Monthly Archive for June, 2011

JUNE 2011 BAD FAITH CASES
JUDGE MUNLEY ORDERS A WIDE RANGE OF DOCUMENTS PRODUCED, AND WILL LATER CONSIDER SPECIFIC ITEMS FROM PRIVILEGE LOG, IN UIM BAD FAITH CLAIM (Middle District)

In Consugar v. Nationwide Insurance Company of America, plaintiff Diana Consugar was involved in an April, 2009 car accident from which she sustained severe injuries. Her auto insurance policy with Nationwide provided for underinsured motorist (UIM) coverage—meaning that the policy would provide coverage for injuries sustained in an accident where the other driver’s insurance policy did not provide sufficient reimbursement.
The insurance policy carried by the other driver had a limit of $25,000, and while the plaintiff received this amount from the third party’s insurer, she sought additional coverage from Nationwide under her policy’s UIM provisions, which provided for coverage up to $300,000. Though plaintiff provided Nationwide with her medical records to assist in their evaluation of the claim, Nationwide never proposed a settlement offer. The insurer notified plaintiff that they would not arbitrate her UIM claim and that if she wished to recover anything under the policy, she would have to take Nationwide to court.
So she filed an action in state court, alleging that Nationwide was obligated to provide UIM coverage under the policy and that their failure to do so constituted bad faith. Nationwide removed the case to the Middle District on diversity grounds whereupon plaintiff propounded several discovery requests, most of which Nationwide objected to,  citing attorney-client privilege and the work product doctrine.
While Nationwide did provide the insured with some limited records from its claims file, it redacted most of the information that could have illustrated the thought process behind the UIM claim’s denial.
On one hand, the court noted that the withheld information could be of particular relevance in a bad faith claim, pointing to another District court decision involving Nationwide in which the Eastern District found that the claims file or claims log should be disclosed in a bad faith action against the insurance carrier. Marshall v. Nationwide Mut. Ins. Co., 1994 U.S. Dist. LEXIS 7834 (E.D. Pa. 1994). On the other hand, the Middle District here was not prepared to engage in a wholesale denial of privilege for every document in Nationwide’s file. Thus, to the extent that plaintiff sought Nationwide’s entire claims file without any redactions for privilege, the court denied the insured’s motion for production. However, it did so without prejudice, noting that the plaintiff could, by motion, bring particular documents it sought disclosed before the court for “in camera” inspection in which the court would determine whether discovery of the document would be appropriate.
Nationwide sought more absolute protection from disclosure under the work product doctrine, arguing that any document added to the file after June 14, 2010 should be considered as created in anticipation of litigation and therefore protected work product. Nationwide pointed to June 14th because it was on this date that Nationwide discovered that the insured had a pre-existing medical condition which she was now attempting to attribute to the accident. After learning of the insured’s medical history, it became clear that Nationwide would deny the claim and that litigation would be imminent. Thus, argued Nationwide, any contributions to the file from that point forward should be considered protected work created in anticipation of litigation.
However, the Middle District was not prepared to take an exception to discovery’s liberal disclosure rules as far as Nationwide would have liked, noting that ultimately litigation should not be a competition to see which party can manipulate legal doctrines to gain advantage.
Nationwide also sought to prevent the disclosure of its procedures for establishing “insurance reserves”—the pools of funds allocated to satisfy obligations that may arise under a claim. It argued that reserve information was not discoverable in a bad faith claim. The court disagreed, finding that reserve information—inasmuch as it is an estimation by the insurer of its potential liability on a claim—is of particular relevance in a potential bad faith situation. Thus, the court ordered that the amount of any reserve allocated to the insured’s claim be produced.  The court observed that if in fact there was a discrepancy between the reserve value assigned to the claim and Nationwide’s actions in actually processing the claim, that could shed light onto whether or not there was bad faith.
Similarly the court ordered Nationwide to produce its employee training manuals and the files of other claims similar in nature to plaintiff’s. Its reasoning was that such information could be instructive in a bad faith inquiry by revealing whether denying claims like plaintiff’s was a part of company policy as a matter of course, or whether denying the plaintiff’s claim indicated a failure to follow established policy.
Ultimately, the court ordered Nationwide to provide that which plaintiff specifically requested, with the caveat that if Nationwide wanted to designate certain information as privileged it could do so by creating a log which would inform the plaintiff what is believed to be privileged and why. Plaintiff would then be able to challenge this designation by requesting an in camera review of the specific information for which privilege was claimed.
Date of Decision: June 9, 2011
Consugar v. Nationwide Ins. Co. of America, No. 3:10cv2084, United States District Court for the Middle District of Pennsylvania, 2011 U.S. Dist LEXIS 61756 (June 9, 2011) (Munley, J.)

JUNE 2011 BAD FAITH CASES
BANKRUPT INSURED LACKS STANDING TO BRING BAD FAITH AND BREACH OF CONTRACT CLAIMS, AS SUCH CAUSES OF ACTION ARE ASSETS OF HIS BANKRUPTCY ESTATE (Middle District)

In Reisinger v. Seneca Specialty Insurance Company, Plaintiff-insured owned an apartment/office building in Wilkes-Barre, which was insured by defendant, Seneca. In 2005, the building suffered damage from a fire and the owner filed a notice of loss with the insurer. The insurer advanced the property owner $25,000 on the claim, with the remainder to be paid out after the adjustment was completed. Following the adjustment, the claim was valued at $155,148.46. The insurer sent the property owner a check for $130,148.46 to cover the balance owing on the claim (the adjusted value less the $25,000 advance), indicating that there would be no further payments on the claim. The property owner cashed the settlement check but wrote a letter to the insurer indicating that he did not consider the check to be final payment on his claim.

Plaintiff then filed for bankruptcy and the appointed bankruptcy trustee was ordered by the court to abandon all of the estate’s real estate assets. While the bankruptcy was still pending, the plaintiff brought the present suit against the insurer, alleging that the fire-loss claim was improperly adjusted and seeking both breach of contract and bad faith damages.

Originally filed in Luzerne County, the insurer removed the case to the Middle District on diversity grounds where it moved for summary judgment. Magistrate Judge Mannion in Wilkes Barre recommended that the insurer’s motion be granted, suggesting that, given the status of his bankruptcy proceeding, the plaintiff did not have standing to bring suit.

The insurers argued, and the magistrate judge agreed, that because of the plaintiff’s status as a bankruptcy debtor, any breach of contract or bad faith cause of action that he could have pursued prior to filing for bankruptcy was no longer his property but the property of the bankruptcy estate.

The Middle District here agreed with the Magistrate’s analysis, citing the Supreme Court’s decision in Segal v. Rochelle, 382 U.S. 375 (1966) for the proposition that where the pre-bankruptcy activities of the debtor give rise to a cause of action, that cause of action becomes an asset of the bankruptcy estate. Accordingly, the court held, if any person or entity would have standing to bring suit against the insurer, it would be the bankruptcy trustee on behalf of the estate.

The insured argued that the insurance policy was held in trust for the benefit of the property’s mortgage holder and thus should be without the reach of the bankruptcy estate.

While the court noted that as a general rule trust property is excluded from a debtor’s bankruptcy estate, it noted that there was no indication in this particular case that the breach of contract and bad faith damages sought were to be held in trust for the benefit of anyone but the plaintiff property owner.

Similarly unpersuasive to the Middle District was the plaintiff’s argument that the insurance policy and any attendant causes of action had been abandoned pursuant to the bankruptcy court’s order for the trustee to abandon all of the debtor’s real property. In rebuffing this argument, the court noted a distinction between a debtor’s interest in real property and his interest in insurance proceeds related to that property’s damage—that distinction being that insurance policies (and any causes of action that might stem therefrom) do not attach to the real estate itself but instead are personal contracts existing between the insurer and the insured. Thus, while the bankruptcy court may have ordered the physical property abandoned as an asset of the debtor’s bankruptcy estate (resulting in it’s title re-vesting in the debtor), the building owner’s insurance policy (i.e. a contractual asset) was not included within that order.

As such, the Middle District adopted the Magistrate’s report and recommendation to grant the insurer summary judgment, finding that any causes of action stemming from the insurance policy were property of the plaintiff debtor’s bankruptcy estate, thereby precluding him from having standing to bring suit.

Date of Decision: June 14, 2011

Reisinger v. Seneca Specialty Ins. Co., No. 3:07cv1221, United States District Court for the Middle District of Pennsylvania, 2011 U.S. Dist. LEXIS 62914 (June 14, 2011) (Munley, J.)

JUNE 2011 BAD FAITH CASES
SUMMARY JUDGMENT TO INSURER, AS LANGUAGE OF EXCLUSION FOUND TO BE UNAMBIGUOUS (Philadelphia County)

In Commandments, Inc. v. Penn-America Insurance Company, the insured was a bar owner whose toilets and bar drains backed up due to a sewer blockage. A plumber inspected the premises and prescribed a course to remedy the blockage. When the insured sought to have the insurer cover the costs of the plumber’s repairs, the insurer declined, pointing to an exclusion within the policy stating that “We will not pay for any loss or damage caused directly or indirectly by…water that backs up or overflows from a sewer, drain, or sump.”

The lower court granted summary judgment to the insurer on the breach of contract and bad faith claims against it; and the court here recommended that the appellate court affirm on appeal, citing the widely held principal that when the language of the contract is clear and unambiguous, a court is required to give effect to its language. Because the terms in the exclusionary provision at issue were not accorded any specific meaning in the policy, the court was obligated to afford them their normal meaning, and in doing so determined that the coverage requested was unambiguously within the scope of the policy’s exclusionary clause which broadly covered any back ups of sewers or drains causing damage. 

Date of Decision: May 12, 2010

Commandments, Inc. v. Penn-America Ins. Co., October Term, 2009, No. 1119, Common Pleas Court of Philadelphia County, Civil Trial Division, 2010 Phila. Ct. Com. Pl. LEXIS 394 (May 12, 2010) (DiVito, J.)

JUNE 2011 BAD FAITH CASES
COMMERCE COURT VOIDS POLICY, FINDS INSURED TO HAVE ACTED IN BAD FAITH UPON MATERIALLY MISREPRESENTING THE NATURE OF THE BUSINESS INSURED (Philadelphia Commerce Court)

In Certain Underwriter’s at Lloyd’s London v. Wojdalski, defendant Wojdalski, the owner and operator of a construction and remodeling outfit, sought a commercial liability insurance policy with business insurer, Lloyd’s of London.

Shortly after, the insured was installing a new roof atop a Philadelphia building when a roofer’s torch caused a fire destroying the entire building. The building’s insurer covered the building’s losses and then brought a subrogation suit against Wojdalski’s construction company to recover the funds it paid to satisfy the building owner’s claims. Lloyd’s filed for a declaratory judgment, seeking a determination that the policy was void on account of Wojdalski misrepresenting the nature and extent of the risk that was being insured.

Philadelphia’s Commerce ultimately held for Lloyd’s, finding that Wojdalski had materially, and in bad faith, misrepresented the danger involved in his company’s work, thereby voiding the policy.

Lloyd’s acceptance of the insured’s commercial liability insurance application was conditioned upon assurances that the insured would not engage in roofing operations or work with liquid propane gas. After the agreement was reached, Lloyd’s sent the insured a binder outlining the specific activities which were and were not covered, mentioning once more that roofing work was outside the scope of coverage. So when the subrogee insurer sought indemnification from Lloyd’s, Lloyd’s sought a declaratory judgment to void the policy in its entirety, arguing that the entire policy was obtained based upon the false representation that the insured would no longer engage in roofing work (or at least would not seek coverage for liability stemming from such work).

The building’s insurer (the plaintiff in the underlying subrogation action and a defendant in Lloyd’s declaratory judgment action) and Wojdalski argued not just that the policy was valid but that it called for coverage of the underlying incident on the ground that the insured had not made false statements in his application. However, the court found that argument to be fallacious, recognizing that Wodjalski effectively asserted in the application that throughout the term of insurance, the nature of his business would not involve certain operations such as roofing and that he did, in fact, misrepresent himself because he did engage in such business activities as evidenced by the events which led to the underlying subrogation action (i.e. the fire started by a roofing torch).

Thus, because the insured did misrepresent the nature of his business and but for that misrepresentation Lloyd’s would likely not have insured Wodjalski, the misrepresentation was material.

Finally, the court found Wodjalski to have acted in bad faith because he obtained the insurance policy by assuring Lloyd’s that he would refrain from the very activities which he intended to, and did in fact, continue. With that, all three elements to void an insurance contract based on misrepresentation had been met: misrepresentation, materiality and bad faith. Accordingly, the court declared the insurance policy void.

Date of Decision: May 20, 2011

Certain Underwriters at Lloyd’s London v. Wojdalski, Sept. Term 2009, No.01347, Court of Common Pleas of Philadelphia County, 2011 Phila. Ct. Com. Pl. LEXIS 127 (May 20, 2011) (New, J.)

JUNE 2011 BAD FAITH CASES
COURT DENIES INSURER’S MOTION TO DISMISS BAD FAITH CLAIM, HOLDING THAT BAD FAITH STATUTE EXTENDS TO UNINSURED MOTORIST CLAIMS (Western District)

In Rankin v. State Farm Mutual Automobile Insurance Company, Sheila Rankin, the insured, was involved in a motor vehicle accident in September, 2007, in which she injured her left heel. At the time of the accident, she was insured by State Farm and her policy included uninsured motorist (UIM) coverage. However, instead of initially attempting to recover against her policy with State Farm, Plaintiff settled directly with the tortfeasor for $87,500. State Farm allowed this and waived its right to pursue a subrogation action against the tortfeasor. Then, nearly three years after the accident, Plaintiff decided to pursue an uninsured motorist claim with State Farm.

Plaintiff submitted a UIM claim of $200,000 to cover her medical expenses. State Farm denied, reasoning that plaintiff’s injuries did not warrant that type of settlement. It should also be remembered, though, that State Farm had waived subrogation. And even putting that waiver to the side, the tortfeasor’s prior settlement with Rankin would likely have precluded State Farm from bringing another claim against it arising from the same set of facts. In other words, if State Farm had honored Plaintiff’s claim, it likely would have had no recourse in recouping any of the settlement. This might serve as an alternate explanation (aside from the validity and extent of plaintiff’s injuries) as to why State Farm denied Plaintiff’s claim. It might also explain why the court ultimately found this denial of coverage to be about more than a mere dispute over a claim’s valuation and as such refused to dismiss plaintiff’s bad faith claims.

Plaintiff initially brought suit against State Farm in the court of common pleas for Indiana County, PA, alleging breach of the insurance contract and bad faith for failing to objectively evaluate her UIM claim. Plaintiff also alleged that State Farm owed her a fiduciary duty in the UIM context. State Farm removed to the Western District on diversity grounds, where it argued that it could not be held liable for bad faith based upon a valuation dispute. State Farm also moved to strike the fiduciary duty allegations from the bad faith claim and similarly moved to strike Plaintiff’s request for attorney’s fees and punitive damages.

The court granted defendant State Farm’s motion to strike the plaintiff’s requests for punitive damages and attorneys’ fees but denied State Farm’s motions to strike and dismiss in all other respects.

The court eschewed State Farm’s arguments that Pennsylvania’s bad faith statute did not extend to uninsured motorist claims. In fact, it found that the bad faith statute applies to UIM claims in much the same way as it applies to other insurance benefit claims in that the insurer’s duty to the insured continues to be one of good faith and fair dealing. And, while the court did recognize that there are aspects of UIM claims which make them unique—like the fact that they may contain elements of both first and third party claims and may pit the insured and insurer as adversaries—it was adamant that the insurance company’s duty of good faith persists throughout changing dynamics in its relationship with the insured. That being said, the court made certain to mention that this duty does not require an insurer to sacrifice its own interests by blindly paying each and every claim submitted by an insured in order to avoid a bad faith lawsuit. What is required is that the insurer evaluates the value of each claim in good faith. In other words, an insurer cannot evaluate a claim, gauge the extent of the insured’s injury and then make an intentionally low offer. Along these lines, numerous cases have recognized that when insurance companies make initial low ball offers and then increase their offers with no intervening new information, it is likely that they have acted in bad faith.

Here, State Farm made an initial offer of settlement of $40k and then just 19 days later, without any new information, raised the settlement offer to $100k. However, because it was unclear as to whether State Farm evaluated the claim before making a settlement offer, it cannot be determined whether it intentionally “low-balled” the insured. Thus, more information would be needed in order for the court to rule that State Farm acted in bad faith.

Finally, in terms of State Farm’s motion to strike the allegations of a fiduciary relationship, the court noted that an insurer can be the fiduciary of an insured within the context of a UIM claim, suggesting that the insurer’s duty to act in good faith is actually based upon the existence of this fiduciary relationship.

Date of Decision: April 27, 2011

Rankin v. State Farm Mut. Auto. Ins. Co., Civil Action No. 11-331, United States District Court for the Western District of Pennsylvania, 2011 U.S. Dist. LEXIS 55305, (April 27, 2011) (Mitchell, U.S.M.J.)

This Report and Recommendation was adopted as the Opinion of the United States District Court for the Western District of Pennsylvania by Order of the Honorable Nora Barry Fischer on May 24, 2011.