Yearly Archive for 2012

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MAY 2012 BAD FAITH CASES: BAD FAITH CLAIM DISMISSED WITHOUT PREJUDICE, SUGGESTING IF INSURED IS AWARDED DAMAGES FOR BREACH OF CONTRACT, SHE IS UNLIKELY HAVE OTHERS CLAIMS AGAINST THE CARRIER (Philadelphia Federal)

In Cobb v. State Farm Ins. Co., the court heard a carrier’s motion to dismiss the insured’s amended complaint. The complaint alleged breach of contract and bad faith against the carrier. The breach of contract count actually detailed a claim for violation of the carrier’s covenant of good faith and fair dealing, prompting the court to permit the contractual allegation to proceed only as a breach of contract claim. With respect to the second count, the court dismissed the insured’s bad faith claim without prejudice, permitting the insured to amend its conclusory allegations and submit a second amended complaint.
However, the court stated that under Pennsylvania law, statutory bad faith claims are unlikely to be successful where an insured party succeeds in its breach of contract claim. In this case, the court stated that the insured’s statutory bad faith claims were premature, suggesting that the insured may want to wait until the resolution of the breach of contract suit before pursuing its bad faith claim, though the court left it open for the plaintiff to attempt to plead a statutory bad faith claim in an amended complaint if it could meet the strictures of Twombly/Iqbal.
Date of Decision: April 20, 2012
Cobb v. State Farm Ins. Co., No. 11-7383, 2012 U.S. Dist. LEXIS 55651, U.S. District Court for the Eastern District of Pennsylvania (E.D. Pa. Apr. 20, 2012) (Baylson, J.).

MAY 2012 BAD FAITH CASES: CONTRACT BAD FAITH CLAIM DISMISSSED, BUT STATUTORY CLAIM STILL VIABLE, AND COURT PERMITS IMPLIED WARRANTY CLAIMS (Philadelphia Federal)

In Nova Financial Holdings, Inc. v. Bancinsure, Inc., the court heard a carrier’s motion to dismiss several allegations related to its denial of the insured’s claim. The suit stemmed from a series of illegal transactions undertaken by the insured’s employees in 2009 and 2010. The insured argued that its policy with the carrier covered the actions of its employees. The policy stated that the carrier would cover illegal acts committed with “the manifest intent to (a) cause the [insured] to sustain such loss, or (b) to obtain improper financial benefit for the Employee.”
After the carrier denied coverage for the unlawful acts of the insured’s employees, the insured sued, seeking declaratory relief and alleging breach of contract, breach of good faith and fair dealing, statutory bad faith, and breach of implied warranty. The carrier moved to dismiss the breach of good faith and fair dealing, declaratory judgment, and breach of implied warranty claims.
The court first turned to the insured’s breach of good faith and fair dealing claim. It reasoned that the claim should be dismissed because the insured’s breach of contract action precludes a separate claim emanating from the duty of good faith and fair dealing. Such a claim is essentially the same as a breach of contract suit. The court also rejected the insured’s argument that Pennsylvania’s bad faith statute creates an affirmative duty of good faith and fair dealing. Such a claim should be dismissed, the court held, because the bad faith statute is actually proscriptive in nature. However, even absent the ability to expand on the bad faith statute, the insured could still pursue the statutory bad faith claim within its proscriptive limitations.
The court also reasoned that the insured’s request for declaratory judgment should be denied. The court held that the insured’s claim was duplicative of its breach of contract claim. The court also stated that the insured can still attain full relief through its breach of contract claim because the dismissal of a declaratory judgment does not force the moving party to suffer any prejudice.
With respect to the insured’s implied warranty claims, the court held that the party stated viable “common law” claims and ruled against the carrier’s motion. The insured pleaded claims for breaches of the implied warranty of fitness for a particular purpose and breach of the implied warranty of merchantability. Since Pennsylvania has recognized implied warranty claims outside of the UCC, the court did not have to address whether the policy was a good.
Date of Decision: April 17, 2012
Nova Financial Holdings, Inc. v. Bancinsure, Inc., No. 11-07840, 2012 U.S. Dist. LEXIS 53800, U.S. District Court for the Eastern District of Pennsylvania, at *1 (E.D. Pa. Apr. 17, 2012) (Kelly, J.).

MAY 2012 BAD FAITH CASES: COURT DISMISSES BAD FAITH COMPLAINT AS CONCLUSORY, ABSENT FACTUAL ALLEGATIONS INDICATING A LACK OF REASONABLE BASIS FOR CLAIM DENIAL (Philadelphia Federal)

In Miracle Temple Christian Academy v. Church Mutual Insurance Co., the court heard a carrier’s motion to dismiss the complaint of a religious institution that brought suit for breach of contract, bad faith, and common law fraud. The case stems from wind and water damage sustained by the insured party in early 2010. When the insured’s general commercial liability carrier alerted the insured that the full amount of its losses were not fully covered by the policy, the insured brought suit.
Examining the insured’s complaint, the court reasoned that allegations such as “Defendant has refused to provide coverage pursuant to said claim of damages” are conclusory legal statements that fail to support a claim of bad faith. The court dismissed the insured’s complaint because it failed to provide sufficient factual allegations supporting the carrier’s alleged lack of reasonable basis for denying the full amount of the insured’s claim.
The court also dismissed the insured’s common law fraud claim, citing the party’s bare legal conclusions as insufficient to support a viable claim.
Date of Decision: April 16, 2012
Miracle Temple Christian Academy v. Church Mutual Insurance Co., No. 12-00995, 2012 U.S. Dist. LEXIS 53017, U.S. District Court for the Eastern District of Pennsylvania (E.D. Pa. Apr. 16, 2012) (Buckwalter, J.).

MAY 2012 BAD FAITH CASES: BAD FAITH CLAIM CANNOT BE RAISED AGAINST THIRD PARTY ADMINISTRATOR WHICH DID NOT TAKE ON ROLE OF AN INSURER (Philadelphia Federal)

In McLaren v. AIG Domestic Claims, Inc., the court dismissed an insured’s bad faith and breach of contract claims. The suit arose from an underlying negligence claim against the insured party, a nurse. She was insured by National Union Fire Insurance Company (NUFI). Although insured by NUFI, the claim against her was administered by AIG, a wholly owned subsidiary of NUFI.
AIG appointed her with defense counsel, and communications with NUFI went through AIG. The underlying case proceeded through a four-week trial, which resulted in a mistrial. The case was settled. Prior to settlement, she had signed a consent to settle, which gave AIG authority to settle up to policy limit; but she claimed this consent was coerced and she later withdrew the consent. She notified her personal legal counsel that she would refuse to consent to a settlement and that counsel likewise gave notice that the consent was withdrawn. However, settlement negotiations continued post-trial to at least some degree, and the plaintiffs in the negligence action took the position that they accepted a purported settlement offer from appointed defense counsel, which was later opposed by that counsel as well. The plaintiff moved to enforce and the state court enforced the settlement against the insured.
The insured/plaintiff claimed that the report of the settlement caused her harm, and she brought this suit. It included among other things a bad faith claim against AIG, whom she claimed she always believed to be her insurer. She claimed that AIG acted in bad faith and breached the terms of its policy by agreeing to an unauthorized settlement. She claimed that the act was not in her best interested and that in settling AIG breached its duty of good faith and fair dealing. She also alleged that AIG knew or recklessly disregarded the fact that there was no reasonable basis to settle for her $500,000 policy limits. Moreover, she claims that as a result of the settlement, her professional reputation as a midwife is forever tarnished.
AIG was not her insurer, and she claimed she was still entitled to relief under Pennsylvania’s bad faith statute because AIG was NUFI’s “alter ego”, was its agent and/or was her de factor insurer. However, her only contract was with NUFI as an insurer, and the court rejected all of these arguments. Thus, AIG was not an insurer in this matter and as such could not be subject to a statutory bad faith claim. Specifically, the court held that AIG, a non-party to the insurance contract who administered the claim, did not meet the criteria for being deemed an insurer. It did not issue an insurance policy or collect premiums, or assume certain risks and contractual obligations in exchange for those premiums. Concomitantly the court found in the absence of a privity of contract there was no basis for a breach of contract claim; and that the agent of a disclosed principal could not be sued for the breach of a contract between that principal and another with whom it had contracted.
Date of Decision: March 30, 2012
McLaren v. AIG Domestic Claims, Inc., No. 10-cv-04224, 2012 U.S. Dist. LEXIS 44808, U.S. District Court for the Eastern District of Pennsylvania (E.D. Pa. Mar. 30, 2012)

MAY 2012 BAD FAITH CASES: COURT GRANTS SUMMARY JUDGMENT FOR CARRIER WHERE “INHERENT RISK” EXCLUSION APPLIED TO FURNACE CONTAINING DEFECT KNOWN TO INSURED (Western District)

In U.S. Fire Ins. Co. v. Kelman Bottles, the court heard cross-summary judgment motions between an insured glass-maker and its two carriers to determine the scope of coverage. While the insured asserted breach of contract claims against both carriers, it alleged bad faith conduct against its “all-risk” insurer for denying coverage.
The insured is an industrial glass-maker who operates a large furnace for melting glass. The company needed to replace the furnace every nine years and last replaced it in January 2004. In 2009, the furnace leaked and the insured replaced portions of the unit, but not the entire thing. In March 2011, there was a severe leak in the furnace that destroyed some of the insured’s property. This blog will only discuss the bad faith claim against the insured’s “all-risk” carrier, rather than the insured’s “equipment breakdown” carrier, because the latter only covered “sudden and accidental” breakdowns.
With respect to the all-risk insurer, the insured alleged breach of contract and bad faith for the carrier’s denial of coverage. However, the insured’s policy contained an “inherent vice exclusion,” which prevented coverage in this case. The court reasoned that, after the loss, the insured admitted that molten glass was an inherent risk to operating the furnace. As such, the insured’s breach of contract claim failed.
However, the insured argued that it should be covered as a “molten material loss” under the policy. The court disagreed, holding that the “molten material loss” clause is predicated upon the loss already being a covered loss under its policy. In this case, the escape of molten glass was an inherent risk and, as noted, the damage caused by the escape of molten glass is excluded under the policy’s inherent risk exception.
The insured also attempted to argue that it was covered via Pennsylvania’s adoption of the “Current Causation Doctrine,” which means that if two or more causes concurrently caused the insured’s loss and one of the causes is covered, the carrier must provide coverage. However, the court rejected this theory, holding that the only way coverage would be available is if “the inherent risk of operating a furnace containing molten glass [was] the proximate cause of the loss.”
Therefore, the court also rejected the insured’s bad faith claim – in the absence of a viable breach of contract suit, the insured was unable to maintain such an allegation.
Date of Decision: April 5, 2012
United States Fire Ins. Co. v. Kelman Bottles, No. 11cv0891, 2012 U.S. Dist. LEXIS 48684, U.S. District Court for the Western District of Pennsylvania (W.D. Pa. Apr. 5, 2012) (Schwab, J.)

MAY 2012 BAD FAITH CASES: COURT REJECTS BURFORD ABSENTION AS BASIS FOR REMAND IN LIGHT OF CLAIMS SEEKING MONEY DAMAGES (Philadelphia Federal)

In Borough of Catasauqua v. Darwin Nat’l Assur. Co., the Eastern District of Pennsylvania court addressed an insured borough’s motion to remand, motion for declaratory judgment of rights under its policy, and allegations of bad faith against its carrier. The case stems from underlying copyright infringement litigation between an engineering firm and its builder who were involved in construction on the insured borough’s property. After the plaintiff engineering firm in that case named the insured borough as a necessary party under Federal Rule of Civil Procedure 19, the borough sought a defense from its carrier.
After the carrier refused, the insured sought a declaration of its rights under its policy and alleged bad faith claims against the carrier. The insured also sought to remand the proceedings, which the carrier had removed to federal court. The borough’s argument for remand was that Burford Abstention was appropriate – under such a theory federal courts will remand if a case “involves difficult questions of state law impacting on the state’s public policy.” While the doctrine itself is beyond the scope of this blog, it is worth noting that the court rejected the insured’s argument that a Pennsylvania state court should hear the insured’s bad faith claim under such a theory.
However, the court declined to remand the action based upon the type of relief sought. It ruled that even if Burford Abstention may otherwise be proper, the case would not be remanded because the insured sought money damages rather than equitable relief, which is the only proper scenario for the Burford remand.
Date of Decision: March 29, 2012
Borough of Catasauqua v. Darwin Nat’l Assur. Co., No. 11-cv-03855, 2012 U.S. Dist. LEXIS 46232, U.S. District Court for the Eastern District of P.A. (E.D. Pa. Mar. 29, 2012) (Gardner, J.)

MAY 2012 BAD FAITH CASES: COURT CAN CONSIDER OTHER STATUTES IN FINDING BAD FAITH, CLAIMS HANDLING DELAYS IN BENEFIT CANNOT BE OBVIATED BY LATER PAYMENT, MANUAL ON LITIGATION AND LEGAL FEES ADMISSIBLE AND COURT NEEDS TO CONDUCT IN CAMERA REVIEW (Superior Court)

In Berg v. Nationwide Mut. Ins. Co., the Superior Court reversed the trial court’s grant of a directed verdict to the carrier on the insured’s bad faith claim. This was a first party claim against an insurer under Pennsylvania’s bad faith statute, among other claims.
The suit stemmed from faulty repairs to the insured automobile conducted by the carrier’s preferred repair facility. There was a bifurcated trial, the first part being Unfair Trade Practices and Consumer Protection Law (“UTPCPL”) claims before a jury, and the second the issue of treble damages under the UTPCPL and statutory bad (42 Pa.C.S. § 8371) before the judge. The jury found for the insured on the UTPCPL claims, and for the auto repairer and the carrier on the fraud claims and conspiracy claims. The jury awarded $1,925 against the car repair shop and $295 against the insurer.
In the second phase, after a 4 day trial, the trial judge granted a directed verdict to the carrier on statutory bad faith claim and the insured appealed. The crux of the insured’s claim was that the carrier acted in bad faith by “interfering with a total loss appraisal on their vehicle and later returning it to them despite known structural deficiencies that left it in a potentially dangerous condition.” Part of the trial court’s rationale for declining to find for the insured was that such a claim does not “arise under an insurance policy.” The lower court also found that there was no ultimate denial of a benefit. The Superior Court specifically found that such a claim does in fact arise under the insured’s policy with respect to its contractual duties, including good fair and fair dealing, and the carrier’s failure to effectuate a “prompt, fair, and equitable” settlement in the face of a clear statutory and contractual duty.
The Superior Court also found that the violation of other statutes can be used as evidence of violation of the bad faith statute because bad faith conduct may be “defined by reference to violations of statutes related to insurance practices.” Thus, in this case, the jury’s finding that the carrier violated Pennsylvania’s UTPCPL should have been considered as evidence of bad faith, and weighed under the clear and convincing evidence standard applicable to the bad faith statute, rather than the judge ruling on the issue as a matter of law. The Superior Court relied upon its earlier decision in Romano v. Nationwide Mutual Fire Ins. Co., 646 A.2d 1228 (Pa. Super. 1994), which earlier case permitted consideration of violations of Pennsylvania’s Unfair Insurance Practices Act (UIPA) as evidence of bad faith, stating that “a plaintiff seeking damages for an insurer’s bad faith conduct under section 8371 may, in addition to other available methods, attempt to prove bad faith by demonstrating that the insurer has violated one or more provisions of related Pennsylvania insurance statutes or regulations, even if those provisions do not provide for private rights of action.”
The Superior Court also cited additional factors to consider. The carrier had the insured’s car sent to a different repair shop after the initial choice found that the insured’s car could not be repaired. Further, the manner in which the carrier discharged its duty of good faith during the pendency of the carrier’s insurance claim was subject to a bad faith analysis because of allegations that it was the carrier’s practice to vigorously defend small claims regardless of merits to discourage others from bringing suit. In this case, the trial court would not admit evidence that the insurer paid over $900,000 to defend this claim, which the plaintiff argued in the context of being part of the litigation defense strategy in allegedly deterring the bringing of small claims. The appellate court permitted evidence in connection with the carrier’s legal billing in the case, focusing on the concept of claims handling, and tying the payment amount to the claims handling.
Further, the appellate court found that the lower court erred in not doing an in camera review on documents that were alleged to be privileged and had been redacted.
Date of Decision: April 17, 2012
Berg v. Nationwide Mut. Ins. Co., No. 12-MDA-2008, 2012 PA Super 88, Superior Court of Pennsylvania (Pa. Super. Ct. Apr. 17, 2012) (Donohue, J.)

MAY 2012 BAD FAITH CASES: COURT DENIES INSURED’S MOTION TO REMAND BASED ON REQUEST TO ABSTAIN FROM HEARING DECLARATORY JUDGMENT (Western District)

In Ackerman v. Geico General Insurance Company, the court heard the insured’s petition for remand after its carrier removed a declaratory judgment action to federal court. The case arose from a 2008 car accident during which the insured was serious injured. In January 2011, the insured allegedly requested that the carrier pay $100,000 in underinsured motorist coverage provided in the insured’s automobile policy. After the insured filed suit, seeking a declaration of coverage under its policy and alleging breach of contract and bad faith, the carrier removed to federal court.
The insured subsequently moved to remand back to state court, arguing that this was a declaratory judgment case involving only issues of state law pertaining to the interpretation of its policy with the carrier. However, the court disagreed, finding that, although the present action did not involve a federal question, it was properly removed on the basis of diversity. The case was in the nature of a breach of contract claim for money damages, since there was no disputed policy language at issue, and there was no pending parallel state court action that was going to determine underlying issues and rights.
Date of Decision: April 19, 2012
Ackerman v. GEICO Gen. Ins. Co., No. 2:12-cv-00005, 2012 U.S. Dist. LEXIS 54622, U.S. District Court for the Western District of Pennsylvania (W.D. Pa. Apr. 19, 2012) (Hornack, J.).

MAY 2012 BAD FAITH CASES: COURT REMANDS FOR LACK OF JURISDICTION ON BASIS THAT CLAIMS CANNOT BE AGGREGATED AND CONCERN WITH A “REMOVE AND DISMISS” APPROACH BY THE CARRIER (Philadelphia Federal)

In Cruz v. State Farm Insurance Company, the court denied the carrier’s motion to dismiss and remanded the insureds’ bad faith claims to state court. The case was initially filed in Lehigh County’s Court of Common Pleas as a suit for underinsured motorist benefits by two accident victims insured by the carrier. The carrier then removed the action to federal court on the basis of diversity jurisdiction, alleging that the insured’s punitive damage claims for bad faith would bring the total claims above the jurisdictional requirement of $75,000.
In its original petition for removal, the carrier alleged that each insured party sought $50,000 and punitive damages, contending that this amount in controversy exceeds the jurisdictional requirement of $75,000.00. The court recognized that this is an incorrect understanding of the law, because two separate claims by two distinct plaintiffs may not be aggregated for jurisdictional purposes. However, the court also noted that the carrier has been inconsistent – first they used the projected punitive damage award as the basis for removal, and then second sought to dismiss the suit for damages as baseless. The court rejected these so-called “remove-and-dismiss” tactics and ordered the case to be remanded back to state court.
Date of Decision: April 19, 2012
Cruz v. State Farm Ins. Co., NO. 12-cv-1629, 2012 U.S. Dist. LEXIS 55157, United States District Court for the Eastern District of Pennsylvania (E.D. Pa. Apr. 19, 2012) (Davis, J.).

MAY 2012 BAD FAITH CASES: COURT RULES THAT BAD FAITH CLAIM MAY NOT BE PREDICATED UPON CARRIER’S CONDUCT IN DRAFTING AN INSURANCE POLICY, BUT REQUIRES DENIAL OF BENEFITS AFTER ISSUANCE OF THE POLICY (Middle District)

In Sewell v. Liberty Life Insurance Company, the court heard a motion to file an amended complaint by the executrix of the insured’s estate. The case arose from an accidental house fire that killed the insured party, prompting his estate to file suit when the carrier denied benefits under the insured’s accidental death insurance policy. The carrier denied benefits because the insured party was allegedly under the influence of an intoxicant at the time of his death.
An exclusion in the insured’s life insurance policy stated that the carrier “shall not be liable for any loss sustained . . . in consequence of the insured’s being intoxicated . . . unless administered on the advice of a physician.”
In the instant action, the executrix of the insured’s estate sought to amend her original complaint to allege bad faith. Specifically, she sought leave to amend her complaint to allege that the carrier acted in bad faith because the terms of her son’s policy were less favorable to him than they were to the carrier. In response, the carrier argued that leave should be denied on the basis that the proposed amendment would be futile. Because the executrix’s proposed bad faith claim was premised upon the carrier’s conduct in drafting the insurance policy, as opposed to the unreasonable denial of benefits, the carrier defended that the proposed amendment should be denied as futile.
Opposing this claim, the estate asserted that Pennsylvania’s bad faith statute encompasses provisions that may be included in the policy and that her son’s policy contained provisions that were overly broad, amounting to statutory bad faith. However, the court disagreed with the insured’s estate, reasoning that leave to amend would be futile because “the essence of a bad faith claim [is] the unreasonable and intentional (or reckless) denial of benefits.”
The court relied upon a recent Eastern District of Pennsylvania decision, Mitch’s Auto Service v. State Automobile, where the court stated that bad faith claims pertaining to “the drafting of policy language itself [are] . . . not actionable.” According to Judge Robreno, who authored that opinion, some courts applying Pennsylvania law have extended bad faith beyond the denial of claims, but such cases all involved “bad faith claims related to specific conduct of the insurer following the issuance of a policy.”
Therefore, the court denied the estate’s motion for leave to amend its complaint because the proposed allegations do not set forth that the carrier acted in bad faith regarding its compliance with the terms of the policy as written. Instead, the estate merely raised a dispute over the provisions of the policy itself, and whether they violated Pennsylvania law. As such, the court found for the carrier, ruling that leave to amend would be futile.
Date of Decision: April 25, 2012
Sewell v. Liberty Life Ins. Co., NO. 3:11-01721, 2012 U.S. Dist. LEXIS 57801, United States District Court for the Middle District of Pennsylvania (M.D. Pa. Apr. 25, 2012) (Caputo, J.)