BAD FAITH
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The broker is not an insurer subject to the bad faith statute
First, the court recognized that there was no sustainable statutory bad faith action against the broker because it was not an insurer.
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There is no bad faith where no benefit is denied
Next, as to the insurer, “To prevail on a bad faith claim, a plaintiff must present clear and convincing evidence that, among other things, an insurer ‘did not have a reasonable basis for denying benefits under the policy’ or that an insurer committed a ‘frivolous or unfounded refusal to pay proceeds of a policy.’” Because the insurer had no contractual obligation to pay its refusal could not have been unreasonable, and the claim failed.
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The UIPA and UCSP regulations do no prevent changing a coverage decision based on new information
The court rejected another argument based on the UIPA and UCSP regulations cited above. The insured argued the failure to pay was unreasonable once the insurer accepted coverage. The court found, however, the UCSP regulations did not “prevent an insurer from changing a coverage determination based on new information.”
More importantly to the court, the insured adduced no case law adding such a gloss to section 146.7, i.e. a mandate that once coverage was accepted it could never be denied under any circumstances. Thus, it was reasonable for the insurer to interpret that regulation to permit an insurer to revise a coverage decision based on new information.
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A Delay based on an Oversight is not the Basis for Bad Faith
Finally, any delay in revising its coverage determination was likewise not bad faith. Citing the 2007 DeWalt decision, the court observed that an “insurer’s actions in allegedly delaying investigation did not constitute bad faith under Pennsylvania law [when] there was no evidence that such delay was deliberate or knowing, or was unreasonable.”
While the carrier “probably could have been more diligent” in determining which vehicle was involved in the collision by looking at the police report earlier, “an insurer ‘need not show that the process used to reach its conclusion was flawless or that its investigatory methods eliminated possibilities at odds with its conclusion.’” There was nothing in the record to establish the insurer “acted with reckless disregard of its obligations or otherwise fell so short that it acted in bad faith.”
Date of Decision: April 1, 2020
Live Face on Web, LLC v. Merchants Insurance Group, U.S. District Court Eastern District of Pennsylvania Case No. 2:19-cv-00528-JDW, 2020 U.S. Dist. LEXIS 56852 (E.D. Pa. April 1, 2020) (Wolson, J.)
Our thanks to attorney Daniel Cummins of the excellent Tort Talk Blog for bringing this case to our attention. We also note the Tort Talk Blog’s three recent posts on post-Koken motions to sever and stay bad faith claims in the Western District, York County, and Lancaster County.
The court determined there was no coverage due under an additional insured endorsement. Thus the insured lost on its breach of contract and declaratory judgments claims. It likewise failed to salvage its bad faith claims.
In addressing the bad faith claim, the court relied on the Third Circuit’s recent decision in 631 N. Broad Street v. Commonwealth Land Title, observing “that where there is ‘no duty to defend, there could be no [statutory] bad faith claim against’ the insurer.”
The insured tried to evade this result by asserting it still had a common law bad faith claim. However, the only common law bad faith cause of action available in Pennsylvania arises out of the insurance contract. If the contract claim fails, the common law bad faith claim fails of necessity. Thus, “[b]ecause the Court dismisses [the] breach-of-contract claim based on lack of potential for coverage, so too must it dismiss a subsumed claim of common law bad faith.”
On the common law bad faith holding, the court relied upon the Eastern District decisions in CRS Auto Parts and Tubman, and the Middle District decisions in Bukofsi and Porter.
Date of Decision: March 13, 2020
NVR, Inc. v. Mutual Benefit Insurance Co., U.S. District Court Western District of Pennsylvania No. 2:19-cv-26-NR, 2020 U.S. Dist. LEXIS 44135 (W.D. Pa. Mar. 13, 2020) (Ranjan, J.)
