Monthly Archive for December, 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.