Archive for the 'PA – Reserves' Category

DISCOVERY IN BAD FAITH CASE: (1) RESERVES DISCOVERABLE; (2) MENTAL IMPRESSIONS NOT DISCOVERABLE; (3) TRADE SECRET OBJECTIONS CANNOT STAND ABSENT APPROPRIATE MOTION FOR PROTECTIVE ORDER (Philadelphia Federal)

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In this bad faith action, Eastern District Judge Slomsky addressed three disputed discovery issues: (1) reserves; (2) claim adjuster work product; and (3) trade secrets.

Reserves are Discoverable

District courts within the Third Circuit are split on whether reserves are discoverable in bad faith cases. In this action, Judge Slomsky stood with those judges who find reserves relevant and discoverable.

Work Product Privilege not Eviscerated Simply by Bringing a Bad Faith Action

On the other hand, he refused to require production of a claim adjuster’s mental impressions simply because it was a bad faith case. As the court states: “In essence, Plaintiff’s sole argument to compel production of [the adjuster’s] mental impressions is that [the mental impressions] are relevant merely because this case contains a bad faith claim. It is well-settled that this argument is insufficient to disregard the work-product privilege set forth in Rule 26.”

Trade Secret Objections Fail When (1) Insurer Does not Move for Protective Order, and (2) Does not Lay Out Nature of Trade Secrets in Opposing Motion to Compel

The insurer made redactions to document production based on trade secret objections. The court first observed that Pennsylvania Civil Rule 4012 governed this trade secrets issue, rather than the Federal Rules. The interpreted Pa.R.C.P. 4012 to require a party objecting on this basis to bring a motion for a protective order in the first instance, which the insurer did not do in this case. The court then observed that the insurer failed to address the insured’s arguments against the presence of trade secret protections, which could have been done without revealing any trade secrets. Still, after granting the motion to compel on this issue, the court gave leave for the insurer to file an “appropriate” motion for a protective order.

Date of Decision: July 16, 2019

Penn-Dion Corp. v. Great American Insurance Co. of N.Y., U. S. District Court Eastern District of Pennsylvania CIVIL ACTION NO. 17-4634, 2019 U.S. Dist. LEXIS 117635, 2019 WL 3202503 (E.D. Pa. July 16, 2019) (Slomsky, J.)

COURT ADDRESSES DISCOVERY RE: (1) RESERVES (2) OTHER CLAIMS/DISPUTES; (3) CLAIM LOGS; (4) CLAIM STATUS REPORTS; (5) POLICY AND PROCEDURE MANUALS; (6) EMPLOYEE INCENTIVES; (7) ANTICIPATION OF LITIGATION/WORK PRODUCT; AND (8) OVERBROAD DISCOVERY LANGUAGE (Middle District)

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This case addresses a number of discovery issues in this first party benefit denial breach of contract and bad faith case.

RESERVES (BAD FAITH ON COVERAGE VS. REFUSAL TO SETTLE/VALUE DISPUTES)

Magistrate Judge Carlson observed courts in the Third Circuit are split on whether reserves are discoverable in bad faith cases. He first states that when the bad faith case is about a failure to settle or dispute over a claim’s value, the prevailing view is that reserves are discoverable. “However, when the bad faith claim is based on a denial of coverage and ‘does not involve the value of the claim or [the plaintiff’s] estimation of liability… the reserve information requested is neither relevant nor reasonably calculated to lead to the discovery of admissible evidence.”

The alleged bad faith in this case is based on denying coverage through a biased and unfair review process, and not a dispute over value. Thus, reserves are irrelevant to the bad faith claim, and production is not required.

OTHER MATTERS NOT RELEVANT OR DISCOVERABLE

The alleged basis of the bad faith claim was that the insurer intentionally used a biased peer review organization and doctor to terminate plaintiff’s medical benefits unfairly. Plaintiff served interrogatories concerning virtually all matters in which the same PRO and doctor were selected by the insurer. Magistrate Judge Carlson did not permit this discovery.

The court first looked at prior case law denying discovery on the issue of the size of an adjuster’s case load, finding it both irrelevant and of marginal utility compared to the burden imposed on the insurer to make production. In the present case, Magistrate Judge Carlson found that “the number of times that this PRO and/or doctor decided in favor of the insurer, whether on initial review or on reconsideration, will not necessarily speak to any such bias.” If, e.g., a PRO found for the insurer 98 out of a 100 times, “those 98 claims may very well have been legitimately decided on their merits, which could not be known without an extensive post hoc evaluation of the merits of each claim.”

The court was not going to carry out that kind of evaluation, and observed that “courts in this circuit have held that ‘discovery of other insureds’ claims in bad faith cases is generally improper, as such information is irrelevant.”

ADDITIONAL RULINGS ON CLAIMS LOGS, CLAIMS STATUS REPORTS, ANTICIPATION OF LITIGATION, OVERBROAD DISCOVERY LANGUAGE, EMPLOYEE INCENTIVES, AND POLICY/PROCEDURE MANUALS

Magistrate Judge Carlson made the following additional points and rulings:

  1. Magistrate Judges have broad discretion in resolving discovery disputes.

  2. Plaintiff alleged there was a biased peer review process used to deny medical benefits. The court found the portions of the insurer’s policy manuals on the peer review process, and employee procedures or policies for handling inquiries about insurance policies, must be produced.

  3. A request for “all communications of any nature whatsoever” concerning the complaint are vague and overbroad, as are requests for communications regarding “any matters raised by Plaintiff’s and Defendants’ initial disclosures”.

  4. The work product doctrine kicked in when plaintiff’s counsel wrote to the insurer expressing dissatisfaction with the outcome of the PRO process. Actual suit or even the threat of suit are not required to trigger the insurer’s anticipation of litigation. Thus, claim notes created after the date of that letter received work product protection, but claim notes before that date had to be produced.

  5. Claim log entries indicating an employee simply looked at the file or generically uploaded a document are not protected work product.

  6. The insurer was required to respond to an interrogatory asking for “the nature and amount of any employee incentive to close out insureds’ claims”.

Date of Decision: February 6, 2019

Barnard v. Liberty Mutual Insurance Corp., U. S. District Court Middle District of Pennsylvania Civil No. 3:18-CV-01218, 2019 U.S. Dist. LEXIS 18660 (M.D. Pa. Feb. 6, 2019) (Carlson, M.J.)

SEPTEMBER 2018 BAD FAITH CASES: RESERVES DISCOVERABLE IN BAD FAITH ACTION; WORK PRODUCT PROTECTION DOES NOT ARISE WITH MERE SUGGESTION OF LITIGATION (Philadelphia Federal)

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This discovery dispute arose in a UIM bad faith case over the insurer’s seeking to reduce benefits after taking the position it had overpaid for lost income.

The insurer refused to produce claims file materials based on the work product doctrine. These included (1) employee mental impressions and opinions about the claim and (2) reserve information. The court ordered the parties to meet and to try and reach agreement on the date the insurer reasonably anticipated litigation. If any document remained in dispute, these would be considered for in camera review. The insurer ultimately submitted redacted and unredacted claim filed documents to the court, and an annotated privilege log identifying the disputed documents.

Among other things, the court observed that “discovery disputes involving an insurance company’s claims file often present problems for the parties because the ordinary course of an insurer’s business involves evaluating its policyholder’s claims.” It stated that “The temporal trigger for work product protection in this context is the point in its investigation an insurance company’s activity shifts from mere claims evaluation to an anticipation of litigation.” The burden is on the insurer to “demonstrate that it subjectively anticipated litigation, and that the anticipation was objectively reasonable.”

The court rejected the notion that protected was triggered when the insured’s lawyer told the carrier he wanted to discuss the case to avoid litigation. “[A] lawyer’s mere suggestion of a lawsuit is not enough to make an insurer reasonably anticipate litigation when the insurer’s evaluation of the claim is ongoing.” In this case, the ongoing claim payments indicated the evaluation process was continuing even after this statement.

The court next found there was no per se standard under the controlling federal rules barring discovery of reserves under the work product doctrine. It further noted that prior Pennsylvania state law, relied on by the carrier, left open the issue of whether reserves were discoverable in bad faith cases. The court added that the insurer did not provide factual support that the reserves were prepared in anticipation of litigation.

[See this blog post discussing discovery and reserves.]

Date of Decision: August 22, 2018

Neidich v. Progressive Advanced Insurance Co., U. S. District Court Eastern District of Pennsylvania CIVIL ACTION NO. 17-5375, 2018 U.S. Dist. LEXIS 142445 (E.D. Pa. Aug. 22, 2018) (Padova, J.)

 

 

DECEMBER 2017 BAD FAITH CASES: MEDIATION PRIVILEGE INAPPLICABLE TO MOST COMMUNICATIONS; REINSURANCE INFORMATION DISCOVERABLE EVEN IF NOT ULTIMATELY ADMISSIBLE (Western District)

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The insured was involved in a deadly motor vehicle accident. The insurer could have settled the case within the $11,000,000 policy limit, but declined to do so. The case was mediated before two different mediators and the judge held a settlement conference. The case went to trial and the jury awarded $32,000,000. The insured sued for breach of contract and bad faith.

During the bad faith litigation, the insured sought discovery concerning the mediations and reinsurance. The insurer asserted the mediation privilege and that the reinsurance documents were not relevant.

The insured argued that the purpose of Pennsylvania’s mediation privilege is to enable the parties to be frank and honest with the mediator and/or opposing parties without fear of reprisal in a subsequent bad faith lawsuit for doing so.” The insurer had the burden in asserting this privilege.

MEDIATION PRIVILEGE

As a practice point, the court observed the insurer “did not specify on its privilege log whether its decision to redact or withhold a document was because a portion of a document was ‘a mediation communication’ or a ‘mediation document’ as those terms are defined. Instead, [the insurer] merely opted to cite the statute and then let this Court attempt to discern what [it] meant by the following entry on its privilege log: ‘Mediation and/or settlement conference privilege pursuant to 42 Pa.C.S. §5949, F.R.E. 408, and/or applicable law.’”

The court then stated that the insurer had reciting the statutory definitions of mediation communication and mediation document and then argued that “‘[a]ll of the documents withheld and/or redacted … and submitted to the Court in camera qualify as mediation documents or mediation communications.’” The court went on to describe this as a lack of pointed argument.

Pertaining to documents redacted or withheld, the court found that “none of the redacted or withheld documents qualify as ‘a mediation document’ under the plain meaning of Pennsylvania’s mediation privilege statute except for” a single document. As to that document, it should only have been “redacted where the mediator … wrote an email ….”

Under 42 Pa.C.S. 5949, “mediation document” is defined as: “Written material, including copies, prepared for the purpose of, in the course of or pursuant to mediation. The term includes, but is not limited to, memoranda, notes, files, records and work product of a mediator, mediation program or party.”

The court then went on to address mediation communications within the documents, which the statute defines as: “A communication, verbal or nonverbal, oral or written, made by, between or among a party, mediator, mediation program or any other person present to further the mediation process when the communication occurs during a mediation session or outside a session when made to or by the mediator or mediation program.”

The court refused to apply the mediation privilege to statements made outside the mediation that did not in some way include the mediator.

The court did protect communication from the insured’s expert consultant relaying something the mediator said. However, it did not protect “redacted statements a mediator or a party may have said during the course of a mediation” in other circumstances.

Specifically, it did not protect these communications where the documents including those statements “are nothing more than reports and/or claims notes. These redacted documents contain statements which were made by a person who may have been present at the mediation session to someone (not the mediator) outside the mediation session.

Thus, they do not meet the plain meaning of the definition of ‘mediation communication’ and therefore, are not protected by Pennsylvania’s mediation privilege.” (Emphasis in original)

REINSURANCE DISCOVERY

On the reinsurance documents, the court observed that there “is no absolute exclusion of reinsurance information, as discovery of such information has been readily permitted,” citing at least one case on the issue of reserves being discoverable in bad faith litigation to support this position.

The court also quoted case law that “the purpose of permitting discovery of the existence of and content of any insurance agreement is to equalize the knowledge of both parties and give the plaintiff ‘assurance that there can be recovery in the event of a favorable verdict to justify the time, effort and expense of preparing for trial.’ … Although the discovered information may not be admissible at trial, it would allow parties to fairly evaluate settlement offers and foster a just, speedy and inexpensive determination.”

Relying on these cases, the court concluded that: “Given the nature of this case, and the allegations brought by Golon, this Court finds that all of [insurer’s] documents which were either withheld or redacted because the document either referenced or discussed reinsurance should be produced in their entirety.

However, this does not guarantee that these documents will be admissible at the time of trial. The Court is ordering them produced so that [the insured] can evaluate what [the insurer] did or did not do, and when [the insurer] took action with its own reinsurer, in relation to the underlying claim.”

The Court subsequently denied two emergency motions for reconsideration.

Date of Decision: December 7, 2017/December 14, 2017

Golon, Inc. v. Selective Ins. Co., No. 17cv0819, 2017 U.S. Dist. LEXIS 201792 (W.D. Pa. Dec. 7, 2017) (Schwab, J.)

Golon v. Selective Ins. Co., No. 17cv0819, 2017 U.S. Dist. LEXIS 213966 (W.D. Pa. Dec. 14, 2017) (Schwab, J.)

 

OCTOBER 2017 BAD FAITH CASES: COURT ADDRESSES A WIDE RANGE OF BAD FAITH DISCOVERY ISSUES AS TO PRIVILEGE, WORK PRODUCT, AND RESERVES (Western District)

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This is a discovery opinion addressing a wide range of issues including the attorney client privilege, work product doctrine and discovery of reserves. A number of rulings were held in abeyance pending in camera review, which are not addressed below

1.        The attorney client privilege is not limited to claims handler communications with outside counsel.

“This Court is not aware of any authority that limits the attorney-client privilege to communications with outside counsel, as opposed to in-house counsel, and Plaintiff has cited none. Therefore, this Court rejects Plaintiffs’ claim that the attorney-client privilege could not have attached before Attorney McDonnell was retained as outside counsel to handle Plaintiffs’ claim.”

2.         The privilege is not abrogated simply because a document is relevant to a bad faith claim.

“Plaintiffs next assert that the documents listed in the privilege log titled ‘Communications with counsel regarding the value and merits of claim’ are not privileged because they “go to the heart of this bad faith action[.]” (ECF No. 20 at 8.) However, as Defendant notes, the Third Circuit has unequivocally held that ‘[r]elevance is not the standard for determining whether or not evidence should be protected from disclosure as privileged, and that remains the case even if one might conclude the facts to be disclosed are vital, highly probative, directly relevant or even go to the heart of an issue.’ Rhone-Poulenc Rorer Inc. v. Home Indem. Co., 32 F.3d 851, 864 (3d Cir. 1994). Moreover, ‘[a] party does not lose the privilege to protect attorney client communications from disclosure in discovery when his or her state of mind is put in issue in the action.’ Id. Thus, while Plaintiffs are correct that these communications ‘go to the heart’ of Plaintiffs’ bad faith claim, this fact does not change the analysis of whether these communications are protected by the attorney-client privilege.

3.     Documents prepared by claims adjusters and sent to attorneys are privileged.

“Plaintiffs also claim that ‘communications made by the claims representatives are not immune from discovery.’ This argument is easily dismissed. ‘[T]he attorney-client privilege operates in a two-way fashion to protect confidential client-to-attorney or attorney-to-client communications made for the purpose of obtaining or providing professional legal advice.’ The fact that the documents were prepared by the claims adjusters, rather than the attorney to whom the documents were sent, is immaterial to the analysis of whether those documents are protected under the attorney-client privilege.”

4.         Reserves discoverable in bad faith action.

The court found reserve information discoverable in bad faith cases. It wrote the following in explaining its position:

“There is competing treatment of whether reserve information is discoverable in a bad faith lawsuit.” Shaffer v. State Farm Mut. Auto. Ins. Co., No. 1:13-CV-01837, 2014 U.S. Dist. LEXIS 30436, 2014 WL 931101, at *2 (M.D. Pa. 2014). “Some courts have noted a ‘tenuous link between reserves and actual liability given that numerous considerations factor into complying with this statutory directive.'” Sharp, 2014 Pa. Dist. & Cnty. Dec. LEXIS 282, 2014 WL 8863084 at *8, quoting Fidelity & Deposit Co., 168 F.R.D. at 525 (citing Rhone-Poulenc Rorer, Inc. v. Home Indemnity Co., 139 F.R.D. 609, 613 (E.D. Pa. 1991)). However, as a court of common pleas recently stated:

Several trial courts, including this court, have reasoned that insurance reserves are discoverable in bad faith litigation against insurers, where liability for the underlying claim has already been established, since such information may be relevant to the issue of whether the insurer acted in bad faith in failing to settle or pay the original claim. See Consugar v. Nationwide Insurance Co. of America, 2011 U.S. Dist. LEXIS 61756, 2011 WL 2360208, at * 5 (M.D. Pa. 2011) (‘Since plaintiff here claims that defendant acted [*19]  in bad faith, a comparison between the reserve value of the claim and defendant’s actions in processing plaintiff’s claim could shed light on defendant’s potential liability.’); North River Ins. Co. [v. Greater New York Mut. Ins. Co.], 872 F. Supp. [1411] at 1412 [(E.D. Pa. 1995)] (finding reserve information “relevant to the question of whether or not [the insurer] acted in bad faith during the pre-trial settlement negotiations.”); McAndrew v. Donegal Mutual Ins. Co., 56 Pa. D. & C. 4th 1, 18 (Lacka. Co. 2002); Fretz v. Mutual Benefit Ins. Co., 37 Pa. D. & C. 4th 173, 180 (Alleg. Co. 1998). Sharp, 2014 Pa. Dist. & Cnty. Dec. LEXIS 282, 2014 WL 8863084 at *8.”

5.     Reserves concerning insured’s claim are discoverable, but reserves concerning other claims are not, and court will not indulge fishing expedition on setting reserves for other claims.

“Defendant’s boilerplate responses also contend that Plaintiffs’ requests are overly broad. … This Court disagrees with Defendant’s contention in regards to Interrogatory No. 5, in which Plaintiffs’ seek information regarding the reserve history for [the insured’s] own claim. Because the gist of Plaintiffs’ complaint is that Defendant acted in bad faith in handling [the insured’s] underinsured motorists claim, Plaintiffs’ request for the reserve history for [her] claim is not overly broad.”

“However, this Court agrees with Defendant that RPD No. 4 is overly broad. While Plaintiffs have demonstrated the relevancy of the reserve amounts for [the insured’s] own claim, Plaintiffs have not shown — nor even argued in their Motion to Compel — that reserve information for other insureds is relevant to Plaintiffs’ claim. Therefore, Defendant will only be required to produce any relevant documentation of the reserve history for [the insured’s] claim.”

“RPD No. 4 asks for “all documents relating to or involving the process used from 2011 to the present in setting or otherwise establishing or determining reserves for underinsured motorists claims.” (ECF No. 20-2 at 4.) However, neither Plaintiffs’ Motion to Compel nor Defendant’s Brief in Opposition contain any argument concerning whether or not discovery of Defendant’s reserve process for other insureds is appropriate. In other words, neither party addresses the issue of whether RPD No. 4 seeks documents that are outside of the context of Plaintiffs’ specific claim. To the extent that Plaintiffs’ ask for discovery of reserve information for other claims, this Court declines the invitation to allow Plaintiffs to embark on a fishing expedition.”

6.       Work product doctrine not applicable to reserve information in this case.

“The only other objection that Defendant has put forth is its boilerplate response that the information requested by RPD No. 4 and Interrogatory No. 5 ‘is protected from discovery by the work-product doctrine.’ … However, Defendant’s threadbare and conclusory invocations of the work product doctrine fail to establish that Defendant is entitled to the privilege it asserts. Moreover, Defendant does not even argue in its Brief in Opposition that this information is protected by the work-product doctrine. Further, according to the reserve history for [the insured’s] claim, the reserve values were set by non-attorneys. … In fact, Defendant has not asserted that the reserve amounts were set or altered at the direction of, or with the cooperation of, counsel. Therefore, Defendant has failed to establish that the information Plaintiffs seek is protected by the work-product doctrine.”

Date of Decision: October 2, 2017

Parisi v. State Farm Mut. Auto. Ins. Co., CIVIL ACTION NO. 3:16-179, 2017 U.S. Dist. LEXIS 162131 (W.D. Pa. Oct. 2, 2017) (Gibson, J.)

 

SEPTEMBER 2017 BAD FAITH CASES: COURT ADDRESS DISCOVERY OF RESERVES, SETTLEMENT AUTHORITY, CLAIMS MANUALS, AND THE RULES FOR ORGANIZING DOCUMENT PRODUCTION (Philadelphia Federal)

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This case involved the adjustment of a fire loss claim. The insurer made over $1 Million in payments during a two-year period. The insured brought a bad faith action over claims handling and payment during that two-year period. This opinion addresses the insured’s motion to compel discovery.

Once the party seeking discovery meets its initial burden by showing relevance, “the burden then shifts to the party opposing discovery to articulate why discovery should be withheld.”

“The party resisting production must demonstrate to the court ‘that the requested documents either do not come within the broad scope of relevance defined pursuant to Fed. R. Civ. P. 26(b)(1) or else are of such marginal relevance that the potential harm occasioned by discovery would outweigh the ordinary presumption in favor of broad disclosure.’”

  1. Organization of Document Production

3,200 pages of documents were provided on an unsearchable pdf. The plaintiff objected that the documents were not as kept in the usual course of business or referenced to particular document requests. The insurer responded they were provided as kept in the ordinary course of business.

The Court stated that “the producing party has the choice to either produce documents as they are kept in the ordinary course of business or to label them to correspond with the request categories.” Thus, “labeling is not required where the party otherwise complies with the rule by producing the documents as they are kept in the normal course of business.”

The Court accepted the insurer’s “representation that the documents were produced as kept in the usual course of business.” The insurer offered “some narrative explanation of what was produced, and how it was produced.” The Court would not require the insurer “to label the documents to correspond to [the] requests,” where it had “sufficiently described its document production as containing emails, claims notes,  and correspondence—all of which are pieces of the entire file that Plaintiff requested.”

In asserting that the documents were “not produced … as kept in the usual course of business,” the insured’s argument was “devoid of any particularized factual basis for this claim.” Thus, this aspect of the motion to compel was denied.

  1. Discovery of Reserves and Settlement Authority

The Court first observed the split in authority on discovery of reserves. It “ordered in camera inspection of the loss reserves ‘to the extent that those documents contain information other than specific amounts set for loss reserves.’”

The Court stated that “the reserve information may be relevant to Plaintiffs bad faith claim based on the timeline of this case. For instance, Plaintiff alleges that Defendant insisted on a release before issuing payments because Defendant knew it was offering less than what it owed; that Defendant knowingly delayed the payment of claims to save money and to injure Plaintiff; and that the release is invalid.”

The Court cited authority for the proposition that “reserve information relevant to whether insurer acted in bad faith in not settling case within policy limits before trial” could be discovered. “Accordingly, to the extent employees or agents of the company discussed the value of Plaintiffs claim or other factual information regarding the claim in connection with setting the reserves, such information may be relevant.”

Still the Court did not order direct production of previously redacted material, but ordered the insurer to “produce unredacted copies of the reserve and settlement authority information to the Court for in camera inspection.”

  1. Discovery of Claims Manuals

“Courts within this district have found that limited portions of claims manuals are relevant in bad faith insurance cases.” The Court observed thatEastern District Judges “have typically found that information contained in claims manuals is discoverable to the extent that it concerns employee procedures for processing claims.”

The insured sought “[t]he portion of the claims manual regarding any portion of the Policy relied upon by you in making a coverage decision on plaintiff’s claim.” The specific bad faith claim involved the manner and timing of payment.   The Court found the document request overly broad, and that it went further than the bad faith claim as asserted.

The Court did disagree with the insurer’s argument that discovery can only be permitted for a total denial of coverage.

The Court limited the document request “to include only portions of the claims manuals that discuss policies relating to valuation of claims, and the timing of claims payments.”

Date of Decision: August 9, 2017

Bala City Line, LLC v. Ohio Sec. Ins. Co., CIVIL ACTION No.: 16-cv-4249, 2017 U.S. Dist. LEXIS 126579 (E.D. Pa. Aug. 9, 2017) (Sitarski, M.J.)

MARCH 2017 BAD FAITH CASES: FINEMAN, KREKSTEIN & HARRIS OBTAINS SIGNIFICANT VICTORY FOR INSURER IN DEFEATING UIM BAD FAITH CLAIM AT TRIAL IN PHILADELPHIA’S COMMERCE COURT (Philadelphia Commerce Program)

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In a bad faith case that actually went to trial, in Philadelphia’s Commerce Court, Fineman, Krekstein & Harris won a finding in favor of the insurer in a hard fought case, involving a myriad of bad faith issues. The court issued a 37 page Findings of Fact and Conclusions of Law, vindicating the positions argued and case presented for the insurer.

The insureds argued, among other things, that there were undue delays in claims handling, adjusters did not keep claims files in accordance with policy manuals, and reserves were improperly set. Among other things, the insurer focused its arguments on the timing of the insureds first making a demand for payment; reliance upon competent counsel in reaching decisions; and that the insureds’ original demand for the $1,000,000 policy limits was never lowered through the course of the UIM case.

In its conclusions, among other things, the court observed there is no heightened duty to insureds in the UIM context, and that even negligence or bad judgments do not equate to bad faith. The court made clear that delay is not bad faith per se, and that evaluating delay includes an analysis of the reasonableness of denying a claim. Moreover, even if unreasonable, to constitute bad faith the delay must be knowing or reckless. Bad faith is measured from the time demand is made.

The court also stated that undervaluing a claim is not bad faith if there is a reasonable basis for the valuation. Thus, a low but reasonable valuation is not bad faith. A settlement offer in the insurer’s low range of estimated value also is not bad faith. On the facts of this case, the court observed that the insurer never took the position that it would pay nothing on the claim, and as described below, made a number of offers.

The court found it was reasonable under the circumstances for the insurer to decline mediation two weeks before the arbitration was to take place. The insurer’s counsel testified that it was too late to mediate, and that there was no indication the insureds would lower their demand. The court observed that in evaluating bad faith, courts weigh the insureds’ decision not to negotiate down from a policy limit demand, even though the insured is not required to negotiate. The court found that settlement almost always requires a mutual give and take, which did not occur in this case.

The insurer was required to pay $600,000 under the UIM arbitration award. The court found, however, there was no evidence the insureds would have accepted $600,000 to settle the case prior to arbitration.

The court also took into consideration the actual difference between the ultimate UIM arbitration award, the insurer’s final offer, and the insured’s demand. In this case, the insured’s final offer was approximately $182,000 below the ultimate award, but the insureds’ policy limit demand was $400,000 greater than the award. The court found the insurer’s final settlement offer was reasonable, and that earlier offers for lesser sums were permissible interim offers. The court explained the reasonableness of each offer in its context.

Among other facts addressed in the court’s conclusion of law, the court gave weight to the fact that the insurer’s UIM defense counsel received a report from his own expert that counsel had not requested. Furthermore, defense counsel disagreed with the report’s conclusions. However, instead of withholding the report, counsel and the insurer’s representatives produced it to the insureds.

Moreover, the insurer used a high-end number from this same report in coming up with the basis for its final offer. The arbitration panel also used that number, rather than the insureds’ expert’s even higher number, in coming up with its arbitration award. The court stated that the insurer did not have to base its decision upon the insured’s expert rather than the insurer’s own expert.

The court found the insurer’s investigation was lengthier than it should have been, but did not constitute bad faith. The court found the insurer’s request for an independent medical examination was not evidence of bad faith. Nor was this a case of setting a reserve and never moving from that number during the course of the claim. The court found no discrepancy in the manner of setting reserves and the nature of the investigation that showed intent or recklessness in undervaluing the claim. As to the claims handling, even if unduly lengthy or negligent, this did not constitute bad faith.

The court further found that the carrier’s representatives sought UIM defense counsel’s advice in good faith, and that counsel was competent to give advice on defense and valuation of the claim. Although this was not a strict advice of counsel defense, since the insurer’s representatives ultimately made their own decisions, the thorough nature of counsel’s advice, when considered as a component of their decision making, supported the reasonableness of their claims handling decisions.

Date of Decision: March 21, 2017

Richman v. Liberty Insurance Underwriters, Sept. Term 2014, No. 1552, Court of Common Pleas of Philadelphia (C.C.P. Phila. Mar. 21, 2017) (McInerney, J.) (Commerce Program)

S. David Fineman of Fineman, Krekstein & Harris was lead defense counsel.

MAY 2016 BAD FAITH CASES: COURT ADDRESSES BIFURCATION OF BAD FAITH CLAIM AND WIDE RANGE OF DISCOVERY ISSUES (Middle District)

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In Morris v. USAA Casualty Insurance Company, a UIM case, the Court provided a compact opinion addressing a wide range of discovery issues, and a motion to bifurcate the breach of contract and bad faith claims.  The issues relating to the bad faith claim are summarized as follows:

  1. The motion to bifurcate was denied. The court found there was “an overlap in the issues of the separate claims, and that having one trial would better serve judicial economy.”

  2. The court recognized “generally that an expert opinion is not required in bad faith cases, [but] there are times when expert testimony is appropriate.” Here, the court found testimony from the insured’s expert “would be helpful to the jury, but [the expert was] precluded from offering any legal conclusions.”  The court rejected the argument that report contained no legal conclusions, and found there were portions that went to the ultimate issues in this case and would not be permitted in the final report.

  3. The insurer was required to produce reserve information for a two year period, in line with a prior order.

  4. The court precluded any evidence, argument, comment or reference to any other claims or litigation to which [the insurer] is or has ever been a party, at any time during the course of the trial.”

  5. The insurer had asserted the allegations concerning the insured’s conduct as a defense and the insured sought to preclude evidence of that defense. The court ruled this was premature, and should be addressed via trial objections.

  6. The court rejected the insured’s effort to preclude payments by the tortfeasor. The amount paid is relevant to the bad faith claim.

Date of Decision:  May 3, 2016

Morris v. USAA Cas. Ins. Co., No. 3:12-cv-1664, 2016 U.S. Dist. LEXIS 58948 (M.D. Pa. May 3, 2016) (Kosik, J.)

DECEMBER 2015 BAD FAITH CASES: RESERVE INFORMATION DISCOVERABLE IN BAD FAITH CASES (Western District)

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In Smith v. Progressive Specialty Insurance Company, the court was asked to reconsider its recent discovery decision compelling production of reserve information. The insurer again tried to argue “that this was opinion work product which is entitled to near absolute protection from discovery while Plaintiff’s claim for underinsured motorist (“UIM”) benefits is still pending and being litigated.”

The court observed that motions for reconsideration are designed to address manifest errors of law or fact, a change in governing law, or to bring out newly discovered evidence.  They are not a second bit at the apple.  None of these exceptions applied.  The insurer simply wanted the court to rely upon the set of cases favoring its view, rather than the legal opinions the court previously cited to support its decision in favor of production.  The court reiterated that the key difference it found was in the case at issue, reserves were sought in connection with a bad faith claim, while such a claim was not at issue in the cases the insurer adduced.

Date of Decision:  December 15, 2015

Smith v. Progressive Specialty Ins. Co., 2:15-cv-528, 2015 U.S. Dist. LEXIS 167619 (W.D. Pa. December 15, 2015) (McVerry, J.)

 

NOVEMBER 2015 BAD FAITH CASES: COURT ORDERS INSURER TO PRODUCE (1) RESERVE INFORMATION (2) CLAIMS FILES FOR IN CAMERA REVIEW AND (3) PROPRIETARY INFORMATION SUBJECT TO CONFIDENTIALITY ORDER (Western District)

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In Smith v. Progressive Specialty Insurance Company, the court granted in part the insured’s motion to compel discovery after finding that redacted information provided by the insurer was discoverable and relevant to the determination of whether the insurer acted in bad faith.

The insured originally filed a complaint against her automobile insurer, alleging state law claims for breach of contract and bad faith relative to an underinsured motorist (“UIM”) claim. The insured served discovery requests on the insurer, and the insurer provided the insured with non-privileged portions of UIM claim notes along with a privilege log.

Upon receipt of the requested documents, the insured filed a motion to compel in which she argued that the redactions related to the insurer’s valuation of her UIM claim and reserves are “relevant to [her] bad faith claim, as it has been alleged that [the insurer] failed to properly investigate and evaluate her case in accordance with the duty of good faith and fair dealing.” The insurer opposed the motion and argued that its UIM claim notes and reserve information were protected from discovery as opinion work product. Alternatively, the insurer urged the court to conduct an in camera review of the documents before ordering the production of same.

The court acknowledged that there is “competing treatment of whether reserve information is discoverable in a bad faith lawsuit,” but ultimately determined that the amount set aside for reserves is germane to any analysis that the insurer made of the claim’s value and relevant to the determination of whether the insurer acted in bad faith in processing the claim. Accordingly, the court ordered the insurer to produce any previously redacted reserve information in the claim file.

The court next pointed to Pennsylvania case law for the proposition that an insurer’s “claims file is discoverable in a bad-faith case like this one, as information in that file on [the insurer’s] decision to deny the claim is relevant or could lead to potentially relevant information.” Thus, the insurer was ordered to produce to the court all entries it had previously redacted in the UIM claim notes based upon the work product doctrine in order for the court to conduct an in camera review.

Finally, the court ordered the insurer to produce to the insured any information it had previously redacted pursuant to its so-called “confidential and proprietary” privilege, finding that disclosure of this information appeared adequately protected by the parties’ confidentiality agreement.

Date of Decision:  November 4, 2015

Smith v. Progressive Specialty Ins. Co., CIVIL ACTION NO. 2:15-cv-528, 2015 U.S. Dist. LEXIS 149835 (W.D. Pa. November 4, 2015) (McVerry, J.)

The court denied a subsequent motion for reconsideration on the reserve issue.