Yearly Archive for 2008

DECEMBER 2008 BAD FAITH CASES
BAD FAITH CLAIM DISMISSED WITHOUT PREJUDICE UNDER TWOMBLY: FACTS INSUFFICIENTLY ALLEGED TO ESTABLISH A BAD FAITH CLAIM (Philadelphia Federal)

In Atiyeh v. National Fire Insurance Company, the insurer denied coverage as a result of water damage to the insured’s real estate business and personal property.  The insured was the owner of a real estate business. The insured purchased a commercial insurance policy from the insurer covering this real estate business. The insured paid all premiums and performed all requirements under the insurance policy. During the policy period, the pipes in the insured’s business building froze causing water damage to the building and to the insured’s personal property. In addition, the insured suffered a loss from the interruption of his business.  The insured notified the insurer of his claim.  The insurer initiated an investigation and inspection of the insured’s real estate and personal property.  The insurer then denied coverage for the insured’s loss. 

The insured filed a two-count complaint against the insurer for breach of contract and bad faith. The insurer removed the case to the United States District Court for the Eastern District of Pennsylvania.  The insurer filed a motion to dismiss the action.  With regard to the bad faith claim, the insurer argued that the insured did not sufficiently state a claim for bad faith pursuant to the statute.  The insured argued that the complaint stated a viable bad faith claim under the federal notice pleading requirements.  The insured alleged that he did not need to support the claim with extensive facts because the complaint sufficiently placed the insurer on notice of their bad faith claim. 

In federal court, state pleading requirements do not apply. In federal court, a plaintiff states a sufficient claim if the complaint avers basic facts regarding the insurance policy, loss, denial of claim as well as allegations that the insurer acted unreasonably. Unlike the Pennsylvania fact pleading standard, plaintiffs are not required to state facts in sufficient detail to prove the claim in their complaint under the Federal Rules of Civil Procedure.  However, the court found that even under the federal rules less stringent notice pleading requirement, the insured had not sufficiently alleged facts to establish a claim of bad faith. 

The Court applied the newer standard enunciated by the Supreme Court in Bell Atlantic Corp. v. Twombly. Thus, a Complaint will be reviewed for whether it “contain[s] either direct or inferential allegations respecting all the material elements necessary to sustain recovery under some viable legal theory.” The insured had not made any allegations that the insurer’s investigation was unreasonable, that the denial of the claim was unreasonable, or that the insurer lacked a sufficient basis for denying the claim.  Therefore the court dismissed the insured’s bad faith claim without prejudice in order to allow the insured to file an amended complaint more specifically pleading the bad faith claim.  The Court agreed that an alleged violation of the Unfair Insurance Practices Act (UIPA), by itself, does not create a private right of action or set out a statutory bad faith claim.

Date of Decision: September 30, 2008

Atiyeh v. Nat’l Fire Ins. Co., Civil Action No. 07-cv-04798, 2008 U.S. Dist. LEXIS 76770 (E.D. Pa. Sept. 30, 2008) ( Gardner, J.)

 

J.M.A.

DECEMBER 2008 BAD FAITH CASES
BAD FAITH CLAIM CAN EXIST WHERE CONTRACT CLAIM IS PROCEDURALLY BARRED (Philadelphia Federal)

In Atiyeh v. National Fire Insurance Company, the Court stated that a statutory bad faith claim can exist even if there were no viable breach of insurance contract claim, as an independent cause of action.  This is a questionable proposition in light of recent Supreme Court case law, Toy v. Metropolitan Life Insurance Company, 928 A.2d 186 (Pa. 2007), but in the context alleged here, where the contract claim is not viable because of a contractual limitations period expiring, the result is less controversial.
It is arguable that Toy means that a viable bad faith claim can only exist when a basic contractual obligation has been violated, i.e. a failure to pay a claim in the first party context or a failure to indemnify or defend in a third party claim.  There may be other forms of bad conduct that are evidence of a bad faith claim, but which by themselves cannot create a bad faith claim. If that is the case, then the proposition that a bad faith claim can exist independently of the underlying breach of the insurance contract loses its force; except maybe in unusual procedural circumstances like the Atiyeh case.
In Toy v. Metropolitan Life Insurance Company, 928 A.2d 186 (Pa. 2007), the factual issue centered on the allegedly improper solicitation to purchase an insurance policy, which solicitation was a purported violation of the Unfair Insurance Practices Act. Writing for himself and two other Justices (on a panel consisting of five, rather than seven, Justices), Chief Justice Cappy looked to the Statutory Construction Act and found that: the term “bad faith” had acquired a specific meaning in the insurance context at the time the legislation was enacted; that under the Bad Faith Statute the cause of action arose “under an insurance policy”; and that the statutory damages permitted were “based on the ‘amount of the claim from the date the claim was made by the insured.’” Expounding on this analysis, the majority concluded that the statute did not permit claims for unfair practices involving the solicitation of a policy.
As to the specific meaning acquired by the statute’s 1990 enactment, “the term ‘bad faith’ concerned the duty of good faith and fair dealing in the parties’ contract and the manner by which an insurer discharged its obligations of defense and indemnification in the third-party claim context or its obligation to pay for a loss in the first-party claim context.”  Justice Cappy then wrote:  In other words, the term captured those actions an insurer took when called upon to perform its contractual obligations of defense and indemnification or payment of a loss that failed to satisfy the duty of good faith and fair dealing  implied in the parties’ insurance contract. Thus, when § 8371, which provides a remedy in an action “arising under an insurance policy” as to a claim an insured has made of his insurer, is read with this meaning of bad faith in mind, we can only conclude on the question before us, that the words of the statute are clear and explicit, and that the Legislature intended not to give relief under the bad faith statute to an insured who alleges that his insurer engaged in unfair or deceptive practices in soliciting the purchase a policy.
Justice Cappy dropped some significant footnotes in this part of his Opinion, in large part to address Justice Eakin’s concurrence. In this context, it is important to observe that the majority identified two uses of the phrase “bad faith” in connection with section 8371:  (1) going to the nature of the claim; and (2) going to the actions that constitute bad faith conduct. Thus, the majority found that this phrase had two different and distinct meanings, depending on the context in which it is being used.
As phrased by the Chief Justice: “It bears repeating that in this case, we determine the essence of the claim given to an insured under the bad faith statute.” This is distinguished from “what actions amount to bad faith, what actions of an insurer may be admitted as proof of its bad faith, whether an insurer’s violations of the UIPA are relevant to proving a bad faith claim or whether the standard of conduct the Superior Court has applied to assess an insurer’s performance of contractual obligations in bad faith cases is the correct one.”  In this case, the Chief Justice’s Opinion is only addressing the nature of the claim permitted, i.e., whether there is a “cognizable” claim within the statute’s “purview”, and not the conduct that might establish a viably pleaded claim.
In his concurrence, Justice Eakin rejected the majority’s reasoning stating that a section 8371 claim “is not limited to actions for an insurer’s wrongful failure to pay an insurance claim or disposal of its obligations of defense and indemnification.”  If that were the case, he contends, the statute would include actions arising out of an insurance claim, rather than arising under an insurance policy.  This concurrence shows that, at least in Justice Eakin’s view, just what the Supreme Court has now concluded is not covered under a statutory bad faith claim.  However, as stated above, the Chief Justice thought some of this conflict resulted from confusion over the context in which the same phrase – “bad faith” – is used, i.e., that it is a single phrase that has two different uses/meanings.
In sum, it would appear that a cognizable bad faith claim involves either duties to pay a claim in the first-party context or obligations to defend and indemnify in a third-party claim context.
Date of Decision: September 30, 2008
Atiyeh v. Nat’l Fire Ins. Co., Civil Action No. 07-cv-04798, 2008 U.S. Dist. LEXIS 76770 (E.D. Pa. Sept. 30, 2008) ( Gardner, J.)

L.A.

DECEMBER 2008 BAD FAITH CASES
TWO YEAR LIMITATIONS PERIOD BEGINS WITH DENIAL OF CLAIM (Philadelphia Federal)

In Atiyeh v. National Fire Insurance Company, the Court noted that Pennsylvania’s Supreme Court holds that statutory bad faith claims are subject to a two-year statute of limitations pursuant to 42 Pa.C.S.A. § 5524, but the court did not specify when the cause of action accrues. Ash v. Continental Insurance Company, 593 Pa. 523, 536, 932 A.2d 877, 884 (2007). The Third Circuit Court of Appeals has predicted that the Pennsylvania Supreme Court would find that the limitations period beings to run when coverage is denied. Sikirica v. Nationwide Insurance Company, 416 F.3d 214, 224-225 (3d Cir. 2005).

Date of Decision: September 30, 2008

Atiyeh v. Nat’l Fire Ins. Co., Civil Action No. 07-cv-04798, 2008 U.S. Dist. LEXIS 76770 (E.D. Pa. Sept. 30, 2008) ( Gardner, J.)

 

L.A.

DECEMBER 2008 BAD FAITH CASES
BAD FAITH CLAIM AGAINST THE INSURER REMAINS UNRESOLVED, WHERE ARGUMENT AGAINST COVERAGE DENIED IN PART (Western District)

In Fleming Fitzgerald & Assocs. V. United States Specialty Ins. Co., a bad faith claim arose after the insurer denied the insured coverage.  The insured purchased a Directors, Officers, and Organizations Liability Policy from the insurer.  During the policy period, the insured sought coverage under this policy for defense costs incurred responding to a lawsuit filed against it.  The insurer denied the insured’s claim for coverage on the basis that the claims against the insured was excluded from coverage by the breach of contract and errors and omissions exclusions of the policy. 

The insured filed suit against the insurer for breach of contract and bad faith.  The insurer removed the case to the United States District Court for the Western District of Pennsylvania.  The insurer then filed a counterclaim against the insured seeking a judgment that the subject policy does not afford coverage for the underlying action brought against the insured.  The insured argued that with the exception of the underlying breach of contract claim, all of the claims alleged in the state court action against the insured are covered by the policy.  The insurer argues that none of the claims alleged against the insured in the state court action against them are covered under the policy. 

The court looked at the language of the policy exclusions and found that with the exception of the underlying breach of contract claim against the insured, the claims alleged in the state court action against the insured are covered by the policy.  However, the issues relating to the insured’s damages and claims for bad faith remain unresolved.

Date of Decision: September 30, 2008

Fleming Fitzgerald & Assocs. v. United States Specialty Ins. Co., Civil Action No. 07-1596, 2008 U.S. Dist. LEXIS 76613 (W.D. Pa.  Sept. 30, 2008)( Lancaster, J.)

J.M.A.

NOVEMBER 2008 BAD FAITH CASES
NO BAD FAITH WHERE INTERPRETATION OF THE POLICY WAS REASOANBLE (Philadelphia Federal)

In Whitmore v. Liberty Mutual Fire Insurance Company, a bad faith claim arose after the insurer denied the insured’s claim for coverage as a result of a heating oil spill in the insured’s basement.  The insured had heating oil delivered to a house.  During the delivery to the insured’s above ground storage tank, gallons of oil leaked into the basement.  The insured hired a public adjuster to estimate the cost of the damage.  The insured had a homeowner’s policy with the insurer and made a claim for coverage of the damages.  The insurer hired a company to investigate the oil spill and the company determined that the oil had leaked as a result of the oil tank being overfilled.  As a result, the insurer denied the claim and asserted that the oil spill was excluded under the policy’s pollution exclusion. 

The insured filed suit against the insurer for breach of contract and bad faith.  The insurer filed a motion for summary judgment and the insured responded with a cross motion for partial summary judgment. 

The court found that the insurer failed to meet its burden to show that heating oil is a pollutant excluded from coverage. Therefore, the pollution exclusion in the policy is inapplicable here.  However the court found that the insurer’s denial of the insured’s claim did not amount to bad faith.  Pennsylvania law does not allow for the finding of bad faith when the insurer’s conduct is in accordance with a reasonable, albeit incorrect, interpretation of the insurance policy. The insurer relied on various case law that acknowledged heating oil as a pollutant in denying the insured’s claim.  Even though the court did not accept the insurer’s interpretation of heating oil as a pollutant, this interpretation was not wholly unreasonable or reckless.  Therefore because there is insufficient evidence that the insurer acted in bad faith in denying the claim, the court granted the insurer’s motion for summary judgment for the insured’s bad faith claim. 

Date of Decision: September 30, 2008

Whitmore v. Liberty Mut. Fire Ins. Co., No. 07-5162, 2008 U.S. Dist. LEXIS 76049 (E.D. Pa. Sept. 30, 2008) (Pratter, J.)

J.M.A.

NOVEMBER 2008 BAD FAITH CASES
INSURER HAD NO OBLIGATION TO HIRE EXPERT IN CLAIMS HANDLING PROCESS (Philadelphia Federal)

In Rock-Epstein v. Allstate Insurance Company, a bad faith claim arose from the insurer’s denial of the insured’s claim after her home and personal belongings suffered water damage.  The insured had a homeowner’s policy with the insurer.  The policy provided for dwelling protection for “sudden and direct physical loss to the property” except as limited or excluded in the policy. The policy excluded losses to the property for flood, including but not limited to surface water……whether or not driven by wind.” The policy also covered “sudden and accidental direct physical loss …except as limited or excluded in the policy” to personal property owned or used by the insured.  This personal property coverage included damage caused by windstorm or hail, except for “loss to covered property inside a building structure…..unless the wind or hail first damaged the roof or walls and the wind forces the rain, snow, sleet, sand, or dust through the damaged roof or wall.” 

The insured suffered a covered loss to her home and personal property.  She hired a public adjuster to assist her in filing a claim under her policy.  The adjuster sent a letter to the insurer filing a claim and asserting that a windstorm caused the insured’s loss.  The insurer assigned the claim to a representative who went out and inspected the property with the insured’s adjuster.  At the inspection the insured’s adjuster told the representative that water had run off the roof on the spa cover and then splashed through a window that was left partially open.  The adjuster also told him that water had run off the roof settled on top of the spa and then wind blew it or it ran over and hit the ground and went through the window that was left open.  The insurer later denied the claim based on the exclusion in the policy for flood, including, but not limited to, surface water whether or not driven by wind. 

The insured filed a complaint against the insurer for breach of contract and bad faith in the Philadelphia Court of Common Pleas.  The insurer removed the case to the United States District Court for the Eastern District of Pennsylvania.  The parties filed cross motions for summary judgment.

The insured claims that the insurer’s representative did not believe the explanation of the loss given by her adjuster yet failed to use an expert to determine the cause of the loss.  She also argued that the insurer’s representative lacked evidence to confirm what he believed caused the damage, and denied coverage based on the policy’s exclusion, although he had no basis for his stated conclusion regarding the definition of surface water. 

The court found the insured’s evidence was unsupported and insufficient to show bad faith.  The insurer’s representative investigated the claim by going to the insured’s home and spoke with the adjuster hired by the insured to determine the cause of the loss.  He accepted the representation of the loss given to him by the insured’s adjuster in an effort to find coverage for the insured. The insurer’s representative even discussed his investigation with his supervisor who agreed with him that the facts did not allow for coverage.  It is not bad faith to conduct a thorough investigation into a questionable claim.  Also, the insured provided no evidence that the insurer’s failure to employ an expert to determine the cause of loss rises to the level of bad faith.  At most the insurer erred in not engaging an expert to further examine the damage, but that mistake in judgment falls short of bad faith.  Therefore, since the evidence presented did not meet the clear and convincing standard for bad faith, the court granted the insurer’s motion for summary judgment on the insured’s bad faith claim.

Date of Decision: September 29, 2008

Rock-Epstein v. Allstate Ins. Co., No. 07-2917, 2008 U.S. Dist. LEXIS 76042 (E.D. Pa. Sept. 29, 2008)(Schiller, J.)

J.M.A.

NOVEMBER 2008 BAD FAITH CASES
INSURER’S SUMMARY JUDGMENT GRANTED WHERE INVESTIGATION AND DENIAL OF THE INSURED’S CLAIM FELL SHORT OF BAD FAITH (Philadelphia Federal)

In Rock-Epstein v. Allstate Insurance Company, a bad faith claim arose from the insurer’s denial of the insured’s claim after her home and personal belongings suffered water damage.  The insured had a homeowner’s policy with the insurer.  The policy provided for dwelling protection for “sudden and direct physical loss to the property” except as limited or excluded in the policy. The policy excluded losses to the property for flood, including but not limited to surface water……whether or not driven by wind.” The policy also covered “sudden and accidental direct physical loss …except as limited or excluded in the policy” to personal property owned or used by the insured.  This personal property coverage included damage caused by windstorm or hail, except for “loss to covered property inside a building structure…..unless the wind or hail first damaged the roof or walls and the wind forces the rain, snow, sleet, sand, or dust through the damaged roof or wall.” 

The insured suffered a covered loss to her home and personal property.  She hired a public adjuster to assist her in filing a claim under her policy.  The adjuster sent a letter to the insurer filing a claim and asserting that a windstorm caused the insured’s loss.  The insurer assigned the claim to a representative who went out and inspected the property with the insured’s adjuster.  At the inspection the insured’s adjuster told the representative that water had run off the roof on the spa cover and then splashed through a window that was left partially open.  The adjuster also told him that water had run off the roof settled on top of the spa and then wind blew it or it ran over and hit the ground and went through the window that was left open.  The insurer later denied the claim based on the exclusion in the policy for flood, including, but not limited to, surface water whether or not driven by wind. 

The insured filed a complaint against the insurer for breach of contract and bad faith in the Philadelphia Court of Common Pleas.  The insurer removed the case to the United States District Court for the Eastern District of Pennsylvania.  The parties filed cross motions for summary judgment.

The insured claims that the insurer’s representative did not believe the explanation of the loss given by her adjuster yet failed to use an expert to determine the cause of the loss.  She also argued that the insurer’s representative lacked evidence to confirm what he believed caused the damage, and denied coverage based on the policy’s exclusion, although he had no basis for his stated conclusion regarding the definition of surface water. 

The court found the insured’s evidence was unsupported and insufficient to show bad faith.  The insurer’s representative investigated the claim by going to the insured’s home and spoke with the adjuster hired by the insured to determine the cause of the loss.  He accepted the representation of the loss given to him by the insured’s adjuster in an effort to find coverage for the insured. The insurer’s representative even discussed his investigation with his supervisor who agreed with him that the facts did not allow for coverage.  It is not bad faith to conduct a thorough investigation into a questionable claim.  Also, the insured provided no evidence that the insurer’s failure to employ an expert to determine the cause of loss rises to the level of bad faith.  At most the insurer erred in not engaging an expert to further examine the damage, but that mistake in judgment falls short of bad faith.  Therefore, since the evidence presented did not meet the clear and convincing standard for bad faith, the court granted the insurer’s motion for summary judgment on the insured’s bad faith claim.

Date of Decision: September 29, 2008

Rock-Epstein v. Allstate Ins. Co., No. 07-2917, 2008 U.S. Dist. LEXIS 76042 (E.D. Pa. Sept. 29, 2008)(Schiller, J.)

J.M.A.

NOVEMBER 2008 BAD FAITH CASES
BAD FAITH CLAIM DISMISSED DUE TO FAILURE TO PROVIDE SUFFICIENT EVIDENCE TO ESTABLISH THE CLAIM (Middle District)

In, Littleton v. State Farm Fire and Casualty Company, a bad faith claim arose from the insurer’s alleged mishandling of the insured’s claim following a fire that destroyed the insured’s home.  The insured had a policy with the insurer which covered his dwelling, personal property, and additional living expenses. 

After the fire, the insured’s daughter reported the fire to the insurer.  The insurer’s representative spoke to the insured and his daughter to gather information about the fire and conducted an inspection.  The insurer’s representative had meetings with the insured and his daughter to review the policy coverage, limits, terms, and conditions.  The insurer’s representative determined estimates for the dwelling, however, the insured did not agree with these estimates.  The insured demanded appraisal, but the insurer objected to the appraiser chosen by the insured because they felt he was not a disinterested independent appraiser. 

The insured did not appoint another appraiser and just continued to send letters requesting the policy limit.  The insured did not hire a contractor or builder to commence rebuilding his home. 

With regard to the personal property, the day after the fire the insurer’s representative met with the insured and his daughter and provided them with personal property inventory forms.  The insured did not provide a complete inventory list to the insurer within 60 days as the policy required.  The insured did provide a partial inventory list and the insurer did give the insured an advance amount of money while awaiting a complete inventory list from the insured.  With regard to the additional living expenses, the insured told the insurer that he wanted to stay with his daughter in her home.  The insured requested that the insurer provide a certain amount to his daughter each month since he was residing there,  yet the insurer felt this amount was unreasonable and refused to pay that amount. 

The insured filed a multiple count complaint against the insurer including bad faith.  The insurer submitted a motion for partial summary judgment on the insured’s bad faith claim. The insurer argued that the insured failed to prove by clear and convincing evidence that the insurer acted in bad faith in the handling of the insured’s claims.  The insured argued that sufficient facts do exist to raise a genuine issue of material fact regarding whether the insurer acted by clear and convincing evidence in bad faith.  The insured pointed to various conduct of the insurer to support his claim including alleged failure to communicate, refusal to answer inquiries, and  denial of amounts requested and payments on personal property. 

The court found that most of the alleged conduct attributed to the insurer by the insured either did not occur or blatantly contradicts the record.  The remaining conduct does not suggest bad faith.  The insured failed to establish that the insurer lacked a reasonable basis for denying benefits under the insured’s dwelling, personal property, or additional living expenses.  It is clear from the plain language of the policies, and supported further by the insurer’s investigation of  the claim, tender of payment, and extension of deadlines for payment under the policies even where the insured failed to satisfy those deadlines.  The insurer took immediate steps to resolve the claim. The insurer’s estimates and actions were reasonable and did not amount to bad faith.  The court held that the insured did not establish a bad faith claim against the insurer and granted the insurer’s partial summary judgment motion with regard to the bad faith claim.

Date of Decision: September 22, 2008

Littleton v. State Farm Fire & Cas. Co., U. S. District Court for the Middle District of Pennsyvlania, No. 07-1515, 2008 U.S. Dist. LEXIS 73278 (M.D. Pa. Sept. 22, 2008)(Rambo, J.)

J.M.A.
    

NOVEMBER 2008 BAD FAITH CASES
CONSEQUENTIAL DAMAGES AND EXPERT FEES NOT RECOVERABLE UNDER BAD FAITH STATUTE (Western District)

In, Standard Steel, LLC v. Nautilus Insurance Company, a bad faith claim arose from the insurer’s failure to defend and indemnify the insured in connection with a train derailment caused by a faulty railcar axle that the insured had manufactured.  The insured makes wheels and axles for the railway industry. A coal train derailed which caused substantial property damage. The insured subsequently investigated the cause of the derailment, and it concluded that the derailment was caused by the in-service failure of an axle which it improperly manufactured. The insured received a claim against them for damages. 

The insured had a commercial general liability policy with the insurer and tendered the claim to the insurer.  The insured provided the insurer with substantial information regarding the derailment, including an internal report provided by an in-house expert.  The insurer informed the insured that it would grant their request with the understanding that the $750,000 Self Insured Retention (SIR) payment to the coal train company was not an admission of liability nor a final resolution of the claim.  Nearly a year after the derailment, the insurer sent the insured a letter acknowledging that the axle was defective, but denying any responsibility for the claim due to insufficient evidence of what role the axle played in the derailment. 

After the denial of the claim the insured submitted additional information and asked the carrier to reconsider.  The insurer again denied the claim. After the insurer’s second denial, the insured advised the insurer that it would attempt to resolve the claim directly with the coal train company, reserving the right under the policy to be reimbursed for amounts it paid to resolve the claim. The insurer informed the insured that any payments it made in excess of its SIR would be deemed voluntary payments and not be reimbursed.

The insured filed a three count amended complaint for breach of contract, declaratory judgment, and bad faith.  The insured alleged that the insurer acted in bad faith by unreasonably denying its claim and attempting to leverage for its own benefit the commercial relationship between the insured and the coal train company customer.  The insured sought to recover consequential damages, interest, punitive damages, costs, attorney fees, and expert fees.  The insurer moved to dismiss the bad faith claim. 

The insurer argued that there can be no claim for bad faith refusal to settle a third party claim where there is not an excess verdict and the insured settles a claim without the insurer’s consent in violation of the policy.  In the alternative, the insurer moved to dismiss or strike the insured’s demands for consequential damages and expert fees.

The court found that an excess verdict was not a condition precedent to a bad faith claim for failure to settle a third party claim.  There is no Pennsylvania case law or statutory text to support otherwise.  Also a bad faith claim focuses on the acts of the insurer and not the acts of the insured.  Therefore the insured’s allegations stated a viable bad faith claims and the court denied the insurer ’s motion to dismiss. 

However the court did grant the insurer’s motion to dismiss or strike the insured’s demands for consequential damages and expert fees because the bad faith statute does not authorize these types of damages and fees to be awarded.  The Pennsylvania bad faith statute authorizes courts which find bad faith to award punitive damages, attorney’s fees, interest, and costs.  Since consequential damages and expert fees are not included, the court granted the insurer’s motion to dismiss or strike the insurer’s claim to recover these fees and damages.

Date of Decision: September 17, 2008

Std. Steel, LLC v. Nautilus Ins. Co., No. 08-195, 2008 U.S. Dist. LEXIS 71487 (W.D. Pa. Sept. 17, 2008) (Mitchell, U.S.M.J.)

J.M.A.

 

NOVEMBER 2008 BAD FAITH CASES
EXCESS VERDICT NOT CONDITION PRECEDENT TO ESTABLISH EXISTENCE OF BAD FAITH CLAIM (Western District)

In, Standard Steel, LLC v. Nautilus Insurance Company, a bad faith claim arose from the insurer’s failure to defend and indemnify the insured in connection with a train derailment caused by a faulty railcar axle that the insured had manufactured.  The insured makes wheels and axles for the railway industry. A coal train derailed which caused substantial property damage. The insured subsequently investigated the cause of the derailment, and it concluded that the derailment was caused by the in-service failure of an axle which it improperly manufactured. The insured received a claim against them for damages. 

The insured had a commercial general liability policy with the insurer and tendered the claim to the insurer.  The insured provided the insurer with substantial information regarding the derailment, including an internal report provided by an in-house expert.  The insurer informed the insured that it would grant their request with the understanding that the $750,000 Self Insured Retention (SIR) payment to the coal train company was not an admission of liability nor a final resolution of the claim.  Nearly a year after the derailment, the insurer sent the insured a letter acknowledging that the axle was defective, but denying any responsibility for the claim due to insufficient evidence of what role the axle played in the derailment. 

After the denial of the claim the insured submitted additional information and asked the carrier to reconsider.  The insurer again denied the claim. After the insurer’s second denial, the insured advised the insurer that it would attempt to resolve the claim directly with the coal train company, reserving the right under the policy to be reimbursed for amounts it paid to resolve the claim. The insurer informed the insured that any payments it made in excess of its SIR would be deemed voluntary payments and not be reimbursed.

The insured filed a three count amended complaint for breach of contract, declaratory judgment, and bad faith.  The insured alleged that the insurer acted in bad faith by unreasonably denying its claim and attempting to leverage for its own benefit the commercial relationship between the insured and the coal train company customer.  The insured sought to recover consequential damages, interest, punitive damages, costs, attorney fees, and expert fees.  The insurer moved to dismiss the bad faith claim. 

The insurer argued that there can be no claim for bad faith refusal to settle a third party claim where there is not an excess verdict and the insured settles a claim without the insurer’s consent in violation of the policy.  In the alternative, the insurer moved to dismiss or strike the insured’s demands for consequential damages and expert fees.

The court found that an excess verdict was not a condition precedent to a bad faith claim for failure to settle a third party claim.  There is no Pennsylvania case law or statutory text to support otherwise.  Also a bad faith claim focuses on the acts of the insurer and not the acts of the insured.  Therefore the insured’s allegations stated a viable bad faith claims and the court denied the insurer ’s motion to dismiss. 

However the court did grant the insurer’s motion to dismiss or strike the insured’s demands for consequential damages and expert fees because the bad faith statute does not authorize these types of damages and fees to be awarded.  The Pennsylvania bad faith statute authorizes courts which find bad faith to award punitive damages, attorney’s fees, interest, and costs.  Since consequential damages and expert fees are not included, the court granted the insurer’s motion to dismiss or strike the insurer’s claim to recover these fees and damages.

Date of Decision: September 17, 2008

Std. Steel, LLC v. Nautilus Ins. Co., No. 08-195, 2008 U.S. Dist. LEXIS 71487 (W.D. Pa. Sept. 17, 2008) (Mitchell, U.S.M.J.)

J.M.A.