Monthly Archive for September, 2006

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SEPTEMBER 2006 BAD FAITH CASES
BAD FAITH INVOLVING INSURER DEFENSE GROUP, ATTORNEY-CLIENT PRIVILEGE PROTECTED DURING JOINT DEFENSE AGREEMENT ONLY; NO MEDIATION PRIVILEGE (Philadelphia Commerce)

Published on September 10, 2006 in Discovery and Evidence. Closed

In Executive Risk Indemnity, Inc. v. Cigna Corporation, Plaintiff reinsurance company (ERI) contested its obligation to provide reinsurance coverage to Defendant insurer in connection with underlying lawsuits filed against the insurer.  Defendant insurer counterclaimed for breach of contract and bad faith, and filed various discovery motions.  These include among others (1) the important issue of to what extent ERI could assert that the attorney-client privilege was encompassed by a joint-defense privilege; (2) whether discovery of ERI’s claims’ examiner’s handwritten notes could be had; and (3) whether counsel for ERI and another excess counsel could be deposed on the circumstances under which ERI ceased participating in a mediation.

The Philadelphia Commerce Court found that the attorney-client privilege is not waived when there is a actual joint-defense agreement to which a third person was party, and that this third person had a common interest in the defense with the party now asserting the privilege. The Court applied the same reasoning to the work product doctrine.  ERI had entered into a joint defense agreement with other insurers concerning the underlying case involving Cigna, and its communications and lawyers’ work product remained privileged for the life of that agreement; however, communications or work product shared after that agreement terminated were not protected.  Following this same logic, the claim’s examiner notes embodying privileged communications or work product during the joint defense period were precluded from discovery, but the depositions of counsel were permitted for the time after the agreement terminated (and there was no longer a common interest), when ERI chose not to participate in the mediation.  Nor was ERI allowed to assert a mediation privilege, since it did not agree to participate; though the carriers that did participate may yet have that privilege. 

Date of Decision:  August 18, 2006

Executive Risk Indemnity Inc. v. Cigna Corporation, November Term 2004, No. 1495, 2006 Phila. Ct. Com Pl. LEXIS 328 (C.C.P. Philadelphia Aug. 18, 2006) (Bernstein, J.)

The decision in this case addressing the discoverability of reserve and/or reinsurance information is set forth in a separate summary, located in the “Discovery and Evidence” category.

It should be noted that Judge Mark I. Bernstein, author of this Opinion, is the author of a commentary on Pennsylvania’s Rules of Evidence.
        

SEPTEMBER 2006 BAD FAITH CASES
RESERVE INFORMATION DISCOVERABLE IF RELEVANT TO AN ISSUE PRESENTED IN A BAD FAITH ACTION BY INSURER AGAINST RE-INSURER (Philadelphia Commerce)

Published on September 10, 2006 in Discovery and Evidence. Closed

In Executive Risk Indemnity, Inc. v. Cigna Corporation, Plaintiff reinsurance company contested its obligation to provide reinsurance coverage to Defendant insurer in connection with underlying lawsuits filed against the insurer.  Defendant insurer counterclaimed for breach of contract and bad faith, and filed various discovery motions.  The Philadelphia Commerce Court allowed the insurer to obtain information concerning reinsurance as it concluded that such information could permit a determination about whether the reinsurance company acted in bad faith.  The Court observed that reserve information could be discoverable if relevant to an issue presented in a bad faith action; and that reserve information is relevant to a bad faith claim based upon an insurer’s failure to settle based upon a dispute issue over the claim’s value or whether the insurance company made any reasonable settlement offer.  However, the issue presented in this case was whether the reinsurance company’s denial was based on a reasonable interpretation of the insurance policy.  The Commerce Court held that the reserve information requested was neither relevant nor reasonably calculated to lead to the discovery of admissible evidence in that context, thus denying the insurer’s motion to compel reserve information.

Date of Decision:  August 18, 2006

Executive Risk Indemnity Inc. v. Cigna Corporation, November Term 2004, No. 1495, 2006 Phila. Ct. Com Pl. LEXIS 328 (C.C.P. Philadelphia 2006) (Bernstein, J.)

It should be noted that Judge Mark I. Bernstein, author of this Opinion, has authored an annotated commentary to Pennsylvania’s Rules of Evidence.

The decision in this case addressing the discoverability of privilege information shared under a joint defense agreement is set forth in a separate summary, located in the “Discovery and Evidence” category.

SEPTEMBER 2006 BAD FAITH CASES
COURT AWARDS PRE & POST JUDGMENT INTEREST; CAPS ATTORNEY’S FEES OF $1 MILLION, AFTER NO FINDING OF BAD FAITH WHERE THERE WAS A DUTY TO DEFEND (Middle District)

Published on September 5, 2006 in Lawyer's - Attorney's Fees. Closed

In Rite Aid Corporation v. Liberty Mutual Fire Insurance Company, Rite Aid’s coverage and bad faith claims were based upon an underlying suit by a former employee.  The United States District Court for the Middle District of Pennsylvania had held that Liberty Mutual did have a duty to defend Plaintiff, but had also previously granted Liberty Mutual’s motion for summary judgment on Rite Aid’s bad faith claim.  See Rite Aid Corp. v. Liberty Mutual Fire Ins. Co., 414 F.Supp.2d 508 (M.D. Pa. 2005) (“Although the Court does not agree with Defendant’s interpretation of the policy language at issue, Plaintiff offers no evidence, and the Court finds none, to indicate that Defendant’s denial was reckless or unreasonable. Moreover, contrary to Plaintiff’s assertions, Defendant’s initiation of the declaratory action in California does not, by itself, indicate bad faith.”)  Thus, the only questions remaining for the Court were (1) the amount of reasonable and necessary defense costs for which Liberty Mutual was required to reimburse Rite Aid, not to exceed $1 million; and (2) whether Rite Aid was entitled to pre- and/or post-judgment interest.  As Liberty Mutual’s obligation to reimburse Rite Aid’s legal expenses was capped at $1 million, the Court awarded that amount.  The Court also accepted Plaintiff’s pre-judgment calculations and awarded Rite Aid $284,494.02 in pre-judgment interest, while awarding all of the undisputed post-judgment interest.

Date of Decision:  August 14, 2006

Rite Aid Corporation v. Liberty Mutual Fire Insurance Company, U.S. District Court for the Middle District of Pennsylvania, No. CV-03-1801, 2006 U.S. Dist. LEXIS 57094 (M.D. Pa. 2006) (Kane, J.)

SEPTEMBER 2006 BAD FAITH CASES
SUPREME COURT LETS LOWER COURT RULING STAND, PERMITTING BAD FAITH CLAIMS FOR CONDUCT DURING BAD FAITH LITIGATION, & 10 to 1 PUNITIVE DAMAGES AWARD (Supreme Court)

Published on September 2, 2006 in Litigation Conduct Claims. Closed

In Hollock v. Erie Insurance Exchange, the Supreme Court had granted an appeal to address two important issues:  (1) whether Pennsylvania’s Bad Faith statute encompasses conduct that occurs during the bad faith litigation itself; and (2) whether an award of punitive damages 10 times those of the compensatory damages is permissible.  Along with the punitive damages award 10 times compensatory damages, in Hollock, the trial court included a substantial sum in attorneys’ fees incurred during the bad faith litigation within plaintiff’s compensatory damages; finding that bad faith can continue into the bad faith litigation itself.  An en banc Superior Court panel upheld the trial court’s rulings.  More than two and one-half years after Pennsylvania’s Supreme Court accepted the appeal on this highly significant and controversial ruling, however, it dismissed the carrier’s appeal as improvidently granted.

The legal effect of this decision is to allow the Superior Court’s decision to stand, without giving a definitive ruling on whether that decision will ultimately become the law in Pennsylvania (if the Supreme Court ever permits an appeal on the subject in the future).  The practical effect is that the Superior Court’s decision will bind all Pennsylvania state trial courts, and will be highly influential on all Pennsylvania federal courts, until the Pennsylvania Supreme Court says otherwise.

In a non-jury trial, the trial Judge had found that, “most of the testimony of [the carrier’s] employees [during the bad faith litigation] was an intentional attempt to conceal, hide or otherwise cover-up the conduct of [its] employees in the handling of the [insured’s] claim.”  In affirming the Court of Common Pleas, the Superior Court made two important rulings.  First, the Court ruled that a carrier could be liable for bad faith conduct during the bad faith litigation, even though the carrier paid the benefits due on the underlying claim before the current bad faith action was tried.  Second, the Superior Court affirmed the trial court’s award of punitive damages, which was based in part on the conduct of the insurer during the bad faith litigation itself.  The Trial Court had awarded punitive damages of $2.8 million, approximately ten times the compensatory damages award. 

The Supreme Court Majority’s Order dismissing the appeal did not address these  issues nor state why the appeal was dismissed.  In dissenting from the dismissal, Chief Justice Cappy, joined by Justice Castille, wrote a lengthy dissenting statement, laying out the nature and significance of the Superior Court’s decision; that this decision would effectively continue as the law in the Commonwealth; and that, in his view, the Superior Court was incorrect in finding that the Legislature intended to include bad faith conduct during the bad faith litigation as part of the claim.  Justice Cappy stated: “In my opinion, once the insurer is asked to defend an action under the [bad faith] statute, there can no longer be a relationship with its insured subject to a duty to act in good faith; adequate means exist to control the behavior of the insurer, or any party, during the litigation.”  He further noted his belief that the Court’s decision not to hear the appeal would only, “delay the task and allow the lower courts to continue to follow, what I believe is, an incorrect application of this statutory claim.”

Date of Decision: August 22, 2006

Hollock v. Erie Ins. Exch., 2006 Pa. LEXIS 1544, No. 67 MAP 2005 (Pa. 2006) (Per Curiam) (order of dismissal) (dissenting statement)

SEPTEMBER 2006 BAD FAITH CASES
MORTGAGE LENDER THAT REQUIRES HOMEBUYER TO FORWARD FUNDS TO PURCHASE DISASTER INSURANCE WITH MONTHLY PAYMENT NOT AN INSURER FOR BAD FAITH PURPOSES (Middle District)

Published on September 1, 2006 in General Bad Faith and Litigation Issues. Closed

In Lindsey v. Chase Home Finance, L.L.C., the United States District Court for the Middle District of Pennsylvania addressed whether a mortgage lender could be deemed an insurer under Pennsylvania’s Bad Faith Statute.  The lender required its borrowers to purchase disaster insurance.  This required paying an additional $10.90/month with the homeowner’s payment to Chase, which then had the insurance purchased from ACE.  Chase canceled the ACE policy in 2003, but still included the $10.90 in the monthly bills.  A flood occurred, and the homeowner claimed that she never received notice of the cancellation and had expected the disaster insurance to pay off her mortgage.  She demanded that Chase step into the carrier’s role, and brought an insurance bad faith claim against Chase, among other claims, when it refused.  The Court dismissed that claim, holding that the Bad Faith Statute, 42 Pa.C.S. § 8371, only applies to true insurance companies; citing to state and federal cases holding that self-insurers and insurance adjusters are not subject to the statute.  As the Court stated:  “The amended complaint does not aver any facts that Chase has agreed to assume certain risks, such as flood damage to the Property, in consideration for premiums; that Chase is licensed to conduct insurance business in Pennsylvania; that the Agreement was reviewed and approved by the state insurance regulator; or that Chase issued an insurance policy naming Ms. Lindsey as an insured.”

Date of Decision:  August 30, 2006

Lindsey v. Chase Home Finance, L.L.C., United States District Court for the Middle District of Pennsylvania, No. CV-06-1220, 2006 U.S. Dist. LEXIS 61893 (M.D.Pa. Aug. 30, 2006) (Vanaskie, C.J.)

SEPTEMBER 2006 BAD FAITH CASES
SUPREME COURT LETS LOWER COURT RULING STAND FOR $2.8 MILLION PUNITIVES AWARD ON BAD FAITH CLAIM, TEN TIMES GREATER THAN COMPENSATORY DAMAGES (Supreme Court)

Published on September 1, 2006 in Punitive Damages. Closed

In Hollock v. Erie Insurance Exchange, the Supreme Court had granted an appeal to address two important issues:  (1) whether Pennsylvania’s Bad Faith statute encompasses conduct that occurs during the bad faith litigation itself; and (2) whether an award of punitive damages 10 times those of the compensatory damages is permissible.  The Trial Court had awarded punitive damages of $2.8 million, approximately ten times the compensatory damages award.  The compensatory damages substantially consisted of fees and costs incurred in the bad faith litigation.  Further the punitive damages award was itself based in large part on the carrier’s conduct during the bad faith litigation itself.

The case eventually came before an en banc Superior Court panel which upheld the trial court’s rulings.  More than two and one-half years after Pennsylvania’s Supreme Court accepted an appeal of the Superior Court’s decision, it dismissed the carrier’s appeal as improvidently granted. The Supreme Court Majority’s Order dismissing the appeal did not address these  issues nor state why the appeal was dismissed.  In dissenting from the dismissal, Chief Justice Cappy, joined by Justice Castille, wrote a lengthy dissenting statement, in which he would have vacated the punitive damage award for considering factors that occurred during trial, with instructions to adhere the U.S. Supreme Court’s ruling in State Farm v. Campbell.

For a discussion of Chief Justice Cappy’s statements concerning conduct during bad faith litigation, see “Categories, Litigation Conduct Claims”.

Date of Decision: August 22, 2006

Hollock v. Erie Ins. Exch., 2006 Pa. LEXIS 1544, No. 67 MAP 2005 (Pa. 2006) (Per Curiam) (order of dismissal) (dissenting statement)