Archive for the 'PA – Release of bad faith claim' Category

MARCH 2018 BAD FAITH CASES: THIRD CIRCUIT DID NOT HAVE TO REACH ISSUE OF WHAT LITIGATION CONDUCT COULD CONSTITUTE BAD FAITH, BECAUSE CONDUCT AT ISSUE WAS NOT BAD FAITH CONDUCT IN THE FIRST INSTANCE (Third Circuit, Pennsylvania law)

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The insured alleged bad faith based on the insurer’s introduction and reliance on allegedly biased expert testimony in this underinsured motorist case. The District Court had dismissed the claim, after an extensive analysis on when litigation conduct might constitute bad faith. The Third Circuit affirmed, but without addressing that issue.

The parties entered a high/low settlement agreement during the course of a jury trial, i.e., if the insured won he could get up to $300,000, but no less than $100,000 if he lost. The jury awarded $1.6 Million, but that sum was molded to $300,000. The agreement released all bad faith claims existing up to the date of the agreement, but did not release post-agreement bad faith claims.

The insurer relied upon two experts’ reports and testimony before the jury. The insured later brought a bad faith action based upon the insurer’s use of its expert reports and testimony during the trial process and after the date of the high/low agreement. He alleged that the insurer acted in bad faith by introducing and relying upon the biased testimony of its experts; by “failing to make an honest, intelligent settlement offer”; and by “seeking to have the bad faith claim dismissed with prejudice.”

The Third Circuit observed that bad faith is based upon the frivolous or unfounded refusal to pay proceeds under a policy, under a two criteria test: (1) that it was unreasonable to deny benefits; and (2) that the insurer knew or recklessly disregarded the absence of a reasonable basis to deny benefits. The big issue addressed at the District Court level was how to evaluate litigation conduct under the Bad Faith Statute. The Third Circuit found it did not have to reach that issue because the complaint’s allegations (including expert reports and depositions as exhibits) did “not identify any misconduct, much less bad faith” conduct.

It was alleged contradictions in the experts’ testimony that formed the basis of the bad faith claim. The Court found no inconsistencies in the first expert’s report and testimony, and found that the report was more limited in scope than the insured asserted. Similarly, the Court found no contradictions in the second expert’s report. Thus, “[b]ecause the statements made by [the medical experts] are not contradictory, [the insurer’s] introduction of and reliance on their testimony cannot rise to the level of bad faith, even under [insured’s] suggested legal standard.”

And again, after noting the absence of Pennsylvania Supreme Court precedent on when litigation conduct could be subject to the Bad Faith Statute — though it had been addressed to some degree in the Superior Court and the Third Circuit — the Court stated that it “need not reach this question because the facts alleged clearly do not amount to knowing presentation of biased expert testimony.”

Date of Decision: February 27, 2018

Homer v. Nationwide Mutual Insurance Co., U. S. Court of Appeals Third Circuit No. 16-3686, 2018 U.S. App. LEXIS 4859 (3d Cir. Feb. 27, 2018) (Fishman, Hardiman, Roth, JJ.)

OCTOBER 2017 BAD FAITH CASES: BAD FAITH PLEADED BASED ON FACTUAL HISTORY OF TIMING AND AMOUNT OF SETTLEMENT OFFERS, AND INCLUSION OF DEMAND TO RELEASE BAD FAITH CLAIM TO OBTAIN A SETTLEMENT (Western District of Pennsylvania)

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This is a UIM bad faith case. The insurer did not meet the insureds’ demand, and sought a release of bad faith claims during the negotiation process. Suit followed for breach of contract and bad faith.

In the fall of 2015, the insureds rejected a $4,335 offer. The insureds’ counsel demanded the insurer’s best and final offer in January of 2016, and the insurer responded with $5,000. The insureds rejected this offer.

The insurer increased its offer to $5,100, but the insureds remained uninterested in settlement for that amount. In the fall of 2016, the insurer increased its offer to $12,500, contingent on an agreement that the insureds execute a full and final release of all claims, including the bad faith claim.

The insureds rejected this offer as well, and subsequently brought suit for breach of contract and bad faith. The insurer moved to dismiss both claims, and the matter was referred to the Magistrate Judge for a Report and Recommendation.

As to the bad faith claim, the Magistrate Judge cited the Pennsylvania Superior Court as defining bad faith in the insurance context as “conduct [that] imports a dishonest purpose and means a breach of a known duty (for example, good faith and fair dealing), through some motive of self-interest or ill will; mere negligence or bad judgment is not bad faith.” [Pennsylvania’s Supreme Court recently made clear the motive of self-interest or ill will do not constitute an additional element of proof.]

The Magistrate Judge observed case law indicating bad faith may exist where an insurer attempts to obtain a release of a bad faith claim before it will pay any settlement under the policy. The court also reasoned that the insureds’ factual allegations concerning the length of time over which the offers were made, and the allegations that low offers were followed by dramatic increases were sufficient to support that claim. Thus, the Magistrate Judge recommended denying the insurer’s motion to dismiss as sufficient facts were pleaded to make out a plausible claim.

The Report and Recommendation was adopted by the Court.

Date of Decision: September 29, 2017

Winschell v. Encompass Home & Auto Ins. Co., No. 17-CV-522, 2017 U.S. Dist. LEXIS 162384 (W.D. Pa. Sept. 29, 2017) (Pupo Lenihan, M.J.)

MARCH 2017 BAD FAITH CASES: TYING PAYMENT TO RELEASE OF BAD FAITH CLAIMS IS ONLY BAD FAITH IF THAT REQUEST IS PART OF INSURER’S REGULAR PRACTICE; REFUSAL TO EXTEND ONE-YEAR SUIT PERIOD WAS NOT BAD FAITH (Philadelphia Federal)

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The homeowner’s policy at issue provided a one-year period in which to bring suit. Some repair work was identified and paid, but the repairs needed on other sections of the home would go beyond the one-year period. The insured attempted to negotiate an extension or tolling of the one-year period, pending the repairs. As the one-year term was approaching, the insured filed a writ of summons to toll the period and the insurer filed a Rule to File a Complaint.

In response to the insured’s counsel continuing to seek a tolling agreement, the insurer’s “counsel responded that Plaintiff would have to release any bad faith claim … in order for [the insurer] to consider entering into a tolling agreement.” “Plaintiff’s counsel offered to waive any claims of past bad faith in exchange for a tolling agreement which would give Plaintiff an additional year to complete any necessary repairs.” In response, the insurer “sent a status letter reiterating the one-year suit limitation provision and did not respond to Plaintiff’s offer.” Plaintiff then filed a breach of contract and bad faith complaint.

The focus of the bad faith claim was the alleged unreasonable refusal to enter a tolling agreement. However, the pleading did not meet Twombly/Iqbal standards, and was dismissed without prejudice. The most the complaint said was that the insured had a homeowner’s policy, suffered a covered loss for which he received some benefits, and was refused an extension of the one-year suit period. The complaint did not offer any basis from which the court could conclude that the refusal to extend was not made on a reasonable basis.

More interestingly, the court then addressed the issue of the insurer’s tying a release of bad faith claims to its entering a tolling agreement. The insured argued that this violated Pennsylvania’s Unfair Insurance Practices Act (UIPA). The court accepted the Superior Court of Pennsylvania’s view that UIPA violations can be evidence of bad faith.

The regulation at issue “forbids insurers from ‘request[ing] a first-party claimant to sign a release that extends beyond the subject matter that gave rise to the claim payment,’ where it is shown that the insurer makes such requests ‘with a frequency that indicates a general business practice.’” Even though plaintiff alleged that the insurer conditioned its agreement on releasing bad faith claims, he “alleges no facts showing that [the insurer] had a regular practice of forcing insureds to release claims in this way….” Thus, the court could not “consider the potential violation of the regulation as a factor swaying against dismissal.”

Date of Decision: March 3, 2017

Jack v. State Farm Fire & Cas. Co., No. 16-5771, 2017 U.S. Dist. LEXIS 30136 (E.D. Pa. Mar. 3, 2017) (Baylson, J.)

FEBRUARY 2017 BAD FAITH CASES: INSURER BAD FAITH AT ISSUE IN EVALUATING SETTLEMENT PAYMENT; ADVICE OF COUNSEL NOT AT ISSUE UNLESS ASSERTED (Middle District)

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An insurer sued its appointed defense counsel in connection with counsel’s defense of a UIM claim. The insurer claimed that counsel failed to assure that the UIM arbitration panel was instructed on the limits of insurance ($2 million), and that the carrier was subjected to the risk of having to pay an excess arbitration award of nearly $4 million above policy limits.

The UIM plaintiff settled the claim with the carrier, which included receiving the full amount of the arbitration award above policy limits. Defense counsel asserted a defense of contributory negligence based on the insurer’s alleged bad faith handling of the UIM claim; and further argued that the settlement was not entirely for the $ 6 million arbitration award (to which sum it was identical), but included monetary consideration for the UIM plaintiff’s threatened bad faith claim as well.

The court granted partial summary judgment to strike the affirmative defense of contributory negligence, but only to the extent that this defense was based on the insurer’s conduct that was not causally related to the arbitration award. The court accepted counsel’s argument that part of the settlement payment was to get a release for the bad faith claim, and thus was part of the damages at issue.

Therefore, it would permit some discovery on the argument that the insurer acted in bad faith in handling the underlying UIM claim, and paid some portion of the settlement to address that issue.

Thus, the Court found that “the fact and extent of [the insurer’s] bad faith handling of the [UIM] claim and concomitant exposure to bad faith liability are directly relevant to the question of the amount of damages it sustained due to [defense counsel’s] conduct. If [the insurer] is successful on its malpractice claim, it will have to prove actual losses that it suffered as a result of Defendants’ negligence. Because [the insurer] did not pay the arbitration award directly, it cannot claim that the excess award is the damages it now seeks. However, if [the insurer] attempts to prove that the settlement payment constitutes actual losses proximately caused by Defendants’ negligence, it must also prove with reasonable certainty what portion of the settlement payment in excess of its policy limits was paid to satisfy the arbitration award. Discovery on [the insurer’s] exposure to bad faith liability is therefore relevant to the scope of damages [the insurer] alleges to have sustained. And because [the insurer’s] bad faith conduct affects the amount of damages sought, the Court will not preclude Defendants from pursuing discovery on … bad faith.”

Next, the court addressed discovery issues.

The carrier had argued that certain documents in its own files were subject to the attorney-client privilege or work product doctrine. In addition, defense counsel sought discovery of the files of the attorney that replaced him in the UIM case.

As to the second category, the court could not rule because the privilege log was inadequate. The privilege log “entries do not contain specific sender and recipient information, and the Attorney Work Product entries do not state the specific party who created the work product. Additionally, the descriptions are too vague to permit the Court to find that each element of the privilege claimed is satisfied. [The insurer] therefore must supplement its privilege log with this information in order for the Court to determine whether the documents are in fact privileged.”

As to the insurer’s own documents, the court found that the work product doctrine applied to claim notes containing the mental impressions and strategies of the insurer’s attorneys and representatives. These notes were authored by an attorney or claim handler of the insurer.

The insurer also sought to withhold documents that were sent by the defendant defense counsel to the insurer regarding post-arbitration strategy. The court found the attorney-client privilege waived once the insurer sued its attorney, and that the attorney himself held the work product privilege, not the insurer.

The court found the carrier did not waive the privilege concerning communications with in-house counsel, and with the outside counsel subsequently retained. The carrier had disclosed a limited privileged document, but the court found this did not constitute waiver of the privilege as to every communication with counsel.

The court further found that the insurer was not asserting an advice of counsel defense, which could waive the privilege. The court observed that “an attorney’s ‘[a]dvice is not in issue merely because it is relevant, and does not necessarily become in issue merely because the attorney’s advice might affect the client’s state of mind in a relevant manner.’”

“Rather, ‘[t]he advice of counsel is placed in issue where the client asserts a claim or defense, and attempts to prove that claim or defense by disclosing or describing an attorney client communication.’” Those circumstances were not present.

Date of Decision: January 20, 2017

N.J. Mfrs. Ins. Co. v. Brady, No. 15-2236, 2017 U.S. Dist. LEXIS 8268 (M.D. Pa. Jan. 20, 2017) (Caputo, J.)

JULY 2015 BAD FAITH CASES: (1) COURT DISMISSES BREACH OF IMPLIED DUTY OF GOOD FAITH AND FAIR DEALING CLAIM BECAUSE (i) IT CANNOT BE PLEADED SEPARATELY FROM A BREACH OF CONTRACT CLAIM AND (ii) BECAUSE THE ALLEGATIONS SUPPORTING THAT CLAIM WERE IDENTICAL TO THOSE SUPPORTING THE STATUTORY BAD FAITH CLAIM; AND (2) COURT ENTERS JUDGMENT FOR INSURER ON BAD FAITH CLAIM AFTER FINDING THAT INSURED, AS ASSIGNEE, RELEASED INSURER FROM ANY CLAIMS (Eastern District)

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In Charbonneau v. Chartis Property Casualty Company, the court dismissed an assignee’s claims for breach of implied duty of good faith and fair dealing because it could not be pleaded separate from the breach of contract claim, and because it duplicated the statutory bad faith claim; and then dismissed the statutory bad faith claim because the assignor insured had released that claim in settling with the insurer.

The plaintiff had been living as a tenant in a historic home that was destroyed by fire. The plaintiff attempted to exercise an option under her lease to buy the property from the owner, who was involved in negotiations with his homeowner’s insurer in connection with the loss. After the homeowner reached a settlement with his insurer that would pay the property owner $18.5 million as a result of the fire, litigation ensued between the property owner and the plaintiff.

The plaintiff ultimately received $11 million of the $18.5 million settlement and title to the property, and an assignment of claims from the homeowner-insured.

The plaintiff then filed an action against the insurer, “claiming that [the insurer’s] dealings with [the property owner] were improper and that she, as assignee, has been wrongly denied millions of dollars in additional insurance proceeds owed to her to cover the cost of rebuilding” the property. The insurer filed a motion for summary judgment.

In entering judgment for the insurer on the breach of implied duty of good faith and fair dealing claim, the court stated that the duty of good faith and fair dealing “does not allow for a cause of action separate and distinct from a breach of contract claim.” Here, the plaintiff did just that by bringing a breach of implied duty of good faith claim as a cause of action independent of her breach of contract claim.

Further, the court pointed to Third Circuit case law for the proposition that “a party is not entitled to maintain an implied duty of good faith claim where the allegations of bad faith are ‘identical to’ a claim for ‘relief under an established cause of action.’”

The court found that here, “the allegations of bad faith that [the insured] uses to support her implied duty of good faith claim are identical to those with which she supports her § 8371 claim … which is indeed an established cause of action.” Thus, because the allegations of implied bad faith duplicated the allegations of statutory bad faith, the court entered judgment for the insurer on the implied duty of good faith claim.  [This same court made a similar ruling in May of this year.]

The court next addressed the insured’s statutory bad faith claim. The insured argued that as an assignee of the property owner, she has an interest in the proceeds of the policy and could therefore sue the insurer for refusing to pay those proceeds.  While the case law allows for such an assignment, in settling with the insurer, the property owner insured had released the insurer “from any claims, demands, damages, actions or other forms of proceedings of any kind whatsoever of or for bad faith, including but not limited to claims under 42 Pa.C.S. § 8371, arising in any way” out of the property fire.

Thus, because the plaintiff stood in the shoes of the insured who could not bring such a claim himself, she could not prevail on the statutory bad faith claim. Alternatively, as there was no genuine dispute of material fact that the insurer’s refusal to pay the insured was either frivolous or unfounded, the court entered judgment for the insurer on the statutory bad faith claim.

Date of Decision: July 1, 2015

Charbonneau v. Chartis Prop. Cas. Co., Civil Action No. 13-4323, 2015 U.S. Dist. LEXIS 85428 (E.D. Pa. July 1, 2015) (Yohn, J.)

JULY 2015 BAD FAITH CASES: COURT DENIES MOTION TO COMPEL PRODUCTION OF CLAIMS NOTES UNDER ATTORNEY CLIENT PRIVILEGE AND/OR WORK PRODUCT DOCTRINE (Middle District)

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In Berry v. Ohio Casualty Insurance Company, the court addressed a dispute over whether certain notes in the claims files were protected from production. The court had received the unredacted notes for in camera review, prior to ruling.

This was a UIM case where the tortfeasor’s insurer paid its full policy limits, and the insured brought a UIM claim against her own insurer for her $100,000 in coverage.  After two and one-half years, the UIM claim settled at policy limits.  The insured then brought a bad faith claim.

The insured alleged failure to conduct a prompt and thorough investigation,  continually requested medical records after being provided with them, lying about a pre-existing condition, making “unreasonable ‘low-ball’ offers”, increasing offers with no material changes in circumstances, “misleading or misrepresenting the amount of UIM benefits available”, “sending a release for the ‘policy limits’ when the release was for a sum that was less than the actual policy limits”, “retracting a ‘policy limits’ offer”, “attempting to leverage a potential bad faith claim as part of the UIM claim”, and “attempting to get plaintiff to release defendant insurance companies from a bad faith claim as part of the settlement of the UIM claim.”

The insurer asserted the attorney client privilege and the work product defense, claiming it anticipated litigation when it was planning to make the settlement offer of full policy limits.  The insured argued that anticipation of litigation only arose at the actual time of settlement.

The court described the claim file as “a collection of documents along with notes from the adjustors who handled plaintiff’s UIM claim. The notes include discussions and offers of settlement, along with determinations of defendants’ representatives as to what they believed was a fair value for the plaintiff’s injuries.”

The court observed that institution of a bad faith claim does not work to automatically waive the attorney client privilege or work product doctrine, that “communications between [an] in-house counsel and claims adjustor are generally privileged”, and that “only when a defendant affirmatively pleads reliance on counsel’s advice is such a privilege waived as to the communications between the specific counsel and the client.” There was no such defense asserted in this case.

The court added, in comparing the attorney client privilege and attorney work product doctrine, that it “is the communications and not the underlying facts that are privileged. … Plaintiffs are entitled to discovery regarding the underlying facts of the investigation. It should be further noted, however, that: The protective cloak of [attorney-client] privilege does not extend to information which an attorney secures from a witness while acting for his client in anticipation of litigation. Nor does this privilege concern the memoranda, briefs, communications and other writings prepared by counsel for his own use in prosecuting his client’s case; and it is equally unrelated to writings which reflect an attorney’s mental impressions, conclusions, opinions or legal theories. … Such communications are generally protected by the work-product privilege instead.”

Further, “documents prepared in the regular course of business rather than for purpose of the litigation are not eligible for work-product protection, even if the prospect of litigation exists.” This raises the often difficult question of when a document is prepared in anticipation of litigation.

“A document is prepared in anticipation of litigation when, ‘in light of the nature of the document and the factual situation in the particular case, the document can fairly be said to have been prepared or obtained because of the prospect of litigation.’” Thus, courts “should determine ‘the state of mind of the party preparing the document or … the party ordering preparation of the document.’” “This inquiry is limited by the requirement that the party’s anticipation of litigation be objectively reasonable.”

In this case, the court agreed with the insurer that litigation was anticipated at the time the policy limits settlement offer was contemplated, and that both the privilege and work product doctrine applied to the insurer’s claims files after that date. “Based on the court’s in camera line-by-line review of defendants’ redacted claim notes, these lines clearly contain notes of conversations with counsel, mental impressions, opinions, conclusions and strategy, as well as communications regarding defense costs….”

Thus, the insurer’s representatives’ state of mind fell reasonably within the anticipation of litigation. Further, the claims note themselves showed redactions of material prepared anticipating litigation, as there was information exchanged with outside counsel in the nature of an attorney client communication regarding potential legal proceedings.

The court also found the presence of attorney opinion work product in the claims notes. In addition, the insurer’s documents containing case valuation, negotiation plans, and evaluations of the case’s strengths and weaknesses were not discoverable as “mental impressions, opinions, conclusions and strategy prepared in anticipation of litigation.”

The insured argued she should still be permitted discovery under the substantial need exception to the work product doctrine because the subjects “in the claim notes concern material issues and speak to the mental state and decision-making of defendants’ agents at a critical time during the negotiations where several acts of bad faith were allegedly committed.”

The court rejected this argument because there was not a sufficient showing by the party seeking discovery of work product of a substantial need to (1) obtain these notes to prepare the case, and (2) that the information could not be obtained from another source.  The court specifically observed that no depositions had been attempted of the claims personnel.

The court concluded that “the plaintiff should be able to obtain much of the information in the claim notes from other means, including her own investigations and interviews with witnesses, and the depositions of the claims personnel who handled her UIM claim.”

Thus, the motion to compel production of the redacted material was denied in its entirety.

Date of Decision: July 2, 2015

Berry v. Ohio Cas. Ins. Co., CIVIL ACTION NO. 3:14-1262, 2015 U.S. Dist. LEXIS 86053 (M.D. Pa. July 2, 2015) (Mannion, J.)

JUNE 2015 BAD FAITH CASES: (1) COURT PERMITS CLAIMS TO PROCEED ON ALLEGATIONS THAT INSURER REFUSED TO CONTINUE DAMAGE APPRAISAL PROCESS UNLESS INSURED WITHDREW PENDING BAD FAITH CLAIMS; (2) COURT WOULD NOT CONSIDER INSURER’S FACTUAL ARGUMENTS ON MOTIVE TO ASSESS INSURED’S BAD FAITH IN SEEKING AMENDMENT, AT THE MOTION TO AMEND STAGE (Middle District)

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In Militello v. Allstate Property and Casualty Insurance Company, the court granted the insured’s motion for leave to file a second amended complaint to add an additional claim for bad faith based upon: (1) an alleged refusal to conduct the appraisal process unless the pending bad faith claim was dropped; and (2) that bad faith conduct occurring during litigation can be actionable.  The insured originally filed a complaint and amended complaint alleging breach of contract and bad faith, among other things.

The insured allegedly submitted a claim to its insurer after its horse barn sustained significant damage. After the insurer refused to pay the full amount demanded, the insured alleged a breach of the insurance contract by “failing to accurately assess and pay the loss,” and that the insurer acted in bad faith “by intentionally or recklessly making false representations for the purpose of denying the full value of the claim.”

The bad faith claim alleged that the parties agreed to use an appraisal process set forth in the underlying insurance policy to resolve the breach of contract claim, but not the bad faith claim.

The insured averred that the insurer “repeatedly attempted to pressure [the insured’s] counsel to drop the pending bad faith claim.” After the insured refused to do so, counsel for the insurer allegedly sent an email indicating that he could not “proceed to appraisal with the bad faith claim hanging over [his] head.” The insurer eventually withdrew from the appraisal process after “both parties identified their individual appraisers and selected a neutral appraiser, and [the insured’s] appraiser had submitted his appraisal report to [the insurer’s] appraiser.”

The insured sought a second amendment to the complaint based on the insurer’s withdrawal from appraisal process “to which it had contractually committed”.  The insured further included allegations of bad faith relating to the insurer’s “withdrawal from the appraisal process due to [the insured’s] refusal to terminate his bad faith claim in federal court.”

The insurer opposed the motion on the basis that the facts would show it withdrew from the appraisal process because it concluded there was insurance fraud; and that it put the insured on notice it would be seeking to amend its answer to bring an insurance fraud counterclaim.  The insurer thus claimed the amendment was essentially a litigation tactic, and that the amendment should be denied for undue delay and bad faith.  The insurer also asserted the amendment was futile, chiefly based upon its factual arguments.

The court rejected all of the insurer’s positions.

First, the court was not convinced that the insured sought to amend its motion based on bad faith rather than “the otherwise colorable claims asserted in his second amended motion.” The court concluded that if it “should be found later that [the insured] lacks a good faith belief in the new facts upon which he bases his proposed amendment, [the insurer] is not without a remedy.”  The court found that the factual arguments the insurer asserted against permitting amendment raised disputes of fact which were matters to be addressed during the course of litigation. They were not accepted as true at this stage as a basis to deny an amended complaint.

As to the futility argument on the substance of the new bad faith allegations, the court first observed that bad faith conduct is actionable regardless of whether it “occurs before, during or after litigation.”  Distinguishing discovery disputes, the court stated that “an insurer can be held liable for bad faith conduct occurring during the pendency of litigation that was intended to evade a duty owed under the policy.” The bad faith alleged in this matter is the insurer’s allegedly “threatening to withdraw from the appraisal process if Plaintiff did not terminate his bad faith claim and by ultimately withdrawing from the process after Plaintiff refused to do so.” This stated a bad faith claim.

Date of Decision: June 16, 2015

Militello v. Allstate Prop. & Cas. Ins. Co., Civ. No. 14-cv-0240, 2015 U.S. Dist. LEXIS 77481 (M.D. Pa.  June 16, 2015) (Rambo, J.)

Go to this link for the summary of a prior decision in this case.

MARCH 2015 BAD FAITH CASES: ALLEGED BREACH OF DUTY TO IDENTIFY INSURER’S RISK OF EXPOSURE TO A BAD FAITH CLAIM FOR FAILURE TO SETTLE SOUNDS IN NEGLIGENCE, NOT CONTRACT (Middle District)

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In New York Central Mutual Ins. Co v. Margolis Edelstein, the insurer alleged that its attorney failed to give it proper advice as a client, concerning settlement of a claim.  Among other things, the insurer’s complaint alleged: that the attorney “agreed to perform legal services for [the insurer], which included agreeing to ‘provide [the insurer] with a Legal Opinion on the validity of any Bad Faith Claim under the confines of Pennsylvania law.’” “[The attorney] outlined the initial steps to be taken ‘prior to providing our legal opinion to [the insurer],’ which included reviewing documentation and ‘perform[ing] legal research applicable to the facts of this case,’ and ‘prepar[ing] and ‘circulat[ing]’ a thorough outline ‘to all Counsel in the [local] office, with an eye toward scheduling a meeting of those Counsel in order to conference this matter.’”

The attorney “advised [the insurer] that he did not believe that a potential bad faith claim against [the insurer] resulting from its handling of settlement in the underlying … Litigation would be successful.” Later, the attorney “further advised that ‘[o]ur prior opinion has not changed,’ and recommended ‘that [the insurer] and its Counsel should not make any Offer beyond the $25,000, and should not make inquiry as to whether a sum of money above the policy limit of $25,000 would successfully resolve the third party action and also Release any bad faith claim.’”

Ultimately, a permissive user of the automobile insured by the insurer “stipulated to his sole liability … and the jury returned a verdict on damages that were later remitted to $960,000.” He “then assigned his rights against [the insurer] to [the underlying plaintiff], who agreed not to execute the judgment … and instead prosecuted his claims against [the insurer] for bad faith.” That “matter was ultimately settled for $2 million.”

The insurer later commenced this action “for breach of their agreement to provide legal advice to [the insurer] in connection with [the insurer’s] potential bad faith exposure predicated on its claims handling and settlement position in the [underlying] Litigation.”

The issue before the court was whether the insurer’s claim sounded in tort or contract, as the two-year tort statute of limitations would bar the claim.

The insurer plaintiffs  raised “one cause of action against defendants for breach of contract basically alleging that defendants ‘breached their duty to exercise the degree of skill and knowledge that is ordinarily expected of a reasonable attorney by providing … legal advice that was so misleading that it precluded [the insurer] from making an informed judgment about whether to offer a sum in excess of its policy limits, or, to accept the opportunity to settle the [underlying] claim for $200,000’ and ‘by failing to provide [the insurer] with a complete and correct analysis of the law governing insurance bad faith claims in the Commonwealth of Pennsylvania.’”

Further, the plaintiffs asserted: “’Due to the alleged deviations from the standard of care of a reasonable attorney by defendants, plaintiffs allege that they were caused substantial harm in the form of an unfavorable settlement with [the underlying plaintiff].’”

In a lengthy analysis applying the Pennsylvania’s Supreme Court’s 2014 ruling on the gist of the action doctrine in Bruno v. Erie Insurance Company and other case law on the tort vs. contract posture of professional malpractice claims, in light of the pleadings as made, the court concluded that the insurers’ claims sounded in neglience, and were thus time-barred.

The court found that “’because plaintiffs do not allege a specific instruction or agreement that defendants supposedly breached, but instead allege that defendants ‘deviated from the standard of care of a reasonable attorney’ [emphasis added in original], their claims sound in tort and so are time-barred.’”

In addition, the court observed that “as defendants correctly indicate, plaintiffs filed a [Certificate of Merit] in this case ‘further showing that the basis of their claim is deviation from a professional standard of care, and not breach of a contractual duty.’”

Thus, the case was dismissed with prejudice.

Date of Decision:  January 30, 2015

N.Y. Cent. Mut. Ins. Co. v. Margolis Edelstein, NO. 3:14-0829, 2015 U.S. Dist. LEXIS 10817 (M.D. Pa. January 30, 2015) (Mannion, J.)

APRIL 2014 BAD FAITH CASES: INSURED STATED CLAIM FOR COMMON LAW CONTRACTUAL BAD FAITH UNDER BIRTH CENTER AND COWDEN FOR COMPENSATORY DAMAGES, INCLUDING POSSIBILITY OF RECOVERING DAMAGES FOR EMOTIONAL DISTRESS; AND THE COURT PERMITTED THE CASE TO PROCEED ON BAD FAITH THEORY THAT THE INSURER SOUGHT A GLOBAL SETTLEMENT OF UNDERLYING COVERAGE AND BAD FAITH CLAIMS, EVEN THOUGH COURT QUESTIONED THE STRENGTH OF THAT POSITION (Philadelphia Federal)

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In Perrugia v. American Home Assurance Company, the District Court revisited principles of common law contractual bad faith claims under Cowden and Birth Center, and found that under these principles, damages for emotional distress were recoverable even where the sum paid under the policy was no longer in dispute.

The insured worked for Verizon, and was seriously injured while driving in the course of his employment. The other driver had a $500,000 policy, and Verizon had a $2 million policy in first-party underinsurance coverage. The injured insured settled with the other driver’s carrier for $451,673; and Verizon’s insurer allegedly gave express consent to that agreement.

The injured party pursued Verizon’s carrier, and provided the insurer’s adjuster with medical records, reports from treating physicians, and a vocational expert’s report on lost earnings—said to be over $1.5 million. The insured alleged a dilatory response in the carrier’s adjustment of the claim, making its first settlement offer approximately two years after being provided with this data.

That offer would have included a global release of any claims in connection with the insured’s claim for underinsured motorist benefits and, subsequent to the offer, the insurer’s attorney asked the plaintiff’s attorney if he intended to bring a statutory or common law bad faith claim related to the adjustment of the insurance claim.

The insured alleges that the insurer willfully failed to adjust the claim in a timely manner; inadequately supervised outside counsel; failed to make timely requests for necessary materials; failed to evaluate damages fairly and in good faith; failed to make reasonable, good faith settlement offers; failed to negotiate without demanding a global release of claims; and failed to communicate with the insured in good faith. One week before binding arbitration, the parties reached settlement in an amount of $1.65 million, allegedly to resolve the underinsured motorist claim only.

The insured then brought suit claiming breach of contract and breach of the implied covenant of good faith and fair dealing and statutory bad faith. The carrier moved to dismiss.

First, the court rejected the notion that there was no common law claim for bad faith. Citing Birth Center and Cowden, it recognized that at least since Cowden was issued in 1957, insureds have possessed a ccommon law contract right permitting an insured to recover compensatory damages in bad faith actions. These principles revolve around a bad faith failure to settle that results in damages other than simply payment of the policy limits. Thus, the insurer’s payment of the amounts owed under the policy do not free it from other known or foreseeable damages it has caused its insured to incur.

The court further found that Pennsylvania Supreme Court case law specifically recognized the possibility that emotional distress damages may be recoverable on a contract where, for example, the breach is of such a kind that serious emotional disturbance was a particularly likely result.

The court further found that there was no “physical impact requirement” needed to establish a claim for emotional distress damages in the common law bad faith breach of contract setting. Whether the insured could ultimately prove that the insurer should have foreseen that severe emotional distress was a likely result of its conduct remained open, but the insured had set out a plausible claim for relief.

The court did note that, while the insured alleged that he suffered severe emotional distress as a result of delay in adjustment of his claims and that this was “foreseeable” to the insurer, the insured did not allege the insurer had actual knowledge of the emotional distress.

Next, the insurer sought to dismiss the breach of contract claim based on its alleged attempt to achieve a global settlement in its negotiations with the insured. The insurer asserted that it was not probative of bad faith to ask for a global settlement, and, in any event, the insured could not show damages from such a request. The insured contended the request was a delay-causing attempt to coerce him into releasing the bad faith claims at issue in the current litigation.

The court observed that there may be a valid cause of action where an insurer knows an insured is entitled to a policy limit but will only agree to make full payment if the insured agrees to a global release. In general, however, “it is not inappropriate for an insurance company to attempt to resolve all claims with one settlement, particularly when there is no indication of an attempt to mislead.” Under the circumstances, the court found it difficult to see how the claim based on the insurer’s request for global settlement could be successful.

However, it then found that the insured had alleged a plausible bad faith claim on this point. The court expressly stated that it would allow the parties to develop a more specific factual record through discovery, and address the issue again at summary judgment or at trial.

Date of Decision: March 11, 2014

Peruggia v. Am. Home Assur. Co., 2:13-cv-6256-WY, 2014 U.S. Dist. LEXIS 33007 (E.D. Pa. March 11, 2014) (Yohn, J.)

FEBRUARY 2010 BAD FAITH CASES
NO BAD FAITH WHERE NO BENEFIT DENIED OR BECAUSE INSURER SOUGHT GENERAL RELEASE OF ALL CLAIMS, INCLUDING RELEASE OF BAD FAITH CLAIMS(Western District)

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In Johnson v. State Farm Life Insurance Company, the plaintiff filed suit individually and as Administratrix of the estate of Terry Johnson, plaintiff’s husband, for various claims stemming from the purchase of a life insurance policy issued to Mr. Johnson.  On October 11, 1989, the insurer issued a $10,000.00 whole life policy to Mr. Johnson, in which plaintiff was listed as the beneficiary.

On February 10, 2007, Mr. Johnson allegedly went to an agent of the insurer, to cancel the policy because he did not want plaintiff to receive the proceeds.  The agent initially talked Mr. Johnson into keeping the policy and changing the beneficiary, but a few days later, Mr. Johnson returned to reinstate plaintiff as the beneficiary, and then returned again to cancel the policy.

The agent, who had known Mr. Johnson for many years and was aware that he was using drugs, suggested that he buy the policy because he did not want to see Mr. Johnson lose coverage.  On February 19, 2007, the agent purchased the policy for $100.00.  Mr. Johnson passed away five days later in prison – Mr. Johnson had turned himself in for violating plaintiff’s restraining order.

Plaintiff sued for common law bad faith and violations of Pennsylvania’s bad faith statute.  Plaintiff argued that her bad faith claim was based on: (1) the way the insurer handled her claim before the agent purchased the policy and (2) the fact that the insurer conditioned the policy proceeds on her release of all claims against it.  The insurer argued that plaintiff’s claims should be dismissed because she failed to state a claim for any of her causes of action.

The court held that plaintiff was unable to establish bad faith and dismissed the claims.  In dismissing plaintiff’s common law bad faith claim, the court held that Pennsylvania does not recognize a common law cause of action for bad faith in insurance cases.

The court held that because plaintiff did not file her insurance claim until after the agent purchased the policy, it precluded a finding that her bad faith claim revolved around how her claim was handled.  Further, the court held that there was no statutory bad faith because plaintiff was paid the entire proceeds of the policy plus interest.

The court concluded that “benefits were not denied under the Policy or compromised in any way; rather, it appears that [plaintiff] received everything to which she was entitled.”

In addressing whether seeking a release of the bad faith claims itself could constitute bad faith, the court stated:

“Moreover, it is unclear to the Court how conditioning the payment of the full proceeds on her release of any claims against State Farm constitutes bad faith where the value of the claim was established by the face of the Policy and was tendered in full.  As argued by State Farm, “[a]n insurance company need not submerge its interests to that of a beneficiary,” and is entitled to insulate itself from potential litigation.” (citations omitted)

Date of Decision: January 14, 2010 (Report and Recommendation)

Johnson v. State Farm Life Ins. Co.Civil Action No. 09-207, United States District Court for the Western District of Pennsylvania, 2010 U.S. Dist. LEXIS 10727, 695 F. Supp. 2d 201 (W.D. Pa. Jan. 14, 2010) (Reynolds, U.S.M.J.).

This Report and Recommendation of the Magistrate Judge was adopted by the District Court in Johnson v. State Farm Life Ins. Co., Civil Action No. 09-207, United States District Court for the Western District of Pennsylvania, 2010 U.S. Dist. LEXIS 10473, 695 F. Supp. 2d 201 (W.D. Pa. Feb. 8, 2010) (McVerry, J.).