Archive for the 'PA – Red flags during investigation' Category

LONG INVESTIGATION REASONABLY FOLLOWING UP ON “RED FLAGS” IS NOT BAD FAITH DELAY (Western District)

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Plaintiff’s house burned down. Before ultimately paying full benefits, the insurer conducted a lengthy, detailed, and wide-ranging arson investigation. The insured brought a breach of contract action for the delayed payment, and a bad faith action alleging there was no evidence to support the arson investigation. The court granted the insurer summary judgment on both claims.

First, “where the insurance company has paid the benefits under the policy, the insured cannot maintain an action for breach of contract.” Payment “negates any breach of contract action,” where the insurer has paid full policy limits, and there is no evidence of a failure to compensate. Even if there was a payment delay, there were no damages from that delay in this case.

On the bad faith claim, the court recognized an insurer can conduct investigations of questionable claims without acting in bad faith. “Where an insurer sees ‘red flags’ that cause concern of insurance fraud and prompt an investigation, the insurer has a reasonable basis for investigation, and is therefore not liable for claims of bad faith.” Red flags can include, e.g., (1) an insured’s financial motive in seeking the insurance proceeds, such as debts exceeding income; (2) a fire marshal’s investigating for arson; and (3) an insurer’s investigation revealing that the fire could not have started as the fire department initially believed.

In this case, there were red flags sufficient to warrant the insurer’s lengthy and multi-faceted investigation, and there was no actionable bad faith.

The court further observed that while payment delay can be the basis for bad faith, or a bad faith factor, such delay is only relevant to bad faith where the insurer “knew that it had no basis to deny the claimant.” In addition, “[w]hile delay in paying a claim is relevant to determining an insurer’s bad faith, it is not dispositive, and does not, on its own, ‘necessarily constitute bad faith.’” Moreover, “even if the insurer is solely responsible for the delay, as long as the delay is due to the insurer’s need to investigate further, or even to negligence, there is no bad faith.”

Here, the insured did not produce clear and convincing evidence to establish the insurer knew its payment delay was baseless. To the contrary, the record showed the insurer reasonably believed there were potential grounds to deny the insured’s claim warranting further investigation. The court found the insurer had a reasonable basis to conduct a lengthy investigation, and reasonably pursued all avenues of investigation as new information arose, until it decided to pay the claim after all of those road were finally traveled.

Date of Decision: October 21, 2019

Merrone v. Allstate Vehicle & Property Insurance Co., U. S. District Court Western District of Pennsylvania Case No. 3:18-cv-193, 2019 U.S. Dist. LEXIS 181450 (W. D. Pa. Oct. 21, 2019) (Gibson, J.)

MAY 2017 BAD FAITH CASES: DELAY ALONE IS NOT SYNONYMOUS WITH BAD FAITH; SWORN STATEMENT NOT PROHIBITED SIMPLY BECAUSE OF PRIOR DEPOSITION IN UNDERLYING CASE; TECHNICAL REGULATORY VIOLATIONS NOT BAD FAITH PER SE (Middle District)

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A UIM claimant alleged bad faith based upon: “misstatement of … coverage limits, alleged delay in claims processing, insistence upon a sworn statement under oath …, persistence in collecting medical records and failure to comply with insurances regulations regarding periodic status notices to insureds as evidence of bad faith.”

The insurer wanted summary judgment on the bad faith claim, which the court granted, stating: “that, while both parties indulged in occasional missteps in the process of reviewing and litigating this claim, the essentially uncontested evidence does not meet the demanding, precise and exacting legal standards prescribed under Pennsylvania law for a bad faith insurance processing claim.”

The court observed the “well-established” principle “that it is not bad faith for an insurance company to ‘conduct a thorough investigation into a questionable claim.’” Insurers can be successful in defending against bad faith claim by showing that there were “red flags” warranting further investigation.

Thus, delay alone does not equate to bad faith: “the mere passage of time does not define bad faith. Rather, an inference of bad faith only arises when time passes as part of a pattern of knowing or reckless delay in processing a meritorious insurance claim.”

The court observed that insurers in UIM cases need to deal with the claim against the underlying tortfeasor, which in this case went on for a number of years. Further, the insured did not place the insurer on notice of the UIM claim until nearly 5 years after the accident. Once the claim was made, the parties engaged in an ongoing process to attempt to resolve the dispute.

Further, though the carrier did originally misstate the scope of coverage, this was an understandable mistake and was corrected, resulting only in a brief delay.

In addition, there was nothing untoward in seeking a sworn statement in light of multiple circumstances, including, e.g., incomplete medical information. The court did not accept the argument that no sworn statement was needed because the insured had been deposed two years earlier in the underlying litigation. Further, as stated, each party engaged in some missteps in exchanging medical information, and the insurer was justified in seeking further medical information after having obtained some records.

Next, in evaluating the claim the underlying tortfeasor only settled years after the accident, and for a sum less than policy limits; a factor going to the UIM insurer’s ability to evaluate the claim. The insured had originally demanded over double the UIM policy limits to settle, and then policy limits.

The final argument involved alleged violations of Pennsylvania’s Unfair Claims Settlement Practices Act and the Unfair Insurance Practices Act, specifically concerning the regulatory requirement to provide 45 day updates on the status of insurance claims.

The court recognized that a “violation of these insurance rules can be considered when examining a bad faith claim under §8371.” The court then went on: “However, it is also clear beyond peradventure ‘that a violation of the UIPA or the UCSP is not a per se violation of the bad faith standard.’”

Applying these principles, the court concluded: “This case aptly illustrates why technical violations of these state insurance regulations cannot be equated with bad faith. The record before us amply reveals active, extensive and on-going communications …. Our review of the substance of these multiple communications … reveals that even when the communications are viewed in a light most favorable to [the insured], these communications do not support a claim of bad faith shown by clear and convincing evidence.”

The court then observed: “Given that the communications, in their substance, do not allow for a finding of bad faith here, it would be anomalous to conclude that the fact that the communications did not meet the technical frequency requirements mandated by insurance regulations, standing alone, established a bad faith claim in this case.”

Date of Decision: April 10, 2017

Ridolfi v. State Farm Mut. Auto. Ins. Co., No. 15-859, 2017 U.S. Dist. LEXIS 54267 (M.D. Pa. Apr. 10, 2017) (Carlson, M.J.)

 

MARCH 2017 BAD FAITH CASES: SUMMARY JUDGMENT GRANTED TO INSURER WHERE ITS CLAIMS HANDLING DECISIONS AND CONDUCT WERE REASONABLE (Middle District)

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The court described the insured’s UIM bad faith claim as follows: “[the] bad-faith claim is predicated largely on his contention that [the insurer] conducted a dilatory and meandering investigation into his claim, despite having had sufficient information to evaluate the claim and make a coverage decision, which [the insured] argues was obvious given the severity of the injuries he suffered.”

The insurer sought summary judgment on the bad faith claims, its position being “that the claim in this case was unusual and warranted a careful investigation, which suffered from a number of delays that cannot be attributed to the insurer.” Moreover, the insurer adduced evidence calling into doubt the insured’s policy limits demand and the viability of the insured’s claim based on his own conduct.

In granting the insurer’s summary judgment motion, the court observed that if an insurer can defeat the lack of a reasonable basis component of a bad faith cause of action, it can obtain summary judgment. Moreover, in light of the heavier burden of proof in bad faith cases, “the insured’s burden in opposing a summary judgment motion brought by the insurer is commensurately high because the court must view the evidence presented in light of the substantive evidentiary burden at trial.”

Further, “[i]t is not bad faith for an insurance company to conduct a thorough investigation into a questionable claim.” Thus, “courts applying Pennsylvania law have found that an insurer satisfies its burden by showing a reasonable basis’ for investigating a claim, and is thus entitled to judgment as a matter of law, where it demonstrates the existence of certain red flags which prompted it to further investigate an insured’s claim.”

In finding the insurer’s conduct reasonable, the court focused on the putative delays, the nature of the insured’s policy limit demand in light of another potential source of primary insurance, and the insured’s own culpability in the accident leading to his injury. The court went through the alleged delays, and who caused them, in detail.

It also observed that while phrased as a $100,000 demand against the insured’s carrier, the tortfeasor’s insurer had a $500,000 limit, and settled the underlying claim for $240,000. Thus, in effect, seeking the $100,000 UIM limit when combined with the underlying available insurance made the personal injury claim a $600,000 claim, not a $100,000 claim; and again, the underlying claim was settled for far less than the underlying insurer’s policy limit. Moreover, the arbitrators found the insured 1/3 responsible for the accident leading to his own injuries, which provided some substantiation to the insurer’s position that the insured’s claim may not have been viable.

Date of Decision: November 29, 2016

Walter v. Travelers Pers. Ins. Co., No. 4:12-CV-346, 2016 U.S. Dist. LEXIS 164012 (M.D. Pa. Nov. 29, 2016) (Carlson, M.J.)

 

JANUARY 2017 BAD FAITH CASES: NO BAD FAITH ON RECORD SHOWING REASONABLE INVESTIGATION AND CLAIMS HANDLING; AND COURT OBSERVES THAT WHERE PARTY DOES NOT IDENTIFY AND PROVIDE SUPPORTING FACTS, JUDGES ARE NOT LIKE PIGS, HUNTING FOR TRUFFLES BURIED IN THE RECORD (Middle District)

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The court granted summary judgment to the insurer in this bad faith case arising out of a fire at the insureds’ home. While the insurer provided a detailed factual recount from the record to makes its case, the court stated that the insureds “relied upon bare allegations and narrative argument that does little more than summarize bad-faith law in Pennsylvania, without showing how the facts of this particular case could support a claim under the statute.”   The insurer had paid nearly $150,000 after investigating the fire and losses therefrom, but it argued the items put in dispute by the insured were not connected to the fire, which the insured failed to factually refute.

The court observed that “It is not bad faith for an insurance company to ‘conduct a thorough investigation into a questionable claim.’” The insurer will be successful in defending a bad faith claim based on its investigation of the matter by “showing ‘a reasonable basis’ for investigating a claim, and is … entitled to judgment as a matter of law, where it demonstrates the existence of certain ‘red flags’ which prompted it to further investigate an insured’s claim.”

Red flags existed in this case where “the insurance policy had been purchased immediately prior to the fire and the determination by two fire experts that it had been caused by arson. The record also reveals that, rather than wasting time, [the insurer] began an investigation immediately, while at the same time advancing money to the plaintiffs for immediate needs such as clothing and hotel expenses.”

Further, the insurer “promptly undertook investigation into the fire’s cause, the plaintiffs contributed directly to the duration of the investigation by delaying their examinations under oath, which State Farm had requested, roughly two months earlier.” And, “during this investigation, [the insurer] continued to pay the plaintiffs’ housing and living expenses, despite the ongoing nature of the investigation and the possibility that at the end of that process coverage would not be offered.” The insurer ultimately concluded that the matter was not arson, but as stated did not pay every claim the insureds made in connection with the loss.

The insurer routinely and appropriately sent correspondence in response to the insureds, and delays in the process were “not solely or even principally attributable to” the insurer.

Finally, the court rejected the notion that it should review evidence provided by the moving insurer, and “wade into that evidence in order to find some evidence that could rise to the level needed for the plaintiffs to carry their burden on this claim. This invitation is antithetical to good summary judgment practice, and the plaintiffs would do well to remember that “‘[j]udges are not like pigs, hunting for truffles buried in the record.’”

Date of Decision: November 16, 2016

Hoffman v. State Farm Fire & Cas. Co., No. 4:14-1978, 2016 U.S. Dist. LEXIS 158795 (M.D. Pa. Nov. 16, 2016) (Carlson, M.J.)

2015 BAD FAITH CASES: THIRD CIRCUIT AFFIRMS SUMMARY JUDGMENT ON BAD FAITH CLAIM WHERE NO DISPUTE OF FACT INVESTIGATION WAS REASONABLE, “INITIAL” SETTLEMENT OFFERS COULD BE MADE SUBJECT TO FURTHER DISCOVERY AND EVALUATION, AND INSURED FAILED TO SHOW SELF INTEREST OR ILL WILL UNDER THE SUPERIOR COURT’S GROSSI DECISION (Third Circuit)

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In Miezejewski v. Infinity Auto Insurance  Company, the insured was injured in an auto accident, and not only suffered physical injury, but alleged her physical condition deteriorated over time, causing her to be terminated from her employment.  She claimed that the carrier’s claim evaluation was too low, and failed to consider lost wages.  The district court granted the insurer summary judgment on the statutory bad faith claim.  On appeal, the Third Circuit affirmed.

The carrier’s claim representative acknowledged the UIM claim and noted that the policy limit was $15,000. He requested all documents and records supporting the UIM claim from the insureds’ attorney. The representative was provided with various discovery materials discovered in the litigation against the tortfeasor, including  post-accident medical records and a transcript of a deposition of the insured’s former employer’s human relations manager. The claims representative reviewed the documents and questioned whether the insured’s pain stemmed from a pre-existing degenerative condition.

“The medical records, which raised red flags, included the ‘recommendation’ of an orthopaedic specialist who treated [the insured] for post-accident pain in her left knee: ‘I think this accident definitely exacerbated some pre-existing arthritis.’” In addition another doctor concurred, and the insured herself testified about the scope of her arthritis. This “post-accident medical information struck the claim representative as ‘indicative of prior related conditions that [he] would want to review.’” The insured never provided prior medical records; nor did their counsel  “at any point explain the absence of pre-accident treatment information.”

The claim representative also doubted whether the insured’s firing was accident-related. He noted that she was rated as either meeting or exceeding expectations on a performance evaluation four months after the car accident, and it was eight months later that she was fired. The claim representative characterized the former employer’s HR manager’s testimony as conflicting on the idea that she was rated well four months after the accident, but then the accident somehow caused her firing after that.

After a review of materials from the insured’s counsel, the adjuster evaluated the claim at $5-7,000 net the $25,000 from the tortfeasor. “The representative noted, ‘[a]nything more than that could require some additional discovery,’ including [the insured’s] pre-accident medical records and additional information concerning her termination.” Offers of $5,000 and then later $7,500 were rejected.

Applying the Superior Court’s Grossi decision, the Third Circuit stated the following standards to prove statutory bad faith, which must be accomplished through clear and convincing evidence: “The Pennsylvania Superior Court has held that to prevail under the bad faith statute, the insured must show that the insurer did not have a reasonable basis for denying benefits under the policy and that the insurer knew of or recklessly disregarded its lack of reasonable basis in denying the claim.’ An insurer need not engage in fraud to be subject to the statute; however, ‘mere negligence or bad judgment is not bad faith. The insured must also show that the insurer breached a known duty (i.e., the duty of good faith and fair dealing) through a motive of self-interest or ill will.’” [It is interesting to observe here that self-interest or ill-will appear to hold the status of elements of a bad faith claim, whereas there was some prior case law that self-interest or ill will are only evidence of the second element, and not an element themselves.]

Applying this test, the appellate court affirmed the grant of summary judgment to the insurer on the bad faith claim.  “Consistent with [the insurer’s] ‘ongoing vital obligation,’ its claim representative acted in good faith—i.e. with a reasonable basis for his assessments and interactions with the [insureds]’ attorney—throughout ‘the entire management of the claim.’” The settlement offers fell within the initial valuation, and the insurer’s representative had emphasized they were not final, and informed the insureds’ counsel, however, that any higher offer would require some additional discovery as to the prior medical history and more information about why the insured was terminated. The court further noted that “after the close of discovery in this lawsuit, which included a deposition of the executive who made the termination decision, [the insurer] tendered to the [the insureds] the $15,000 policy limit they initially sought.”

The court specifically held that it is not bad faith for an insurer to make an initial settlement offer subject to further discovery and evaluation after that discovery. The court concluded that the insurer’s “representative acted reasonably in light of the evidence, both presented and inexplicably withheld.” Further, there was simply no evidence of self-interest or ill will.

Date of Decision:  April 28, 2015

Miezejewski v. Infinity Auto Ins. Co., No. 14-1603, 2015 U.S. App. LEXIS 6984 (3d Cir.  April 28, 2015)  (Roth, Ambro, and Fuentes, JJ.)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Date of Decision: April 7, 2014

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

JUNE 2012 BAD FAITH CASES: SERVING RULE TO FILE A COMPLAINT ON WRIT OF SUMMONS NOT BAD FAITH; CLAIMS HANDLING NOT UNREASONABLE UNDER CIRCUMSTANCES (Middle District)

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In Fabrikant v. State Farm Fire & Casualty Co., the court ruled for a carrier that had filed a motion for summary judgment in opposition to the insured’s breach of contract, bad faith, and Unfair Trade Practices and Consumer Protection Law (“UTPCPL”) claims. The insured originally filed his complaint in the Lackawanna County Court of Common Pleas, prompting the carrier to remove to federal court and file a motion to dismiss. The court denied the motion and the case moved to discovery.

The case arose from a fire at the insured’s residence that destroyed his home on Thanksgiving Day, 2009. Initial police reports stated that the cause of the fire was a space heater. One day later, the carrier’s claims manager learned that the insured was having severe financial difficulties, had recently been divorced, and owned a failing business. Because he could not pay his gas bills, the insured had been heating his home exclusively with space heaters. The next day, the carrier’s representatives examined the property and smelled flammable liquids, determining that the cause of the fire was “incendiary.”

Given the insured’s financial situation and the evidence of flammable substances, the carrier then referred the case to its Special Investigative Unit (“SIU”). In his preliminary report, the SIU investigator determined that the fire was set with gasoline. During the entire investigative process, the carrier continued to reserve its rights on the insured’s claims. An SIU report later concluded that the solvent used in the space heater did not show up in the lab samples and was unlikely to have been the ignition source.

Throughout the investigation, the insured was uncooperative, failing to provide information requested by the carrier, despite his contractual obligation to comply. As a result, the carrier refused to waive the one-year suit limitation provision in the insured’s policy.

In response, the insured filed a Praecipe for Writ of Summons in Lackawanna County in late 2010. A month later, the carrier filed a Praecipe requesting that the court issue a Rule on Plaintiff to file a Complaint within twenty days. In response to the carrier’s Rule to File Complaint, the insured filed a complaint alleging breach of contract and bad faith on behalf of the carrier.

Regardless of the difficulties in adjusting the insured’s claim, the carrier paid $154,422.75 for the dwelling claim, $109,975.00 for the personal property claim, and a final $2,500 representing the insured’s jewelry/fur policy limit in early 2011.

The court first examined the insured’s breach of contract allegation, which the carrier defended as moot since it had paid the limits of the insured’s policy. The court agreed, granting summary judgment to the carrier on this count.

It also found that the insured had not proven the carrier’s investigation to be untimely or unreasonable, especially given the circumstances surrounding the claim. Moreover, the insured was uncooperative, delaying the investigation.

The insured also alleged that the carrier was in breach because it forced him to file a Writ of Summons prior to the one-year suit limitation. Had the carrier waived the time limit, the insured claimed, he would not have been forced to file the Writ. However, the court disagreed, ruling that the carrier did not force the insured to litigate by filing a Rule to File Complaint in response to the Writ. The court reasoned that this procedural maneuvering was wholly in accordance with Pa. R. Civ. P. 1037, which provides that “the Prothonotary, upon praecipe of the defendant, shall enter a rule upon plaintiff to file a complaint.” Therefore, the carrier acted in accordance with Pennsylvania law by filing the Rule in response to the insured’s Writ. Nothing in the policy’s suit provision prohibited the carrier from exercising this right, despite the fact it chose not to waive the one-year limitation.

With respect to the insured’s bad faith claims, the court also granted summary judgment to the carrier. The insured’s argument relied upon the carrier’s allegedly “unreasonable handling” of his claim. The court disagreed, citing the numerous “red flags” that warranted an extended investigation. The court also rejected the insured’s claim that the carrier acted in bad faith by adhering to the one-year suit limitation clause. The carrier acted properly in refusing to waive the provision in light of the insured’s uncooperative behavior.

The crux of the court’s holding, however, related to the carrier’s choosing to serve the insured with the Rule to File Complaint. While the court reasoned that forcing an insured to litigate in this manner might represent bad faith in some contexts, there was no evidence of “a dishonest purpose” here. The carrier merely exercised a procedural right, which, given the facts of this case, did not represent bad faith. The court recognized that it might have been better for the carrier to delay requiring the insured to file a complaint since the coverage decision was in its final stages. Yet, the court deemed this decision mere “bad judgment,” refusing to find the carrier’s actions constituted bad faith.

With respect to the insured’s UTPCPL claim, the court ruled that, because the carrier had been up front with the insured, reserving its rights through the process, there was no consumer protection violation.

The court therefore granted summary judgment to the carrier on all counts.

Date of Decision: May 14, 2012

Fabrikant v. State Farm Fire & Casualty Co., 2012 U.S. Dist. LEXIS 67017, U.S. District Court for the Middle District of Pennsylvania (M.D. Pa. May 14, 2012) (Conaboy, J.)

APRIL 2012 BAD FAITH CASES: COURT DENIES INSURED’S MOTION FOR RECONSIDERATION, WHICH REPEATED ARGUMENTS FROM THE PARTIES’ MOTION OPPOSING SUMMARY JUDGMENT (Middle District)

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The insured parties’ filed a motion for reconsideration of the court’s granting of the carrier’s motion for summary judgment. The action arose out of a coverage dispute between the insureds and their carrier after a fire at the insureds’ rental property.

In 2008, the insureds rented a home and purchased renter’s insurance from the carrier. In early 2009, the insureds moved from the rental home. Before the move was complete however, the insureds’ first rental home caught fire.

The cause of the fire was determined to be arson. After the fire, the insureds contacted the carrier to recover for damage to personal property left at the rental home during their move in 2009.

After discovering the cause of the fire, the carrier became aware of several “red flags” relating to the insureds’ claim. As a result, the carrier determined that further investigation of the claim was necessary. The insureds refused to cooperate with the investigation, prompting the carrier to deny coverage for personal property destroyed in the fire. The insureds filed suit and the carrier moved for summary judgment, which the court granted.

Turning to the insureds’ motion for reconsideration, the court recognized that the parties merely relied upon the same unavailing arguments that they had asserted during the summary judgment phase. The court reiterated that the existence of “red flags” may form the basis for an insurer’s investigation and that the insureds had a contractual obligation to comply with the insurer’s requests. This failure to cooperate, the court reasoned, was more than a technical departure from the terms of the policy, severely prejudicing the carrier’s interests. As such, it was not erroneous for the court to have granted summary judgment to the carrier.

Date of Decision: March 6, 2012

Verdetto v. State Farm Fire and Casualty Co., NO. 3:10-CV-1917, U.S. District Court for the Middle District of Pennsylvania, 2012 U.S. Dist. LEXIS 29593 (M.D. Pa. Mar. 6, 2012) (Caputo, J.)

DECEMBER 2011 BAD FAITH CASES
NO BAD FAITH WHERE MATERIAL BREACHES OF COOPERATION OBLIGATIONS AND REASONABLE TO INVESTIGATE ARSON (Middle District)

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The court was faced with a carrier’s motion for summary judgment on an insured’s breach of contract and bad faith claims. The suit arose from a fire that occurred at a property rented by the insured. At the time of the incident, the insured had renter’s insurance with the carrier.

The insured moved into the rental home and shortly thereafter a fire erupted at the property. The fire marshal investigating the matter ruled that the fire was the result of arson. The insured began the claims process by filling out an inventory form, as required by the carrier. The forms indicated a large amount of valuable items, many of them less than two years old.

The carrier was put in contact with the investigating fire marshal, who ruled the fire arson and told the carrier that he did not see very much person property at the residence. He also reported that the insured had previously been involved in arson of another property. The carrier then decided to have the matter further investigated.

The carrier requested that the insured party sign various authorization forms, as required under the policy, requesting phone and financial records. The insured refused. The carrier also hired a salvage company to begin working on the damaged property, but the insured’s landlord denied entrance to their home for several weeks. The carrier subsequently sent the insured a Reservation of Rights letter, citing questions over the cause of the fire and whether the insured misrepresented their claims. The carrier hired an outside party to conduct an Examination under Oath, but the insured again refused to cooperate with the investigation. After the carrier denied coverage, the insured filed suit.

The court first examined the insured’s bad faith claim, finding that the carrier acted reasonably and did not delay or stall the investigation of the insured’s claim. Specifically, several significant “red flags” provided a reasonable basis for investigating the claim, including: the fire being ruled an arson; the claim being on a policy less than six months old; and the history of late payments on the policy.

Moreover, the insured refused to turn over the records they were contractually obligated to provide. Without the requested financial and telephone records, which were critical to determining the insured’s motive and opportunity for setting the fire, the carrier could not complete the investigation. Therefore, the court concluded that summary judgment was appropriate on the bad faith claim.

The court also granted summary judgment on the insured’s breach of contract claim. The insured was contractually bound to provide any documents requested by the carrier. The refusal to do so was a significant departure from the terms of their policy and substantially prejudiced the carrier’s investigation of the claim. Therefore, the court disposed of the matter because the insured’s material breach of the terms of its policy precluded any finding of liability on the part of the carrier.

Date of Decision: November 23, 2011

Verdetto v. State Farm Fire and Casualty Company, NO. 3:10-CV-1917, U.S. District Court for the Middle District of Pennsylvania, 2011 U.S. Dist. LEXIS 135287 (M.D. Pa. Nov. 23, 2011) (Caputo, J.)

JANUARY 2010 BAD FAITH CASES
POLICY HELD TO BE VOID AB INITIO DUE TO APPLICANT’S MISREPRESENTATIONS (Middle District)

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In Bonsu v. Jackson National Life Insurance Company, the district court held that the plaintiff’s claims for bad faith and breach of contract failed because the life insurance policy was void ab initio due to the applicant’s misrepresentations in the life insurance application.

The facts underlying this case date back to 2002, when an individual purporting to be Kwaku Asamoah submitted an life insurance application naming his brother, Augustine Bonsu, as the sole beneficiary.  According to the application, Asamoah was thirty-five years of age; had never been diagnosed with a serious medical condition; his driver’s license had never been suspended or revoked; and he had never been convicted of a misdemeanor or felony offense.  Based on the answers he provided, Asamoah was given a “preference plus” policy rating and his semi-annual premium was fixed at $96.90.  On December 27, 2002, the insurer approved the application and issued a $250,000 policy to Asamoah.

In May 2003, Asamoah allegedly traveled to his native country of Ghana.  On May 13, 2003, however, Bonsu claims that Asamoah died in his sleep of unknown causes. After his allegedly death, Asamoah’s body was never examined by a physician and an autopsy was never performed prior to his burial.  On May 30, 2003, the insurer received a $98 policy premium payment allegedly sent from Asamoah.  Approximately two months later, on July 11, 2003, Bonsu contacted the insurer to report Asamoah’s death.

The insurer’s claims investigator noted several red flags in the case, including Asamoah’s recent application for life insurance, his relative youth and purported good health, and his assertion that he had no preexisting medical conditions.  The insurer started a comprehensive investigation into Asamoah’s death.  The investigator was unable to find any evidence that Asamoah had ever traveled to Ghana, and the alleged death certificate provided by Bonsu was missing important information.

Additionally, the insurer was notified that “Kwaku Asamoah” was a fictitious name used by Bonsu as an alias to commit fraudulent acts, and that Bonsu had been arrested for business fraud, identity fraud, and insurance fraud.

During its investigation, the insurer obtained a copy of Asamoah’s Virginia driving record, which indicated that Asamoah’s license was suspended from September 2001 until March 2002 because of a reckless driving conviction.  In the state of Virginia, reckless driving is a misdemeanor.

Asamoah was convicted of a misdemeanor offense and his driver’s license was suspended approximately one year before he filed the life insurance application, which stated that his driver’s license had never been suspended or revoked and that he had never been convicted of a misdemeanor offense.

On June 14, 2004, the insurer denied Bonsu’s claim for life insurance benefits because of its inability “to independently verify Mr. Asamoah’s death after an extensive investigation of the matter.”  Bonsu, the beneficiary of the life insurance policy, sued the insurer seeking benefits and bad faith damages.

The insurer filed a motion for summary judgment arguing that the life insurance contract was void ab initio due to false statements knowingly proffered by Asamoah during the application process, and asserting that its denial of benefits under the policy was reasonable given the information discovered during the investigation.

Under Pennsylvania law, a life insurance policy is void ab initio when (1) the insured made a false representation; (2) the insured knew the representation was false when it was made or made the representation in bad faith; and (3) the representation was material to the risk being insured.

The court found that the first element was satisfied because an individual purporting to be Asamoah made a false representation on the insurance application when he stated that his driver’s license was never suspended and that he had never been convicted of a misdemeanor offense.

In determining the second element, the court stated that it could presume that Asamoah knew the answers he provided were untruthful due to the short period of time between his license suspension and his false responses, as well as the unequivocal nature of the questions posed and response requested.

The court found that the third element was satisfied because Asamoah’s misrepresentation resulted in a significantly lower premium, and that it was material to the risk assumed by the insurer.  The policy underwriter testified that had Asamoah provided truthful responses to the questions concerning his prior conviction and license suspension, he would have been given a “Standard” policy rating with a higher premium, and not a “Preferred Plus’ policy rating.”

In granting the insurer’s motion for summary judgment, the court concluded as follows: “In sum, a rational juror viewing the record evidence could reach only one conclusion: Asamoah knowingly provided false responses to [the insurer]’s policy questionnaire, and these responses caused [the insurer] to fix Asamoah’s premium at rate below that which he would have received by answering truthfully.

Because his life insurance policy was procured by means of knowing falsehood, Asamoah’s policy was void ab initio.  Without a valid policy, Bonsu’s claims for breach of contract and insurance bad faith necessarily fail, and [the insurer] is entitled  to summary judgment.”

Date of Decision:  January 4, 2010

Bonsu v. Jackson Nat’l Life Ins. Co., Civil Action No. 1:05-CV-2444, United States District Court for the Middle District of Pennsylvania, 2010 U.S. Dist. LEXIS 89 (M.D. Pa January 4, 2010) (Conner, J.)