Monthly Archive for April, 2011

APRIL 2011 BAD FAITH CASES
“COMPENSATORY DAMAGES” DEMAND IN BAD FAITH CLAIM SURVIVES MOTION TO DISMISS BECAUSE THE TERM HAS DIFFERENT MEANINGS IN DIFFERENT CONTEXTS (Western District)

In Simmons v. Nationwide Mutual Fire Insurance Company, in 2004, the insured’s business was burglarized.  A large assortment of the insured’s tools were stolen, and he promptly reported the theft to the insurer.  The insurance policy between the two parties allegedly covered the property and the contents of the property, and the insured claimed that the stolen tools were “business personal property” and therefore a covered loss under the policy.

The insurer conducted an investigation, and it denied the claim about seven months after the burglary occurred.  The insured then filed a Complaint containing claims for breach of contract, breach of duty of good faith and fair dealing, and statutory bad faith.  The insurer filed a motion to dismiss the breach of duty of good faith and fair dealing count and strike the insured’s demand for compensatory damages from the statutory bad faith claim.

Regarding the breach of duty of good faith and fair dealing, the court did acknowledge that “a duty of good faith and fair dealing is implicit in an insurance contract,” and that a plaintiff can bring a cause of action for breaching this duty that may lead to compensatory damages.  In this case, however, the claim was subsumed by the breach of contract claim, as that claim already implied that the insurer beached its duty of good faith and fair dealing.  The court consequently dismissed the second count of the Complaint because it was redundant.

Concerning the demand in the statutory bad faith claim, the insurer alleged that Pennsylvania’s bad faith statute, 42 Pa.C.S.A. § 8371, did not permit the recovery of compensatory damages.  The court agreed that a plaintiff cannot recover compensatory damages under § 8371, but § 8371 does not specifically prohibit an award of compensatory damages, as they are available under Pennsylvania contract law even if the action is brought under bad faith theory.  Additionally, Pennsylvania courts in the past had labeled the attorney’s fees, costs, and interests available under § 8371 as “compensatory damages” in the past, implying that the term has different meanings in different contexts.  The court therefore denied this portion of the motion to dismiss, without prejudice, as the challenged language was “unobjectionable in the context presented.”

Date of Decision:  April 20, 2011

Simmons v. Nationwide Mut. Fire Ins. Co., 2:11-cv-328, United States District Court for the Middle District of Pennsylvania, 2011 U.S. Dist. LEXIS 42724,  788 F. Supp. 2d 404 (Apr. 20, 2011) (McVerry, J.)

APRIL 2011 BAD FAITH CASES
BAD FAITH CLAIM SURVIVES SUMMARY JUDGMENT WHEN INSURER’S WAIVER FORM IS NON-COMPLIANT AND NON-BINDING ON INSURED (Middle District)

In Grassetti v. Property & Casualty Insurance Company, the insured was in a serious car accident while driving in Florida in 2007.  The driver of the other vehicle was never identified and was therefore considered an uninsured driver.  Under his insurance policy, the insurer allegedly agreed to pay compensatory damages up $50,000 per vehicle for injuries inflicted upon the insured by the operator of an uninsured vehicle.  Because the insured had two vehicles, the total compensatory damages available would be $100,000.

The insured filed a two-count Complaint in state court (the action was later removed to federal court).  He first asserted a breach of contract claim based on the insurer’s failure to pay $100,000.00 in compensatory damages.  The second court of the Complaint was a bad faith allegation, as the insured alleged that the insurer denied his claim for uninsured motorist (“UM”) benefits knowing it had no reasonable basis for the denial, in violation Pennsylvania’s Bad Faith Statute, 42 Pa. Cons. Stat. Ann. § 8371.  The insurer filed a motion to dismiss the second count for bad faith.

The main issue before the court was a waiver the insured signed that served as a rejection of UM coverage.  The insured asserted that this waiver did not comply with Motor Vehicle Financial Responsibility Law (“MVFRL”), 75 Pa. Cons. Stat. Ann. § 1731(b).  The statute states that insurers must offer UM coverage that compensates individuals for damages sustained in accidents with uninsured or underinsured vehicles.  The purchase of UM coverage is optional, but to refuse such coverage, “an insured must sign rejection forms whose precise language is dictated by statute.”

In this case, the insurer incorrectly restated the precise language prescribed by the MVFRL, as it wrote the words “uninsured motorist coverage” instead of “uninsured coverage.”  Citing precedent where the Pennsylvania Superior Court held that an insurer’s similar coverage waiver was null and void for failure to comply with the MVFRL, the court here held that the waiver was invalid.  The insurer had thus adequately alleged that the insurer withheld payment upon a claim without a reasonable basis and that it did so knowing it did not have a reasonable basis.  The court therefore denied the insurer’s motion for summary judgment.

Date of Decision:  April 20, 2011

Grassetti v. Property & Cas. Ins. Co., No. 3:10cv2068, United States District Court for the Middle District of Pennsylvania, 2011 U.S. Dist. LEXIS 42731, (Apr. 20, 2011) (Munley, J.)

APRIL 2011 BAD FAITH CASES
SUMMARY JUDGMENT GRANTED TO INSURED WHEN CLEAR AND CONVINCING EVIDENCE EXISTS THAT INSURER BREACHED AN INSURANCE POLICY AND ACTED IN BAD FAITH (Philadelphia Commerce Court)

In Grigos v. Certain Underwriters at Lloyds, London, the insured was the principal owner of a diner that suffered significant damage in a fire in December 2006.  In addition to the damage to the property, the company lost income while the diner was forced to close for repairs.  The insurer covered the insured in a policy that required it to pay for “direct physical loss of or damage to Covered property . . . caused by or resulting from any Covered Cause of Loss.”  The policy also covered the insurer for losses if the business had to close due to one of the covered causes of loss.  Fire was not excluded from the policy and therefore was considered a covered cause of loss. 

The insured notified the insurer of the fire the day after it occurred.  The insurer assigned the claims to a third party, and the representative there acted hostile and untruthful towards the insured throughout the process.  He first told the insured that there was a policy exclusion for decay and deterioration of food, and the damaged food at the store would therefore not be covered, but there was no such exclusion.  The insurer’s own investigator then valued the damaged food at over $36,000, but the insurer’s representative offered far less money to the insured.

Additionally, the representative delayed any payments he made to the insured for almost four months after the fire, and once he did pay them he only provided a check for $10,000, which was $40,000 less than what the insured requested in good faith as an advance.  After receiving the advance, the insured sent additional proofs of loss, which the representative rejected without explaining why he did so.

Once the insured believed the insurer would not voluntarily pay anywhere near the amount he was requesting, he demanded an appraisal, as the insurance policy required an appraisal whenever the parties could not agree upon a loss.  After waiting a month to respond to the demand, the insurer’s representative denied the request for appraisal because there was a dispute over the “scope of damages,” but the court determined that a “scope of damages” dispute cannot prevent an appraisal when a contract requires it in the case of disputed damages.

Finally, throughout the process, the representative seemed to intentionally delay events as much as possible, often waiting until the last day of a deadline to respond to requests and other inquiries.  Once the insured could not deal with the representative anymore, he filed the instant suit for breach of contract and bad faith, and based on the facts, the court was sympathetic to him.  It first determined that the insurer’s refusal to proceed to appraisal, combined with the constant delaying of the insured’s claims despite having no substantive objections, meant that the insurer breached the insurance policy as a matter of law.

Concerning the bad faith allegation, the court determined that the insurer “knowingly misrepresented the policy and intentionally delayed the resolution of [the insured’s] claims.”  It also misrepresented the policy’s terms, mentioning an exclusion that simply did not exist.  The insurer often requested repetitive paperwork and otherwise delayed the insured’s claims for no stated reason.  Finally, the court rejected the insurer’s argument that it should not be held responsible for the independent adjuster’s actions.  The court found that there was clear and convincing evidence that the insurer acted in bad faith, and it granted summary judgment to the insured on the breach of contract and bad faith claims.  It also ordered the case to proceed to trial for assessment of damages on the bad faith claim.  The case settled after being listed for trial.

Date of Decision:  December 15, 2010

Grigos v. Certain Underwriters at Lloyds, London, No. 01907, Commerce Program, Control No. 10090785, Common Pleas Court of Philadelphia County, Pennsylvania, Civil Trial Division, 2010 Phila. Ct. Com. Pl. LEXIS 383, (Dec. 15, 2010) (Bernstein, J.)

APRIL 2011 BAD FAITH CASES
PAYMENT DELAY CLAIMS SURVIVES MOTION TO DISMISS AGAINST BOTH INSURER AND THIRD-PARTY ADMINISTRATOR WHERE TPA STATUS AS AN INSURER STILL OPEN (Middle District)

In Cozzone v. AXA Equitable Life Insurance Society of the United States, the insured fell ill in December 2005.  She had an insurance policy with the insurer, and she submitted claims for malpractice insurance tail expenses, salary replacement reimbursement, and other expenses related to her place of business.

The insured did not receive payments for all of her claims in a timely fashion, and she filed a Complaint against the insurer for breach of contract and bad faith.  She alleged that the insurer, through its third-party agent, “failed to provide all payments due and owing under the terms and obligations of the defendants under said policy.”  As part of the bad faith claim, she asserted that the insurer “arbitrarily, intentionally, and capriciously delayed and denied all benefits due” under the policy.  The insurer filed a motion to dismiss the Complaint in its entirety.

In the motion to dismiss, the third-party agent argued that it could not be a proper party because it was not a party to the original insurance contract.  The court rejected that argument, as the insured alleged in the Complaint that she paid premiums to both the insurer and the agent and that both defendants assumed obligations to her with respect to the policy.

Concerning the bad faith claims against the insurer and the third party administrator, the court determined recognized that non-insurers are not subject to the bad faith statute.  However, the court found “[t]o the extent that [the TPA] may have been the decision maker on [the insured’s] claims and acted as the insurer, [the TPA] may be liable for breach of contract and bad faith.” 

The insured sufficiently alleged that the carrier and potential insurer unreasonably delayed payments and failed to promptly make full payments once they did decide to cover the insured for her losses.  The delay and non-payments supposedly began in March 2007 and continued in the months after, and the court felt that these allegations constituted a legitimate bad faith allegation.  The court therefore denied the insurer and third-party agents’ motion to dismiss miss the Complaint in its entirety.

Date of Decision:  April 12, 2011

Cozzone v. AXA Equitable Life Ins. Soc’y of the United States, No. 3:10cv2388, United States District Court for the Middle District of Pennsylvania, 2011 U.S. Dist. LEXIS 39528 (Apr. 12, 2011) (Munley, J.)

APRIL 2011 BAD FAITH CASES
THIRD CIRCUIT DENIES INSURED’S APPEAL OF A BAD FAITH INSURANCE CASE BECAUSE DISTRICT COURT HAD PROPERLY TURNED CASE OVER TO JURY (Third Circuit)

In Hered LLC v. Seneca Insurance Company, a fire occurred at a 175,000 square foot building owned by the insured. The insured filed a claim with the insurer for over $3.4 million in damages, but the parties disputed the amount of damages for over a year.  Eventually the insured filed a Complaint in the district court, alleging breach of contract and bad faith.

The case proceeded to trial, and the jury ruled in favor of the insurer.  The insured then appealed, arguing that the district court should have granted its motion for judgment as a matter of law and that the district court incorrectly permitted certain testimony at trial.

At trial, the insurer had asserted that the insured made misrepresentations on its application for coverage.  It demonstrated that the building’s sprinkler system was not functional at the time of the fire, as it had last been inspected in the 1990s and the sprinkler heads had been painted over.  On its insurance application, the insured had left the section blank that asked about the sprinkler system.  Additionally, the building’s prior insurer had cancelled its policy with the insured partially because the insured failed to update that insurer on repairs to the building’s sprinkler system, but the insured only disclosed that non-payment was a reason for the cancellation.  Finally, when the insurer’s broker contacted the insured about the blank answer on application, the insured’s broker stated that the building “was sprinklered.”

On appeal, the Third Circuit viewed the evidence presented and determined that the district court did not err in denying the insured’s motion, and it correctly turned the case over to a jury.  The insured had presented an argument that the insurer waived its right to assert the misrepresentation defense because it accepted the incomplete application, and this waiver had occurred as a matter of law. The Third Circuit, however, said that this issue was properly was for the jury to decide, and the jury had reasonably concluded that the insurer had not waived its defense.

The insured also argued on appeal that the district court erred in permitting certain testimony, but the Third Circuit found no abuse of discretion in the court’s rulings.  Therefore, the court affirmed the district court’s order and upheld the jury verdict in favor of the insurer.

Date of Decision:  January 24, 2011

Hered LLC v. Seneca Ins. Co., No. 10-2026, United States Court of Appeals for the Third Circuit, 2011 U.S. App. LEXIS 6703, (Jan. 24, 2011), Submitted Pursuant to Third Circuit L.A.R. 34.1(a), (Fuentes, J.).

APRIL 2011 BAD FAITH CASES
SUMMARY JUDGMENT FOR INSURER ON BAD FAITH CLAIM WHEN INSURER CONDUCTS REASONABLE INVESTIGATION AND HAS SUFFICIENT REASONS FOR DELAYING ACCEPTANCE OF COVERAGE (Middle District)

In Aumen v. Nationwide Mutual Insurance Company, one of the insureds was driving a van owned by his employer when he was struck by another vehicle.  At the time of the accident, the insureds were the beneficiaries of a motor vehicle insurance policy with the insurer, which provided benefits of up to $50,000 per person.  The benefits were stacked for three vehicles, so the maximum coverage was actually $150,000 per person.

The driver of the other vehicle, the tortfeasor, had an insurance policy that provided liability coverage for up to $25,000, and the insureds settled their claim against him for that amount.  They maintained, however, that their injuries exceeded $25,000, and they made a claim to the insurer for underinsurance motor (“UIM”) benefits to cover the balance.

Months after the insureds filed their claim, the insurer denied claims for both lost wages and UIM benefits.  The insured was in his employer’s vehicle at the time of the accident, and the policy contained an exception for “use by an insured of any vehicle to carry persons or properties for a fee.”  After the insureds demanded arbitration almost three years later, the insurer eventually accepted coverage of the UIM claim and agreed to settle the claim for $80,000 in exchange for a general release from the insureds.

The insureds filed suit shortly after the settlement proposal.  They believed that the insurer acted in bad faith in 1) failing to conduct a reasonable coverage investigation, 2) unreasonably delaying acceptance of coverage, and 3) requesting that the insureds execute a general release (which the insureds argued was contrary to Pennsylvania law).

The court first noted that insurers have the same duty of care in UIM claims as they do in regular first party claims.  Therefore, the same standard of insurer bad faith would apply:  the insured must “present clear and convincing evidence that the insurer did not have a reasonable basis for denying benefits under the policy and that the insurer knew of or recklessly disregarded its lack of reasonable basis in denying the claim.”

While the standard for bad faith was the same, the court sided with the insurer on all aspects of this dispute.  Concerning the reasonableness of the insurer’s investigation and position, the court felt that it was reasonable for the insurer to initially deny coverage because it believed the insured was acting in the course of his employment when the accident occurred, and it simply applied the policy exception.  Even if the insurer’s interpretation of the law was eventually incorrect, it certainly did not act unreasonably in denying benefits, according to the court.

Additionally, while the court recognized that a delay in evaluating and settling a claim “may be a relevant factor in deciding whether a insurer has acted in bad faith,” in this case the insurer did not unreasonably delay anything.  The insureds never notified the insurer that they believed the processing of their claim was taking too long, and the insurer had a complex claim before it with multiple parties involved.

Finally, the insureds had asserted that the release executed in consideration of the UIM settlement was contrary to Pennsylvania law.  The court dismissed this allegation as well, as it noted that the release was limited to the scope of the UIM claim, so it was not overbroad and was within the bounds of the law.  Therefore, the magistrate recommended that the court grant the insurer’s motion for summary judgment, as nothing the insurer did was indicative of bad faith.

In a short opinion after the magistrate judge’s recommendation, the district judge adopted the recommendation in its entirety.  Neither party objected to the recommendations, and the court agreed with the reasoning that led the magistrate judge to form his conclusions.

Date of Recommendation:  March 8, 2011

Aumen v. Nationwide Mut. Ins. Co., No. 1:10-CV-597, United States District Court for the Middle District of Pennsylvania, 2011 U.S. Dist. LEXIS 31166, (Mar. 24, 2011) (Jones, III, J.)

Date of Adoption of Recommendation:  March 24, 2011

The opinion adopting the magistrate’s recommendation can be found at: Aumen v. Nationwide Mut. Ins. Co., No. 1:10-CV-597, United States District Court for the Middle District of Pennsylvania, 2011 U.S. Dist. LEXIS 31360, (Mar. 8, 2011) (Prince, U.S.M.J.)

 

APRIL 2011 BAD FAITH CASES
THE TWO WAY STREET ON ATTORNEY CLIENT PRIVILEGE REOPENS IN PENNSYLVANIA (Pennsylvania Supreme Court)

In Gillard v. AIG Insurance Company, the insured brought a bad faith claim based on the insurers’ handling of his uninsured motorist claim.  During discovery, the insured sought production of all documents on file from the law firm representing the insurers.  The insurers withheld and redacted documents created by their counsel, asserting the attorney-client privilege.  The issue before the Pennsylvania Supreme Court was whether, and to what degree, the attorney-client privilege applied to attorney-to-client communications.

The Pennsylvania statute concerning privilege, 42 Pa. C.S. § 5928, states that “in a civil matter counsel shall not be competent or permitted to testify to confidential communications made to him by his client, nor shall the client be compelled to disclose the same, unless in either case this privilege is waived upon the trial by the client.” 

Two intermediate appellate court decisions had ruled that this meant the privilege only applied to client to attorney communications, or attorney to client communications that incorporated the information received from the client.  Thus, a communication from an attorney to a client that did not meet the later standard was simply not subject to the attorney client privilege.  (These holdings did not address the work product doctrine’s applicability to the same communication).  Thus, the attorney client privilege was deemed a one way street in Pennsylvania.

After a thorough examination of the precedent that supported the lower courts’ view and the contrary position that the lawyer should be able to speak to the client freely within the privilege, the High Court determined that the attorney-client privilege does afford derivative protection to lawyer to client communications.  It rejected the insured’s argument that the Pennsylvania Legislature intended strict limits on the derivative protection. 

In short, the two way street is open, and like lawyers in other states lawyers in Pennsylvania can speak to their clients within the protection of the attorney client privilege. 

Date of Decision:  February 23, 2011

Gillard v. AIG Ins. Co., No. 10 EAP 2010, Supreme Court of Pennsylvania, 2011 Pa. LEXIS 393, 15 A.2d 44 (Feb. 23, 2011) (Saylor, J.)

APRIL 2011 BAD FAITH CASES
RELATIONSHIP OF GOOD FAITH AND THE RIGHT OF INSURER TO SETTLE(Superior Court)

In Step Plan Services, Inc. v. Koresko, during the course of its opinion, the Superior Court observed that: “If the insured freely entered into an insurance contract that gives the insurer the express right to investigate and settle a claim, a challenge to the insurer’s decision must show more than just that the insurer settled the claim without the insured’s consent. Although an express right to settle is not absolute, judicial deference is given to the insurer’s decision to settle within the policy limits. Such settlements are actually favored, if made in good faith.”  At that point, the Superior Court includes a footnote stating that:  “In fact, established Pennsylvania legislative policy provides that insurers may not delay settling third-party claims just because the insured objects. See 40 P.S. § 1171.5(a)(10)(xv). …. Section 1171.5 of the Unfair Insurance Practices Act specifically provides that an insured’s objection cannot be the sole basis for refusing to pay a claim unless: (a) The insured claims sovereign, eleemosynary, diplomatic, military service, or other immunity from suit or liability with respect to such claim; (b) The insured is granted the right under the policy of insurance to consent to settlement of claims; or (c) The refusal of payment is based upon the insurer’s independent evaluation of the insured’s liability based upon all available information. See 40 P.S. § 1171.5(a)(10)(xv)(a)-(c).
The Court then draws a comparison to the leading case of Birth Center v. St. Paul Companies, Inc., for the point that an “insurer’s refusal to settle claim within policy limits must be justified by ‘bona fide belief…that it has a good possibility of winning’ at trial; refusal to settle can expose insured to damages in excess of policy limits and insurer might be subject to liability for full amount of excess verdict as well as claims of bad faith and unfair practices; risk of liability in excess of policy limits to both insured and insurer works as incentive to settle).”  The court goes on, “[t]hus, the presumption in favor of settlement can withstand an insured’s objection. 40 P.S. § 1171.5(a)(10)(xv). Additional persuasive authority similarly favors settlement, even if the insured wants to go to trial.
Date of Decision:  December 15, 2010
Step Plan Servs. v. Koresko, No. 1236 EDA 2009, No. 1342 EDA 2009, Superior Court of Pennsylvania, 2010 PA Super 232, 12 A.3d 401, 2010 Pa. Super. LEXIS 4615, (Dec. 15, 2010), reargument denied by Step Plan Servs. v. Koresko, 2011 Pa. Super. LEXIS 48 (Pa. Super. Ct., Feb. 22, 2011).

APRIL 2011 BAD FAITH CASES
NO SEPARATE ACTION FOR COMMON BAD FAITH; MOTION IN LIMINE GRANTED PREVENTING EXTRA-CONTRACTUAL CAUSE OF ACTION AGAINST PLAINTIFF INSURER (Philadelphia Federal)

In Monarch Life Insurance Company v. Estate of Tarone, a man who was the beneficiary of an annuity from an insurer passed away before receiving the minimum guarantee of 360 months of payments.  The annuity contract stated that if the man died before the end of those 360 months, “the remaining monthly payments in the guaranteed period shall continue to be paid monthly to [his] estate . . . as they fall due and not in a lump sum.”

Both the estate of the decedent and his sister made claims to the insurer for the remaining annuity payments.  The insurer then sued both parties in a statutory interpleader action to determine the proper beneficiary of the annuity.  The Estate and the decedent’s sister moved for summary judgment, and the court denied both motions in January 2010.  It asked the parties to update the court on discovery concerning any extrinsic evidence and whether the parties had any factual disagreements about the evidence they uncovered.

The current opinion addressed an attempt by the decedent’s sister to potentially initiate an additional extra-contractual cause of action while the interpleader action was still pending.  The insurer filed a motion in limine, seeking a ruling that there could be no extra-contractual cause of action remaining  against it in the case.

The court discussed precedent from a prior Eastern District case where the court granted a defendant’s motion to dismiss a common-law bad faith claim separate from a breach of contract claim.  The court there held that under Pennsylvania law, a common law bad faith claim, i..e. not a statutory bad faith claim, is subsumed in the breach of contract action.  In this case, while the decedent’s sister never raised a separate bad faith claim, she did attempt to raise a separate breach of contract claim in addition to the interpleader action already before the court.  Following the precedent, the court determined that “even a breach of contract claim is duplicative in an interpleader action,” and it granted the insurer’s motion in limine.

Date of Decision:  March 23, 2011

Monarch Life Ins. Co. v. Estate of Tarone, Civil Action No. 09-734, United States District Court for the Eastern District of Pennsylvania, 2011 U.S. Dist. LEXIS 29740 and 2011 U.S. Dist. LEXIS 32931 (Mar. 23, 2011) (Hart, U.S.M.J.)

The prior opinion can be found at

Monarch Life Ins. Co. v. Estate of Tarone, Civil Action No. 09-734, United States District Court for the Eastern District of Pennsylvania, 2010 U.S. Dist. LEXIS 6122 (Jan. 26, 2010) (Dalzell, J.)