Monthly Archive for August, 2011

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AUGUST 2011 BAD FAITH CASES
MVFRL PREEMPTS BAD FAITH CLAIMS WHERE FACTS ALLEGE FALL WITHIN NARROW PURVIEW OF ITS TREATMENT SECTION, 1797(Philadelphia Federal)

Published on August 10, 2011 in Procedural Issues. Closed

In McWalters v. State Farm Mutual Insurance Company, the court was faced with the issue of whether Pennsylvania’s Motor Vehicle Financial Responsibility Law (MVFRL) pre-empted the plaintiffs’ bad faith claim under 42 Pa.C.S. § 8371.  After a thorough analysis addressing extensive case law on the subject, the court concluded that section 1797 of the MVFRL did preempt the bad faith claims in this case.

The Court observed that section 8371 was enacted at the same time section 1797 was amended.  That later section applies to “Customary charges for treatment,” solely in the context of motor vehicle insurance policies.  The relevant section, (b)(4), addresses challenges to the reasonableness and necessity of medical treatment or rehabilitative services or merchandise, through peer review and appeals to court.  It’s remedies include that where a “court determines that medical treatment or rehabilitative services or merchandise were medically necessary, the insurer must pay to the provider the outstanding amount plus interest at 12%, as

well as the costs of the challenge and all attorney fees.”

Applying the principle of statutory construction that a special provision in a statute controls over a general provision in a statute in the event of a conflict, if the two cannot be reconciled.  While the Pennsylvania Supreme Court has not ruled, and there is some split in authority, the court observed that the Third Circuit has determined there is an irreconcilable conflict and section 1797 controls.

In determining whether there is preemption, however, the court still must look to the specific nature of the facts and bad faith alleged.  Section 1797 is of narrow scope, “limited to those situations in which a disputed claim is to be submitted to the PRO procedure.” It only applies where “the insured is asserting a denial of first party benefits that was made following the process outlined in §1797.” Thus, “Section 1797 preempts Section 8371 where both

are applicable;” but where “an insurer’s malfeasance goes beyond the scope of Section 1797,” “courts have reconciled the two statutes and found bad faith claims to supplement claims under

Section 1797.”

In that case, the plaintiff alleged that the insurer provided Plaintiffs and Class members with motor vehicle insurance policies and accepted premiums for the coverage provided to Plaintiffs; knew and/or should have known that Plaintiffs and Class members were likely to place confidence and trust in Defendant and/or its agents, servants and/or employees to process claims in good faith in their best interests;  acted in bad faith by denying proper coverage to Plaintiffs and Class members by denying proper payment for medical benefits as required by the issued insurance policies and Pennsylvania law; acted with willful, intentional, gross and/or

reckless disregard for the injury and risk of economic loss inflicted upon Plaintiffs and Class members; and that as a direct and proximate result of its acts and omissions, Plaintiffs and members of the Class have suffered injury in the form of economic losses.

The court concluded from these “very general allegations,” that the gravamen of the statutory bad faith claim was the denial of first party medical benefits and nothing more. It found that there were no allegations that the carrier failed to properly invoke or follow the PRO process, denied or refused coverage, improperly invoked a coverage exclusion or otherwise misinterpreted or misapplied the insurance contract.  Thus, the scope of the purported bad faith allegations fell squarely within the purview of section 1797, and the bad faith claim was deemed preempted and was dismissed.

Date of Decision:  July 21, 2011

McWalters v. State Farm Mut. Auto. Ins. Co., Civil Action No.. 10-4289, U. S. District Court for the Eastern District of Pennsylvania, 2011 U.S. Dist. LEXIS 79288 (E.D. Pa. July 21, 2011) (Joyner, C. J. )

AUGUST 2011 BAD FAITH CASES
UNSUPPORTED CONCLUSIONS PLEADED BY COUNSEL CANNOT MEET CLEAR AND CONVINCING STANDARD ON SUMMARY JUDGMENT (Philadelphia Commerce Court)

Published on August 8, 2011 in General Bad Faith and Litigation Issues. Closed

In Dawson v. Utica First Insurance Company, plaintiff’s seventh amended complaint included a statutory bad faith count.  The carrier brought a summary judgment motion.  The court observed that bad faith conduct required that plaintiff prove her case with clear and convincing evidence.  In this case, plaintiff offered no evidence, but rather relied upon the legal conclusions pleaded by her lawyer, in opposing summary judgment.  The Commerce Court concluded that the plaintiff had in no way presented any evidence that could clearly and convincing persuade the court of statutory bad faith [N.B. there is no jury trial right on bad faith claims in Pennsylvania’s state courts], and thus failed to create a triable issue of material fact.  Summary judgment was entered for the carrier.

Date of Decision:  April 4, 2011

Dawson v. Utica First Insurance Company, Jan. Term 2009, No 3139, 2011 Phila. Ct. Com. Pl. LEXIS 164 (C.C. P. Phila. April 4, 2011) (New, J.) (Commerce Program)

AUGUST 2011 BAD FAITH CASES
BAD FAITH CLAIM SUFFICIENT UNDER TWOMBLY TO WITHSTAND DISMISSAL; EXISTENCE OF BAD FAITH CLAIMS DOES NOT PRECLUDE RECOVERY OF COMPENSATORY DAMAGES (Western District)

Published on August 6, 2011 in Procedural Issues. Closed

In Pavlick v. Encompass Indemnity Insurance Company, the plaintiff was the wife and executrix of John Pavlick’s estate.  Defendant insurers sold the late Mr. Pavlick polices which included underinsured motorist (UIM) coverage.

The decedent was killed when a car struck him in his front yard. The driver of that car lacked the personal assets to pay any more than what the limit of his insurance policy allowed. That amount was not sufficient to compensate plaintiff’s loss and damages. The plaintiff sought additional compensation under the UIM provisions of Mr. Pavlick’s insurance policies.

At the time of his death, Mr. Pavlick had his own personal automobile insurance through Encompass and another policy through State Auto Insurance which covered his contracting business. Both policies included UIM coverage, and each had a limit of $500,000. The plaintiff sought the policy limit from each insurer.

Over the ensuing months, both defendant insurers got together and agreed to split the costs of an eventual settlement. However, defendant State Auto soon notified the plaintiff that further investigation would need to be done to determine whether the decedent’s particular policy covered her claim. State Auto attempted to have the policy valued through a mediation process, but the plaintiff would not compromise on the policy’s limits.

The defendants made an initial joint offer of $650,000 and then a second offer of $950,000, citing an extra-marital affair as justification for not providing the widow plaintiff with the entirety of the proceeds.

Plaintiff filed suit, first alleging an improper delay in the insurer’s settlement offers. She also brought a statutory bad faith claim on account of the defendant insurance carriers’ failure to pay the $50,000 difference between that offered and paid ($950,000) and the full limits of the combined policies ($1 million).

Both insurers moved to have these claims dismissed, claiming that the plaintiff has merely submitted conclusory allegations of statutory bad faith without the factual support required by the post-Twombly pleading standards.

The Western District disagreed, finding that the plaintiff’s complaint did provide the factual details necessary to withstand a motion to dismiss. Moreover, the court refused to dismiss the plaintiff’s bad faith claim solely on account of the fact that she also requested compensatory damages, noting that compensatory damages are available under Pennsylvania’s common law of contracts, even where the action is brought under a bad faith theory. As such, the court pointed to the plaintiff’s breach of contract count and found that the mere existence of a supplemental bad faith claim did not preclude her from recovering compensatory damages in connection with her breach of contract claim.

Accordingly, the insurers’ motions to dismiss were denied.

Date of Decision: July 14, 2011

Pavlick v. Encompass Indem. Ins. Co., 11cv705, United States District Court for the Western District of Pennsylvania, 2011 U.S. Dist. LEXIS 76026 (July 14, 2011) (Schwab, J.)

 

AUGUST 2011 BAD FAITH CASES
INSURER’S MOTION TO DISMISS GRANTED, AS INSURED’S BAD FAITH CLAIM NOT SUFFICIENTLY FACTUAL TO CLEAR TWOMBLY THRESHOLD(Western District)

Published on August 5, 2011 in Procedural Issues. Closed

In Pfister v. State Farm Fire and Casualty Company, plaintiffs’ home suffered physical and structural damage due to a blocked shower drain. When they turned to State Farm, seeking coverage under their homeowners’ insurance policy, the insurer accepted the claim and issued the insured a payment of just over $16,000. Plaintiffs’ however made repeated appeals for further coverage, and when they realized full payment for their property loss was not forthcoming they asserted causes of action for breach of contract, a declaratory judgment and statutory bad faith in the Allegheny County Court of Common Pleas.

State Farm removed to the Western District based on the parties’ diverse citizenship and then moved to dismiss the statutory bad faith claim.

In pointing to the “new” pleading standards set forth by the U.S. Supreme Court in Twombly and Iqbal, the Western District here noted that merely stating conclusory averments or listing the elements of a cause of action without establishing some factual basis upon which the plaintiff would be entitled to relief is not sufficient to withstand a motion to dismiss. In this vein, the court went on to find that the plaintiffs’ complaint was not sufficiently factual to reasonably suggest that State Farm frivolously or speciously refused to pay the policy’s proceeds.

Although there was a wide discrepancy between the amount the insured requested ($152,000) and the amount received ($16,169), the court cited to Brown v. Progressive Ins. Co., 860 A.2d 493 (Pa. Super. 2004), for the proposition that Pennsylvania law generally does not treat as  bad faith an insurer’s low but reasonable assessment of an insured’s losses.

The court also noted that it was not surprising that State Farm disagreed with the Plaintiff’s loss estimate, as that estimate was computed by Brian Pfister himself and was not a reflection of State Farm’s own valuation of the claim. In fact, plaintiffs’ never alleged in their complaint that the insurer failed to adequately investigate the claim before making their settlement offer.

As such, the court found that there was not enough information pled to establish a cognizable claim of bad faith and, accordingly, granted State Farm’s motion to dismiss, with leave to amend.

Date of Decision: July 26, 2011

Pfister v. State Farm Fire and Cas. Co., 11cv0799, United States District Court for the Western District of Pennsylvania, 2011 U.S. Dist. LEXIS 81324 (July 26, 2011) (Schwab, J.)

 

AUGUST 2011 BAD FAITH CASES
NO BAD FAITH (1) WHERE DEFENSE NOT PROVIDED PENDING DECISION TO MEDIATE; (2) FOR BRING DECLARATORY JUDGMENT; OR (3) FOR RESERVING RIGHTS (Philadelphia Federal)

Published on August 4, 2011 in Claims Handling Procedures. Closed

In MP III Holdings, Inc. v. The Hartford Casualty Insurance Company, the Eastern court granted Hartford’s motion for summary judgment with respect to the insured’s statutory claim of bad faith, finding that the insurer’s position with respect to indemnifying the insured from underlying lawsuits was reasonable.

The insured sought such indemnification when it became the subject of three separate legal actions.

The court’s opinion specifically focused on one of these actions, in which the insurer initially agreed to provide for the insured’s defense. However, the plaintiff in the underlying action soon agreed to voluntarily dismiss the claims against the insured as long those claims could be brought to mediation.

Once the parties in the underlying action came to this agreement, the insurer informed the insured that it would no longer be providing a defense because, in the opinion of the insurance company, there were no longer any claims pending against the insured to which the insurance policy was applicable. At this time, the insurer pursued a declaratory action to vindicate its position. The Hartford did note, however, that if the plaintiff did pursue mediation as stipulated in the settlement agreement, the insurer would reconsider its position in terms of indemnifying the insured. Ultimately, the plaintiff in the underlying action did pursue mediation, and the insurer provided for the insured’s defense.

The insured, nevertheless, pursued a bad faith cause of action against the insurer, alleging that the insurer’s termination of its defense and its subsequent declaratory judgment action constituted bad faith. The court disagreed and validated the insurer’s interpretation of its indemnification duty, observing that it was “obvious and logical that external factors such as…agreements between parties affecting the vitality and operability of the legal claims may be considered in determining the endurance of a particular duty to defend.” The court also declined to take any issue with the insurer’s decision to seek a declaration of its rights, citing a proposition widely held in courts across the state that the Declaratory Judgments Actions may be invoked to interpret the obligations of the parties under an insurance contract.

Finally the court found that the insurer had not acted in bad faith by misrepresenting its coverage position because it never unequivocally terminated coverage, as noted by the fact that it provided for the insured’s defense during mediation. The court noted that mere communication as to the potential bases for the denial of coverage does not constitute bad faith.

Date of Decision: June 30, 2011

MP III Holdings, Inc. v. The Hartford Cas. Ins. Co., Civil Action No. 08-CV-4958, United States District Court for the Eastern District of Pennsylvania, 2011 U.S. Dist. LEXIS 72370 (June 30, 2011) (Davis, J.)

AUGUST 2011 BAD FAITH CASES
JUDGE ORDERS IN CAMERA REVIEW OF INSURER’S LOSS RESERVES DOCUMENTATION AS POTENTIALLY RELEVANT TO INSURED’S BAD FAITH CLAIM (Philadelphia Federal)

Published on August 3, 2011 in Discovery and Evidence. Closed

In Mirarchi v. Seneca Specialty Insurance Company, the insured filed a claim with the defendant insurer after a fire damaged his pizzeria.

After Seneca denied coverage, plaintiff sought to compel the insurer to produce un-redacted documentation of its claim investigation. Specifically, the information sought by the plaintiff concerned the defendant’s setting of loss reserves, a process which the insurer argued is protected from disclosure by the work product doctrine. The insurer also contended that such information need not be disclosed because it is irrelevant to the resolution of plaintiff’s bad faith claim.

The court first struck down Seneca’s work product defense, as it found that the requested documentation was neither prepared by attorneys (or their agents) nor prepared in anticipation of litigation but was instead created within the ordinary course of the insurance business.

The court then addressed whether Seneca’s loss reserves were sufficiently relevant to the action’s subject matter to be discoverable, including a lengthy discussion of the nature of setting reserves.

Typically, the court noted, loss reserve information is irrelevant and thus undiscoverable. However, such information is more likely to be discoverable in bad faith cases because it can illustrate discrepancies, if any, between what the insurer believed the claim to be worth and what it actually ended up paying out to the insured. Still, the court took care to note that even in bad faith cases, the relevance of loss reserve information is not a foregone  conclusion.

The court concluded:  “However, the facts considered in setting the reserve amount may potentially be relevant to [the insured]’s bad faith claim. For instance, to the extent that employees or agents of Seneca discussed the value of [the insured]’s claim or other factual information regarding the claim in connection with setting the reserves, such information may potentially be relevant to [the insured]’s claim of bad faith. Thus, the Court will order Seneca to produce unredacted copies of the non-privileged documents provided to the Court for in camera inspection to the extent that those documents contain information other than specific amounts set for loss reserves. The Court cautions that this ruling in no way implies that such information will be admissible at trial.”

Date of Decision: July 22, 2011

Mirarchi v. Seneca Specialty Ins. Co., Civil Action No. 10-3617, United States District Court for the Eastern District of Pennsylvania, 2011 U.S. Dist. LEXIS 80871 (July 22, 2011) (Pratter, J.)

AUGUST 2011 BAD FAITH CASES
COMPENSATORY DAMAGES NOT RECOVERABLE UNDER STATUTORY BAD FAITH CLAIM BUT ARE RECOVERABLE UNDER A BREACH OF CONTRACT BAD FAITH CLAIM (Philadelphia Federal)

Published on August 2, 2011 in General Bad Faith and Litigation Issues. Closed

In Cummings v. Allstate Insurance Company, the plaintiff, Barry Cummings, experienced a flood in his home, causing his floor to collapse. Cummings, who held a home owners insurance policy with Allstate, promptly alerted the insurer of the damage. Allstate sent out an adjuster to assess the extent of the insured’s loss and decided to deny coverage.

The insured did not have the money to pay for the necessary repairs out of pocket, so after Allstate denied coverage, the damaged floor in plaintiff’s home remained in disrepair. A little over a year after coverage was denied, plaintiff’s mother, Mary—who was an additional insured on the homeowner’s policy—broke her leg after tripping on the collapsed floor. While recovering from surgery on her broken leg, the insured’s mother suffered a fatal heart attack.

In bringing a bad faith suit against Allstate for denying coverage, the insured alleges that the damages to his home and the consequential damages stemming therefrom are in excess of $50,000.

Plaintiff originally filed in Philadelphia County Municipal Court, where a default judgment was entered in his favor after Allstate failed to appear. Allstate appealed the default judgment and plaintiff amended his complaint. In April of 2011, Allstate had the amended claim removed via diversity to the Eastern District.

Allstate argued that a plaintiff cannot seek compensatory damages couched within a statutory bad faith claim and, accordingly, moved to dismiss. The court agreed with Allstate that compensatory damages are generally not recoverable under the bad faith statute. Thus, that aspect of plaintiff’s statutory bad faith claim was dismissed.

However, the court said that the plaintiff could seek compensatory damages within the scope of a common law breach of contract bad faith claim. Here, the insured did bring a breach of contract claim, in addition to the bad faith claim, but did not initially pray for compensatory damages therein. Taking this into account, the court decided to allow the plaintiff leave to amend its breach of contract claim in order to include a prayer for compensatory damages.

Date of Decision: July 11, 2001

Cummings v. Allstate Ins. Co., Civil Action No. 11-02691, United States District Court for the Eastern District of Pennsylvania, 2011 U.S. Dist. LEXIS 74349 (July 11, 2011) (Kelly, J.)