Archive for the 'PA – Reservation of Rights' Category

APRIL 2017 BAD FAITH CASES: (1) INSURER INTERPRETS POLICY CORRECTLY, SO NO BAD FAITH; (2) NO BAD FAITH WHERE INSURER AGREED TO DEFEND ONLY COVERED CLAIMS, BECAUSE OF NOVEL ARGUMENT THAT USUAL RULE DID NOT APPLY TO TITLE INSURANCE (Philadelphia Federal)

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This dispute arises out of a Title Insurance Company’s initial refusal to defend its insured against a third party claim. The plaintiff in the underlying action proceeded pro se, and filed three different complaints before obtaining counsel. Based on the confusing and unclear language in the complaints, the insurer denied coverage.

It was not until a fourth Complaint was filed that the insurer provided a defense under a reservation of rights. Notably, however, the insurer only agreed to defend the covered claims, and refused to provide a defense for the uncovered claims. The insurer’s position went against well-established Pennsylvania case law requiring insurers to defend against both covered and uncovered claims until all potentially covered claims had been dismissed or resolved.

The insured brought suit alleging that the insurer acted in bad faith by delaying its defense, and by refusing to defend against all claims as required under Pennsylvania law. In determining that there was no bad faith, the Court reviewed the policy and held that the insurer correctly determined that its duty to defend was not triggered until the filing of the fourth Complaint. Because the insurer’s refusal to defend was based on a correct interpretation of the policy, its denial of benefits was not unreasonable, and the plaintiff was unable to satisfy the first element of bad faith.

With regard to insurer’s refusal to defend all claims, the court observed that the general rule that if any claim is covered, then under Pennsylvania law, the insurer must defend all claims, i.e., both covered and uncovered claims. The title insurer argued, however, “that title insurance policies should be construed differently, to extend the duty to defend only to those claims within the contours of the policy.” The title insurer relied upon case law from other jurisdictions and the title policy language; and the insured relied upon Pennsylvania public policy as set forth in case law. The court determined that it should rely upon Pennsylvania precedent, and rejected the title insurer’s argument.

As to bad faith, however, the court held that the insurer’s position was not taken in bad faith for two reasons. First, although unsupported by any Pennsylvania case law, this title insurance exception was an issue of first impression and had apparently never been presented before a Pennsylvania court. Second, the insurer’s position was supported by case law from other jurisdictions that had carved out similar exceptions for Title Insurance Companies.

Date of Decision: March 27, 2017

Lupu v. Loan City, LLC, No. 12-4556, 2017 U.S. Dist. LEXIS 45135 (E.D. Pa. Mar. 27, 2017) (Rufe, J.)

NOVEMBER 2016 BAD FAITH CASES: FOR CHOICE OF LAW PURPOSES IN BAD FAITH CASE, PLACE OF LOSS IS INSURED’S BUSINESS LOCATION; INSURER’S TREATING SIMILAR CLAIMS DIFFERENTLY IS NOT A PER SE BASIS TO SHOW BAD FAITH (Middle District)

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The insured failed to allege a plausible bad faith claim in this case.

The insurer had defended the insured under a reservation of rights in two state actions. The insurer brought suit for declaratory relief in Pennsylvania on those two claims, seeking a ruling that it had no duty to defend or indemnify. It denied coverage in a third state (Vermont) action, apparently without any agreement to defend under a reservation of rights, and amended its Pennsylvania declaratory judgment action to cover this third case as well. The insured brought a counterclaim for bad faith for this last denial of coverage, focusing on the different treatment between the third action and the first two actions.

The Court first had to address a choice of law analysis. Although the states’ bad faith laws at issue were likely not in conflict, the court carried out the analysis to be thorough. The Court found that a key element was where the insurance benefit was denied, in cases where an insured is claiming breach of contract and bad faith. The denial is located at the insured’s place of business, since this is where the economic impact of the denial occurs. In this case, that was Pennsylvania. Further, there were other factors favoring application of Pennsylvania law.

The Court then addressed the insurer’s motion to dismiss the bad faith claim. The following allegations failed to set out a plausible claim under Pennsylvania bad faith law:

The insurer does not have a good faith basis for its denial of a defense to [the insured] in the Vermont Action.

The insurer agreed to defend the New York and Massachusetts Actions based on similar allegations as those contained in the Vermont Action and has at all times continued to defend the New York and Massachusetts Actions.

The insurer’s decision to deny a defense to [the insured] in the Vermont Action while agreeing to defend the New York and Massachusetts Actions is arbitrary, capricious and/or frivolous.

The Vermont Plaintiff’s claim for property damage and/or bodily injury falls within the Policy’s coverage and the products completed operations coverage and [the insured] is entitled to a defense for the claims asserted by the Vermont Plaintiff.

The insurer’s denial of coverage for the Vermont Plaintiff’s claim was made in bad faith.

The insured is entitled to recover damages for the insurer’s bad faith handling of the Vermont claim regardless of the law that applies.

The Court found that, even where claims are similar, denying some claims and covering others is not per se bad faith. The court gave the example that there could be 5 similar claims, none of which the insurer believed in good faith merited coverage. However, it might offer coverage for a subset of those cases “based upon a calculated business judgment, risk avoidance, litigation forecasts, etc.” Thus, “’similarity’ among claims is a poor predictor of bad faith denials in cases where either the claims’ alleged similarity or the claims’ coverage under the policy is not clearly established.”

The Court went on to observe that the insured “points out that coverage of the prior two claims to which [insured] compares the instant action was actually made under a reservation of rights. I consider it a poor use of judicial resources to create judicial rules that make it costlier for insurers to offer initial coverage under a reservation of rights letter. Were Defendant’s argument accepted, insurers would be less willing to offer coverage while a claim was initially being investigated for fear that one coverage decision might be viewed as an admission as to that claim or a comparable one in related litigation. Similar policy justifications underlie determinations by the Federal Rules of Evidence mandating that subsequent remedial measures and offers to pay initial medical or hospitalization costs be deemed irrelevant in associated legal proceedings.”

Finally, the Court found that “most damning for Defendant’s bad faith counterclaim, [the insurer] has provided the Court a copy of its coverage denial letter. Plaintiff has accurately characterized its declination letter as ‘detailed.’ The ten-page, single-spaced letter sets forth, from Plaintiff’s perspective, the applicable choice-of-law analysis, the pertinent policy definitions, the facts surrounding the claim, the justifications that it provides for why those facts do not trigger coverage, and various legal decisions that it suggests support its denial of the claim.”

The Court referenced the fairly debatable standard from other jurisdictions, in observing this was not a basis for bad faith. It looked at Pennsylvania case law on the existence of the insurer’s “reasonable basis” to deny a claim, to the same effect. As stated, it found that the insured had not met the Twombly/Iqbal pleading standards.

Unlike many dismissals for failure to plead a plausible action, however, this bad faith claim was dismissed with prejudice, the Court finding that amendment would be futile.

Date of Decision: August 29, 2016

Westfield Insurance Company v. Icon Legacy Custom Modular Homes, 2016 U.S. Dist. LEXIS 115214 (M.D. Pa. Aug. 29, 2016) (Brann, J.)

We also remind you of Judge Brann’s decision of the same date, as one of the relatively few cases in the last 9 years addressing the Supreme Court of Pennsylvania’s important bad faith decision in Toy v Metropolitan.

PENNSYLVANIA SUPREME COURT ADOPTS FAIR AND REASONABLE STANDARD FOR INSURED’S UNILATERALLY SETTLING CLAIMS WHERE: (1) THE INSURER REFUSES TO SETTLE, (2) THE INSURER HAS ISSUED A RESERVATION OF RIGHTS LETTER ON CLAIMS AT ISSUE, AND (3) COVERAGE IS ULTIMATELY DUE (Pennsylvania Supreme Court)

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In Babcock & Wilcox Co. v. American Nuclear Insurers, Pennsylvania’s Supreme Court had to determine under what circumstances an insured being defended under a reservation of rights could settle with a claimant, absent the insurer’s agreement, and later recover the settlement proceeds from the insurer. The Supreme Court ruled that: (1) where an insurer defends subject to a reservation of rights; (2) the policy is ultimately found to cover the relevant claims that were settled; (3) then the insured may accept a settlement over the insurer’s refusal; (4) where the settlement is fair, reasonable, and non-collusive.

As discussed below, the Court recognized that lower courts will have to look at the specific nature of the rights reserved in applying these principles.

Analytically, the insurer’s failure to settle within policy limits under these circumstances, i.e., rejecting a fair and reasonable settlement while maintaining a reservation of rights, is a breach of its contractual duty.  The burden of proof is on the insured to make this case, and factors to consider include “consideration of the terms of the settlement, the strength of the insured’s defense against the asserted claims, and whether there is any evidence of fraud or collusion on the part of the insured.”

The Supreme Court more generally stated the “risks of going to trial” had to be evaluated. The Court rejected two contrary possibilities.

First, it rejected the insurer’s arguments that the insured must prove bad faith, rather than the settlement’s fairness and reasonableness.

Second, the Supreme Court vacated the Superior Court’s ruling that had provided the insured with two options: (1) accept a defense subject to a reservation of rights, and be required to prove insurer bad faith to recover on any unilateral settlement; or (2) reject the insurer’s offer of a defense under a reservation of rights, hire counsel at the insured’s own expense, and then settle and recover from the insurer under a fair and reasonable standard if coverage is otherwise due.

As to defects in the Superior Court’s analysis, the Supreme Court accepted (1) the legal argument that the insured could breach the insurance contract by rejecting a defense offered by the insurer; and (2) the practical argument that many insureds could not even afford to hire private counsel to pursue this route.

In evaluating the insurer’s responsibility to reimburse the insured, the Court accepted a distinction between a “soft” reservation of rights and a “hard” reservation of rights.  A “soft” reservation of rights involves circumstances where an insured is reserving rights which are “unlikely to alter the interests of the parties”; whereas with a “hard” reservation of rights “the insurer views the claims as possibly covered, requiring a defense, but ultimately unlikely to be covered by the policy, such as when intentional actions are also pled in negligence.”

The Court agreed “that not all reservations of rights are equal…. [and] [t]he mere fact that an insurer restates that it will not cover what the insurance policy does not cover, where it arguably might be part of the damages sought, does not automatically result in allowing the insured to settle the entire suit. Parties and courts may need to consider whether a particular reservation of rights justifies diverging from the contract’s cooperation clause,” i.e., does the insurer’s specific reservation of rights in a particular case permit a court to allow the insured to unilaterally settle the entire case, contrary to the insured’s normal contractual duty to cooperate in any settlement with the insurer and to only settle with the insurer’s consent.

[Note: By way of one hypothetical, assume a case is brought in negligence, but the claimant is also seeking punitive damages, which is possible under Pennsylvania law.  The insurer issues a reservation of rights solely on the punitive damages claim.  The insurer refuses to settle at the underlying plaintiff’s demand number because it concludes that there is a reasonable chance for a defense verdict on the covered claim.  The insured later settles unilaterally at that same demand number because of the concern over punitive damages, which are clearly not covered under the policy.  Thus, there could be an issue under as to whether the fair and reasonable standard even applies because the claim motivating the settlement of the entire case was not a covered claim.]

Date of Decision:  July 21, 2015

Babcock & Wilcox Co. v. American Nuclear Insurers, No. 2 WAP 2014, 2015 Pa. LEXIS 1551 (Pa. 2015)

The dissent can be found here.

SEPTEMBER 2014 BAD FAITH CASES: VICTORY ON COVERAGE ISSUES ON AMBIGUOUS BASIS, DID NOT PRECLUDE BAD FAITH AGAINST PRIMARY AND EXCESS INSURERS CONCERNING DUTY TO DEFEND OR SETTLE; CONDUCT OF DEFENSE COUNSEL IN DECIDING NOT TO REQUEST SPECIAL INTERROGATORIES REMAINED AN ISSUE; AND INSURED’S EXPERT TESTIMONY WAS EXCLUDED ON ISSUE OF ACTUAL CONFLICT IN APPOINTING DEFENSE COUNSEL, BUT ALL EXPERTS COULD OTHERWISE TESTIFY (Philadelphia Federal)

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In Charter Oak Insurance Company v. Maglio Fresh Foods, a primary and excess carrier sought declaratory judgments that they owed the insured no coverage duty under their policies.  The insured counterclaimed for bad faith.  The parties agreed to let the court decided the coverage issues before ruling on the bad faith issue.  The court found that neither insurer owed any coverage duty.  However, this, in itself, did not end the bad faith inquiry.

Background

The insured subsequently amended its counterclaims for bad faith against each insurer. It alleged that the primary carrier acted in bad faith (1) by failing to acknowledge a conflict of interest between the insurer and insured; (2) by failing to advise the insured of its right to independent counsel as a result of that alleged conflict, and to provide that independent counsel; (3) by failing to intervene in the underlying litigation in a timely manner in order to submit jury interrogatories as means of clarifying whether the jury found against the insured based on a theory of liability that the insurance policies would cover or on an uncovered theory; and finally (4) by failing to consider settlement offers and attempt to settle the underlying lawsuit in good faith.

The insured alleged that the excess carrier acted in bad faith by (1) failing to conduct a reasonable investigation before disclaiming coverage and (2) failing to provide a defense to the insured and refusing to post an appeal bond upon the exhaustion of the primary carrier’s policy limits.

Opinion 1.  Winning coverage issue did no eliminate bad faith claims automatically and court found material issues of fact that would place these claims before a jury.

The carriers attempted to win the day on the argument that because they won on coverage, they must by necessity win on bad faith.  In rejecting that argument, the court first observed that the duty to defend was broader than the duty to indemnify.

Next, the court observed that defending under a reservation of rights does not eliminate the possibility of bad faith.  “As the Superior Court of Pennsylvania recently observed, ‘[t]his is not to say that, when an insured accepts the insurer’s defense, the insurer’s conduct of the litigation is subject to no further scrutiny.” Babcock & Wilcox Co. v. Am. Nuclear Insurers. “Rather, the insurer remains bound by its fiduciary obligation to represent the insured’s interests, and to settle the case when appropriate, in keeping with its obligation of good faith.’”

Then, on the issue of alleged bad faith by the primary insurer in not seeking to intervene in the litigation to request jury instructions that would determine whether the jury found against the insured on a covered or non-covered claim, the court appeared to place this in the context of a duty to settle.  The argument appears to be that doing so may have been advantageous to the insured at a time when itfaced potential liability based on certain claims, some of which were not covered by the policy and some of which may have been.

That the court later determined there was no coverage was not the relevant question; rather, it looked to the point in time when the decision could have been made to do so, and at which time the issue of coverage was “by no means certain”. The court framed the issue: “In order to determine whether [the insurer] acted in bad faith, the factfinder must evaluate [its] conduct vis-a-vis the factual landscape that existed at the time of the conduct in question, not based on this Court’s later determinations.”

Addressing this last issue on the facts, the court stated that: “To the extent that a trial involved potentially covered theories of liability, [the insured] had an interest, and indeed a right, to have [the primary carrier] take appropriate steps so that the jury could be instructed on, and if the evidence warranted under the law, return a verdict of liability on the [the potentially covered] claim.” The facts showed that by the time to case got to the jury, potentially covered claims were still on the table.

That being said, the court came very close to ruling in the insurer’s favor on this issue.  The insurer had retained coverage counsel as well as defense counsel at the time of trial, and coverage counsel had recommended submitting special interrogatories, which the insurer wanted to do.  However, the final decision was left up to defense counsel who did not do so, but who was given full leeway on this issue without the carrier’s making the call.

Because there was some remaining question on why he so chose, the court allowed the matter to go to trial; and further, because it would not be granting the motion for summary judgment in full for the carrier in any event.  Importantly, the court did find that there was no issue about defense counsel’s independence; and defense counsel’s decision not to submit the special interrogatories when the carrier wanted him to, evidenced his independence.

The court further found that there were issues concerning an alleged bad faith failure to settle.  There were two products at issue in the underlying unfair competition case.  One went to verdict in the original action, and the other was subject to a mistrial.

The first resulted in an excess verdict for the primary carrier, but there was no bad faith as the case had been consistently evaluated as worth less than policy limits.

As to the second, there were factual disputes about whether that case could then settle before retrial.  It did not settle, and on retrial, the second verdict was for less than policy limits ($1 Million), but was still a substantial $660,000.  The court found on the record various factual issues concerning whether the cases could have settled.

As to the excess carrier, the time period at issue was likewise that period between verdicts, and then even after the verdict.  The court framed the issue as whether the excess carrier met “its potential defense obligations to [the insured]?” Because the primary carrier tendered policy limits during this period, potential defense issues arose for the excess carrier, even though the primary still provided a defense for a time before the post-verdict settlement.  The insured argued that the excess carrier needed to reevaluate the case to meet its fiduciary responsibilities, and to pay towards defense and an appeal bond.

The court found issues remained open, and would not grant summary judgment.

Finally, the court rejected the argument that bad faith could not exist because there was no objective basis to find that the excess carrier’s position on coverage was unreasonable.  However, the court again focused on the claim as relating to the duty to defend, adding that even though the court found there was no duty to indemnify, “it did so because the underlying trial record was not sufficiently clear such that [the insured] would be able to meet its burden to show that the jury awarded … damages based on a covered, as opposed to a non-covered, claim.” Thus, the question remained as to whether the excess carrier’s  refusal to participate in the “defense was reasonable in light of (1) the principle that an insurer has a duty to defend the insured until it can confine the claim to a recovery excluded from the policy, and (2) the existence of a possible [covered] claim … in the [second] trial.”

After this decision, the insured and the primary carrier settled, but the case against the excess carrier went to trial 10 days after the decision.  The court issued factual findings on August 8, which will be the basis for its ultimate decision, not rendered as of this date.

Opinion 2.  Motions in limine on experts.

In between these two rulings, the court ruled on all three parties’ motions in limine concerning experts.

First, although finding that the insureds expert was qualified on insurance issues, the court had already found that the primary insurer “did not, as a matter of law, breach its duty to [the insured] or any provision of its insurance policy by appointing [defense counsel] to represent [the insured]….” Thus, there was no factual issue for a trial on this matter, and the expert would “not be allowed to give any opinion that [the primary carrier] breached its policy by not appointing counsel in addition, or as an alternative, to [the defense counsel it had appointed].”

Second, on the jury interrogatory issue, the insured’s expert report did not “adequately address this issue nor raise relevant facts with respect to it.” Instead, the analysis on this point was all premised on there being a failure to appoint different or additional counsel, which argument the court had already rejected.  Moreover, “even assuming that, following [appointed defense] counsel’s offer of proof at the beginning of trial, as required in the Court’s opinion on summary judgment motions, the interrogatory issue remains for the jury’s consideration, [the insured’s expert’s] opinion does not ‘fit’ with the issues in this case, and therefore, he will not be allowed to testify on this issue.”

Third, on the settlement issue, the insured’s expert did address that issue in his report. Thus,  subject to any rulings that the Court makes on interpreting the policy or concerning Pennsylvania law, [the expert] will be allowed to testify as to this issue.”

Next, the court addressed the insured’s motion to exclude the primary insurer’s expert.  This motion was denied.  This expert would be allowed to testify about the factors leading up to defense counsel’s decision not to submit jury interrogatories, if that were to be before the jury.  He could also testify “as to the issue of whether [the primary insurer] acted in bad faith with respect to settlement of the underlying litigation, subject to any forthcoming rulings from the Court.”

Lastly, as to the insured’s motion to preclude the expert testimony of the excess carrier’s expert, this was also denied.  He was qualified and his opinions related to the excess carrier’s duty to defend in the underlying litigation, which were relevant to key issues at trial and could potentially assist the jury in its consideration of those issues. Thus, his proposed testimony, subject to any rulings the Court makes in interpreting the contract or under Pennsylvania law, would be admitted.

Date of Decision:  July 18, 2014 (on legal issues)

Date of Decision:  July 21, 2014 (motions in limine)

Dated of Decision:  August 8, 2014 (factual findings in insured v. excess carrier)

Charter Oak Ins. Co. v. Maglio Fresh Food, CIVIL CASE NO. 12-3967, 2014 U.S. Dist. LEXIS 97795 (E.D. Pa. July 18, 2014) (Baylson, J.)

Charter Oak Ins. Co. v. Maglio Fresh Food, CIVIL CASE NO. 12-3967, 2014 U.S. Dist. LEXIS 98445 (E.D.Pa. July 21, 2014) (Baylson, J.) (motions in limine)

Charter Oak Ins. Co. v. Maglio Fresh Food, CIVIL CASE NO. 12-3967, 2014 U.S. Dist. LEXIS 109576 (E.D. Pa. August 8, 2014) (Baylson, J.) (factual findings)

2013 BAD FAITH CASES: COURT GRANTS MOTION FOR SUMMARY JUDGMENT ON COVERAGE ISSUE BASED ON BABCOCK RULING, REJECTING WAIVER AND ESTOPPEL ARGUMENTS ON BASIS OF PROPER RESERVATION OF RIGHTS; BUT UNADJUDICATED BAD FAITH CLAIM ON FAILURE TO SETTLE, RATHER THAN INTERPLEAD POLICY LIMITS, REMAINED OPEN (Philadelphia Federal)

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This case involves a coverage dispute between plaintiff, the primary insurer, the defendant-insured, and the excess and umbrella insurer.  Plaintiff filed a complaint alleging its policy did not provide coverage for the insured’s claim, and listing the excess insurer as a “nominal defendant,” although plaintiff and the excess insurer do not have adverse interests.

Both insurers sought a declaratory judgment holding insured’s claims were not covered by these policies. The insured then filed a counterclaim against plaintiff and cross claim against the excess insurer seeking coverage and alleging bad faith. Both insurers filed motions for summary judgment, which the court granted.

The insured and insurers both advanced arguments disputing coverage and applicability of exclusions in the policy. The insured also advanced an equitable argument, suggesting even if the court found the underlying claims were not covered by the policies, the insurers should still be barred from contesting coverage.

Considering the new case law handed down by the Superior Court in Babcock & Wilcox v. Am. Nuclear Insurers in July of 2013 (THE BABCOCK CASE WAS REVERSED BY THE PENNSYLVANIA SUPREME COURT ON JULY 21, 2015), the court found the insured’s argument without merit. Under Babcock, where an insured accepts a defense from the insurer, the insured is bound to its decision, granting the insurer sole authority to control the defense.

Although the insurer is still required to act in good faith in representing the insured’s interest and settling the case, if the insured has accepted the defense, its sole protection against any injuries arising from the insurer’s conduct of the defense is a claim for bad faith.

The court found the insured failed to present law or facts supporting a finding of waiver due to the plaintiff’s alleged failure to seek a timely intervention or to file a declaratory action while the underlying litigation advanced. Plaintiff had no obligation to intervene or file a declaratory action, nor did either party dispute that plaintiff effectively reserved its right to contest coverage. The insured also alleged plaintiff waived its coverage defense by initiating an interpleader action in state court (prior to the federal action).

The court stated that Charter had moved to deposit the policy limit plus post-judgment interest with the Court of Common Pleas in order to halt the accrual of post-judgment interest and demonstrate a good faith effort to settle.

However, existing case law demonstrates courts do not recognize the tender of funds for settlement purposes as a waiver of coverage contest where the insurer has properly reserved its right to do so.  Plaintiff paid the funds into the account to stop the accrual of post-judgment interest, and did not indicate in any way that it intended to reverse its previous reservation of its rights to contest coverage.

The insured also argued plaintiff should be estopped from asserting its coverage defense due to its unreasonable refusal to settle the underlying claims within the policy limits and its failure to provide the insured with independent counsel when a conflict of interest arose between plaintiff and the insured.

However, under Babcock, the insurer can simultaneously challenge whether a claim is covered under the policy while also assuming the duty to defend. Based on Babcock, plaintiff retained full control of the litigation when the insured accepted its defense, and plaintiff’s decisions with respect to settlement of the claim, or choice of counsel, did not affect its reservation of rights.

Therefore, the court found in the insurers’ favors, and granted the motion for summary judgment of non-coverage.

The bad faith claim was not before the Court, as the parties had submitted only the coverage issues.  The court observed that the insured’s protection for its contention that Charter Oak failed to appropriately settle the case within the policy limits or failed to appoint independent counsel – its sole protection – lies in its claim of bad faith.

Specifically, “Maglio asserts counterclaims against Charter Oak based on Charter Oak’s alleged bad faith in refusing to settle the underlying litigation within the policy limits and failing to appoint independent counsel to defend Maglio. The summary judgment motions presently before this Court do not address Maglio’s counterclaims, pursuant to the parties’ agreement to proceed with coverage issues first. The Court therefore makes no finding with respect to Maglio’s counterclaims at this time.”

Date of Decision: October 24, 2013

Charter Oak Ins. Co. v. Maglio Fresh Food, Civil Case No. 12-3967, 2013 U.S. Dist. LEXIS 152741 (E.D. Pa. Oct. 24, 2013) (Baylson, J.).

JULY 2013 BAD FAITH CASES: SUPERIOR COURT ISSUES OPINION CREATING NEW STANDARD FOR RESERVATION OF RIGHTS LETTERS (Superior Court)

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THIS DECISION WAS REVERSED BY THE PENNSYLVANIA SUPREME COURT ON JULY 21, 2015.

The Pennsylvania Superior Court created new law by holding an insured may decline an insurer’s defense tendered under a reservation of rights and later seek to be indemnified for any settlement and defense costs deemed fair, reasonable, and non-collusive.

This case stems from over 300 underlying claims alleging personal injury and property damage from radioactive emissions at two nuclear fuel processing facilities owned by Babcock & Wilcox and its predecessor Atlantic Richfield Company (collectively “B&W”). Beginning in March 1958, American Nuclear Insurers and Mutual Atomic Energy Liability (collectively “ANI”) provided coverage to B&W, with limits beginning at $3 million and increasing to $160 million per facility as of February 1979.

In 1998, the district court tried eight “test cases,” with the jury returning verdicts in favor of all eight plaintiffs and an aggregate of over $36 million in damages. The trial court subsequently granted a motion for a new trial based on evidentiary errors made in the test case trials. While the new trials were pending, ANI filed a declaratory judgment action in the Court of Common Pleas in Allegheny County against B&W. Before the court ruled on the declaratory judgment action, B&W reached a settlement agreement with all 300-plus plaintiffs and provided the agreed upon $80 million in settlement funds. ANI opposed the settlement.

Following the settlement, B&W sought reimbursement for the $80 million paid in settlement funds as well as counsel fees. ANI resisted, claiming it had no obligation to make any payment because B&W violated the consent to settlement clauses in the insurance policies. In trying to resolve this dispute, an issue regarding the appropriate standard to apply in determining ANI’s insurance coverage obligations arose. The trial court determined the Cowden standard should apply, requiring B&W to plead and prove the four-part test to be entitled to reimbursement.

The litigation progressed as expected until two years later when the trial court issued a new memorandum and order instructing the standard described in Alfiero v. Berks Mutual Leasing Co., 500 A.2d 169 (Pa. Super. 1985) be used in the pending trial. Despite previously being reserved for cases where a defendant sought indemnification for settlement funds following a bad faith action by the insurer, under the Alfiero standard, B&W would be entitled to reimbursement “if the settlement was fair, reasonable, and non-collusive.”

The Babcock trial court chose to break precedent and apply the Alfiero standard because it felt “there was no principled distinction between a case in which an insurer provides a defense subject to a reservation of rights… and a case where the insurer denies both defense and coverage.” The trial court further opined, “the insurance company should not be the sole decision maker where there is a possibility that only the insured’s interests will be affected by the outcome of the underlying litigation,” as is the circumstance when a defense is tendered under a reservation of rights. Id. Following this determination, the court directed the parties to trial to determine whether the $80 million settlement entered into by B&W was “fair and reasonable.” The jury determined that the settlement was fair, reasonable, and non-collusive, and the trial court entered an order reflecting the same.

ANI appealed the order, presenting a single issue to the Superior Court:

“Whether ANI had the right to deny coverage for B&W’s unauthorized $80 million payments to settle the [underlying] Action where: (1) the ANI Policy, which had combined limits of $320 million, unambiguously afforded ANI the right to control settlement and exclude coverage for unauthorized payments; (2) ANI was fully performing its policy obligations by funding B&W’s $40 million-plus defense in the underlying Action; and (3) ANI’s decision to continue defending the [underlying] Action comported with the Pennsylvania Supreme Court’s decision in Cowden.”

On appeal, ANI contended that by adopting Alfiero as the appropriate standard, the trial court had effectively adopted the standard articulated in United Services Auto. Ass’n v. Morris, 741 P.2d 246 (Az. 1987), and its progeny. In Morris, the Arizona Supreme Court held when an insurer tenders a defense under a reservation of rights it “[does] not breach any of its policy obligations” but “neither [does] it accept full responsibility for the insured’s liability exposure.” As such, it held “the cooperation clause prohibition against settling without the insurer’s consent forbids an insured from settling only claims for which the insurer unconditionally assumes liability under the policy… The insurer’s reservation of the privilege to deny the duty to pay relinquishes to the insured control of the litigation, almost as if the insured had objected to being defended under a reservation.” The Superior Court felt this mischaracterized the trial court’s ruling. Furthermore, such a ruling would be incongruous with Pennsylvania’s contract law because the Morris court found “the insurer’s defense with a reservation did not constitute a breach of contract,” yet still “relieved the insured of its own corresponding contractual duty.” Instead, the Superior Court chose to rely on Taylor v. Safeco Insurance Company, 361 So.2d 743 (Fla. Ct. App. 1978). In Taylor, the insurer tendered its defense under a reservation of rights, then withdrew its defense, only to retender the defense at trial, again under a reservation of rights. The insured rejected the defense, and, without counsel, consented to “a substantial judgment, assigning its right to seek reimbursement from its insurer to the plaintiff in exchange for a release from all personal liability for the judgment.” When the plaintiff sought reimbursement, the trial court granted the insurer summary judgment based on the insured’s failure to comply with the consent to settlement clause of the policy. The appeals court reversed that holding, finding “because the insured had rejected the insurer’s defense… if coverage were established, the insurer would be obligated to indemnify the insured for the amount of settlement up to the policy limit if the settlement was “reasonable” and was not entered into “in bad faith, fraudulently, collusively, or without any effort to minimize his liability.”

Following the Taylor line of case law, Pennsylvania’s Superior Court held:

“When an insurer tenders a defense subject to a reservation, the insured may choose either of two options. It may accept the defense, in which event it remains unqualifiedly bound to the terms of the consent to settlement provision of the underlying policy. Should the insured choose this option, the insurer retains full control of the litigation, consistently with the policy’s terms. In that event, the insured’s sole protection against any injuries arising from the insurer’s conduct of the defense lies in the bad faith standard articulated in Cowden.

Alternatively, the insured may decline the insurer’s tender of a qualified defense and furnish its own defense, either pro se or through independent counsel retained at the insured’s expense. In this event, the insured retains full control of its defense, including the option of settling the underlying claim under terms it believes best. Should the insured select this path, and should coverage be found, the insured may recover from the insurer and the insured’s defense costs and the costs of settlement, to the extent that these costs are deemed fair, reasonable, and non-collusive.”

After making this ruling, the Superior Court held that the trial court erred in constraining the trial to the question of whether B&W’s settlement was “fair and reasonable.” Rather, the questions presented to the jury should have been, “(1) whether B&W in fact rejected ANI’s defense; and, if so, (2) whether ANI acted in bad faith in declining to settle, or, as alleged by B&W, to participate in settlement negotiations with the [underlying] plaintiffs.”  Based on this finding, the court vacated the underlying jury verdict and judgment and remanded to allow the trial court to conduct a new trial in conformity with the new standard derived from Taylor.

Date of Decision:  July 12, 2013

Babcock & Wilcox Co. v. Am. Nuclear Insurers & Mut. Atomic Energy Liab. Underwriters, 2013 Pa. Super. LEXIS 1633 (Pa. Super. Ct. 2012) (Wecht, J.)

 

JULY 2013 BAD FAITH CASES: INSURER’S MOTION TO DISMISS BAD FAITH CLAIM BASED ON FAILURE TO ISSUE RESERVATION OF RIGHTS DENIED (Western District)

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The court denied plaintiff’s motion to dismiss defendants’ counter claim for bad faith. Plaintiff-insurer initially brought suit against its insured. Defendant-insureds then filed a counter-claim against their insurer, alleging bad faith for plaintiff-insurer’s denial of coverage after agreeing to provide coverage and a legal defense without issuing a reservation of rights letter.

Plaintiff-insurer initially agreed in writing on May 12, 2011, to defend defendant-insureds without issuing a reservation of rights letter, then, 165 days later, reversed its position and issued a reservation of rights letter. Defendant-insureds were forced to hire private counsel to avoid inherent conflicts of interest and identified the insurer-retained counsel in the underlying action as a fact witness in the current case.

Plaintiff-insurer’s actions also putatively threatened privileged attorney-client communications. Defendant-insureds claimed to have detrimentally relied on plaintiff’s initial assurance of coverage and to have been prejudiced by plaintiff-insurer’s reversal of position.

Relying on precedent from district courts in Ohio, Washington, Florida, and South Carolina, the Western District determined an insurer’s delay in issuing a reservation of rights letter could, under some circumstances, support a claim for bad faith or estoppel. On this basis, the court denied plaintiff-insurer’s motion to dismiss, determining the issue could not be appropriately resolved at that stage in the litigation.

While the court acknowledged some of defendant-insureds’ claims of bad faith might be susceptible to dismissal at the 12(b)(6) stage, the claims regarding plaintiff-insurer’s change in position, detrimental reliance and prejudice were not. Consistent with that finding, the court granted defendant-insured’s request for leave to amend their counterclaim.

The court declined to rule on which damages would potentially be available if the claims survived a motion to dismiss due to a complex choice-of-law issue that would need to be resolved.

Date of decision: June 4, 2013

Greenwich Ins. Co. v. BBU Servs., Civil Action No. 12-291, 2013 U.S. Dist. LEXIS 78070 (June 4, 2013 W.D. Pa.) (Bissoon, J.).

OCTOBER 2012 BAD FAITH CASES: COURT GRANTS SUMMARY JUDGMENT TO CARRIER ON BAD FAITH CLAIM BECAUSE IT DEFENDED INSUREDS UNDER A RESERVATION OF RIGHTS AND RECOMMENDED THAT THE INSURED HIRE PERSONAL COUNSEL (Philadelphia Federal)

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In Clunie-Haskins v. State Farm Fire & Cas. Co., the court heard a carrier’s motion for summary judgment that was filed in response to a breach of contract and bad faith suit filed by an insured’s assignees. This case stemmed from a sexual assault perpetrated by the insureds. In 2000, the two individuals allegedly assaulted an eleven-year old girl at a sporting event. The victim successfully sued the assailants for assault and battery. The carrier initially defended the insureds under a reservation of rights, pursuant to homeowners insurance policies issued to their parents. However, the carrier later ended its defense of the litigation on behalf of the insureds.

The assailants assigned any potential rights against the carrier to the victim and her mother, who sued the carrier for breach of contract and bad faith in late 2011. Thereafter, the carrier removed the case to federal court and filed the instant motion for summary judgment.

The court first examined the assignees breach of contract claim, which alleged that the carrier had a duty to defend and indemnify the insureds under homeowners policies issued to the assailants’ parents. The carrier pointed to a November 2003 order issued by the Philadelphia Court of Common Pleas in the underlying litigation, which held that the carrier had no duty to indemnify the insureds. Although the carrier did defend the insureds, it did so under a reservation of rights. The assignees disagreed, arguing that the complaint alleges breach of contract for acts occurring after November 2003. However, the court sided with the carrier, finding the November 2003 order applicable and that it precluded a suit for breach of contract.

Next, the court turned to the assignees’ bad faith claims. The assignees argued that the carrier’s continued defense, after the November 2003 order, and subsequent withdrawal after the Supreme Court of Pennsylvania prevented the insureds from asserting a particular defense in the assault and battery litigation, amounts to bad faith. The carrier disagreed, arguing that it provided a successful defense for many years, subject to a reservation of rights.

Moreover, the carrier continuously recommended that the assailants hire their own counsel due to the potential for personal liability. The court found for the carrier, ruling that, without a duty to indemnify or defend, the carrier did not act in bad faith by refusing to continue representation.

The court also ruled that the carrier did not act in bad faith during the underlying litigation, recognizing that the carrier repeatedly advised the assailants to procure personal representation. As such, the carrier did not “unilaterally direct” the litigation in bad faith because it reminded the insureds of their rights throughout the entire process.

As such, the court ruled in favor of the carrier, awarding summary judgment and dismissing the suit.

Date of Decision: March 2, 2012

Clunie-Haskins v. State Farm Fire & Cas. Co., 855 F. Supp. 2d 380 (E.D. Pa. 2012)

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.)

JUNE 2012 BAD FAITH CASES: STATUTE OF LIMITATIONS DID NOT COMMENCE WHEN CARRIER SENT RESERVATION OF RIGHTS, BUT WHEN CARRIER TENDERED UNEQUIVOCAL DENIAL OF COVERAGE TO THE INSURED (Western District)

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In Wiseman Oil Co. v. TIG Ins. Co., the insured brought suit against its carrier seeking a declaratory judgment as to the carrier’s duty to defend, alleging breach of contract claims and statutory bad faith. The carrier thereafter filed a motion for judgment on the pleadings. The original suit arose from the government’s 1997 claim for environmental damage against the insured, filed pursuant to CERCLA. When the insured sought coverage under its pollution policy with the carrier in 2004, the carrier was unable to provide coverage because it could not determine that the insured was a policy-holder. It notified the insured of its findings in 2005, reserving its rights under the terms of the missing policy.

The litigation was administratively closed until 2009, when the insured produced certificates of insurance issued by the carrier. However, in early 2010, the carrier indicated that it could not find copies of the insured’s policy and would not proceed further in handling the insurance claim. According to testimony of the carrier’s representatives, the company had “no central database” and would “stick stuff in boxes.” There were apparently 160,000 unopened boxes in storage at the time of his deposition, rendering it nearly impossible to figure out if the insured’s policy was in any of the boxes.

With respect to the insured’s bad faith claims, the point of contention between the carrier and the insured was the commencement of the statute of limitations. The carrier claimed that the two-year limitation commenced in 2005 when it advised the insured that is was “unable to locate evidence sufficient to establish the terms, conditions and/or provisions of the policy.” The 2005 letter also went on to “reserve all of the [insurer’s] rights and defenses . . . .” The carrier alleged that this letter began the two-year period and that the insured was unable to pursue its claim.

In the Report and Recommendation, the Magistrate Judge disagreed, reasoning that the letter bears more resemblance to a reservation of rights. To commence the statute of limitations under Pennsylvania’s bad faith law, the carrier is required to deny coverage. Since the 2005 letter does not explicitly deny coverage, the court reasoned, it is more functionally equivalent to a reservation of rights, which fails to commence the limitation period. As such, the statute did not begin to run until early 2010 when the carrier advised that it would “take no further action” with respect to the insured’s claim. The Magistrate Judge therefore recommended that the carrier’s motion for judgment on the pleadings be rejected.

The time period for objections remained open at the time of this posting.

Date of Decision: May 22, 2012

Wiseman Oil Co. v. TIG Ins. Co., 878 F. Supp. 2d 597, No. 011-1011, 2012 U.S. Dist. LEXIS 71138, U.S. District Court for the Western District of Pennsylvania (W.D. Pa. May 22, 2012) (Lenihan, M.J.).