Monthly Archive for January, 2014

JANUARY 2014 BAD FAITH CASES: ARBITRATION CLAUSE APPLIES TO BAD FAITH CLAIM AS IT ARISES OUT OF UNDERLYING ARBITRABLE BREACH OF CONTRACT CLAIM (Philadelphia Federal)

In United Ref. Co. v. Nat’l Union Fire Ins. Co., Plaintiff brought suit against its insurer alleging the insurer was liable for business losses incurred by the plaintiff when a ruptured pipeline delayed shipments of crude oil to plaintiff’s refining facilities. The insurer provided plaintiffs with an “all-risk” policy, as well as providing “contingent business income coverage” and “contingent extra expense coverage.” Plaintiff filed a claim under both of these clauses of the policy. After hiring independent appraisers to evaluate and analyze plaintiff’s losses and claims, the insurer denied the claims on the basis that the losses were incurred within a 45 day waiting period, and therefore, were not covered.

Plaintiff filed suit alleging breach of contract, intentional interference, and bad faith claims against the insurer and the appraisers. The insurer then filed a motion to dismiss arguing, among other things, that plaintiff’s claims were subject to an arbitration clause in the insurance policy. The relevant portion of the arbitration policy provided for arbitration if “the Insured and the Company fail to agree in whole or in part on the liability of the insured or on the amount of loss or damage…” Plaintiff first argued the arbitration clause only applied to disagreements about the liability of the insured, and not the insurer. Based on precedent that interpreted an identical arbitration clause, the court found that argument without merit. Plaintiff also argued the arbitration clause only applied to contract disputes between the parties and not tort claims. However, similar cases provided precedent that all claims arising out of the facts concerning the breach of contract claim will also fall within the arbitration clause. Since a bad faith claim, by its very nature, arises out of the underlying breach of contract claim, the court found the bad faith count to be arbitrable.

Date of Opinion: Dec. 12, 2013

United Ref. Co. v. Nat’l Union Fire Ins. Co., Civil Action No. 2:13-CV-909, 2013 U.S. Dist. LEXIS 175814 (E.D. Pa. Dec. 13, 2013) (Jones II, J.).

JANUARY 2014 BAD FAITH CASES: INSURER’S SUMMARY JUDGMENT AFFIRMED ON EQUITABLE FRAUD COUNT AND POLICY RESCINDED (New Jersey Appellate Division)

In Those Certain Underwriters at Lloyd’s, London Subscribing to Policy No. Buy1780 v. Cleopatra, LLC, the insurer brought suit against its insured seeking declaratory judgment and rescission of the policy for material misrepresentation by the client on the insurance application. In November of 2009 defendant-hotel suffered severe damage caused by high winds and rain associated with Hurricane Ida. Three months later, defendant submitted a claim to the insurer alleging a loss caused by heavy winds, which damaged the roof causing a water loss to the building and property. The insurer reserved the right to deny coverage due to any failures by defendant, and later exercised that right finding the damage was not caused by the Hurricane, and was actually the result of wear and tear and seepage over a period of time that caused the losses. The insurer then filed a declaratory judgment action against defendant, and defendant filed counterclaims alleging breach of contract and bad faith.

After filing its declaratory judgment action, the insurer discovered defendant had, in fact, sustained losses on the property while insured by another company despite its opposite representation in its insurance application. The insurer provided policies based on its belief defendant’s property had not sustained any previous losses, and required defendant’s signature attesting that the insurance application contained no efforts to defraud the insurance company. Defendant separately signed a ‘no-loss-letter’ certifying she suffered no loss or claim on the property. At her deposition, defendant testified she was never presented with completed documents. Rather, she signed and dated blank pieces of paper and provided them to the insurance broker.

Upon discovering the misrepresentation, the insurer amended its complaint to add counts of legal fraud, equitable fraud, and violations of the NJ Insurance Fraud Prevention Act. The insurer sought summary judgment on the equitable fraud issue in an effort to have the policy voided. Equitable fraud consists of 1) a material misrepresentation of a presently existing or past fact; 2) the maker’s intent that the other party rely on it; and 3) detrimental reliance by the other party, all proven by a preponderance of the evidence. The court granted summary judgment finding the insurer definitely proved all elements of equitable fraud. Furthermore, the insurer was able to demonstrate the misrepresentation was untruthful, material to the particular risk assumed by the insurer, and actually and reasonably relied upon by the insurer in the issuance of the policy thereby causing the misrepresentation to constitute equitable fraud and allowing for the rescission of the policy. The court found the insurance application and no-loss-letter contained material misrepresentations, and affirmed the lower court’s grant of summary judgment in favor of the insurer.

Date of Decision: Nov. 20, 2013

Those Certain Underwriters at Lloyd’s, London Subscribing to Policy No. Buy1780 v. Cleopatra, LLC, 2013 N.J. Super. Unpub. LEXIS 2797 (App. Div. Nov. 20, 2013) (Parrillo, Harris, and Guadagno).

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Back from Winter Break

We are back from a brief winter hiatus, and hope you are finding some sun and warmth on these cold winter days.Sun and Sky

JANUARY 2014 BAD FAITH CASES: BAD FAITH CLAIM ARISING FROM DEATH IN 1999 BARRED BY STATUTE OF LIMITATIONS (Philadelphia Commerce Court)

In Tertyshnaya v. Std. Sec. Life Ins. Co., plaintiff, wife of the late Philadelphia Flyers player Dmitri Tertyshny, brought suit against the insurer that provided her husband with a disability and accidental death policy when it denied her benefits under the policy after her late husband’s death at a summer training camp. The policy was issued in March of 1999, listing plaintiff as the beneficiary. Decedent passed away in July of 1999. Plaintiff was never paid any benefits under the policy, and in August of 1999, the insurer returned the unused premium and canceled the permanent total disability policy. In May of 2010, plaintiff filed a seven-count complaint, including a claim of bad faith, against the insurer.

The insurer filed a motion for summary judgment citing the lapse of the statute of limitations. In Pennsylvania, bad faith claims are governed by a two year statute of limitations. The court granted the insurer’s motion, finding plaintiff was aware of her right to recover in July of 1999 upon her husband’s death, and that she was aware no death benefits were included in the policy, nor would any such benefits be disbursed by the insurer, in August of 1999. Therefore, at the latest, the statute of limitations began to run in August of 1999. The court granted the insurer’s motion for summary judgment on the basis of statute of limitations and dismissed the action.

Date of Decision: Dec. 13, 2013

Tertyshnaya v. Std. Sec. Life Ins. Co., No. 3803 Commerce Program, 2013 Phila. Ct. Com. Pl. LEXIS 374 (C.C.P. Phila. Dec. 13, 2013) (Snite, J.).

JANUARY 2014 BAD FAITH CASES: EASTERN DISTRICT DENIES INSURED’S MOTION ON THE PLEADINGS OF INSURER’S BAD FAITH BREACH OF CONTRACT COUNTERCLAIM (Philadelphia Federal)

In Solid Waste Servs. v. New York Marine & Gen. Ins. Co., plaintiff brought suit against its insured concerning subrogation of an employee’s personal injury claim. Plaintiff was self-insured up to $1 million per claim under the Pennsylvania Workers’ Compensation Act, after which the insurer provided an excess policy to plaintiff for up to $25 million in excess coverage. The policy provided the insurer with subrogation rights in the event of a successful recovery of damages from a third party. Specifically, the policy provided that any recovered amounts would first be used to reduce the insurer’s loss, and any remaining balance would be paid to the insured. The policy also required the insured to retain a loss of $1 million.

After a catastrophic work injury, plaintiff provided the one million in a work-related incident, in benefits to the employee. After that point, plaintiff began submitting all remaining pay-outs for reimbursement to the insurer. The insurer ultimately paid out approximately $2.1 million in reimbursements for the employee’s benefits. The employee brought suit against several third parties. In that litigation, he recovered approximately $6.5 million. Under the PWCA, a portion of the recovery was subject to a lien based on the workers’ compensation benefits the employee had already received. That money, $1.5 million, was paid into escrow and both plaintiff and the insurer were notified.

At that point, plaintiff sought reimbursement from the escrow funds. The insurer believed it should receive the funds first, and since the funds were insufficient to fully compensate the reimbursements it paid out to plaintiff, that it should receive all of the funds. Plaintiff filed suit, and the insurer filed three counterclaims, seeking declaratory judgment and alleging bad faith by plaintiff. Summary judgment motions were filed on all claims.

The court ruled in the insurer’s favor on the declaratory judgment issue, as the plain language of the policy clearly required the insurer be reimbursed out of any third party recovery before plaintiff. Furthermore, the policy required plaintiff to retain a million dollar loss to have access to the excess coverage, and if plaintiff were reimbursed before the insurer, that requirement would not be satisfied. The court dismissed plaintiff’s complaint, and allowed the insurer to move forward with its bad faith claim.

Date of Decision: Dec. 12, 2013

Solid Waste Servs. v. New York Marine & Gen. Ins. Co., Civil Action No. 13-1525, 2013 U.S. Dist. LEXIS 173849 (Dec. 12, 2013 E.D. Pa.) (Pratter, J.).

JANUARY 2014 BAD FAITH CASES: PRIMA FACIE EVIDENCE CLAUSE ENFORCED AGAINST PRINCIPAL IN SURETY CASE THAT CONSIDERED STANDARDS FOR BAD FAITH IN SURETY CONTEXT (Chester County)

Plaintiff, the surety, brought suit against its principal seeking indemnification for damages paid on the principal’s behalf after issuing a bond for a construction project. Under the surety agreement, the principal was liable for indemnifying the surety for all losses and expenses arising from the execution or procurement of the bonds. The surety contract also included a “prima facie evidence clause.” Under the clause, the surety was allowed to pay or compromise any claim, demand, suit, judgment, or expense arising out of the bonds if the surety reasonably believed it was liable for the amount paid, or that it was expedient under the circumstances to make such a payment or compromise. The payment would be binding upon the principal as a loss or expense covered by the indemnity clause whether or not the liability actually existed.

Courts enforce prima facie evidence clauses against the principal unless the principal is able to demonstrate either bad faith or fraudulent payment by the surety. In the context of a surety contract, bad faith requires a showing of recklessness or improper motive, such as self-interest or ill will. In this scenario, plaintiffs produced an itemized statement, which was explicitly listed as sufficient to establish prima facie evidence in the surety agreement. Defendants were unable to demonstrate the payment in question as made in bad faith, making the court’s decision turn on the parties’ agreement as a matter of law. Defendants failed to create any genuine issue of material fact, and therefore summary judgment was entered in favor of the plaintiff.

Date of Decision: March 8, 2013

Lincoln Gen. ins. co. v. Gracie Corp., Civil Action No. 2008-06251, 2013 Pa. Dist. & Cnty. Dec. LEXIS 190 (March 8, 2013 Pa. County Ct.) (Tunnell, J.).

JANUARY 2014 BAD FAITH CASES: CLAIM CONCERNING FIRST PARTY MEDICAL BENEFITS GOVERNED BY SECTION 1797 OF MVFRL WHICH PRE-EMPTS BAD FAITH CLAIMS (Philadelphia Federal)

In our first post of 2014,

Winter Sun

Yang v. State Farm Mut. Auto. Ins. Co., the Court found that plaintiff’s claims concerning improper conduct by insurers in paying first party medical benefits is governed by section 1797 of the Motor Vehicle Financial Responsibility Law, which pre-empts any potential claim under the Bad Faith Statute.

Date of Decision:  November 21, 2013

Yang v. State Farm Mut. Auto. Ins. Co., No. 13-CV-2725, UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA, 2013 U.S. Dist. LEXIS 166194 (E.D.Pa. November 21, 2013) (Ditter, J.)