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

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Anyone following this blog has been made aware, ad naseum, that courts are divided on whether statutory bad faith can exist where no benefit is denied.  In this context, denial of a benefit includes a bad faith delay in providing a benefit owed. Thus, the issue is not whether a belated payment or defense can constitute bad faith.  Rather, the issue is whether a statutory bad faith claim is cognizable if an insurer owes no duty to indemnify in a first party case, or to defend or indemnify against a third party claim.

We have pointed out that the 2007 Pennsylvania Supreme Court decision in Toy v. Metropolitan Life strongly appears to have answered this question: There is no statutory bad faith possible if no benefit is denied.  Thus, if no benefit is due, it would appear section 8371 is not the remedy for poor claims handling practices, standing alone.

Last week, Eastern District Judge McHugh ruled in a case that no coverage was due under the policy at issue.  After so ruling, he then addressed the bad faith claim in one sentence.  “Because I have concluded that [the insurer] acted in accordance with the terms of the policy, it cannot be deemed to have acted in bad faith.”  Hemphill v. Landmark Insurance Company. Another example of this principle is found in Judge DuBois’ 2019 Buck decision, which specifically cites Toy.

One day earlier, Lackawanna County Common Pleas Judge Nealon concluded that statutory bad faith did not require denial of a benefit. In fact, a carrier could win summary judgment that no coverage was due under an insurance policy, but still be subject to a statutory bad faith claim.  Farber v. Erie Insurance Exchange.

Judge Nealon states that the success of a statutory bad faith claim does not depend on the success of the underlying contract claim. Citing a 1999 Superior Court opinion, he adds that “because ‘[a] bad faith action under Section 8371 is neither related to nor dependent on the underlying contract claim against the insurer,’ [the insured] is ‘not required to await a judicial determination of the coverage issue’ before pursuing a bad faith claim….”

There are numerous cases out of Pennsylvania’s Superior Court and Federal Courts finding there is a subset of statutory bad faith claims that do not require the denial of a benefit.  Despite Toy’s importance on this issue, these cases typically do not cite Toy. Of course, some of the cases were decided before Toy, but many are not.   Rather, these post-Toy cases cite case authority that ultimately relies on pre-Toy precedent.

The Farber opinion cites Superior Court case law relying on authority from the 1990s, as well as Middle District Judge Rambo’s 2019 Ferguson opinion.  In Ferguson, Judge Rambo addressed the issue head on, and concluded that there are cognizable statutory bad faith claims that do not require denial of a benefit. Unfortunately, Ferguson does not consider the Toy opinion in reaching this conclusion.

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

Dates of Decision: July 8, 2020 and July 9, 2020

Farber v. Erie Insurance Exchange, Court of Common Pleas of Lackawanna County, No. 19 CV 2302 (July 8, 2020) (Nealon, J.)

Hemphill v. Landmark Insurance Company, U.S. District Court Eastern District of Pennsylvania CIVIL ACTION No. 19-5260, 2020 U.S. Dist. LEXIS 120447 (E.D. Pa. July 9, 2020) (McHugh, J.)

Our thanks to attorney Daniel Cummins of the excellent and valued Tort Talk Blog for bringing the Farber case to our attention.

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