Monthly Archive for October, 2011

OCTOBER 2011 BAD FAITH CASES
COURT DENIES AND GRANTS PORTIONS OF MOTION TO DISMISS BAD FAITH CLAIMS IN UM/UIM CONTEXT (Western District)

In Flaherty v. Allstate Property & Casualty Insurance Company, the court ruled upon a carrier’s motion to dismiss an insured’s breach of contract and bad faith claims.  The action stemmed from a 2008 car accident, during which the insured passenger suffered several injuries.  After the accident, the insured was unable to recall who was driving the vehicle.  The car was insured under a policy, issued in Ohio, by the owners of the vehicle.  The complainant was also insured by the same carrier, but in Pennsylvania.  The carrier refused to cover the insured under either policy.

The insured subsequently brought claims for Uninsured and/or Underinsured Motorist (“UM/UIM”) coverage under both policies in the Court of Common Pleas of Allegheny County.  The carrier removed to federal court in the Western District of Pennsylvania and moved to dismiss the insured’s seven-count amended complaint.

Count I alleged that the carrier breached the policy held by the insured because it failed to issue UM/UIM benefits.  As to the UM coverage, the court highlighted language in the policy that the carrier would pay damages that the insured is entitled to recover from the owner of an uninsured automobile.  However, the policy conditioned that recovery be a part of a “hit-and-run motor vehicle.”  As such, the court held that the insured did not state a plausible claim for UM benefits under its own policy. 

With respect to the UIM benefits, the insured’s policy covered damages that exceed “the bodily injury protection in effect at the time of the accident.”  However, the insured had yet to ascertain the precise amount of damages he sustained, warranting discovery on the issue.  The court therefore denied the carrier’s motion to dismiss the suit for UIM benefits.

Counts II and III included bad faith claims under Pennsylvania and Ohio law.  The court disposed of the Ohio bad faith claim in count III because the insured’s own policy was issued in Pennsylvania.  The court denied the motion to dismiss with respect to the Pennsylvania bad faith claim because the insured’s allegation that he was improperly denied coverage was plausible and warranted discovery.

Count IV contained a breach of contract claim under the car owner’s UM/UIM coverage.  The court began by noting that, according to the owner’s policy, Ohio law would apply.  Specifically, under Pennsylvania’s flexible “contacts/interest” methodology, the court would apply law of the state with the greatest interest in the underlying tort.  The court decided that Ohio law should apply because the car owner’s policy was executed and delivered in Ohio to two Ohio residents.  Moreover, Ohio has the most substantial contacts with the car owner’s policy.  Pursuant to the policy’s choice of law provision, the court ruled that Ohio law should govern the owner’s policy.

With respect to count IV, the carrier argued that, under the policy, “An Uninsured Auto Is Not: a motor vehicle which is insured under the Automobile Liability Insurance of this policy.”  Because the car involved in the accident was listed as the insured vehicle on the owner’s policy, it was not an uninsured vehicle for the purposes of the insured’s claim.

However, the insured insisted that Ohio’s Revised Code § 3937.18(B) contravenes the language of the policy, stating that “an ‘uninsured motorist’ is the owner or operator of a motor vehicle if…[t]he identity of the owner or operator cannot be determined, but independent corroborative evidence exists to prove that the bodily injury… of the insured was proximately caused by…the unidentified operator of the motor vehicle.”  The court disagreed, citing case law where Ohio courts have applied the language of similar UM policies over that of the statute.  Moreover, the court agreed with the carrier that the owner’s policy only provides UIM coverage in limited circumstances, where there is a “uninsured” auto.  Yet, the owner’s policy provides that a vehicle insured under the policy cannot also be deemed “an uninsured auto,” so it does not qualify for coverage under the policy’s UIM provision.  The court therefore dismissed count IV.

The court then examined counts V and VI, which alleged bad faith under Pennsylvania and Ohio law, respectively.  The court immediately dismissed count V because the owner’s policy was governed by Ohio law.  As for count VI, the court dismissed the Ohio bad faith claim because, as discussed in reference to the counts I-IV, the carrier had a “reasonable justification” for believing that the insured was not entitled to coverage under the owner’s policy.

Lastly, the carrier claimed that count VII, alleging negligence on behalf of the anonymous driver, should be dismissed or severed.  It argued that suits against fictitious, unidentified defendants are disfavored in Pennsylvania.  However, the court recognized the need for this claim to proceed to discovery, affording the insured an opportunity to identify the driver.  The court rejected the carrier’s motion on count VII, noting that it would revisit a possible severance of the negligence claim prior to trial.

Date of Decision: October 19, 2011

Flaherty v. Allstate Property & Casualty Insurance Company, No. 11-440, U.S. District Court for the Western District of Pennsylvania, 2011 U.S. Dist. LEXIS 120698 (W.D. Pa. Oct. 19, 2011) (Mitchell, U.S.M.J.)

OCTOBER 2011 BAD FAITH CASES
NO MVFRL PREEMPTION; EMOTIONAL DISTRESS NOT ACTIONABLE (Philadelphia Federal)

In Watson v. Nationwide Mutual Insurance Company, the court was faced with a carrier’s motion to dismiss and strike an insured’s breach of contract and bad faith claims.  The suit arose from injuries sustained in a car accident that required medical treatment from several physicians.  The insured claimed that, under its policy, the carrier was required to provide first-party medical and uninsured motorist benefits.

The carrier contracted several peer review organizations (“PROs”) to determine whether the insured’s treatment was medically necessary.  The insured responded that the carrier had no reasonable basis for submitting the medical bills to a PRO.  Based upon their findings, however, the carrier denied coverage.  The insured claimed that the PROs yielded defective reports through a “sham peer review process,” which failed to conduct objective reviews of her medical records.

As such, the insured filed suit in the Court of Common Pleas of Lancaster County, alleging breach of contract and bad faith.  The carrier removed to federal court and filed a motion to dismiss and strike portions of the insured’s complaint.

First, the court addressed the bad faith claim.  In its motion to dismiss, the carrier argued that the insured’s suit was preempted by Pennsylvania’s Motor Vehicle Financial Responsibility Law (“MVFRL”).  Under that statute, which governs the carrier’s use of PROs, an insured may seek first-party medical benefits plus interest, costs, and fees, if the court finds that the treatment was medically necessary.  Typically, an insured may not pursue a bad faith claim where a PRO improperly denied first-party benefits.

However, where a carrier’s “alleged bad faith conduct [goes] beyond the scope of” the MVFRL, it is not preempted.  In this case, the insured alleged that the carrier failed to employ the PRO with fair and impartial physicians authoring their reports.  As such, the scope of the bad faith claim exceeded a cause of action permitted under the MVFRL, forcing the court to “permit [the insured] to proceed with her bad faith claim…to the extent that she alleges an abuse or misuse of the peer review process.”

Second, the court examined the insured’s action for punitive damages for breach of contract.  The court quickly granted the carrier’s motion because punitive damages are unavailable in breach of contract actions.  However, the court noted that the insured did state a plausible claim in that the MVFRL permits treble damages, a claim for which the carrier did not seek dismissal.

Third, the insured alleged that she suffered serious emotional distress because her bills were not paid by the carrier.  While the insured did not seek recovery for either negligent or intentional infliction of emotional distress, she incorporated such a claim into her bad faith action.  The court dismissed this claim pursuant to the carrier’s motion because Pennsylvania’s bad faith statute does not authorize damages for emotional distress.

Lastly, the insured cited the Pennsylvania Unfair Insurance Practices Act (“UIPA”) in its action for bad faith.  The carrier argued that this portion of the complaint should be stricken because the UIPA is irrelevant to the bad faith inquiry. 

The court first examined a split in case law on this issue.  The Pennsylvania Superior Court has determined that it is appropriate to consider the UIPA when evaluating a carrier’s bad faith because the bad faith statute leaves certain terms undefined.  However, several courts in the Third Circuit have refused to examine UIPA violations as evidence of bad faith.  Specifically, in Oehlmann v. Metropolitan Life Insurance Company, the Middle District of Pennsylvania ruled that the UIPA is designed to be enforced only by the state’s insurance commissioner. (See also this blog). Allowing a litigant to take advantage of the UIPA would “usurp the Commissioner’s power…under the guise of” the state’s bad faith statute.  The court also noted that the UIPA regulates systemic violations in the insurance industry, not individual episodes of bad faith.  As such, the court concluded that reliance on the UIPA was misplaced. 

In sum, the court granted the carrier’s motion with respect to punitive damages, emotional distress, and the UIPA analysis.  However, it ruled that the insured stated a plausible claim for bad faith, as it was not preempted by the MVFRL.

Date Decided: October 12, 2011

Watson v. Nationwide Mut. Ins. Co., NO. 11-1762, U.S. District Court for the Eastern District of Pennsylvania, 2011 U.S. Dist. LEXIS 118873 (E.D. Pa. Oct. 12, 2011) (Surrick, J.)

OCTOBER 2011 BAD FAITH CASES
VIOLATIONS OF THE PENNSYLVANIA UNFAIR INSURANCE PRACTICES ACT CANNOT SUPPORT BAD FAITH CLAIM (Philadelphia Federal)

In Watson v. Nationwide Mutual Insurance Company, the court was faced with a carrier’s motion to dismiss and strike an insured’s breach of contract and bad faith claims.  The suit arose from injuries sustained in a car accident that required medical treatment from several physicians.  The insured claimed that, under its policy, the carrier was required to provide first-party medical and uninsured motorist benefits.
The carrier contracted several peer review organizations (“PROs”) to determine whether the insured’s treatment was medically necessary.  The insured responded that the carrier had no reasonable basis for submitting the medical bills to a PRO.  Based upon their findings, however, the carrier denied coverage.  The insured claimed that the PROs yielded defective reports through a “sham peer review process,” which failed to conduct objective reviews of her medical records.
As such, the insured filed suit in the Court of Common Pleas of Lancaster County, alleging breach of contract and bad faith.  The carrier removed to federal court and filed a motion to dismiss and strike portions of the insured’s complaint.
First, the court addressed the bad faith claim.  In its motion to dismiss, the carrier argued that the insured’s suit was preempted by Pennsylvania’s Motor Vehicle Financial Responsibility Law (“MVFRL”).  Under that statute, which governs the carrier’s use of PROs, an insured may seek first-party medical benefits plus interest, costs, and fees, if the court finds that the treatment was medically necessary.  Typically, an insured may not pursue a bad faith claim where a PRO improperly denied first-party benefits.
However, where a carrier’s “alleged bad faith conduct [goes] beyond the scope of” the MVFRL, it is not preempted.  In this case, the insured alleged that the carrier failed to employ the PRO with fair and impartial physicians authoring their reports.  As such, the scope of the bad faith claim exceeded a cause of action permitted under the MVFRL, forcing the court to “permit [the insured] to proceed with her bad faith claim…to the extent that she alleges an abuse or misuse of the peer review process.”
Second, the court examined the insured’s action for punitive damages for breach of contract.  The court quickly granted the carrier’s motion because punitive damages are unavailable in breach of contract actions.  However, the court noted that the insured did state a plausible claim in that the MVFRL permits treble damages, a claim for which the carrier did not seek dismissal.
Third, the insured alleged that she suffered serious emotional distress because her bills were not paid by the carrier.  While the insured did not seek recovery for either negligent or intentional infliction of emotional distress, she incorporated such a claim into her bad faith action.  The court dismissed this claim pursuant to the carrier’s motion because Pennsylvania’s bad faith statute does not authorize damages for emotional distress.
Lastly, the insured cited the Pennsylvania Unfair Insurance Practices Act (“UIPA”) in its action for bad faith.  The carrier argued that this portion of the complaint should be stricken because the UIPA is irrelevant to the bad faith inquiry.
The court first examined a split in case law on this issue.  The Pennsylvania Superior Court has determined that it is appropriate to consider the UIPA when evaluating a carrier’s bad faith because the bad faith statute leaves certain terms undefined.  However, several courts in the Third Circuit have refused to examine UIPA violations as evidence of bad faith.  Specifically, in Oehlmann v. Metropolitan Life Insurance Company, the Middle District of Pennsylvania ruled that the UIPA is designed to be enforced only by the state’s insurance commissioner. Allowing a litigant to take advantage of the UIPA would “usurp the Commissioner’s power…under the guise of” the state’s bad faith statute.  The court also noted that the UIPA regulates systemic violations in the insurance industry, not individual episodes of bad faith.  As such, the court concluded that reliance on the UIPA was misplaced.
In sum, the court granted the carrier’s motion with respect to punitive damages, emotional distress, and the UIPA analysis.  However, it ruled that the insured stated a plausible claim for bad faith, as it was not preempted by the MVFRL.
Date Decided: October 12, 2011
Watson v. Nationwide Mut. Ins. Co., NO. 11-1762, U.S. District Court for the Eastern District of Pennsylvania, 2011 U.S. Dist. LEXIS 118873 (E.D. Pa. Oct. 12, 2011) (Surrick, J.)

OCTOBER 2011 BAD FAITH CASES
COURT DENIES CARRIER’S MOTION TO DISMISS AND PERMITS DISCOVERY ON BAD FAITH CLAIMS, WHICH REQUIRE A FACT-INTENSIVE INQUIRY (Middle District)

In Zimmerman v. State Farm Mutual Automobile Insurance Company, the court was faced with a carrier’s motion to dismiss an insured’s bad faith allegations.  The case stems from a May 2010 car accident that caused the insured to suffer serious personal injuries, including a fractured fibula.   At the time of the accident, the insured held a policy with the carrier that included underinsured motorist coverage.  This coverage required the carrier to pay all sums that the insured is entitled to recover as compensatory damages from the owner of an underinsured vehicle.

The carrier tendered to the insured $100,000, which was the limit of the policy.  The carrier subsequently opened a underinsured motorist claim and obtained the insured’s medical records.  In June 2011, the carrier made an initial offer on the remainder of the insured’s claim.  The insured argued that this offer was inadequate and filed suit against the carrier in the Court of Common Pleas of Schuylkill County, alleging bad faith and breach of contract.  The carrier removed to federal court and filed a motion to dismiss.

The insured claimed that it was entitled to discovery on the bad faith claim because a year after the accident, the carrier “made an inadequate offer that did not adequately consider the severity of her injuries.”  The insured further alleged that the carrier did not properly investigate her claim or reasonably underwrite the underinsured policy limit.  Lastly, the insured argued that the carrier failed to negotiate with her in good faith.

The court reasoned that, although the insured’s allegations were largely conclusory, bad faith claims require a fact-intensive inquiry and the development of a factual record.  As such, the court ruled that the insured stated a viable claim and that discovery was appropriate.

Date of Decision: October 12, 2011

Zimmerman v. State Farm Mutual Auto. Ins. Co., NO. 3:11-CV-1341, U.S. District Court for the Middle District of Pennsylvania, 2011 U.S. Dist. LEXIS 117562 (M.D. Pa. Oct. 12, 2011) (Caputo, J.)

OCTOBER 2011 BAD FAITH CASES
BAD FAITH STATUTE DOES NOT INCLUDE COMPENSATORY DAMAGES; COVENANT OF GOOD FAITH AND FAIR DEALING CLAIM NOT DISTINCT FROM CONTRACT CLAIMS (Philadelphia Federal)

In Cummings v. Allstate Insurance Co., the court granted the carrier’s motion to dismiss stemming from a claim that the insured sustained damages to its home and incurred consequential losses from its inability to use the property.  The insured also alleged bad faith and breach of covenant of good faith and fair dealing.

In 2009, the insured’s home flooded, causing its floor to collapse.  The carrier subsequently denied coverage.  In 2010, the insured underwent surgery after falling on the collapsed floor.  While hospitalized, the insured died from cardiac arrest.

Prior to her death, the insured’s son, acting as the named insured, commenced an action against the carrier, alleging damages to the home and consequential damages.  After the insured passed away, her other son was granted letters of administration.  Thereafter, the insured filed an Amended Complaint and the second son, acting as an assignee, filed a similar claim.  The carrier removed to federal court and filed a motion to dismiss.

First, the carrier argued that compensatory damages are not recoverable under statutory bad faith claims.  Specifically, it sought to dismiss Counts II and III of the complaint, which alleged statutory bad faith on behalf of the insured and the assignee, respectively.  The carrier claimed that compensatory damages are not permitted pursuant to the state’s bad faith statute, but only under breach of contract claims generally.  Therefore, only Count I of the complaint, alleging breach of contract bad faith, stated a plausible claim.  The court dismissed Counts II and III as alleged, but granted the insured leave to amend its complaint, and to include a claim for compensatory damages under Count I.

Second, the carrier sought to dismiss the insured’s Count IV, which alleged a cause of action for breach of the covenant of good faith and fair dealing.  According to the carrier, such a claim merges with the common law claim for breach of contract.  The court found that the insured failed to allege a claim upon which relief might be granted because Pennsylvania does not allow an independent cause of action for a breach of the implied duty to act in good faith in this context.  It reasoned that “there is no independent cause of action for a breach of the covenant of good faith and fair dealing – arising in contract – in Pennsylvania because such breach is merely a breach of contract” claim. 

As such, the court held that a “party is generally precluded from maintaining a claim for the breach for the implied duty of good faith and fair dealing separate and distinct from the underlying breach of contract claim.”  The court concluded by granting the insured and the assignee an additional ten days to amend Counts I, II, and III of the complaint.  However, the court dismissed Count IV with prejudice.

Date of Decision:  July 11, 2011

Cummings v. Allstate Insurance Co., No. 11-02691, U.S. District Court for the Eastern District of Pennsylvania, 2011 U.S. Dist. LEXIS 74349 (E.D. Pa. July 11, 2011) (Kelly, J.)

OCTOBER 2011 BAD FAITH CASES
THIRD CIRCUIT AFFIRMS DISMISSAL OF BREACH OF CONTRACT AND BAD FAITH ACTION, RELYING UPON POLICY’S EMPLOYEE EXCLUSION CLAUSE (Third Circuit)

In Brewer v. United States Fire Insurance Company, the Third Circuit heard an appeal from the district court’s dismissal of a breach of contract and bad faith action brought by an assignee of the insured.  The original suit stemmed from a 2006 car accident, during which the assignee, an employee of a delivery company, was injured in an automobile accident caused by the insured, an ambulance driver.  The assignee filed suit and obtained a $250,000 judgment against the insured ambulance driver.  In an effort to avoid execution of the judgment, the insured assigned his claims against the carrier to the injured driver.  At the time of the accident, the policy issued by the carrier named the employers of both individuals, though the companies were separate entities.

Invoking its policy’s employee exclusion clause, the carrier denied coverage.  The policy prohibited coverage for “bodily injury to an employee of the insured arising out of and in the course of employment for the insured.”  The exclusion applied “whether the insured may be liable as an employer or in any other capacity.”  The assignee filed suit to its rights against the carrier, seeking $250,000 in compensatory damages.  It also brought a bad faith claim.  The carrier filed a motion to dismiss, which the district court granted, ruling that the exclusion clause was triggered under the plain language of the policy.

On appeal, the assignee argued that the exclusion is not applicable to her because “(1) the injury is to her (2) the insured seeking coverage is [the ambulance driver, acting as the assignor]; and (3) [the assignee] is not the [assignor’s] employee.”

The appellate court upheld the district court’s ruling that the exclusion applied to the assignee because, under the policy, both the assignee’s and assignor’s employers are insured.  The court reasoned that, “if [the assignee] stands in [the assignor’s] stead and [the assignor] in the first instance is precluded from coverage, then so is [the assignee].”  Therefore, under the plain language of the policy, the assignor is an “employee” that is “insured,” by its employer’s policy.  Since the policy excludes him, it also excludes the assignee, who acted as a potential substitute recipient of the policy.

The assignee also argued that the policy would not be provided for bodily injury to “an employee of the insured against whom a claim or suit is brought, but that since she is not an employee of [the assignor],” the exclusion did not apply to her.

The appellate court disagreed, reiterating the district court’s rationale.  It held that, under the facts as pled, the assignee “suffered bodily injury while acting in the course and scope of her employment by a named insured.”  Since one of the named insureds was the assignee’s employer, the policy’s exclusion clause was triggered, preventing the assignee from stating a plausible claim.  The appellate court therefore also concluded that proceeding to discovery was inappropriate.

The assignee also claimed that the district court erred in dismissing her bad faith claim, contending that the carrier “(1) had a duty to provide coverage; and (2) acted with reckless indifference and conscious disregard in disclaiming coverage based on the exclusion discussed above.”  As the district court ruled, the Third Circuit rejected this claim because the pleadings did not state a proper bad faith claim, since the carrier properly denied coverage on the basis of the exclusion clause.

Date of Decision:  October 3, 2011

Brewer v. United States Fire Insurance Company, No. 10-4748, U.S. Court of Appeals for the Third Circuit, 2011 U.S. App. LEXIS 20072 (3d Cir. Oct. 3, 2011) (Greenaway, J.)

OCTOBER 2011 BAD FAITH CASES
COURT ADDRESSES DISCOVERY ON INSURER’S UIM FILE, INCLUDING PRIVILEGE, WORK PRODUCT, ADVISE OF COUNSEL, LOGS (Western District)

In Craker v. State Farm Mutual Automobile Insurance Company, the court was presented with an insured’s motion to compel discovery and a carrier’s motion to sever and stay a bad faith claim.  The parties were engaged in discovery during the pendency of these motions, which stem from a dispute over $200,000 in alleged underinsured motorist benefits (UIM) arising from a car accident that injured the insured.  The insured party sued the carrier for its benefits after being denied its UIM benefits.  The insured also brought a bad faith claim.  The carrier later removed to federal court.

Discovery was originally to be completed by August, but the insured successfully moved to extend the discovery phase.  The court set December 1, 2011 as the new deadline.  At the same time, the insured also moved to compel discovery relating to its bad faith claim.  The carrier filed a motion to sever and stay the bad faith claim until after the UIM claim was decided.  According to the carrier, it would suffer irreparable harm if forced to disclose its mental impressions and evaluation of the insured’s claim.  Such information, it argued, was only relevant to the bad faith claim and not the UIM litigation.

The court addressed the carrier’s objectives in pushing back discovery on the bad faith claim.  It therefore reasoned that the carrier was not really moving to bifurcate the trial, under Federal Rule 42(b), but to obtain a phased discovery plan under Rule 26.  After identifying “the true issue to be decided,” the court rejected the carrier’s motion to phase discovery.  It so held because such a motion was not mentioned in the parties’ Rule 26(f) Report, used to anticipate necessary disclosures and discovery.

Aside from these procedural difficulties, the court also rejected the carrier’s motion on the merits.  Because postponing discovery on the bad faith claim would delay the resolution of the case, it was inappropriate.  It is inefficient, the court held, to create a new discovery plan after the UIM claim is decided.  Moreover, such a situation would increase costs for the parties and require witnesses to be re-deposed.  The court concluded that the carrier identified no benefit to proceeding as it proposed, other than its own attempt to shield unfavorable evidence.

Furthermore, the court rejected the carrier’s objections that were based on confidentiality grounds.  While the court did acknowledge that some of the discoverable materials were sensitive, it noted that “confidentiality agreements and protective orders” were a more appropriate means of proceeding.

The court also questioned the carrier’s strategy.  It noted that the carrier really wanted the advantage of “favorable rulings made by state court judges in this judicial district regarding the administration of bad faith claims.”  However, the carrier removed the case to federal court and chose its desired venue.  Although a state court may have granted this motion, it was too late to seek a phased discovery plan under the Federal Rules.

The insured’s motion to compel alleged that the carrier failed to adequately respond to its interrogatories.  In opposition, the carrier claimed that the motion was premature, called for a violation of privilege and work product doctrines, sought confidential information, and sought irrelevant information.  The court agreed with the carrier’s first objection, recognizing that the insured failed to meet and confer prior to its filing.  However, the court opted to advise the insured, rather than sanction them.

The court also noted that several of the objections had been discussed by the parties and resolved.  For instance, the carrier provided the insured with several privilege logs and agreed to produce confidential materials subject to entry of a protective order.  As such, the court ordered the carrier to provide a “log explaining its assertions of the attorney-client privilege and the work product doctrine, and that the parties enter into an appropriate protective order to permit the exchange of confidential information.”

The only remaining issue for the court was the insured’s claim that the carrier waived its attorney-client privilege by asserting an advice of counsel defense.  Yet, the insured failed to identify what statements lead to this assumption, prompting the court to reject this claim on the basis that it lacked adequate information.

The court concluded by denying the carrier’s motion to sever and stay, without prejudice, so that it might seek bifurcation of the trial at the post-discovery status conference.  The court also summarized that the insured’s motion to compel has been resolved in some respects due to agreement between the parties, granted in some respects as a result of the denial of the carrier’s motion, and denied as to the advice of counsel issue, without prejudice to the insured’s ability to file a properly supported motion in light of the impending discovery cut-off date.

Date of Decision:  September 29, 2011

Craker v. State Farm Mutual Automobile Insurance Company, No. 11-0225, U.S. District Court for the Western District of Pennsylvania,
2011 U.S. Dist. LEXIS 111862 (W.D. Pa. Sept. 29, 2011) (Lancaster, J.)

OCTOBER 2011 BAD FAITH CASES
COURT TREATS MOTION TO SEVER AND STAY AS A MOTION TO PHASE DISCOVERY; ADDRESSES DISCOVERY ON INSURER’S UIM FILE (Western District)

In Craker v. State Farm Mutual Automobile Insurance Company, the court was presented with an insured’s motion to compel discovery and a carrier’s motion to sever and stay a bad faith claim.  The parties were engaged in discovery during the pendency of these motions, which stem from a dispute over $200,000 in alleged underinsured motorist benefits (UIM) arising from a car accident that injured the insured.  The insured party sued the carrier for its benefits after being denied its UIM benefits.  The insured also brought a bad faith claim.  The carrier later removed to federal court.

Discovery was originally to be completed by August, but the insured successfully moved to extend the discovery phase.  The court set December 1, 2011 as the new deadline.  At the same time, the insured also moved to compel discovery relating to its bad faith claim.  The carrier filed a motion to sever and stay the bad faith claim until after the UIM claim was decided.  According to the carrier, it would suffer irreparable harm if forced to disclose its mental impressions and evaluation of the insured’s claim.  Such information, it argued, was only relevant to the bad faith claim and not the UIM litigation.

The court addressed the carrier’s objectives in pushing back discovery on the bad faith claim.  It therefore reasoned that the carrier was not really moving to bifurcate the trial, under Federal Rule 42(b), but to obtain a phased discovery plan under Rule 26.  After identifying “the true issue to be decided,” the court rejected the carrier’s motion to phase discovery.  It so held because such a motion was not mentioned in the parties’ Rule 26(f) Report, used to anticipate necessary disclosures and discovery.

Aside from these procedural difficulties, the court also rejected the carrier’s motion on the merits.  Because postponing discovery on the bad faith claim would delay the resolution of the case, it was inappropriate.  It is inefficient, the court held, to create a new discovery plan after the UIM claim is decided.  Moreover, such a situation would increase costs for the parties and require witnesses to be re-deposed.  The court concluded that the carrier identified no benefit to proceeding as it proposed, other than its own attempt to shield unfavorable evidence.

Furthermore, the court rejected the carrier’s objections that were based on confidentiality grounds.  While the court did acknowledge that some of the discoverable materials were sensitive, it noted that “confidentiality agreements and protective orders” were a more appropriate means of proceeding.

The court also questioned the carrier’s strategy.  It noted that the carrier really wanted the advantage of “favorable rulings made by state court judges in this judicial district regarding the administration of bad faith claims.”  However, the carrier removed the case to federal court and chose its desired venue.  Although a state court may have granted this motion, it was too late to seek a phased discovery plan under the Federal Rules.

The insured’s motion to compel alleged that the carrier failed to adequately respond to its interrogatories.  In opposition, the carrier claimed that the motion was premature, called for a violation of privilege and work product doctrines, sought confidential information, and sought irrelevant information.  The court agreed with the carrier’s first objection, recognizing that the insured failed to meet and confer prior to its filing.  However, the court opted to advise the insured, rather than sanction them.

The court also noted that several of the objections had been discussed by the parties and resolved.  For instance, the carrier provided the insured with several privilege logs and agreed to produce confidential materials subject to entry of a protective order.  As such, the court ordered the carrier to provide a “log explaining its assertions of the attorney-client privilege and the work product doctrine, and that the parties enter into an appropriate protective order to permit the exchange of confidential information.”

The only remaining issue for the court was the insured’s claim that the carrier waived its attorney-client privilege by asserting an advice of counsel defense.  Yet, the insured failed to identify what statements lead to this assumption, prompting the court to reject this claim on the basis that it lacked adequate information.

The court concluded by denying the carrier’s motion to sever and stay, without prejudice, so that it might seek bifurcation of the trial at the post-discovery status conference.  The court also summarized that the insured’s motion to compel has been resolved in some respects due to agreement between the parties, granted in some respects as a result of the denial of the carrier’s motion, and denied as to the advice of counsel issue, without prejudice to the insured’s ability to file a properly supported motion in light of the impending discovery cut-off date.

Date fo Decision:  September 29, 2011

Craker v. State Farm Mutual Automobile Insurance Company, No. 11-0225, U.S. District Court for the Western District of Pennsylvania,
2011 U.S. Dist. LEXIS 111862 (W.D. Pa. Sept. 29, 2011) (Lancaster, J.)

OCTOBER 2011 BAD FAITH CASES APPEALS COURT UPHOLDS DAMAGES AWARD(Third Circuit)

In Spector v. Fireman’s Fund Insurance Co., the Third Circuit addressed the carrier’s appeal stemming from the district court’s award of damages to the insured.  The carrier had earlier won dismissal of the bad faith claim, as discussed in an earlier blog entry, which was not appealed by the insured.

In 2000, the insured purchased a homeowner policy from the carrier.  The policy excluded “water damage,” unless such damage “is sudden and accidental” or “hidden and concealed for a period of time.”  The policy required that “a hidden or concealed loss must be reported to us no later than 30 days after the date appreciable loss…is detected or should have been detected.”

In 2006, the paint around the insured’s windows began peeling.  The insured contacted a stucco inspector who suspected high moisture levels in the home.  The inspector advised the insured that it would need to deconstruct the walls in order to know the true status of the home’s substrate.

The insured consulted a plastering company, who advised them that to discover the problems existing behind the home’s stucco, they had to expose the space between the stucco and the drywall.  The company also advised the insured that their roof had been incorrectly installed. Based on this advice, the insured redid their roof and replaced their windows.  After that process, the plastering company removed the stucco for inspection.  In November 2007, the insured learned the extent of the water damage to their home.

The insured filed a claim with the carrier in December 2007, interpreting the notice provision to mean that, where damage was hidden, each new discovery of damage began a new thirty-day cycle.  An adjuster for the carrier denied the insured’s claim based on the policy exclusion for defective construction and failure to comply with the thirty-day notice provision for water damage. 

The insured subsequently filed a claim in Delaware County, alleging breach of contract, bad faith, and violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law.  The carrier removed to federal court, which denied summary judgment in favor of the carrier, held a bench trial, and awarded the insured $104,432 in damages.  The court also awarded attorney’s fees and interest.

On appeal, the carrier first contested the denial of summary judgment, claiming that disputes as to material fact regarding whether the insured met its burden of showing that the amount of costs attributable to home repair satisfied the policy’s water damage exception.  The appellate court examined copies of checks from November to December 2007, made out to the plastering company, which went towards payment of work related to hidden water damage discovered after removal of the external stucco.  Concurring with the district court, the appellate court found that genuine disputes of material fact existed as to which costs were attributable to home repair for defects versus water damage.

Second, the carrier argued that the insured failed to meet its burden of proving damages under the policy.  Under a highly deferential standard of review, the appellate court agreed that the insured adequately proved its loss in the amount of $104,432.50 for hidden water damage.  Specifically, the appellate court affirmed the district court’s finding that testimony from the insured and the plastering company supported the finding that two checks were issued for stuccowork related to the water damage.

Lastly, the carrier claimed that the insured failed to provide notice, as required in their insurance contract, and that the district court incorrectly interpreted the notice provision.  Specifically, the carrier argues that the policy’s notice provision is not a “rolling notice” policy and that the insured was obligated to give notice sooner than was done in order to be covered under the policy.

The Third Circuit held that, based on the plain language of the policy, the nature of the hidden damage, and the inspections that the insured had on the house, there cannot be a “definite and firm conviction that the District Court made a mistake.”  Until the stucco was completely off and the damage could be clearly seen, it was not possible for the insured to appreciate the underlying damage.

Although the carrier argued that expert reports concerning water damage should have triggered earlier notice, the appellate court disagreed, finding that a cancelled check made out to the plastering company on November 5, 2007 corroborates the notion that the water damage was discovered during the proper timeframe.

As such, the appellate court affirmed the damages award of the district court.  However, the appellate court overturned the insured’s $35,000 award of attorney’s fees, as the policy did not include an attorney’s fee provision, a point that the insured conceded on appeal.

Spector v. Fireman’s Fund Insurance Co., No. 10-4265, U.S. Court of Appeals for the Third Circuit, 2011 U.S. App. LEXIS 19843 (3d Cir. Sept 22, 2011) (Greenaway, J.)

SEPTEMBER 2011 BAD FAITH CASES
COURT REJECTS CARRIER’S MOTION TO DISMISS BECAUSE ITS DENIAL OF DELAY DAMAGES WAS IMPROPER (Philadelphia Federal)

In Heebner v. Nationwide Insurance Enterprise, the court was faced with a carrier’s motion to dismiss, hinging upon whether insurance coverage for compensatory damages, provided under an uninsured/underinsured (UM/UIM) policy, includes delay damages.

The case stems from a car accident that occurred in 1997 between the insured and a UM/UIM motorist.  The insured sued the motorist and, in June 2008, was awarded $133,201.96.  The award was allocated as $85,000.00 for compensatory damages, and $48,201.96 for delay damages pursuant to Pa. R.C.P. 238, or Rule 238.  However, the carrier, acting pursuant to the insured’s UM/UIM policy, only paid the insured $85,000.00 in compensatory damages, refusing to pay the $48,201.96 in delay damages on grounds that it is not liable for such damages under the policy.  In response, the insured filed a motion for declaratory judgment in state court.  The carrier removed to federal court and filed a motion to dismiss.

The insured first pointed to the language of Rule 238, which states that delay damages shall be “added to the amount of compensatory damages…and shall become part of the verdict, decision or award.”  The insured claimed that, under its policy, the carrier “will pay damages that exceed such total amount” of a UM/UIM driver’s coverage.  As such, the insured argued that the carrier is responsible to pay all damages, including delay damages.  The insured also alleged that its policy is ambiguous as to whether delay damages are “compensatory.”  The second count of the insured’s complaint argues that the carrier acted in bad faith by refusing to pay the delay damages award.

In its motion to dismiss, the carrier asserted that, because Rule 238 states that delay damages are “added to the amount of compensatory damages,” they must be separate from compensatory damages.  Furthermore, the carrier claimed that the primary purpose of delay damages is only to quicken settlements and lessen the burden on courts, distinguishing them from compensatory damages.  Lastly, the carrier argued that the policy is not ambiguous and that the absence of coverage for delay damages reflects an intent not to cover these types of damages.

First, the court reasoned that, if the carrier desired not to provide coverage for delay damages, it could have easily done so.  The carrier chose not to specifically exclude delay damages, but did specifically exclude other types of damages from the policy, including “punitive or exemplary damages.”

Second, the court held that, under Pennsylvania law, delay damages are “merely an extension of the compensatory damages necessary to make a plaintiff whole.”  While the court did recognize, as the carrier argued, that delay damages under Rule 238 are meant to encourage quicker settlements, the rule’s main purpose is to fully compensate a victim for its loss.  The court denied the carrier’s motion to dismiss on these issues, finding that the insured stated a plausible claim under Pennsylvania law.

However, the court dismissed the insured’s bad faith claim because it did not allege facts sufficient to prove that the carrier acted in bad faith by refusing to cover delay damages.  According to facts alleged by the insured, the court concluded, the carrier’s interpretation of the policy was not so unreasonable that it amounted to bad faith.

Date of Decision: September 28, 2011

Heebner v. Nationwide Insurance Enterprise, No. 10-2381, U.S. District Court for the Eastern District of Pennsylvania, 2011 U.S. Dist. LEXIS 111382, 818 F. Supp. 2d 853 (E.D. Pa. Sept. 28, 2011) (Goldberg, J.)