Monthly Archive for July, 2013

JULY 2013 BAD FAITH CASES: SUPERIOR COURT ISSUES OPINION CREATING NEW STANDARD FOR RESERVATION OF RIGHTS LETTERS (Superior Court)

THIS DECISION WAS REVERSED BY THE PENNSYLVANIA SUPREME COURT ON JULY 21, 2015.

In Babcock & Wilcox Co. v. Am. Nuclear Insurers & Mut. Atomic Energy Liab. Underwriters, the Pennsylvania Superior Court created new law by holding an insured may decline an insurer’s defense tendered under a reservation of rights and later seek to be indemnified for any settlement and defense costs deemed fair, reasonable, and non-collusive.

This case stems from over 300 underlying claims alleging personal injury and property damage from radioactive emissions at two nuclear fuel processing facilities owned by Babcock & Wilcox and its predecessor Atlantic Richfield Company (collectively “B&W”). Beginning in March 1958, American Nuclear Insurers and Mutual Atomic Energy Liability (collectively “ANI”) provided coverage to B&W, with limits beginning at $3 million and increasing to $160 million per facility as of February 1979.

In 1998, the district court tried eight “test cases,” with the jury returning verdicts in favor of all eight plaintiffs and an aggregate of over $36 million in damages. The trial court subsequently granted a motion for a new trial based on evidentiary errors made in the test case trials. While the new trials were pending, ANI filed a declaratory judgment action in the Court of Common Pleas in Allegheny County against B&W. Before the court ruled on the declaratory judgment action, B&W reached a settlement agreement with all 300-plus plaintiffs and provided the agreed upon $80 million in settlement funds. ANI opposed the settlement.

Following the settlement, B&W sought reimbursement for the $80 million paid in settlement funds as well as counsel fees. ANI resisted, claiming it had no obligation to make any payment because B&W violated the consent to settlement clauses in the insurance policies. In trying to resolve this dispute, an issue regarding the appropriate standard to apply in determining ANI’s insurance coverage obligations arose. The trial court determined the Cowden standard should apply, requiring B&W to plead and prove the four-part test to be entitled to reimbursement.

The litigation progressed as expected until two years later when the trial court issued a new memorandum and order instructing the standard described in Alfiero v. Berks Mutual Leasing Co., 500 A.2d 169 (Pa. Super. 1985) be used in the pending trial. Despite previously being reserved for cases where a defendant sought indemnification for settlement funds following a bad faith action by the insurer, under the Alfiero standard, B&W would be entitled to reimbursement “if the settlement was fair, reasonable, and non-collusive.”

The Babcock trial court chose to break precedent and apply the Alfiero standard because it felt “there was no principled distinction between a case in which an insurer provides a defense subject to a reservation of rights… and a case where the insurer denies both defense and coverage.” The trial court further opined, “the insurance company should not be the sole decision maker where there is a possibility that only the insured’s interests will be affected by the outcome of the underlying litigation,” as is the circumstance when a defense is tendered under a reservation of rights. Id. Following this determination, the court directed the parties to trial to determine whether the $80 million settlement entered into by B&W was “fair and reasonable.” The jury determined that the settlement was fair, reasonable, and non-collusive, and the trial court entered an order reflecting the same.

ANI appealed the order, presenting a single issue to the Superior Court:

“Whether ANI had the right to deny coverage for B&W’s unauthorized $80 million payments to settle the [underlying] Action where: (1) the ANI Policy, which had combined limits of $320 million, unambiguously afforded ANI the right to control settlement and exclude coverage for unauthorized payments; (2) ANI was fully performing its policy obligations by funding B&W’s $40 million-plus defense in the underlying Action; and (3) ANI’s decision to continue defending the [underlying] Action comported with the Pennsylvania Supreme Court’s decision in Cowden.”

On appeal, ANI contended that by adopting Alfiero as the appropriate standard, the trial court had effectively adopted the standard articulated in United Services Auto. Ass’n v. Morris, 741 P.2d 246 (Az. 1987), and its progeny. In Morris, the Arizona Supreme Court held when an insurer tenders a defense under a reservation of rights it “[does] not breach any of its policy obligations” but “neither [does] it accept full responsibility for the insured’s liability exposure.” As such, it held “the cooperation clause prohibition against settling without the insurer’s consent forbids an insured from settling only claims for which the insurer unconditionally assumes liability under the policy… The insurer’s reservation of the privilege to deny the duty to pay relinquishes to the insured control of the litigation, almost as if the insured had objected to being defended under a reservation.” The Superior Court felt this mischaracterized the trial court’s ruling. Furthermore, such a ruling would be incongruous with Pennsylvania’s contract law because the Morris court found “the insurer’s defense with a reservation did not constitute a breach of contract,” yet still “relieved the insured of its own corresponding contractual duty.” Instead, the Superior Court chose to rely on Taylor v. Safeco Insurance Company, 361 So.2d 743 (Fla. Ct. App. 1978). In Taylor, the insurer tendered its defense under a reservation of rights, then withdrew its defense, only to retender the defense at trial, again under a reservation of rights. The insured rejected the defense, and, without counsel, consented to “a substantial judgment, assigning its right to seek reimbursement from its insurer to the plaintiff in exchange for a release from all personal liability for the judgment.” When the plaintiff sought reimbursement, the trial court granted the insurer summary judgment based on the insured’s failure to comply with the consent to settlement clause of the policy. The appeals court reversed that holding, finding “because the insured had rejected the insurer’s defense… if coverage were established, the insurer would be obligated to indemnify the insured for the amount of settlement up to the policy limit if the settlement was “reasonable” and was not entered into “in bad faith, fraudulently, collusively, or without any effort to minimize his liability.”

Following the Taylor line of case law, Pennsylvania’s Superior Court held:

“When an insurer tenders a defense subject to a reservation, the insured may choose either of two options. It may accept the defense, in which event it remains unqualifiedly bound to the terms of the consent to settlement provision of the underlying policy. Should the insured choose this option, the insurer retains full control of the litigation, consistently with the policy’s terms. In that event, the insured’s sole protection against any injuries arising from the insurer’s conduct of the defense lies in the bad faith standard articulated in Cowden.

Alternatively, the insured may decline the insurer’s tender of a qualified defense and furnish its own defense, either pro se or through independent counsel retained at the insured’s expense. In this event, the insured retains full control of its defense, including the option of settling the underlying claim under terms it believes best. Should the insured select this path, and should coverage be found, the insured may recover from the insurer and the insured’s defense costs and the costs of settlement, to the extent that these costs are deemed fair, reasonable, and non-collusive.”

After making this ruling, the Superior Court held that the trial court erred in constraining the trial to the question of whether B&W’s settlement was “fair and reasonable.” Rather, the questions presented to the jury should have been, “(1) whether B&W in fact rejected ANI’s defense; and, if so, (2) whether ANI acted in bad faith in declining to settle, or, as alleged by B&W, to participate in settlement negotiations with the [underlying] plaintiffs.”  Based on this finding, the court vacated the underlying jury verdict and judgment and remanded to allow the trial court to conduct a new trial in conformity with the new standard derived from Taylor.

Date of Decision:  July 12, 2013

Babcock & Wilcox Co. v. Am. Nuclear Insurers & Mut. Atomic Energy Liab. Underwriters, 2013 Pa. Super. LEXIS 1633 (Pa. Super. Ct. 2012) (Wecht, J.)

 

July 2013 Bad Faith Cases: COURT FINDS INSURED’S DELAY IN PRODUCTION AND EFFECT ON INSURER’S CLAIM PROCESSING CREATE QUESTIONS OF FACT FOR JURY; NO FIDUCIARY RELATIONSHIP EXISTS BETWEEN THE INSURER AND INSURED IN UIM CLAIMS (Middle District)

Plaintiff and his wife were injured in an automobile accident on July 11, 2006. Plaintiff made a claim against the other driver, and settled at the limits of the other driver’s policy, $95,000. Plaintiff subsequently made a claim with his carrier (“the carrier”) under his underinsured motorist policy which carried limits of $300,000 per person and $600,000 per accident.

On June 1, 2007, the carrier informed plaintiff that based on the documentation produced so far, it did not value the claim at more than $100,000 and as such the other driver was not underinsured. At that time plaintiff had not produced authorizations to obtain his medical or employment records, prior medical providers, information about additional employment or prior tax returns. Despite these missing documents, the carrier continued to investigate the claim for the next 20 months, and on February 23, 2009, made a settlement offer of $35,000. Plaintiff rejected the offer and sought arbitration of the claim. At that time, plaintiff executed the medical release forms, submitted information regarding his additional employment, underwent a sworn examination, and submitted to an evaluation by the carrier’s vocational expert. After receiving this information, the carrier made a settlement offer of $120,000. Nine days later, the carrier increased its offer to $150,000. Five days after that, the case went in front of an arbitration panel and plaintiff was awarded $450,000 in damages. This award was reduced to $300,000 to reflect the applicable policy limit.

On August 31, 2011, plaintiff filed suit against the carrier alleging breach of contract and bad faith for delaying the payment of plaintiff’s full benefits. Plaintiff claimed the carrier’s bad faith was evidenced by the prolonged processing of his claim and unreasonably low settlement offers given the severity of his injuries. Defendant argued that plaintiff caused the delays by failing to produce the requested documents and information, the plaintiff’s claims were subjective and uncertain, and the settlement offers were reasonable based on the information available to the carrier when the offers were made.

In evaluating the motion for summary judgment, the court determined there were three remaining questions of fact which should be presented to a jury. Specifically, the court found issues of fact remained as to, “whether the plaintiff delayed in producing necessary documents,” and if so, “whether any delay effected the defendant’s basis for making settlement offers.” Finally, the “reasonableness of the defendant’s acts” was also a question of fact for the jury. The court also stated that, generally, “the level of complexity [of a claim] and what constitutes a reasonable period to investigate are questions of fact” which should be presented to the jury. Based on these findings, the court denied summary judgment.

Additionally, in the breach of contract claim, the court considered whether the carrier had breached a fiduciary duty to the plaintiff in the handling of his claim. However, based on precedent, the carrier has “no duty to act as a fiduciary when negotiating with its own insured,” and therefore “did not have a fiduciary duty to the plaintiff when resolving the UIM claims.” Rather, insurers only assume a fiduciary role in cases of third party claims where the insurer asserts a right under the policy to handle claims against the insured.

Date of Decision: June 19, 2013

Scott v. GEICO Gen. Ins. Co., Civil Action No. 3:11-1790, 2013 U.S. Dist. LEXIS 85701 (M.D. Pa. June 19, 2013) (Mannion, J.)

JULY 2013 BAD FAITH CASES: PLAINTIFF’S BOILERPLATE COMPLAINT DISMISSED FOR FAILURE TO STATE A CLAIM. (Middle District)

In Yohn v. Nationwide Ins. Co., plaintiff brought suit against his insurance carrier alleging breach of an auto insurance contract and bad faith in connection with his claim for uninsured motorist coverage. Plaintiff was a passenger in a vehicle insured by the carrier that was involved in a collision with a vehicle that fled the scene of the accident. Plaintiff was severely injured in the crash, suffering permanent vision loss and loss of stereoscopic depth perception in his right eye.  Plaintiff also claimed damages for past and future medical expenses, mental and physical suffering, inconvenience in carrying out daily activities, a loss of life’s pleasures and enjoyment, humiliation, embarrassment, anxiety, disfigurement, and past and future loss of earnings, earning power, and earning capacity.

Plaintiff’s policy provided, “Limits of liability: (Stacked) $100,000 each person, $300,000 each occurrence.” The carrier made an offer of $100,000 in exchange for a full and final release, which plaintiff found to be unreasonable in light of his extensive injuries. The carrier made no other offers to settle the claim. The policy also provided, “In no event will any insured be entitled to more than the highest per-person limit applicable to any one motor vehicle under this policy,” with the caveat that if the insured selected the “stacked” coverage, the coverage would apply as listed on the declarations sheet. Plaintiff’s Declarations listed four vehicles, with Uninsured Motorists – Bodily Injury limits of “(Stacked) $100,000 Each Person, $300,000 Each Occurrence.” Based on this language, Plaintiff apparently believed the limits under the policy to be $400,000 per person. Plaintiff alleged no reasonable basis existed for refusing and failing to pay the full amount of benefits owed to him under the policy, and that the carrier acted willfully and recklessly.

In count two of the complaint, plaintiff claimed the carrier acted in bad faith through 14 different failures, shortcomings, and other behaviors. The carrier filed a motion to dismiss, alleging the statements in the complaint were merely conclusory and boilerplate, and thereby failed to state a bad faith claim. The court found that the complaint was, in fact, primarily conclusory statements, unsupported by factual allegations. While plaintiff claimed the carrier misrepresented the policy, he did not allege what misrepresentations the carrier made; plaintiff alleged the carrier used abusive and coercive tactics to settle the claim without explaining what those tactics were; plaintiff alleged the carrier failed to thoroughly investigate his claim, but did not allege what procedures were used, what procedures would have been sufficient, and how the carrier failed to use them. In support of its motion, the carrier referenced three cases which were dismissed for failure to state a claim and that made similar, if not identical, claims to plaintiff’s complaint. The carrier also relied on Sypeck v. State Farm Mut. Auto Ins. Co., in which the plaintiff alleged bad faith on the basis of her carrier’s facially unreasonable offer to settle her suit. The Sypeck court, however, held “even if the offer was facially unreasonable, that does not prove that [the carrier] acted in bad faith – rather, it might have negligently failed to investigate and evaluate, leading to an unreasonable settlement offer.”

Based on these findings, the judge determined plaintiff’s claims were merely “conclusory allegations that characterize[d] the [carrier’s] conduct.” As such, Magistrate Judge Susan Schwab recommended the case be dismissed in part without prejudice and the plaintiff be granted leave to amend his complaint, and District Court Judge Christine Conner adopted Judge Schwab’s recommendation.

Date of Decision: May 10, 2013

Adopted: June 7, 2013

Yohn v. Nationwide Ins. Co., Civil No. 1:13-CV-00024, 2013 U.S. Dist. LEXIS 80703 (May 10, 2013) (Schwab, M.J.)

Yohn v. Nationwide Ins. Co., Civil No. 1:13-CV-00024, 2013 U.S. Dist. LEXIS 80151 (June 7, 2013) (Conner, J.)

JULY 2013 BAD FAITH CASES: CARRIER’S LETTER INDICATING IT WOULD CONSIDER AMENDED CLAIMS DID NOT REQUIRE CARRIER TO APPROVE CLAIM; FOLLOWING PRIOR PRECEDENT UIPA VIOLATIONS CANNOT BE CONSIDERED AS EVIDENCE (Philadelphia Federal)

In Weinberg v. Nationwide Cas. & Ins. Co., plaintiffs brought suit claiming breach of contract and bad faith when the carrier denied coverage on an amended claim after providing plaintiffs with a payment and letter indicating future amendments to the claim would be considered.

Plaintiffs’ policy covered “direct loss caused by rain, snow, sleet, sand or dust driven through roof or wall openings made by direct action of wind, hail, or other insured peril.” The policy excluded losses resulting directly or indirectly from: (1) “wear and tear, marring and deterioration,” and (2) biological deterioration or damage, “even if another peril or event contributed concurrently or in any sequence to cause the loss.” The policy also excluded loss resulting from “a fault, weakness, defect or inadequacy in the… design, workmanship, construction, or materials” if another excluded peril also contributed to the loss.

On June 11, 2012, plaintiff reported to the carrier his house has suffered damage due to a wind or rainstorm which occurred on April 14, 2010. Plaintiffs reported water was seeping into the home and there was water damage in “the garage and family room, around the kitchen window, and on the window dressings” as well as “the walls of the residence and vinyl siding” and “to the stucco on the front exterior of the property.” When the carrier’s adjuster inspected the property, he was unsure whether coverage existed due to the possibility the water was seeping in for reasons besides the storm. Plaintiffs hired a separate contractor to evaluate the damages. When plaintiffs’ contractor spoke with the adjuster, he informed the adjuster of “a neighborhood class action suit” against the builder of the homes in plaintiffs’ neighborhoods for issues of “workmanship, including water seeping into the home through the stucco and windows.”

The carrier denied coverage for the damage to the interior of the property, but provided plaintiffs a check for the value of the exterior damage based on its adjuster’s estimate in the amount of $2,116.40. Furthermore, the carrier indicated it would be willing to review any estimates from plaintiffs’ contractor and possibly adjust the payment based on any such estimate. However, when plaintiffs’ contractor provided an estimate to the adjuster, the adjuster did not respond. Plaintiffs continued to contact the adjuster with little response. Ultimately, the adjuster reaffirmed the carrier’s denial of coverage, and attached a formal denial letter explaining the policy did not provide coverage for damage “caused by faulty or inadequate design, workmanship, or construction materials, as well as wear and tear, aging, or deterioration.” Based on the conversation with plaintiffs’ contractor regarding the pending neighborhood lawsuit, the carrier believed the water seepage was due to “improper installation, workmanship, and construction error, which occurred when the home was originally built.” Plaintiffs’ total cost of repair for the interior and exterior damage totaled $50,000.

Plaintiffs allege three actions constitute bad faith: (1) the carrier’s illusory promise that plaintiffs would be able to submit amended claims for their loss; (2) the carrier’s failure to properly investigate plaintiffs’ claims; and (3) the carrier’s actions violated the Uniform Insurance Practices Act. The court found plaintiffs’ claim the carrier broke its promise regarding the amended claims was not supported by the record and plaintiffs failed to demonstrate the carrier did not consider the additional claims. Rather, the carrier allowed plaintiff to submit additional claims, but did not promise those claims would be covered. The court also found plaintiffs failed to demonstrate the carrier did not conduct a full investigation of the claims. The carrier visited plaintiff’s home, provided plaintiffs with a payment, and when it was informed of additional damage, an adjuster investigated that claim but denied it. Furthermore, the carrier explained in its denial letter why the damage was not covered. Finally, the court stated the UIPA does not provide a private cause of action, and that violations of the UIPA cannot be considered evidence of bad faith. Therefore, plaintiffs’ reliance was inapposite to its statutory bad faith claim. Based on these findings, the court granted the carrier’s motion for summary judgment.

Date of Decision: June 10, 2013

Weinberg v. Nationwide Cas. Ins. Co., Civil Action No. 11-cv-5680, 2013 U.S. Dist. LEXIS 82217 (E.D. Pa. June 10, 2013) (Tucker, C.J.)

JULY 2013 BAD FAITH CASES: LIFE INSURANCE POLICY PROPERLY RESCINDED FOR MATERIAL MISREPRESENTATION (Philadelphia Federal)

In S.B. v. United of Omaha Life Ins. Co., two minor plaintiffs brought suit through their court appointed guardian following their father’s death seeking benefits under his life insurance policy. A claim review took place because the policy had been issued within two years of decedent’s death. In the review process, decedent’s answers to the health related questions in the insurance application were compared to his medical records. In the application, decedent was asked if he had, “ever (a) received care or treatment for, or (b) been advised by a member of the medical profession to seek treatment for, or (c) consulted with a health care provider regarding… (e) Diabeties with onset before age 50 or with vascular or renal complications?” Decedent answer “no” to the question. The application indicated if the applicant answered “yes” to this question, they would not be eligible for the policy. To complete the application, decedent signed the Agreement on the signature line, with the accompanying statement, “I have read and understand… (the application)… and approve of all my answers as recorded.” According to decedent’s medical records, however, the adjuster discovered decedent had, in fact, been diagnosed with diabetes prior to his 50th birthday in late 2009. He was also treated for diabetes and elevated blood glucose levels in January and February of 2010. The policy was issued in October of 2011. Following these revelations, the insurer rescinded the policy, refunded all premium payments, and sent a letter to plaintiffs indicating the insurance proceeds would not be paid due to the material misrepresentation made by decedent in the application.

Plaintiffs then brought suit against the carrier, alleging breach of contract and bad faith. The case was removed to federal court, and the carrier filed a motion for judgment on the pleadings.

Under Pennsylvania law, an insurance policy is void ab initio for misrepresentation when the insurer establishes three elements: “(1) that the representation is false; (2) that the insured knew that the representation was false when made or made it in bad faith; and (3) that the representation was material to the risk of being insured.”

There is no dispute that the representation made by decedent was false; plaintiffs concede that decedent was diagnosed with diabetes before the age of fifty. The dispute, however, arises in the second factor of the test. Plaintiffs allege that due to the confusing wording of the question and the time period that passed between diagnosis and decedent’s signing of the application, his answer was not intentionally false or made in bad faith. The court did not agree, finding that although the question was broken into subparts, it clearly asked whether the applicant had been diagnosed, treated or consulted with a health care provider regarding diabetes before the age of fifty. Furthermore, decedent was diagnosed on December 31, 2009, and treated at a local hospital for his diabetic condition in January and February of 2010. Thus, decedent’s false answer could not be disregarded as an “honest mistake,” and must be viewed as a fraudulent misrepresentation. The Pennsylvania Supreme Court defines bad faith as “an action undertaken with the purpose of fraud, dishonesty, or corruption.” Based on the finding that decedent’s statement was a fraudulent misrepresentation, the court found that it also fell within the bad faith definition, and found the statement was made in bad faith. Such a finding could also be reached through an inference of bad faith under Pennsylvania law.

Finally, Pennsylvania law has long held that all statements made in connection with the application for life insurance regarding prior medical conditions and treatments are material to the risk.

Date of Decision: June 13, 2013

S.B. v. United of Omaha Life Ins. Co., Civil Action No. 13-1463, 2013 U.S. Dist. LEXIS 83642 (E.D. Pa. June 13, 2013) (Kelly, J.)

JULY 2013 BAD FAITH CASES: LARGE ARBITRATION AWARD IN EXCESS OF DE MINIMIS SETTLEMENT OFFER DOES NOT ESTABLISH BAD FAITH CONDUCT BY CARRIER WHERE OFFER BASED ON REASONABLE INVESTIGATION (Philadelphia Federal)

In Richardson v. United Fin. Cas. Co., plaintiff brought suit for bad faith following an arbitration award in extreme excess of the carrier’s settlement offers for plaintiff’s UIM claim. Plaintiff was in a low-impact crash on October of 2006. Following the crash, plaintiff required back treatments including therapy, injections, and ultimately surgery. Plaintiff’s medical bills exceeded $57,000, and a worker’s compensation lien accrued in excess of $114,000. Plaintiff’s expected future medical costs totaled $680,000. The at-fault driver’s policy had a $50,000 policy limit, which was tendered based on the value of the worker’s compensation lien. Plaintiff then brought an underinsured motorist claim under her own policy, which carried a $1,000,000 limit.

Prior to the low-impact crash, plaintiff suffered from chronic back pain. Plaintiff was receiving various treatments, including therapy and injections, had been classified as a candidate for surgery, and was on ‘light duty’ at work due to her existing back problems. At the scene of the crash, plaintiff told the first responder she had suffered from chronic back pain since 2006. Based on this medical history and the low impact nature of the crash, the adjuster determined the crash was not the cause of the injuries, and the carrier was not responsible for the work lien because it pre-dated the crash and plaintiff’s work status did not change following the crash. Furthermore, based on plaintiff’s medical records and a report from an IME, the adjuster determined the surgery was necessary prior to the crash, and thus should be excluded from the medical expenses. Based on these findings, the carrier determined the at-fault driver was not underinsured, but made an offer to settle the case for $5,000. 

Plaintiff refused to settle the case for that amount, and when the case went to arbitration, plaintiff was awarded $675,000 which was reduced to $625,000 to reflect the $50,000 received from the tortfeasor. Plaintiff then brought suit against the carrier alleging its $5,000 settlement offer “was unreasonable, made in bad faith, and showed a reckless disregard for the carrier’s contractual obligations and duties of good faith and fair dealing.”

The court denied plaintiff’s motion for summary judgment, finding the plaintiff failed to meet her burden of demonstrating the carrier’s actions were not reasonable. Specifically, it was reasonable for the carrier to conclude the crash was a “minor impact” accident based the police report which indicated no damage occurred to plaintiff’s vehicle. Furthermore, plaintiff testified the first responders did not want to take her to the emergency room because they felt the crash did not warrant such treatment. The court also found plaintiff’s argument that the carrier acted unreasonably by failing to schedule her IME for two years was without merit because plaintiff’s counsel partially caused the delay by failing to provide plaintiff’s medical records for over a year. Finally, plaintiff’s argument that the carrier failed to properly investigate the claim did not provide clear and convincing evidence of bad faith.  The court found the carrier used all information available to it, evaluated the claim based on that evidence, and came to a reasonable conclusion. As such, the judge denied the motion because plaintiff failed to demonstrate that a jury could find by clear and convincing evidence the carrier’s denial of benefits was unreasonable.

Date of decision:  May 30, 2013

Richardson v. United Fin. Cas. Co., Civil Case No. 11-7688, 2013 U.S. Dist. LEXIS 75713 (E.D. Pa. May 30, 2013) (O’Neill, J.).

JULY 2013 BAD FAITH CASES: INSURER’S MOTION TO DISMISS BAD FAITH CLAIM BASED ON FAILURE TO ISSUE RESERVATION OF RIGHTS DENIED (Western District)

In Greenwich Ins. Co. v. BBU Servs., the court denied plaintiff’s motion to dismiss defendants’ counter claim for bad faith. Plaintiff-insurer initially brought suit against its insured. Defendant-insureds then filed a counter-claim against their insurer, alleging bad faith for plaintiff-insurer’s denial of coverage after agreeing to provide coverage and a legal defense without issuing a reservation of rights letter.

Plaintiff-insurer initially agreed in writing on May 12, 2011, to defend defendant-insureds without issuing a reservation of rights letter, then, 165 days later, reversed its position and issued a reservation of rights letter. Defendant-insureds were forced to hire private counsel to avoid inherent conflicts of interest and identified the insurer-retained counsel in the underlying action as a fact witness in the current case. Plaintiff-insurer’s actions also putatively threatened privileged attorney-client communications. Defendant-insureds claimed to have detrimentally relied on plaintiff’s initial assurance of coverage and to have been prejudiced by plaintiff-insurer’s reversal of position.

Relying on precedent from district courts in Ohio, Washington, Florida, and South Carolina, the Western District determined an insurer’s delay in issuing a reservation of rights letter could, under some circumstances, support a claim for bad faith or estoppel. On this basis, the court denied plaintiff-insurer’s motion to dismiss, determining the issue could not be appropriately resolved at that stage in the litigation. While the court acknowledged some of defendant-insureds’ claims of bad faith might be susceptible to dismissal at the 12(b)(6) stage, the claims regarding plaintiff-insurer’s change in position, detrimental reliance and prejudice were not. Consistent with that finding, the court granted defendant-insured’s request for leave to amend their counterclaim. The court declined to rule on which damages would potentially be available if the claims survived a motion to dismiss due to a complex choice-of-law issue that would need to be resolved.

Date of decision: June 4, 2013

Greenwich Ins. Co. v. BBU Servs., Civil Action No. 12-291, 2013 U.S. Dist. LEXIS 78070 (June 4, 2013 W.D. Pa.) (Bissoon, J.).

JULY 2013 BAD FAITH CASES: INSURER’S DELAY IN SETTLING THIRD PARTY CLAIM CONSTITUTES A DENIAL OF BENEFITS AND CAN CREATE A CAUSE OF ACTION FOR COMMON LAW AND STATUTORY BAD FAITH DESPITE PAYMENT OF POLICY LIMITS AND LACK OF EXCESS VERDICT (Middle District)

In Bodnar v. Nationwide Mut. Ins. Co., plaintiff brought suit against his insurer (“the carrier”) claiming its failure to settle an underlying case against plaintiff in a more timely fashion constituted a bad faith  under Pennsylvania’s bad faith statute. In the underlying case, the carrier initially denied the claims based on the policy’s employee exclusion, excluding coverage for injuries suffered by employees arising out of or in the course of their employment. Plaintiff informed the carrier the underlying plaintiff was not his employee at the time of the accident, but the carrier proceeded with two separate declaratory judgment actions in the case to have its obligations under the policy determined by the court. Ultimately the case was settled within approximately two and a half years, with the carrier tendering the full amount of the policy limits.

Included in the settlement was a hold-harmless clause, in which the underlying plaintiff agreed to indemnify the plaintiff in this case, and save him harmless for any and all further liability, loss, damage, claims or expenses arising out of the underlying plaintiff’s death, as well as any and all liability, loss, damage or claims arising out of the hold-harmless clause including satisfying any judgment on his behalf.

Two months prior to entering the settlement agreement, plaintiff filed this suit alleging statutory bad faith and common law breach of the contract bad faith for failure to indemnify.

Plaintiff alleges that the carrier’s refusal to settle the case more promptly was “callous, unjustified and unreasonable” and caused plaintiff to suffer emotional distress, anxiety, depression and psychological harm. Plaintiff also claimed damages for the effect the underlying lawsuit had on his business, and attorney fees he incurred in the defense of the underlying action. The carrier filed a Motion for Summary Judgment alleging that because it paid the policy limits prior to a finding of liability against plaintiff, there can be no common law bad faith claim because the possibility of an excess verdict was eliminated. The carrier further asserted there can be no claim for statutory bad faith without an excess verdict against the plaintiff, which did not occur here as the case settled prior to any finding of liability.

On the former point, the Court cited numerous cases, including the seminal Birth Center case, which makes abundantly clear that common law contractual bad faith cannot be precluded per say on the basis that the carrier ultimately paid the policy limits, in the context of a third party claim.  Via this decision, Pennsylvania’s Supreme Court opened the door for an insured to seek compensatory damages other than pure failure to pay under the policy.

This later question has not been presented to the Pennsylvania Supreme Court, however similar issues have been handled in other Pennsylvania federal cases. In 2006, the Eastern District of Pennsylvania found in Fuss Builders-Contractors, Inc. v. Assurance Co. of North Am. that “there is no recognized cause of action against an insurer for delaying settlement of a third party claim” and refused to “create a cause of action not yet recognized by Pennsylvania law.”  Two years later, the Western District of Pennsylvania issued its opinion in Gideon v. Nationwide Mutual Fire Ins. Co., disagreeing with the analysis in Fuss, and found an insurer’s declaratory judgment action against its insured could be interpreted as a denial of benefits and therefore the basis of a cause of action for bad faith. Following its ruling in Gideon, the Western District in Standard Steel, LLC v. Nautilus Ins. Co. refused to find an excess verdict was a condition precedent to a statutory bad faith claim failure to settle a third party claim because no Pennsylvania case law had imposed such a requirement. Ultimately, the court followed the Standard Steel ruling, finding the carrier could not avoid further inquiry into its conduct simply by asserting its payment of the policy limit as a complete defense entitling it to summary judgment as a matter of law. Furthermore, the court found “a delay in payment of a third party claim, if of inordinate and unreasonable length, effectively becomes a denial of the claim.” Such a denial of benefits creates the basis for a claim of bad faith against the insurer, even if the insurer pays the policy limits prior to the entry of a verdict. The carrier’s motion for summary judgment was denied.

Date of Decision: May 16, 2013

Bodnar v. Nationwide Mut. Ins. Co., Civil Action No. 3:12-CV-1337, 2013 U.S. Dist. LEXIS 70144 (M.D. Pa. May 16, 2013) (Mariani, J.).

JULY 2013 BAD FAITH CASES: COURT GRANTS MOTION IN LIMINE BARRING EXPERT TESTIMONY REGARDING BAD FAITH CLAIM AS TO BOTH PARTIES; RULES ON OTHER MOTIONS. (Western District)

In Schifino v. Geico Gen. Ins. Co., both parties brought motions in limine before the court, seeking to have evidence excluded at the approaching trial.

The court first ruled on the carrier’s motion to preclude the proposed testimony of plaintiff’s expert witness on bad faith. The carrier alleged the concept of bad faith is readily understandable by a lay person, and therefore, expert testimony was not necessary. Conversely, even if expert testimony was necessary, plaintiff’s expert report was objectionable because it merely stated legal conclusions, supported only by the expert’s personal legal interpretation of insurance law and industry standards. Furthermore, the carrier believed the expert’s testimony would opine on the ultimate issue, usurping the jury’s function.  Following the precedent set in Smith v. Allstate Ins. Co., the court ruled that expert testimony was not necessary because the bad faith issue (supported with evidence of the carrier’s claim handling procedures, insurance industry practices and standards, and UIPA compliance) was neither “complex nor scientific such that an expert was necessary.” Furthermore, whether or not the insurer had a reasonable basis for the manner in which it handled plaintiff’s claim was “an issue within the providence of the jury as its role as factfinder.”

Plaintiff also sought to preclude the carrier’s expert witness from testifying on the issue of bad faith. Based on the same reasoning it used to grant the carrier’s motion, plaintiff’s motion was granted.

In the third motion, plaintiff sought to preclude the carrier from introducing any evidence of plaintiff’s previous alcoholism and occasional drug use, alleging it would be highly prejudicial. The carrier opposed the motion, believing plaintiff sought the wrong standard for admissibility, that a medical report reflected fairly recent and serious drug use, which could potentially impeach plaintiff’s prior testimony that he used drugs “a couple of times,” and third, that the probative value of the evidence outweighed the prejudice given plaintiff’s claim for damages for permanent injuries, and the fact individuals with such a history have shorter lifespans than the average person. Alternatively, the carrier requested the court admit the evidence with a limiting instruction to the jury. Given the evidence in support of both positions, the court chose to defer the motion until properly raised at trial following the carrier laying the proper foundation.

Finally, plaintiff sought to exclude evidence of two prior criminal convictions of the driver of the automobile in which plaintiff was a passenger when the crash took place. Following no objection from the carrier, the court granted plaintiff’s motion.

Date of Decision: May 31, 2013

Schifino v. Geico Gen. Ins. Co., 2:11-cv-1094, 2013 U.S. Dist. LEXIS 76532 (W.D. Pa. May 31, 2013) (McVerry, J.).

This case was dicussed previously on this Blog.