Monthly Archive for November, 2013

NOVEMBER 2013 BAD FAITH CASES: FORMER SUPERIOR COURT JUDGE’S CLAIM FOR BAD FAITH AGAINST INSURER DISMISSED ON IN PARI DELICTO GROUNDS; FEDERAL CONVICTION PREVENTED CIVIL ACTION (Pennsylvania Superior Court)

The case Joyce v. Erie Ins. Exchange arises out of a claim for damages, paid out by the insurers, and then ordered to be repaid to the insurer by plaintiff in restitution following his conviction for mail fraud and money laundering associated with the claim payment. Plaintiff brought suit against the insurers seeking to recover the money he was ordered to repay in restitution, alleging, amongst other claims, bad faith against one of the insurers. The insurer filed a preliminary objection asserting failure to state a claim for bad faith, and the trial court sustained the objection. The entire complaint was dismissed on grounds of in pari delicto, as plaintiff’s claim arose out of his own illegal actions. Plaintiff appealed, alleging the trial court erred in applying the doctrine and sustaining the objection to the bad faith claim.

The Superior Court first evaluated the trial court’s dismissal of plaintiff’s complaint on in pari delicto grounds. Plaintiff argued the doctrine was inapplicable because his federal conviction did not involve the same incident and activities at issue in his civil litigation. The insurer argued the claims were grounded in plaintiff’s illegal actions, plaintiff’s claim under the policy, making the doctrine applicable. The Court found plaintiff’s civil suit was necessarily grounded in the same conduct, representations to and interactions with insurance personnel, which his federal conviction was based on. Therefore, the doctrine was properly applied, rendering the bad faith claim moot.

Date of Decision: July 9, 2013.

Joyce v. Erie Ins. Exchange/Erie Ins. Co., 74 A.3d 157 (Pa. Super. Ct. July 9, 2013) (Wecht, J.).

NOVEMBER 2013 BAD FAITH CASES: SUPERIOR COURT AFFIRMS BAD FAITH FINDING BASED ON ADJUSTER’S FAILURE TO PERFORM INDEPENDENT EVALUATION ON UIM CLAIM; PERMITS EXPERT TESTIMONY ON CLAIMS HANDLING; UPHOLDS PUNITIVE DAMAGE AWARD; AND DOES NOT PERMIT EXPERT FEES, INVESTIGATIVE FEES, ARBITRATION FEES AND TRIAL PREPARATION EXPENSES WITHIN THE TERM “COURT COSTS” (Pennsylvania Superior Court)

In Grossi v. Travelers Personal Ins. Co., plaintiff brought suit against his insurer for bad faith handling of his UIM claim after he was awarded $4M at arbitration despite the insurer’s refusal to settle for more than its $1,000 reserve.  Plaintiff won at the trial level on his bad faith claim, and the insurer appealed to the Superior Court.  The Superior Court affirmed on most issues, in a divided 2-1 panel decision with a vigorous dissent.

The insurer presented six questions on appeal, including a question as to whether the trial court erred as a matter of law in concluding plaintiff had proven by clear and convincing evidence the insurer acted in bad faith in its handling of the underinsured claim. The insurer argued the trial court should have granted its post-verdict motion for judgment notwithstanding the verdict or a new trial. The Superior Court, however, concluded the trial court did not abuse its discretion in finding the insurer had breached its good faith duty. The trial court based its decision on the adjuster’s affidavit, as well as plaintiff’s expert’s testimony.

Much of the majority’s opinion is focused on setting and never changing a loss reserve, and failures to follow the carrier’s manual in evaluating the loss reserve.  As found in the majority opinion, in her affidavit, the original adjuster admitted she conducted no individual assessment of the future earnings loss before setting a $1,000 reserve on the claim, despite plaintiff submitting evidence that his loss far exceeded the $300,000 policy limit. Plaintiff’s expert testified this was an unreasonable practice, particularly given the $4M arbitration award so far exceeded the policy limits. The insurer argued it is not required to pay out claims without the opportunity to fully investigate the same.  However, the court found that the investigation was unduly delayed and or carried out in connection with defending an arbitration rather than making an evaluation of the claim, and distinguished the case law on which the carrier relied.

As to the evaluation, the majority characterized the carrier’s positionas being that the insured’s expert’s number was speculative, and could be rejected on that basis alone.  The found that such an argument would justify rejection of any UIM claim on the basis of an inherent uncertainty in estimating damages, and would take away any responsibility for a carrier’s doing its own analysis and evaluation.  This could not fulfill an insurer’s duty of good faith and fair dealing.

The insurer also appealed the trial court’s finding that its delay in investigating and processing the claim constituted bad faith, however, the appellate court found the trial court’s determinations to be factual in nature and therefore subject to the trial court’s determination of credibility, and did not disturb the findings.  Of note were the majority’s looking to standards in the Unfair Insurance Practices Act governing the time for investigation and reporting.  The court recognized that length of time alone cannot create a per se bad faith case, but time in the context of other conduct is to be considered.

It is further noteworthy that the trial and appellate court placed great reliance on plaintiff’s expert in reaching the bad faith decision concerning the claims handling process.

Next, the insurer argued the trial court erred in awarding punitive damages in the case because the insurer did not act with malice or dishonest purpose. Pennsylvania law, however, requires no showing beyond establishing bad faith conduct under the statute to permit an award of punitive damages. Therefore, despite the insurer’s secondary argument, that the award was too high, the court found no error in awarding the damages or any constitutional impropriety in the amount of the award.  As the punitive damages award was 5-6 times the compensatory damages award, and over $1.2 Million by itself, the court’s lengthiest analysis is on the punitive damages award; looking at its own prior decision in Hollock, and the U.S. Supreme Court case law focusing around State Farm v. Campbell.

Finally, the insurer argued the trial court improperly included expert witness fees, arbitration fees, investigation fees, and other trial preparation expenses and fees in its award of court costs under the statute. The appellate court found in the insurer’s favor on this issue, as court costs is commonly defined, and supported by Pennsylvania case law, as only including ‘docket costs.’

Date of Decision: November 1, 2013

Grossi v. Travelers Personal Ins. Co., Civil Action Nos. 769 WDA 2012, 828 WDA 2012, 2013 Pa. Super. LEXIS 3144 (Pa. Super. Ct. Nov. 1, 2013) (Mundy, J.).

NOVEMBER 2013 BAD FAITH CASES: EXCESS INSURER CORRECTLY DENIED COVERAGE WHERE UNDERLYING SETTLEMENT HAD NOT YET BEEN PAID (Pennsylvania Superior Court)

In Lexington Ins. Co. v. Charter Oak, the trial court granted defendant, the excess insurer, summary judgment, ruling the carrier’s duty to defend and indemnify were not triggered because the underlying policies were not exhausted at the time the plaintiff tendered the claims, as the underlying settlement had not actually been paid yet.

On appeal, plaintiff-appellant asserted the trial court erred in its strict interpretation of the policy’s exhaustion clause because although the limits had not been exhausted at the time the tender was presented, the terms of the proposed settlement, which would exhaust the limits, were sufficiently agreed upon to trigger defendant’s duty to defend. Plaintiff, citing case law from the Second and Third Circuit Courts of Appeals, argued an insured can recover any losses suffered beyond the primary coverage under an excess policy, and that a settlement with a primary insurer, even if within the policy limits, functionally ‘exhausted’ the policy, triggering the excess coverage. The court determined those cases were unpersuasive, as they considered the duty to indemnify, rather than the duty to defend. Furthermore, the question in Lexington was when the duty to defend arose, rather than whether it was triggered.

Instead, the court relied on different Second Circuit precedent and held an excess insurer has a relevant interest in awaiting actual payment of a settlement by the primary insurer before providing coverage under an excess policy. Because the excess policy explicitly stated the underlying policy would be considered exhausted “by payment” of judgment or settlement, the court held its duty to defend was triggered only by the actual payment of the relevant primary insurance. Therefore, the underlying primary policy, but not the excess professional services liability policy, had to be exhausted by payment before defendant’s excess policy was triggered. As always, that duty would remain in effect until defendant could establish the claims against plaintiff were beyond the scope of coverage provided by the excess policy, or until a settlement was reached under the policy.

Date of Decision: November 6, 2013

Lexington Ins. Co. v. Charter Oak Fire Ins. Co., Civil Action No. 2876 EDA 2012, 2013 Pa. Super. LEXIS 3146 (Pa. Super. Ct. Nov. 6, 2013) (Bender, P.J.).

Prior Blog post on this case.

NOVEMBER 2013 BAD FAITH CASES: COURT DISMISSES BAD FAITH CLAIM FINDING PLAINTIFF’S OWN CONDUCT, NOT THE INSURER’S, LED TO DELAYS IN THE CLAIM INVESTIGATION (Western District)

In Hayden v. Westfield Ins. Co., plaintiffs brought suit against their homeowner insurer seeking damages for breach of contract and bad faith after their home was allegedly damaged in a hail and windstorm. The storm took place in March of 2011. Six months later, in September of 2011, plaintiffs first provided notice to the insurer of any claim relating to the storm. When the insurer sent a representative to inspect the home for damage, it discovered plaintiffs had gutted all of the areas where the damage allegedly took place. Following the site inspection, the insurer arranged for an engineer to conduct an inspection of the home. After the inspection, the insurer issued a payment of $741.63 for hail damage, and declined to make any further payment. Following the denials, plaintiffs filed suit against the insurer alleging breach of contract, bad faith for delays in the claim investigation, and violations of the Pennsylvania Unfair Trade Practices and Consumer Protection Law. After extensive litigation, plaintiffs filed a Rule 41(a)(2) motion to dismiss, and the insurer moved for summary judgment.

The court denied plaintiffs’ motion to dismiss, finding it was merely an effort to have the case returned to state court, which plaintiffs perceived would be a more favorable forum, despite the extraordinary and extensive litigation which had already taken place in the district court. The court also held in the insurer’s favor on the bad faith claim, finding plaintiffs’ own conduct significantly contributed to the delays in the claim investigation. Plaintiffs failed to notify the insurer of the loss until nearly six months after the loss. Furthermore, plaintiffs gutted the entire area in which the damage allegedly took place months before providing notice of the loss to the insurer, preventing the insurer from conducting any kind of inspection of the damage to the home. While plaintiffs claimed photographs were taken prior to the demolition, such photographs were never produced, nor were any estimates, bills, invoices, or cancelled checks for the demolition and renovation work. The insurer held the claim open in anticipation of these items, but never received any of the requested documents. Given plaintiffs’ actions, the investigate delays were reasonable and not in bad faith, and summary judgment was granted in the insurer’s favor.

Date of Decision: October 25, 2013

Hayden v. Westfield Ins. Co., Civil Action No. 12-0390, 2013 U.S. Dist. LEXIS 153334 (W.D. Pa. Oct. 25, 2013) (Hornak, J.)

NOVEMBER 2013 BAD FAITH CASES: AMBIGUITY IN RECORDED CONVERSATION WITH INSURED DEFEATS BAD FAITH CLAIM (Philadelphia Federal)

In Lites v. Trumbull Ins. Co., plaintiffs filed suit seeking a retroactive change to full tort coverage, and alleging bad faith for the insurer’s failure to change the coverage prior to plaintiffs’ request. One month before the expiration of their current auto policy, plaintiffs contacted their insurer and requested their coverage be changed from limited tort to full tort. The insurance representative initially informed plaintiffs such a change had to be made by written request, but later in the recorded conversation stated she could make the change over the phone. Six days after the conversation, plaintiffs sent the insurer a check in the amount of the premium increase. Two weeks later, one of the plaintiffs was injured in an accident. When plaintiffs sought reimbursement from the other driver’s insurance, she was refused compensation because of her limited tort coverage. Plaintiffs sought a declaration of insurance from their insurer reflecting the change in coverage, but the insurer denied the full coverage took effect immediately, and instead claimed the full tort coverage would begin with the new policy. Plaintiffs brought suit alleging breach of contract and bad faith against their insurer. Following discovery, the insurer filed a motion for summary judgment arguing plaintiffs failed to demonstrate a breach of contract, and that its conduct did not rise to the level of bad faith.

The court held plaintiffs were unable to establish the insurer lacked a reasonable basis for denying coverage, and granted defendant’s motion for summary judgment on the bad faith claim. Although plaintiffs alleged they intended for the change to full-tort coverage to take effect immediately, the recorded conversation suggested otherwise. The insurer reviewed the recording and determined, based on the conversation, the change in the policy’s coverage was to take effect upon the renewal date, and thus after the underlying accident. This created a reasonable basis for denying payment to plaintiffs, defeating plaintiff’s claim under the bad faith statute.

Date of Decision: October 25, 2013

Lites v. Trumbull Ins. Co., Civil Action No. 12-4167, 2013 U.S. Dist. LEXIS 153346 (E.D. Pa. Oct. 25, 2013) (Restrepo, J.).

NOVEMBER 2013 BAD FAITH CASES: EASTERN DISTRICT DECIDES PENNSYLVANIA BAD FAITH STATUTE DOES NOT EXTEND TO SURETY BONDS (Philadelphia Federal)

In Upper Pottsgrove Twp. v. Int’l Fid. Ins. Co., an Eastern District judge held Pennsylvania’s bad faith statute does not apply to companies that issue surety bonds.  Plaintiff hired a construction company to make improvements to its public spaces. The construction contract required the construction company to purchase a bond for the value of the project, which it did, through the defendant surety company. Approximately two years after beginning the project, the construction company filed for bankruptcy, and plaintiff requested the face value of the bond from the surety. When the surety refused to provide the face value of the bonds to plaintiff, plaintiff filed suit against the surety, including a count for bad faith.

The surety moved to have the count dismissed, arguing Pennsylvania’s bad faith statute only applies to insurance contracts, not surety contracts. The bad faith statute does not define insurance contracts, and the Pennsylvania Supreme Court has not been faced with the specific question, so the district court was forced to predict whether the state Supreme Court would find ‘insurance contracts’ included surety contracts. Based on commentary regarding the differences between insurance and surety contracts, as well as an unreported case, the district court held surety contracts are not insurance contracts under the Pennsylvania bad faith statute. The court found the legislature could have specifically included surety contracts, as well as other types of insurance-related contracts, had it so desired. Since the legislature declined to create an expansive statute, to enforce the statute in a broad manner would be inconsistent with legislative intent. Thus, the court held surety bonds are not insurance contracts within the meaning of the bad faith statute, and granted the surety’s motion to dismiss the claim.

Date of Decision: October 2, 2013

Upper Pottsgrove Twp. v. Int’l Fid. Ins. Co., Civil Action No. 13-1758, 2013 U.S. Dist. LEXIS 142372 (E.D. Pa. Oct. 2, 2013) (Dalzell, J.).

NOVEMBER 2013 BAD FAITH CASES: CLAIMS-MADE POLICY EXCLUDES COVERAGE FOR FORESEEABLE LITIGATION, INSURER PREVAILS ON BREACH OF CONTRACT AND BAD FAITH CLAIMS (Philadelphia Federal)

In Fishman v. Hartford, the insurer refused to provide plaintiffs, an attorney and his law firm, with a defense in an underlying malpractice suit alleging plaintiffs failed to file suit within the applicable statute of limitations. The insurer provided plaintiffs a professional liability claims-made policy, which excluded coverage for all claims which any insured “knew [of] or could have foreseen” as of the effective date of the policy.  Plaintiffs provided the insurer with notice of the underlying malpractice suit during the policy period; however, the insurer denied coverage asserting plaintiffs were aware of the possibility of a claim as early as two years prior to the effective date of the policy when the underlying plaintiff pursued disciplinary action against plaintiff.

Upon the claim denial, plaintiffs brought suit alleging breach of contract and bad faith, and also sought a declaratory judgment requiring defendant to defend and indemnify plaintiffs in the underlying suit. Plaintiffs then filed a motion for judgment on the pleadings, and defendants filed a cross-motion for the same. The court found plaintiffs could have foreseen the suit, excluding coverage for the claim. Therefore, defendant’s cross-motion was granted and the claims were dismissed.

Date of Decision: September 27, 2013

Fishman v. Hartford, Civil Action No. 12-3779, 2013 U.S. Dist. LEXIS 140286 (E.D. Pa. Sept. 27, 2013) (Surrick, J.).

NOVEMBER 2013 BAD FAITH CASES: PRODUCTS-COMPLETED OPERATIONS HAZARD EXTENDS ONLY TO WORK BY GENERAL CONTRACTOR; DAMAGE CAUSED BY SUBCONTRACTOR NOT COVERED, PRECLUDING BAD FAITH CLAIM FOR DENIAL (Western District)

In Allegheny Design Mgmt. v. Travelers Indem. Co. of Am., plaintiff, a general contractor, brought suit against its insurer after a scratch was discovered in the store-front glass at one of plaintiff’s project sites, and the insurer refused to cover the claim. The scratch was discovered shortly before the project was completed, and the client would not sign-off on the project unless the glass was replaced. Plaintiff filed a claim seeking to have the glass, which was installed and then cleaned by two separate subcontractors, replaced so the project could be completed.

The insurer denied the claim, alleging the damage to the glass did not meet the definition of “products-completed operations hazards,” as well as several other exclusions that precluded coverage. After the denial, plaintiff filed a three-count Complaint, setting forth claims for breach of contract, declaratory judgment, and bad faith against the insurer.

The parties agreed the scratch in the glass was caused by one of the two subcontractors, either the glass installation company, or the cleaning company. Based on this undisputed fact, the court determined no coverage existed under the policy because the products-completed operations hazard only provided coverage for plaintiff’s work, not subcontractors. Therefore, because no coverage existed, plaintiff’s bad faith claim was precluded. Accordingly, the insurer was granted summary judgment on the bad faith claim.

Date of Decision: September 25, 2013

Allegheny Design Mgmt. v. Travelers Indem. Co. of Am., Civil Action No. 2:12-cv-00658-TFM, 2013 U.S. Dist. LEXIS 137748 (W.D. Pa. Sept. 25, 2013) (McVerry, J.).

NOVEMBER 2013 BAD FAITH CASES: REVERSING ON BREACH OF CONTRACT CLAIMS IN THE INSURED’S FAVOR, THIRD CIRCUIT STILL AFFIRMS SUMMARY JUDGMENT ON BAD FAITH COUNT FOR FAILURE TO MEET EVIDENTIARY BURDEN OF CLEAR AND CONVINCING EVIDENCE, AND THAT SUGGESTIONS FROM EXPERT REPORTS ALONE ARE NOT SUFFICIENT TO ESTABLISH BAD FAITH CLAIM (Third Circuit)

In U.S. Fire. Ins. Co. v. Kelman Bottles, the insured brought suit against its insurers for breach of contract after its claims for damages resulting from a glass melting furnace blow-up in its factory were denied. Defendant produces glass bottles, requiring it to store approximately 220 tons of molten glass at temperatures of 2300 to 2800 degrees Fahrenheit in a glass melting furnace. In March of 2011, a catastrophic event occurred, spewing the molten glass throughout the factory for several hours. This caused severe damage to the furnace and other equipment in the plant.

The insured had two policies from two different insurers; the first insurer provided an “all risk” policy, and the second insurer provided an “equipment breakdown” policy. After the incident, the insured made claims under both policies. The all-risk insurer denied the claim under an Inherent Vice exclusion, Wear and Tear exclusion, and Design Defect exclusion. It also noted the loss might be excluded under the Maintenance Exclusion or the Mechanical Breakdown exclusion. The equipment breakdown insurer also denied coverage, arguing a “breakdown” did not occur within the definition of the policy. Following its denial, the all-risk insurer filed an action seeking a declaratory judgment that it had no obligation for the damages and losses suffered in the furnace incident. The insured filed cross-claims for breach of contract and bad faith, as well as a joinder complaint asserting a breach of contract claim against the equipment breakdown insurer.

In its bad faith claim, the insured alleged that the all-risk insurer deliberately ignored facts supporting defendant’s claim of coverage, refused to evaluate coverage under the appropriate policy provisions, refused to re-evaluate its position after facts favorable to the insured’s position emerged, and that the all-risk insurer’s conduct during litigation forced defendant to exhaust its financial resources. The district court granted summary judgment in favor of the insurers on both breach of contract claims, as well as the bad faith claim against the all-risk insurer. The insured appealed this ruling.

The appellate court overturned the district court’s grants of summary judgment on the breach of contract claims; however, it affirmed the summary judgment holding on the bad faith count. The appellate court found that the insured failed to present clear and convincing evidence of bad faith on any of its four allegations of bad faith conduct. The insured primarily alleged the all-risk insurer’s experts conceded their studies of the furnace and the blow-up incident suggested the exclusions claimed by the insurer did not apply. Without more, a jury could not find by clear and convincing evidence that the all-risk insurer’s denial was unreasonable, or that it knew or recklessly disregarded its lack of a reasonable basis to deny the claim.

Date of Decision: September 23, 2013

U.S. Fire Ins. Co. v. Kelman Bottles, Civil Action No. 12-2270, 2013 U.S. App. LEXIS 19448 (3d Cir. Sept. 23, 2013) (Roth, J.).

NOVEMBER 2013 BAD FAITH CASES: COURT DISMISSES BANK’S CLAIM AGAINST TITLE INSURER FOR FAILURE TO STATE A CLAIM AND COMPLAINT DID NOT SET OUT BAD FAITH AND DID NOT SET OUT THE KIND OF CLAIM THAT COULD ALLOW FOR BAD FAITH EVEN WHERE THERE WAS NO COVERAGE OBLIGATION (Middle District)

In Bank of Am., N.A. v. Martin, plaintiff brought suit against the insurer alleging breach of contract and bad faith for its failure to pay plaintiff’s claim under its title insurance after an error was discovered in the title. The title in question was created when defendant landowners took out a mortgage for the purchase of two tracts of land. The second of the two tracts was landlocked, and inaccessible except through the first tract. When it provided the loan, the mortgage company failed to include a legal description of the property in the mortgage documents. Instead, the mortgage company listed only the address of the second tract of land on the mortgage, excluding the first tract from the mortgage documents entirely. The insurer provided the mortgage company with a title insurance policy, securing a first priority mortgage interest in the combined parcels. When defendant landowners ultimately defaulted on the mortgage, the mortgage company repossessed it and auctioned it at a sheriff’s sale. Plaintiff purchased what it thought was both parcels, but in actuality, only received the title to the landlocked parcel. Upon learning of the mistake, plaintiff notified the insurer of its intent to make a claim.  The insurer denied coverage on the grounds the claim was premature, and encouraged plaintiff to pursue a foreclosure action against the combined parcels before submitting its claim. The parties continued to negotiate the claim, but were unable to reach a resolution.

Plaintiff ultimately brought suit against the insurer, alleging it acted in bad faith by denying the claim, failing to pay plaintiff for its loss within a reasonable time after the loss was suffered, failing to investigate and adjust the loss suffered, breaching its fiduciary duty, and by failing to act fairly and honestly toward plaintiff.

The court found plaintiff’s assertions were mere legal conclusions, and failed to satisfy the federal pleading standards imposed by Twombly. However, the court also found the other claims throughout the complaint, including the breach of contract claim, were insufficient to establish that the insurer acted unreasonably in denying plaintiff’s claim. Therefore, plaintiff’s failure to establish that it suffered a covered loss for which it should have been indemnified essentially precluded it from establishing a bad faith claim. While the Third Circuit does allow insurers to be held liable for bad faith even in circumstances where no duty to provide coverage existed, the circumstances in the instant case were not sufficiently egregious to establish such a case. The record showed the insurer fully investigated the foreclosure action, adopted the position the claim was premature, and advised plaintiff how to protect its claim. Furthermore, the parties mere disagreement as to whether a covered loss had occurred did not give rise to a bad faith claim.  Accordingly, the court granted the insurer’s motion to dismiss.

Date of Decision: September 12, 2013

Bank of Am., N.A. v. Martin, Civil Action No. 1:12-cv-544, 2013 U.S. Dist. LEXIS 130381 (M.D. Pa. Sept. 12, 2013) (Conner, J.).