Monthly Archive for January, 2008

JANUARY 2008 BAD FAITH CASES
BAD FAITH CLAIM BARRED BY TWO-YEAR STATUTE OF LIMITATIONS (Western District)

    

In McCullough v. Northwestern Mutual Life Insurance Company,  McCullough filed a bad faith action against Northwestern after it denied his claim for disability benefits.  Northwestern moved for partial Motion for Summary Judgment on the basis that: (1) the  bad faith claim was barred by the two-year statute of limitations; and, (2) in the alternative, there was no evidence demonstrating that it did not have a reasonable basis to deny the disability claim.  Northwestern argued that McCullough’s cause of action arose on January 28, 2002, the date it denied the disability claim.  McCullough argued that because he utilized Northwestern’s two-tiered review process, and correspondingly his claim was reevaluated again in 2004, the bad faith cause of action did not accrue until Northwestern completed its second review and unequivocally denied his disability claim. 

The Court held that McCullough’s bad faith claim was triggered by Northwestern’s  denial of coverage in 2002 and, therefore was barred by the two-year statute of limitations.  The Court explained that a bad faith claim under 42 Pa. Const. Stat. Ann. §8371 is governed by a two-year statute of limitations.  Further, citing Adamski v. Allstate Insurance Company, 1999 Pa. Super. 241, 738 A.2d 1033 (1999), the Court stated that, under Pennsylvania law, a bad faith claim under §8371 accrues when the insurer first provides definite notice of a refusal to indemnify or defend.  At that point, the statute of limitations begins to run even if the plaintiff does not know the full extent of the harm caused by the denial of coverage. 

The Court held that dismissal of the claim was also warranted because McCullough failed to demonstrate that: (1) “Northwestern did not have a reasonable basis for denying benefits under the policy; and (2) Northwestern knew of or recklessly disregarded its lack of a reasonable basis in denying the claim, ” as required under Pennsylvania law.  The Court held that Northwestern had conducted a comprehensive review of McCullough’s medical records. Further, citing to surveillance tapes depicting McCullough playing golf, running and performing activities he was allegedly unable to perform, the Court found that Northwestern had produced evidence that McCullough had misrepresented and exaggerated his symptoms.  Consequently, the Court concluded that, in addition to bringing the claim after the statutory cut-off, McCullough had failed to prove his claim on the merits.

Date of Decision:  October 24, 2007

McCullough v. Northwestern Mutual Life Ins. Co., United States District Court for the Western District of PA, No. 2:05cv0105, 2007 U.S. Dist. LEXIS 95134 (W.D. Pa., Oct. 24, 2007) (Cercone, J.)

J.T.L.
    

JANUARY 2008 BAD FAITH CASES
PENNSYLVANIA SUPREME COURT VACATES ORDER GRANTING ATTORNEY’S FEES FOR REVERSE BAD FAITH (Pennsylvania Supreme Court)

 

In Old Forge School District, et al. v. Highmark, Inc., et al.  the Pennsylvania Supreme Court was asked to decide whether the Commonwealth Court abused its discretion in awarding fees to Highmark for the alleged “vexatious” conduct of the Plaintiffs/Appellants, instituting litigation challenging Highmark’s insurance rates and reserves.  Appellants, policyholders, filed petitions with the Commonwealth Court seeking review of the Insurance Commissioner’s refusal to provide retroactive insurance rate relief.  Appellees Highmark and Hospital Service Association of Northeastern Pennsylvania (“NEPA”) each filed preliminary objections on the basis that the Court lacked subject matter jurisdiction and the Appellants failed to exhaust their statutory remedies.  In addition, NEPA filed a Motion for attorneys fees against all Appellants, except Old Forge School District, on the basis that the litigation constituted “vexatious” conduct (the “Motion”).  The Commonwealth Court granted NEPA’s Motion.  NEPA ultimately agreed to withdraw the Motion as part of a settlement agreement.  Soon thereafter, however, Highmark moved for attorneys’ fees.   The Commonwealth Court granted Hallmark’s motion for the same reasons it had granted NEPA’s Motion. The Court stated that the awarding of fees was appropriate because Appellants had been told, repeatedly, that insurance rates and the amount of reserves are a part of the regulatory process under the Insurance Commissioner’s discretion and are not the proper subject of adversary litigation.  On appeal, Appellants argued that pursuant to the “Thunberg” test, a lawsuit is filed for vexatious reasons if: “(1) the suit was filed without sufficient ground in either law or in fact; and (2) the suit served the sole purpose of causing annoyance.” Also, Appellant policy holders argued that the suit was not vexatious as they had asserted legitimate legal theories.  The Supreme Court held that the Commonwealth Court’s decision to impose attorneys’ fees was untenable because the Court did not articulate its reasoning according to the Thunberg test.  Further, the Supreme Court remanded case and directed the Commonwealth Court to reevaluate the issues based upon one of its recent decisions whereby the Supreme Court held that the courts, and not the Insurance Department, were empowered to adjudicate claims challenging insurers’ excess reserves.
Old Forge School District v. Highmark, 592 Pa. 307, 924 A.2d 1205 (2007) (Saylor, J.)
J.T.L.

 

JANUARY 2008 BAD FAITH CASES
COURT AFFIRMS IN BIFURCATED CASE TO STAY ENFORCEMENT OF DISCOVERY ORDER RE BAD FAITH CLAIM UNTIL OUTCOME OF TRIAL ON COVERAGE ISSUES (Pennsylvania Superior Court)

    

In Ace American Insurance Company v. Underwriters at Lloyds and Companies, Ace reported a claim under its E&O policy to its insurers, Lloyds and Columbia (“Lloyds”), which Lloyds denied due to untimely notice.  Ace brought suit seeking coverage of the claim and a determination that Lloyds had acted in bad faith.  The coverage and bad faith claims were bifurcated at trial.  After a jury rendered a verdict in favor of Lloyds on coverage, Ace appealed.  Ace made several arguments on appeal including arguments related to a discovery order (the “Order”) issued prior to trial.  The Order required Lloyds to produce specific documents which Lloyds had characterized as privileged.  Ace argued that the trial court erred in refusing to enforce the Order and thereby prejudiced Ace’s ability to prosecute the coverage claim.  In response, Lloyds argued that the trial court did not err because the documents encompassed by the Order were not relevant to coverage.  The trial court ruled that Ace was not entitled to the documents because the Order was limited to bad faith issues which had been stayed pending the outcome of the trial of the coverage claim.  The Appellate Court agreed with the trial court and held that Ace had failed to demonstrate that: (1) it would have been entitled to the documents; (2) the documents would have been admissible at the trial of the coverage issues and; (3) the absence of the documents prejudiced Ace’s ability to pursue its case as to the coverage issues.  Therefore, the Appellate Court affirmed the trial court’s decision. 

Date of Decision:  December 20, 2007)

Ace American Ins. Co. v. Underwriters at Lloyds, Superior Court of Pennsylvania, No. 2847 EDA 2006, 2007 Pa. Super. LEXIS 4415 (Pa. Super. Ct., Dec. 20, 2007) (Daniels, J.)

 

J.T.L.
    

JANUARY 2008 BAD FAITH CASES
PENNSYLVANIA DOES NOT RECOGNIZE A CLAIM FOR COMMON LAW BAD FAITH (Middle District)

    

In Westport Insurance Corporation v. Black, Davis & Shue Agency, Inc., the plaintiff-insurer issued to the defendant-insured, an insurance brokerage company, a policy obligating the plaintiff-insurer to pay for any losses for which the defendant-insured was legally liable and which was caused by a wrongful act arising out of services rendered to others.  The defendant acted as an agent for its client, an insurance company, in procuring and servicing workers’ compensation insurance.  The client alleged that the defendant improperly transferred certain premiums directly to a reinsurance company in which one or more of the defendant’s principals held financial interests.  The court was called upon to decide the defendant’s motion for partial judgment on the pleadings and plaintiff’s motion for summary judgment arising in a declaratory judgment action brought by plaintiff against defendant to determine whether plaintiff had a duty to defend or indemnify the defendant in a pending lawsuit.  In setting forth the procedural history of the case, the court noted that the defendant had filed several counterclaims against plaintiff alleging breach of contract, statutory bad faith and common law bad faith.  The court further noted that the common law bad faith counterclaim was dismissed by previous order of court because Pennsylvania does not recognize a claim of common law bad faith.   

Date of decision:  May 30, 2007

Westport Ins. Corp. v. Black, Davis & Shue Agency, Inc., United States District Court for the Middle District of Pennsylvania, Civil Action No. 1:05-CV-1252, 513 F. Supp. 2d 157, 2007 U.S. Dist. LEXIS 39039 (M.D. Pa. 2007) (Conner, J.). 

R.E.M
    

JANUARY 2008 BAD FAITH CASES
3RD PARTY BENEFICIARIES MUST SUBMIT BAD FAITH CLAIMS AGAINST REINSURER TO ARBITRATION, WHERE THE CONTRACT HAS ARBITRATION PROVISION (Philadelphia Federal)

    

In Doeff v. Transatlantic Reinsurance Company, the insured, a licensed psychiatrist, purchased malpractice insurance from an insurance company.  The insurance was placed with a reinsurer.  To comply with insurance regulations, the insurance was then placed with a fronting insurance carrier.  The insured was sued in state court for professional liability claims within the policy period.  The fronting insurance carrier withdrew its defense during litigation.  A judgment was later entered against insured.  Following the trial, the fronting insurance carrier was declared insolvent.  At the same time, the insureds of the fronting insurance carrier were found to be third-party beneficiaries of the agreement between the reinsurer and the fronting insurance carrier (“agreement”) and could bring actions against the reinsurer.  The insured then brought an action in state court against the reinsurer for the fronting insurance carrier’s breach of contract, breach of covenant of good faith and fair dealing, and insurance bad faith, and an insurance bad faith cause of action based upon the reinsurer’s own conduct.  The reinsurer removed the case to federal court and moved to compel arbitration based on an arbitration provision contained in the agreement. The court agreed with the reinsurer. The court noted that the insured, who brought claims directly against the reinsurer pursuant to the agreement, was bound by the terms of the agreement so long as the claims arise from the agreement. The court found that the agreement controls any duty the reinsurer owed the insured, and consequently, any cause of action brought by the insured against the reinsurer.  As a result, the court held that the insured must submit his claims against the reinsurer to arbitration.  

Date of decision:  December 13, 2007

Doeff v. Transatlantic Reinsurance Co., United States District Court for the Eastern District of Pennsylvania, Civil Action No. 07-2110, 2007 U.S. Dist. LEXIS 91879, (E.D. Pa. 2007) (Savage, J.). 

 

R.E.M.