Archive for the 'PA – No coverage duty, no bad faith' Category

NO COVERAGE DUE FOR COVID-19 CLAIMS, NO BAD FAITH CLAIM POSSIBLE (Middle District)

Print Friendly, PDF & Email

Middle District Judge Jones ruled that no Covid-19 coverage was due under an all-risk policy.

He found no “direct physical loss of or damage to property,” eliminating the possibility of coverage for business income losses or claims that the business closure resulted from a government order.  Further, even if covered, the claims were subject to the policy’s virus exclusion.

Thus, Judge Jones held plaintiff failed to make out its claims for breach of contract, declaratory judgment, and breach of the implied duty of good faith and fair dealing, and granted the insurer’s motion to dismiss those claims.  Although not a bad faith case, Judge Jones observed in a footnote, “[s]imilarly, Pennsylvania courts have held that if the insurer properly denied a claim, the policyholder is unable to state a bad faith claim.”

Date of Decision: February 8, 2021

Kahn v. Pennsylvania National Mutual Casualty Insurance Company, U.S. District Court Middle District of Pennsylvania No. 1:20-CV-781, 2021 WL 422607 (M.D. Pa. Feb. 8, 2021)

NO BAD FAITH WHERE NO COVERAGE DUE; NO BAD FAITH WHERE LAW IS UNSETTLED ON SCOPE OF COVERAGE; KVAERNER INTERPRETATION OF OCCURRENCE CAN APPLY TO PROPERTY DAMAGE OUTSIDE THE SCOPE OF THE CONSTRUCTION CONTRACT (Middle District)

Print Friendly, PDF & Email

There can be no bad faith where no coverage is due, or where coverage is a close question based on unsettled law.

Court Applies Kvaerner to ALL Reasonably Foreseeable Damages Resulting from Faulty Workmanship

Middle District Judge Brann addressed an expanding body of case law in Pennsylvania’s Superior Court that would appear to require coverage for damages flowing from faulty workmanship, even if the faulty workmanship itself is not covered.  He rejected, however, the Superior Court’s interpretation of what constitutes a covered occurrence under the Pennsylvania Supreme Court’s 2006 Kvaerner decision.

[We have previously posted on Kvaerner in the context of coverage and otherwise, with two case summaries in 2019, here and here, this 2018 case summary, this 2014 summary, in 2013 on the Superior Court’s Indalex decision in relation to Kvaerner, and in this 2009 summary.]

Judge Brann relied on Third Circuit precedent emphasizing that all reasonably foreseeable damages resulting from faulty workmanship do not constitute an occurrence, whether that is damage to the product being constructed or damages to property beyond the scope of the construction contract resulting from that faulty workmanship.

Thus, e.g., in Judge Brann’s and the Third Circuit’s perspective, if a contractor improperly installs a roof, the roof leaks, and other parts of the building or personal property are damaged, there is no occurrence for this other damage to third party property, even though it is beyond the contracted work itself, if that other damage is reasonably foreseeable.  By contrast, the new Superior Court cases would find this third party damage outside the scope of the actual construction work to be a covered occurrence, even if reasonably foreseeable.

Judge Brann observes, “Despite the caselaw that has emerged from the Superior Court, the [District] Court notes that it is not bound by these decisions. As the Third Circuit has explained, although courts should ‘give due deference to the decisions of intermediate state courts…[s]tate appellate decisions…are not controlling.’ Thus, ‘while [courts] may not ignore the decision of an intermediate appellate court, [they] are free to reach a contrary result if, by analyzing other persuasive data, [they] predict that the State Supreme Court would hold otherwise.’”

In the present case, Judge Brann held no coverage due to replace a roof that had been improperly constructed. Further, there was no coverage due to areas of the roof damaged that were outside the scope of the contracted roof work, which also had to be replaced as a result of the faulty construction, as these third party property damages were reasonably foreseeable. Thus, he granted judgment on the pleadings in favor of the insurer as to coverage.

No Bad Faith Where no Coverage Due

On the insured’s bad faith claim, Judge Brann likewise granted judgment on the pleadings. First, he observed that the insurer properly denied benefits. Thus, he found there could be no bad faith because the insurer “certainly had ‘a reasonable basis for denying benefits under the policy,’ meaning that [the insured] cannot demonstrate bad faith.”

Judge Brann then added, “even if this Court were incorrect in its decision that [the insurer] owes no duty to indemnify [the insured], the duty to indemnify is, at the very least, debatable, in light of the differing conclusions reached by the Superior Court and the Third Circuit. Given that the caselaw in this area does not establish a clear duty … to indemnify …, it cannot be said that [the insurer] had no reasonable basis to deny benefits.”

Date of Decision:  January 26, 2021

Berkley Specialty Insurance Company v. Masterforce Construction Corp., U.S. District Court Middle District of Pennsylvania No. 4:19-CV-01162, 2021 WL 254002 (M.D. Pa. Jan. 26, 2021) (Brann, J.)

NO COVID-19 BUSINESS LOSS COVERAGE DUE; NO BAD FAITH FOR DENIAL OF COVERAGE OR FAILURE TO INVESTIGATE (Philadelphia Federal)

Print Friendly, PDF & Email

These two Covid-19 coverage cases ended in summary judgments against the insureds on their breach of contract and statutory bad faith claims.  Eastern District Judge Kenney decided both cases last Thursday (1/14/2021).

Case 1: Clear Hearing Solutions v. Continental Casualty

Covid-19 Business Coverage Issues

In Clear Hearing Solutions, the insured had two all-risk policies.  Plaintiffs were Pennsylvania entities, but they had hearing service stores closed in Maryland and North Carolina due to government shutdowns.  The insureds alleged they were entitled to “Business Income coverage, Extra Expense Coverage, Extended Business Income coverage, and Civil Authority coverage,” but the carrier denied coverage.

Judge Kenney observed that direct physical loss of property or damage to property were essential to all these coverages.  He followed the principles that “[t]he criteria for physical loss caused by a source unnoticeable to the naked eye is thus whether the functionality of the…property was nearly eliminated or destroyed, or whether the[ ] property was made useless or uninhabitable by that source.” (internal quotation marks omitted) The mere presence of the contaminating source material, however, “or the general threat of future damage from that presence, lacks the distinct and demonstrable character necessary for first-party insurance coverage.”

Judge Kenney states:

The Court agrees with and adopts the conclusion reached by another Court in this district. In 4431, Inc. et al v. Cincinnati Ins. Cos., the Court concluded that, “under Pennsylvania law, for Plaintiffs to assert an economic loss resulting from their inability to operate their premises as intended within the coverage of the Policy’s ‘physical loss’ provision, the loss and the bar to operation from which it results must bear a causal relationship to some physical condition of the premises.” No. 5:20-cv-04396, 2020 WL 7075318, at *11 (E.D. Pa. Dec. 3, 2020) (emphasis in original). There must also be an “element correlating to [the] extent of operational utility – i.e., a premises must be uninhabitable and unusable, or nearly as such.” Id; see also Brian Handel D.M.D. v. Allstate Ins. Co., No. 20-3198, 2020 WL 6545893 (E.D. Pa. Nov. 6, 2020) (finding Port Authority and Hardinger preclude a finding of “direct physical loss of or damage to” property where it remained inhabitable and usable, albeit in limited ways). In sum, while structural damage is not required to show “direct physical loss of” property, the source that destroys the property’s utility must have something to do with the physical condition of the premises.

The Clear Hearing insureds conceded there was no Covid-19 on the premises, and their losses resulted from government directed business closures.  “Because Clear Hearing expressly denies the existence of anything affecting the physical condition of its premises, its losses are a mere loss of use untethered to the physical condition of the property itself. Reading ‘direct physical loss of or damage to property’ to contemplate mere loss of use is not a reasonable interpretation because it renders two other Policy provisions superfluous or nonsensical.”

Judge Kenney then goes into a more detailed analysis as to why there is no covered physical damage or property loss from Covid-19, which are discussed in the opinion at length.

He further observes that simply because the policy lacks a virus exclusion, this does not create coverage by implication. “But ‘[a] loss which does not properly fall within the coverage clause cannot be regarded as covered thereby merely because it is not within any of the specific exceptions….’ And it is at least plausible that the physical manifestation of some type of virus could cause covered losses. That situation is just not present here.”

Judge Kenney also finds that the Maryland and North Carolina “government orders cannot constitute a covered cause of loss under either the Business Income and Extra Expense coverages or the Civil Authority Coverage provisions.”  Further, there was no genuine factual issue “as to whether the government orders were issued due to physical loss of or damage to nearby property,” and the insured could not show access to the premises was prohibited entirely for all purposes by these government orders.

Bad Faith Issues

[Note: We have observed numerous times over the years there is a strong argument that cognizable statutory bad faith claims in Pennsylvania require that the insured must have be denied an actual benefit, i.e., a payment of first party damages due or a refusal to defend and indemnify against third party claims due.  Thus, as repeated on this blog ad naseum, there is a genuine issue as to whether an independent statutory bad faith claim for poor investigation practices is cognizable when no coverage is otherwise due under a policy. For example, see this post from January 2020, this post from August 2020, and this post from earlier in August 2020.]

The Clear Hearing opinion states that statutory bad faith is an independent cause of action from a breach of contract action. If the statutory bad faith claim, however, “is premised solely on the denial of coverage, the claim must necessarily fail if a court finds that no coverage exists.” Judge Kenney adds, “[o]n the other hand, ‘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.’” Further, “[t]hat distinction has been accepted when, for example, an insured claims the insurer investigated his claim in bad faith in addition to a bad-faith denial of coverage.”

[Note: The legal support for these propositions goes back, in part, to the Third Circuit’s unpublished 2007 Gallatin Fuels decision, in which the court found bad faith was still possible even though there was not even a policy in effect at the time of the incident.  Here is a link to an article addressing the logic in Gallatin Fuels, and the effect the Pennsylvania 2007 Supreme Court decision in Toy v. Metropolitan Life should have had on Gallatin Fuels reasoning and authority, had the Gallatin Fuels Court looked to Toy, which was decided earlier in 2007.]

The bulk of Clear Hearing’s bad faith claims were based on coverage denials, and these claims were readily dismissed because no coverage was ever due. Judge Kenney then goes on to address the claim handling based bad faith arguments, accepting the possibility that statutory bad faith might still exist even when no coverage is due and no benefit has actually been denied.

Clear Hearing argued that there was bad faith based on the claim handling because Continental immediately denied the claim and did not conduct any investigation, while further failing to address or acknowledge the insureds’ interpretation of the policy language on direct physical loss.  Rather, Continental relied “on case law providing a restrictive interpretation of the term direct physical loss to deny its claim as part of a policy to limit the company’s losses during the pandemic.” (internal quotation marks omitted).

Judge Kenney rejected this argument:

To the extent that these allegations may be construed to extend beyond bad faith in the denial itself to bad faith in the investigatory process or process of denial, Clear Hearing has not met its burden. In the context of a claim for coverage based solely on government closure orders, and on Civil Authority orders where nearby property has not suffered direct physical loss of or damage to property and access to plaintiff’s property has not been prohibited, there is nothing to investigate: coverage does not exist on the face of that claim. Therefore, Clear Hearing has not shown bad faith in Continental’s lack of investigation or by denying Clear Hearing’s claim “in light of the current context of mass denials of COVID-19 related business interruption claims.” Discovery on this issue would not change that conclusion. Nor does Continental’s purported reliance on caselaw that this Court concludes correctly interprets “direct physical loss of or damage to” with respect to Clear Hearing’s claims indicate bad faith. Accordingly, Clear Hearing has not shown its entitlement to damages on its bad faith claim or an existence of a dispute of material fact as to Continental’s bad faith.

Case 2: Ultimate Hearing Solutions v. Twin City Fire Insurance

Plaintiffs were Pennsylvania entities with businesses located in Maryland, Delaware, Pennsylvania, and Virginia, which were subject to government closure orders due to Covid-19.  They likewise had all-risk policies, but with a different insurer than the Clear Hearing plaintiffs.  The Ultimate Hearing plaintiffs were represented by the same counsel as in the Clear Hearing case. These plaintiffs brought similar breach of contract and bad faith claims.

On the coverage, Judge Kenney applied the same reasoning found in Clear Hearing to conclude there was no covered direct physical loss or damage to property.

There were two differences, however, between the Ultimate Hearing and Clear Hearing all-risk policies. The Ultimate Healing policies included (1) limited coverage for fungi, wet rot, dry rot, bacteria, and viruses; and (2) a virus exclusion.

In rejecting limited virus coverage, Judge Kenney stated, “the Limited Virus Coverage clearly states that the Policy only covers ‘Direct physical loss or direct physical damage to Covered Property caused by … virus.’ Plaintiffs did not allege that the coronavirus was present at any of their insured properties. They also have not shown, as discussed above, physical loss or damage to their properties.”

Judge Kenney further rejected the argument that the limited virus coverage was illusory, because “Plaintiffs fail to acknowledge that this Limited Virus Coverage provision also applies to fungi, wet rot, dry rot, and bacteria, not just viruses. While it may be difficult to think of a hypothetical situation where a virus causes physical damage to a property, it is not difficult to imagine that wet rot, dry rot or fungi can cause damage that would satisfy the ‘direct physical loss or direct physical damage’ requirement. Further, while it may be difficult to imagine, Defendants did in fact identify a case where insured property was damaged due to a virus caused by a Covered Cause of Loss.”

Judge Kenney also found the virus exclusion precluded coverage.

The bad faith arguments were similar to those made in Clear Hearing, but without reference to the insurer’s improperly relying on caselaw to deny coverage. Rather, the argument was phrased as a refusal to consider the insureds reasonable interpretation of the policy language concerning direct physical loss.

Judge Kenney rejected the bad faith claim handling argument, stating as in Clear Hearing:

In the context of a claim for coverage based solely on the Closure Orders where there are no claims that the insured property or nearby property has been physically damaged and access to Plaintiffs’ property has not been entirely prohibited, there is nothing to investigate: coverage does not exist on the face of that claim. Therefore, Ultimate Hearing Solutions has not shown bad faith in Twin City’s lack of investigation or by denying Ultimate Hearing Solutions’ claim “in light of the current context of mass denials of COVID-19 related business interruption claims.” Discovery on this issue would not change that conclusion. Accordingly, Ultimate Hearing Solutions has not shown its entitlement to damages on its bad faith claim or an existence of a dispute of material fact as to Twin City’s bad faith.

Date of Decision:  January 14, 2021

Clear Hearing Solutions, LLC v. Continental Casualty Co., U.S. District Court Eastern District of Pennsylvania No. 20-3454, 2021 WL 131283 (E.D. Pa. Jan. 14, 2021) (Kenney, J.)

Ultimate Hearing Solutions II, LLC v. Twin City Fire Insurance Company, U.S. District Court Eastern District of Pennsylvania No. 20-2401, 2021 WL 131556 (E.D. Pa. Jan. 14, 2021) (Kenney, J.)

INSURER CAN GO BEYOND FOUR CORNERS OF COMPLAINT TO DETERMINE IF A PERSON IS AN INSURED IN THE FIRST INSTANCE, WHEN DEFENDING BAD FAITH CASE (Third Circuit, Pennsylvania Law)

Print Friendly, PDF & Email

The Third Circuit addressed the central issue of whether the defendant was an insured, and how to analyze that factual issue in ruling on coverage and bad faith claims.

The named insured went with his girlfriend to a picnic, where they met up with the mother of the named insured’s child.  The girlfriend was also a named insured, but the mother was a stranger to the insurance contract. The mother decided to move the named insureds’ car, and struck plaintiff while driving the car. The injured plaintiff sued the two named insureds and the mother.

The carrier covered the named insureds, but took the position that the mother was not a permissive user and therefore was not an insured under the policy. The mother stipulated to a judgment and assigned her bad faith and breach of contract claims to the injured plaintiff, who sued the carrier.

The trial court granted summary judgment to the insurer, and the Third Circuit affirmed.

The Four Corners Rule does not Apply to Determining if a Party is an Insured for Duty to Defend Purposes

The Third Circuit first addressed the issue of whether the four corners rule encompasses determinations of whether a party is an insured in the first instance.

The issue has never been addressed by Pennsylvania’s Supreme Court.

The insurer argued it could not be bad faith to take the position the mother was not an insured, even if the complaint indicated otherwise, because the law on the issue is unsettled.  The carrier asserted it could use extrinsic evidence to show the mother was not an insured, and denied coverage on that basis. The Third Circuit agreed that “because Pennsylvania courts have not ruled on this issue, [the insurer] did not act in bad faith after it ‘reasonably determined that [mother] was not an insured under the Policy.’”

On the merits of coverage itself, the court concluded “that, when the insurer determines a claim is outside the scope of the insurance policy before a suit is filed, it has no duty to defend because it has effectively ‘confine[d] the claim to a recovery that the policy [does] not cover.’” Here, the insurer investigated the claim, and determined the mother was not an insured because she was not a permissive user.  “After that determination, the four corners rule no longer applied. [The insurer] did not have a duty to defend, and its actions do not show bad faith.”

Bad Faith Investigation

The court then went on to examine whether a bad faith claim could be stated solely on the basis that the insurer’s investigation was conducted in bad faith.  As repeated on this blog ad naseum, there is a genuine issue as to whether there is an independent bad faith claim for poor investigation practices when no coverage is otherwise due. For example see this post from January 2020, this post from August 2020, and this post from earlier in August 2020. A close examination in this case, however, shows the lack of investigation bad faith claim is actually intertwined with the coverage issue. Thus, this is not a case where a party is trying to prove bad faith even though no coverage is due.

Treating investigation based bad faith as a separate cause of action, rather than merely evidence of bad faith, the court observed “[g]ood faith in this context requires that an insurance determination be ‘made diligently and accurately, pursuant to a good faith investigation into the facts’ that is ‘sufficiently thorough to provide [the insurer] with a reasonable foundation for its actions.’” The mother argued the record showed she had “implied permission” to use the car, and the carrier acted in bad faith by unreasonably failing to recognize she had implied permission. The court disagreed, finding no adequate evidence to defeat summary judgment on the issue.

No Common Law Bad Faith Claim

“Finally, although the standard for common law bad faith diverges from statutory bad faith … the common law action for bad faith is a contract claim. Thus, because [the mother] was not an insured, she was not party to the contract, and she had no common law contract claim to assign….”

Date of Decision: December 8, 2020

Myers v. Geico Cas. Co., U. S. Court of Appeals for the Third Circuit No. 19-1108, 2020 WL 7230600 (3d Cir. Dec. 8, 2020) (Fisher, Restrepo, Roth, JJ.)

NO BAD FAITH WHERE NO DUTY TO DEFEND OR INDEMNIFY (Philadelphia Federal)

Print Friendly, PDF & Email

This breach of contract and bad faith case centers on a coverage dispute over the meaning of “advertising injury.” The underlying complaint alleged the insured made false statements about its own product, not that it had disparaged another’s product. The insurer argued these facts do not constitute advertising injury, and the court agreed, finding no duty to defend the underlying case. Thus, the breach of contract claim was dismissed.

The court also dismissed the bad faith claim “because Defendant has no duty to defend Plaintiff in the [underlying] lawsuit. See e.g. Frog, Switch & Mfg. Co., Inc., 193 F.3d at 751 n.9 (rejecting the bad faith claim because ‘bad faith claims cannot survive a determination that there was no duty to defend….’); Continental Casualty Co. v. Westfield Ins. Co., No. 16-5299, 2017 WL 1477136, at *10 (E.D. Pa. Apr. 24, 2017) (dismissing the breach of contract claim because the underlying complaint did not trigger a duty to defend); Everest Indem. Ins. Co. v. Valley Forge, Inc., 140 F. Supp. 3d 421, 432 (E.D. Pa. 2015) (‘There can be no breach of contract or bad faith claim since [Defendant] has neither a duty to defend nor indemnify [Plaintiff] in the underlying action.’).”

Date of Decision: November 23, 2020

Vitamin Energy, LLC v. Evanston Insurance Company, U.S. District Court Eastern District of Pennsylvania No. CV 19-3672, 2020 WL 6866887 (E.D. Pa. Nov. 23, 2020) (Slomsky, J.)

NO BAD FAITH WHERE NO DUTY TO DEFEND; COURT ADDRESSES RESERVATION OF RIGHTS LETTERS AND ESTOPPEL (Philadelphia Federal)

Print Friendly, PDF & Email

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:

  1. 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.

  2. In determining detrimental reliance, courts will assess whether the insured suffered actual prejudice.

  3. “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.”

  4. “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.’”

  5. “[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.”

  6. “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.)

PLAUSIBLE BAD FAITH WHERE INSURER’S POSITION RESULTS IN ILLUSORY COVERAGE; NO BAD FAITH WHERE NO COVERAGE DUE (Western District)

Print Friendly, PDF & Email

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.)

THERE CANNOT BE A BAD FAITH CLAIM AGAINST AN INSURER IF THAT INSURER HAD NO DUTY TO DEFEND (Philadelphia Federal)

Print Friendly, PDF & Email

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.)

INSURED FAILS TO ADEQUATELY PLEAD BAD FAITH; CAN CONDIO BE USED TO DEFINE THE SCOPE OF THE BAD FAITH STATUTE AFTER TOY (Philadelphia Federal)

Print Friendly, PDF & Email

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

  1. 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;

  2. in failing to complete a prompt and thorough investigation of Plaintiff’s claim before representing that such claim is not covered under the Policy;

  3. in failing to pay Plaintiff’s covered loss in a prompt and timely manner;

  4. in failing to objectively and fairly evaluate Plaintiff’s claim;

  5. in conducting an unfair and unreasonable investigation of Plaintiff’s claim;

  6. in asserting Policy defenses without a reasonable basis in fact;

  7. 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;

  8. in failing to keep Plaintiff or [her] representatives fairly and adequately advised as to the status of the claim;

  9. in unreasonably valuing the loss and failing to fairly negotiate the amount of the loss with Plaintiff or [her] representatives;

  10. in failing to promptly provide a reasonable factual explanation of the basis for the denial of Plaintiff’s claim;

  11. in unreasonably withholding policy benefits;

  12. 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.

COURTS SPLIT ON WHETHER STATUTORY BAD FAITH EXISTS WHERE NO BENEFITS ARE DUE UNDER AN INSURANCE POLICY (Philadelphia Federal and Lackawanna County Common Pleas)

Print Friendly, PDF & Email

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.

Here are links to our various posts on the subject over the last two years: May 4, 2020, April 16, 2020, March 25, 2020, February 24, 2020, January 28, 2020, December 9, 2019, November 21, 2019, August 19, 2019, January 30, 2019, and October 31, 2018.

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.