Monthly Archive for May, 2014

MAY 2014 BAD FAITH CASES: COURT DENIES MOTION TO STRIKE AVERMENT OF CONTRACTUAL DUTY OF GOOD FAITH, BUT GRANTS MOTION REQUIRING A MORE DEFINITE STATEMENT FROM PLAINTIFF-INSURED TO PLEAD MORE FACTUAL AND LEGAL DETAIL SUPPORTING HER STATUTORY BAD FAITH CLAIM (Middle District)

In Hoffer v. Grange Insurance Company, the Magistrate Judge addressed, via his Report and Recommendation which was later adopted by the District Court, two technical motions under the Federal Rules of Civil Procedure: a Rule 12(f) motion to strike a paragraph of the Complaint; and requiring a more definite statement of a claim under Rule 12(e). The matter in dispute was a breach of contract and bad faith UIM case.

Addressing the Rule 12(f) motion, the court refused to strike the averment: “[a]s [the insured’s] insurer, Defendant owes a fiduciary, contractual and statutory obligation to investigate, evaluate, and negotiate the UIM claim in good faith and to arrive at a prompt, fair and equitable settlement.” The court recognized such motions are not favored, and that a judge should only use the discretion to strike averments in a pleading only when those pleadings are both redundant, immaterial, impertinent, or scandalous and unfairly prejudicial to the opposing party. In fact, the court found the averment unremarkable and consistent with Pennsylvania law.

One of the plaintiff’s arguments against the motion to strike was that this averment tied into a statutory bad faith. However, this claim was not clearly pleaded, and the court used the authority of Rule 12(e) to direct plaintiff to make a more definite statement of the section 8731 count. The court quoted Third Circuit precedent: “When a complaint fashioned under a notice pleading standard does not disclose the facts underlying a plaintiff’s claim for relief, the defendant cannot reasonably be expected to frame a proper, fact-specific…defense…. The Rule 12(e) motion for a more definite statement is perhaps the best procedural tool available to obtain the factual basis underlying a plaintiff’s claim for relief.” Thus, since the complaint did not clearly articulate the legal and factual footing for any statutory bad faith claim, and did not even specifically identify a claim under Pennsylvania’s bad faith statute, directing the insured to provide a more definite statement at the outset was deemed the prudent, appropriate exercise of the court’s discretion.

Date of Decision: Report and Recommendation of Magistrate Judge April 30, 2014 (Carlson, M.J.), adopted by District Court, May 23, 2014

Hoffer v. Grange Ins. Co., CIVIL ACTION NO. 1:14-CV-0262 , 2014 U.S. Dist. LEXIS 70789 (M.D. Pa. May 23, 2014) (Conner, J.)

MEMORIAL DAY: "But in a larger sense, we cannot dedicate, we cannot consecrate, we cannot hallow this ground. The brave men, living and dead who struggled here have consecrated it far above our poor power to add or detract."

Fourscore and seven years ago our fathers brought forth on this continent a new nation, conceived in liberty and dedicated to the proposition that all men are created equal. Now we are engaged in a great civil war, testing whether that nation or any nation so conceived and so dedicated can long endure. We are met on a great battlefield of that war. We have come to dedicate a portion of that field as a final resting-place for those who here gave their lives that that nation might live. It is altogether fitting and proper that we should do this. But in a larger sense, we cannot dedicate, we cannot consecrate, we cannot hallow this ground. The brave men, living and dead who struggled here have consecrated it far above our poor power to add or detract. The world will little note nor long remember what we say here, but it can never forget what they did here. It is for us the living rather to be dedicated here to the unfinished work which they who fought here have thus far so nobly advanced. It is rather for us to be here dedicated to the great task remaining before us–that from these honored dead we take increased devotion to that cause for which they gave the last full measure of devotion–that we here highly resolve that these dead shall not have died in vain, that this nation under God shall have a new birth of freedom, and that government of the people, by the people, for the people shall not perish from the earth.

 

 

MAY 2014 BAD FAITH CASES: DISTRICT COURT DENIES MOTION TO REMAND WHERE BAD FAITH CLAIMS COULD RESULT IN PUNITIVE DAMAGES AWARD THAT WOULD EXCEED $75,000 (New Jersey Federal)

In Carevel, LCC v. Aspen American Insurance Company, a Super Storm Sandy coverage case, the court addressed the issue of whether to remand the matter to state court for failure to meet the federal jurisdictional minimum of $75,000.

The complaint asserted claims for breach of contract; failure to promptly effectuate a settlement to conduct an investigation to justify its refusal, forcing the insured to seek resolution through litigation; and gross misconduct, bad faith and a breach of defendants’ duty of good faith and fair dealing owed to Plaintiff as established by New Jersey’s Unfair Settlement Practices Act, N.J.S.A. 17:29B-1 et seq., N.J.S.A. 17B:30-13.1 and N.J.A.C. 11:2-17.1 et seq. The insured sought damages, interest and costs of suit, attorney’s fees and punitive damages.

Under New Jersey statutory law, where punitive damages are permitted, there may be an award that is up to 5 times compensatory damages. The court found a claim had been stated that could provide for punitive damages. The record included an invoice for $23,130 that could constitute compensatory damages. Under the case law and the punitive damages statute, punitive damages could rise as high as five times that sum; and therefore a jury could return punitive damages of as much as $115,650.

Thus, the jurisdictional minimum was met as the insured plaintiff could not demonstrate to a “legal certainty” that the damages would not exceed $75,000.

Date of Decision: May 14, 2014

Carevel, LLC v. Aspen Am. Ins. Co., No. 2:13-cv-7581 (WHW), 2014 U.S. Dist. LEXIS 65928 (D.N.J. May 14, 2014) (Walls, J.)

MAY 2014 BAD FAITH CASES: ON MOTION IN LIMINE, COURT DECIDES: (1) PLAINTIFF’S INSURANCE CLAIM HANDLING EXPERT CANNOT TESTIFY ON MEDICAL ISSUES OR RESERVES; (2) EVIDENCE OF RESERVES NOT PROPER IN DISABILITY INSURANCE CLAIM; (3) PAST GENERAL CLAIMS HANDLING PRACTICES NOT ADMISSIBLE, BUT PRE-CLAIM EVIDENCE CONCERNING ACTUAL INSURED ADMISSIBLE; (4) PLAINTIFF CAN RECOVER FOR EMOTIONAL DISTRESS UNDER COMMON LAW CONTRACT BREACH OF DUTY OF GOOD FAITH; BUT (5) PLAINTIFF CANNOT RECOVER FOR “LITIGATION STRESS” EXPERIENCED IN THE BAD FAITH LITIGATION ITSELF (PHILADELPHIA FEDERAL)

In Leporace v. New York Life & Annuity Corp. the court addressed various motions in limine on a bad faith claim against a disability insurer.

On the first issue, both parties attempted to disqualify the other’s experts. Plaintiff’s expert was qualified on most issues, but was not permitted to testify on the strengths of medical opinions or medical care. Furthers, she was not permitted to testify on reserves. The Court concluded that introducing evidence on reserves would be contrary to the concepts behind competitive and confidential reserve practices of insurance companies, and should not be permitted in a bad faith case on a disability insurance claim.

As to the insurer’s expert, the court allowed expert testimony on the basis of the expert’s conclusions regarding the carrier’s claims manual that the insurer met its obligations; however, it found this expert’s reliance on Pennsylvania statutory and regulatory positions, the NAIC Market Regulation Handbook and various on-line websites “doubtfully relevant, if at all….”

The court would not allow a volume of evidence on the carrier’s practices, prior to the date that the court found the claim at issue started; however, the court did allow limited evidence under Federal Rule of Evidence 404(b) on the specific issue of the carrier identifying the insured as a “malingerer” during a five year period prior to the current claim.

Next, citing Birth Center and the recent Peruggia decision, the court did permit plaintiff to see damages for emotional distress under a common law contract claim for breach of the duty of good faith.

Finally, the court would not allow expert testimony, or recovery, on the insured’s claims for “litigation stress”. The court analyzed this issue closely, and gave two reasons that the insured could not seek recovery for the stress of the bad faith lawsuit itself. First, it cited a body of cases from various jurisdictions rejecting “litigation stress” because there is no question that filing a lawsuit is the plaintiff’s decision, and imposing additional damages on the defendant for defending against the plaintiff’s claims would impair the defendant’s right to defend itself. Second, once a lawsuit is instituted, the party becomes subject to the contentions of an opposing party and the rulings of a court, and the stress may be from the insurer’s counsel conduct of the case or even the court’s ruling, and not the insurer itself.

Date of Decision: May 7, 2014

Leporace v. N.Y. Life & Annuity Corp., CIVIL ACTION NO. 11-2000, 2014 U.S. Dist. LEXIS 62911 (E.D.Pa. May 7, 2014) (Baylson, J.)

 

MAY 2014 BAD FAITH CASES: COURT REJECTS INSUREDS’ ATTACK ON THEIR OWN APPRAISER, AND DENIES MOTION TO SET ASIDE APPRAISAL AWARD (Philadelphia Federal)

In Mitchell v. Safeco Insurance Company, a fire loss action, the appraisers for the insured and insurer agreed to the value of the loss, without the need to go to the umpire, and stipulated in writing to the appraisal award. The insureds, however, challenged the result on the basis that their own appraiser suffered some form of mental breakdown which rendered him incompetent to adequately advocate for them; and they brought breach of contract and bad faith claims against the carrier. To pursue these claims, they moved to have the court set aside the appraisal award.

The court observed that judicial review of an appraisal award is severely limited. In order to set aside an appraisal award, a plaintiff must clearly establish that they were denied a hearing, or that fraud, misconduct, corruption or other irregularity caused the rendition of an unjust, inequitable, or unconscionable award. The court observed that it could determine whether appraisers exceed their authority. The court assumed arguendo that challenging their own appraiser’s mental capacity was a proper basis to overturn the appraisal; however, the insureds introduced no evidence in this regard at the hearing. At most, the evidence demonstrated that the insureds’ appraiser was somewhat dilatory and non-responsive to the insureds, their public adjuster, and to the insurer’s appraiser. However, the insureds’ appraiser inspected the property in question and had three meetings with the defendant’s appraiser. The two appraisers agreed that the insurer’s appraiser would prepare the first draft of the appraisal and forward it to the insured’s appraiser for his review and critique. The court observed that this not an uncommon appraisal procedure; and that both appraisers do not always prepare their own initial appraisals. At their final meeting, based on a suggestion by the insureds’ appraiser, the actual cash value of the loss was increased by $13,000 in the original draft; and this sum was incorporated in the jointly signed appraisal award. There was neither actual evidence that the insureds’ appraiser had any mental breakdown; nor any evidence of fraud, misconduct, corruption or other irregularity in the appraisal process. Neither appraiser exceeded his authority. Accordingly, the petition to set aside the appraisal was denied.

Date of Decision: May 6, 2014

Mitchell v. Safeco Ins. Co., CIVIL ACTION NO. 14-625, 2014 U.S. Dist. LEXIS 62661 (E.D. Pa. May 6, 2014) (Bartle, J.)

MAY 2014 BAD FAITH CASES: COURT ALLOWS AMENDMENT TO COMPLAINT ADDING BAD FAITH CLAIM OVER TWO YEARS INTO THE CASE WHERE COVERAGE DENIAL OCCURRED DURING THE LITIGATION, AND THE NEW ALLEGATIONS CONCERNED EVENTS OR OCCURRENCES THAT ONLY CAME TO LIGHT AFTER THE ORIGINAL COMPLAINT WAS FILED (Middle District)

In Kump v. State Farm Fire & Casualty Company, the insured plaintiff sought to amend his complaint. The case arose out of a fire to the insured’s home. The insured claimed that the fire destroyed a valuable art and artifact collection worth many millions of dollars, or that the art and artifacts were stolen after the fire. The insured had a homeowner’s policy and personal articles policy. The insurer did not accept all of the claims as to the presence and existence of the art and artifacts claimed by the insured, and did not pay the full value of the policies. The insured wanted amend his complaint to assert two breach of contract claims, two breach of implied contract claims, and a statutory bad faith claim. The court did permit the bad faith claim to be added, but not the others.

The insured argued that the insurer’s investigation into the ownership and authenticity of his artwork was conducted in bad faith, alleging a series of events including witness intimidation, a biased investigation, inadequate legal research, and unreasonable interpretations of the policies. The original complaint had been filed in 2010. However, the insured’s central assertion in seeking the amendment on the bad faith claim was that a July 2013 letter denying coverage as to the paintings he claimed were lost in the fire or by theft ripened his bad faith claim. The court agreed with that argument. Further, the insured’s allegations contained in his proposed supplemental complaint are mostly events or occurrences that came to light after the original complaint was filed. Given the broad application of bad faith in Pennsylvania, the court found it appropriate to allow the plaintiff to file a supplemental pleading asserting the bad faith cause of action.

In its legal summary, the court emphasized that section 8731’s broad language wasdesigned to remedy all instances of bad faith conduct by an insurer, whether occurring before, during, or after litigation; and that bad faith conduct also includes lack of good faith investigation into facts, and failure to communicate with the claimant.

Date of Decision: April 28, 2014

Kump v. State Farm Fire & Cas. Co., CIVIL ACTION NO. 3:12-0072, 2014 U.S. Dist. LEXIS 58266, April 28, 2014, Decided, (M.D. Pa. April 28, 2014) (Mannion, J.)

MAY 2014 BAD FAITH CASES: THIRD CIRCUIT (1) UPHOLDS DISCOVERY RULINGS THAT RESERVES AND COMMUNICATIONS WITH REINSURER WERE NOT DISCOVERABLE; (2) REITERATES THAT INSURER IS NOT OBLIGATED TO MAKE PARTIAL PAYMENTS ON A DISPUTED CLAIM; AND (3) FINDS NO BAD FAITH IN INSURER NOT ALTERING ITS ORIGINAL POSITION BASED ON ITS FIRST EXPERT’S VALUATION – DESPITE A SUBSEQUENT HIGHER VALUATION BY ITS SECOND EXPERT– PENDING THE OUTCOME OF THE APPRAISAL PROCESS (Third Circuit)

In Mirarchi v. Seneca Specialty Insurance Company, the Third Circuit affirmed the District Court’s judgment in the carrier’s favor on a fire loss claim.

The policy at issue had a $600,000 limit, directing that valuation on claims be done according to the property’s actual cash value (ACV). The policy defined ACV as the amount it would cost to repair or replace the property at the time of loss or damage, with material of like kind and quality, subject to a deduction for deterioration, depreciation and obsolescence. Further, per the policy, the carrier would not pay on any claim until it received a formal proof of loss from the insured. If a disagreement arose as to the value the property value or amount of loss, either party could seek an appraisal. A fire occurred, prompt notice was given, and each party retained experts.

The insurer estimated the ACV at approximately $332,000 and the insured’s expert came in at approximately $692,000. The insurer still paid the first $100,000 on the claim after the insured submitted a partial proof of loss. After receiving a proof of loss based on the $692,000 figure, the insurer paid the balance of the undisputed part of the claim, i.e., the difference between $100,000 and its experts ACV number ($332,000). The experts continued amicable discussions thereafter on the difference until the insured told his expert that he would not accept anything less than $500,000. The parties mutually agreed to enter the appraisal process, and each side hired an independent appraiser. The insurer’s appraiser estimated the ACV at $449,550, more than $100,000 higher than the insurer’s original estimate. The dispute was submitted to an umpire, who concluded that the ACV was $618,338.07. The insurer then paid the balance remaining on the $600,000 policy limit.

The insured brought a bad faith claim on the basis of delayed payment. As stated, the District Court granted the insurer summary judgment. The first issues on appeal were challenges to the trial court’s discovery rulings. First, the trial court found reserves not discoverable because they were irrelevant to the claims. This was a significant issue to the insured, because the carrier had set it reserves at the policy limit, $600,000, well above the initial valuation. The trial court explained that a loss reserve is the insurer’s own estimate of the amount which the insurer could be required to pay on a given claim. The lower court did recognize that reserve information is sometimes relevant in bad faith cases, but it concluded that the loss reserve figures in this particular case did not represent an evaluation of coverage based upon a thorough factual and legal consideration.

The Appellate Court found that the insured failed on appeal to show that the loss reserve figures were related to the carrier’s considered estimate of the ACV such that they would be relevant to his bad faith claim. Thus, the lower court did not err in its legal analysis of the relevance of loss reserve estimates generally in bad faith cases, and did not abuse its discretion in excluding the evidence in this case based on its lack of relevance to the bad faith claim.

In a footnote, the Third Circuit likewise upheld the lower court’s decision not to permit discovery of communications between the insurer and its reinsurer for the same reasons that it affirmed on the loss reserve issue, i.e., these communication were not evidence of the insurer’s considered evaluation of the value of the insured’s claim. The Third Circuit also found no abuse of discretion in the trial court’s refusal to extend discovery, compel additional discovery responses or reconsider earlier rulings after the insured retained new counsel.

Turning to the merits, because the insurer ultimately paid the full policy limit, the bad faith claim was based on delay, which required the insured to show that (1) the delay was attributable to the insurer, (2) the insurer had no reasonable basis for causing the delay, and (3) the insurer knew or recklessly disregarded the lack of a reasonable basis for the delay. The cornerstone of the insured’s argument was the insurer’s second appraiser came in at a significantly higher number than the first expert; and that the insurer acted in bad faith by standing by its adjuster’s initial estimate of ACV pending resolution by the umpire, failing to make an additional partial payment, and failing to make a higher settlement offer.

As to the partial payment issued, an insurer has no duty to advance partial payments, particularly where the claim is disputed. Further, the undisputed evidence showed that the insurer relied on a genuine and considered estimate of ACV by its first expert. That subsequent estimates assigned a higher value to the claim did not constitute clear and convincing evidence that the insurer acted in bad faith either in arriving at its initial estimate or by standing by that estimate until the appraisal process concluded. The Third Circuit stated: “That is, after all, what the appraisal process is for—settling disputes about the value of a claim.”

The insured failed to show by clear and convincing evidence that the insurer acted unreasonably in the manner it paid the claim, and that no reasonable juror could conclude otherwise. The insured’s breach-of-contract claim, based on a breach of the duty of good faith, failed for the same reasons as his statutory bad faith claim.

Lastly, the court noted that the insured’s used of mathematical calculations regarding the first estimate, the property’s purchase price, and the balance of the insured’s mortgage lacked sufficient explanation to make a persuasive argument for a conspiracy between the insurer and its experts.

Date of Decision: April 29, 2014

Mirarchi v. Seneca Specialty Ins. Co., No. 13-2129 , UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT, 2014 U.S. App. LEXIS 8015 (3d Cir. April 29, 2014) (Ambro, J.)

 

MAY 2014 BAD FAITH CASES: IN ENCYCLOPEDIC OPINION ON SEALING DOCUMENTS TO BE FILED IN COURT AS PART OF SUMMARY JUDGMENT MOTION, COURT OBSERVES THE PRESENCE OF A PUBLIC INTEREST IN BAD FAITH DISPUTES WITH INSURERS; AND ADDRESSES CIRCUMSTANCES OF WHEN COMMUNICATIONS BETWEEN INSURED AND INSURER, WHICH INCLUDED PRIVILEGED DOCUMENTS BETWEEN INSURED AND ITS COUNSEL, MAY RESULT IN THE LOSS OF THE ATTORNEY CLIENT PRIVILEGE (Western District)

Mine Safety Appliances Co. v. North River Insurance Company involved breach of contract and bad faith claims by the insured against its insurer for alleged failure to cover losses under an umbrella policy. The underlying claims against the insured involved hundreds of asbestos actions. At issue before the court were motions to file documents under seal, and to redact allegedly privileged and/or confidential information from briefs and statements of fact that were going to be part of summary judgment motions. Judge Cercone goes into a painstakingly detailed analysis of factual and legal issues in reaching his conclusions, and we commend the reader to review is entire opinion. We only recite here the bad faith components of that opinion.

The insured alleged that the insurerfailed and refused to comply with its obligations under the policy; did not pay anything toward the amounts claimed, but instead responded with a carefully and deliberately orchestrated effort to delay and/or avoid payment of proceeds due under the Policy, with the ultimate goal of leveraging the insured into accepting far less than that to which it is entitled under the Policy (and under other excess liability policies that the insurer issued to the insured. The insured specifically asserted that the insurer did this by: (a) raising spurious questions regarding exhaustion of another policy; (b) raising spurious questions regarding the integrity of certain of the insured’s local counsel, when that same local counsel had been relied on for years by other insurers; (c) positing that the Policy does not obligate it to pay defense costs in addition to limits, when the Policy could not state the insurer’s obligation to do so more clearly; (d) positing, after the fact, that the insured was required to obtain jury research to substantiate the reasonableness of amounts that it paid to settle certain claims, while never suggesting before the fact that such research was important to the insurer or offering to pay for such research; (e) positing that the insured’s claims experience in certain jurisdictions is irrelevant to the amounts that plaintiff has paid to settle Underlying Claims that have been presented for reimbursement under the Policy; (f) demanding that the insured provide reams of historical claims data that is wholly irrelevant to the Underlying Claims for which the insured has demanded payment under the Policy, and refusing to make such payments until the insured does so (and, even where the insured does so, still avoiding payment by simply issuing a new set of irrelevant and burdensome information requests); (g) refusing the insured’s invitations to discuss directly with the insured’s local and national counsel the basis for settlement recommendations that the insured’s local counsel has made; (h) withholding from the insured information that the insurer has learned in connection with other of its insureds who, like the insured, are facing thousands of toxic tort claims in jurisdictions that are widely regarded as “plaintiff friendly,” and otherwise refusing to share its own expertise (on matters such as jury awards and settlement amounts that occur in various jurisdictions throughout the United States) with the insured; (i) eschewing its fiduciary obligation to work in a collaborative fashion with [plaintiff] to successfully defend and resolve Underlying Claims in favor of an inexplicably hostile and adversarial approach to [plaintiff]; and (j) refusing to pay any Underlying Claims until the insured has provided claims information that goes far beyond what the Policy, the law, and even the insured’s other insurers, require.

The insured further asserted that the insurer acted in bad faith by (a) failing and refusing to honor demands for reimbursement under the Policy without any adequate basis under the Policy or at law, (b) failing to pay proceeds under the Policy that are due and owing, (c) concocting various excuses, none of which have any merit under the Policy or at law, for delaying, and/or refusing to make, payment of amounts that are due and owing under the Policy; (d) engaging in improper claims-handling tactics, (e) using improper claims-handling tactics in an effort to pressure the insured into accepting less than that which it is owed under the Policy; (f) raising spurious questions regarding exhaustion of underlying insurance, and the integrity of the insured’s defense counsel, without any reasonable or good faith basis to do so; (g) refusing to share with the insured its own expertise or knowledge such that the insured may defend itself against the Underlying Claims more effectively; and (h) dealing with the insured in an adversarial manner, and not in a cooperative manner or as a fiduciary.

In terms of conducting its analysis of public right to access vs. placing documents under the seal, the court stated the following as to the bad faith issues. It observed that the insured had challenged the insurer’s claims-handling, including the formulation of its position on the availability of coverage under the policy, and accused the insurer of orchestrating a scheme to squeeze the insured into accepting less than it was entitled to under the bad faith statute. The court stated that although the term “bad faith” on the part of an insurer is construed as encompassing “any frivolous or unfounded refusal to pay proceeds of a policy” and ordinarily imports “a dishonest purpose and means a breach of a known duty (i.e., good faith and fair dealing, through some motive of self-interest or ill-will, the statue does not require a plaintiff to prove that the insurer consciously acted pursuant to such a motive or interest; it is enough if the insurer recklessly disregarded the lack of a reasonable basis in denying benefits. The court found that such assessments are matters of public importance. Rulings and/or determinations in this area have the potential to impact concretely the legal rights of other carriers and/or insureds not before the court.

The court then observed that the parties’ dispute arises under standard form provisions commonly used in the insurance industry. The resolution of the issues to be raised has the potential to impact (1) the duties and obligations of other carriers from which plaintiff has sought or will seek coverage, (2) the availability of insurance coverage for a great number of third-party claimants who have brought personal injury and wrongful death against plaintiff, and (3) other insureds, claimants and carriers that have been or are presented with similar underlying claims. The parties disagree about core concepts under the policy and related law, such as whether proper exhaustion has occurred; whether defendant has rights of contribution from other carriers; the limits of the policy; whether defense costs are in addition to the limits on indemnification; whether plaintiff can avail itself of the procedures in J. H. France Refractories and designate defendant as the carrier to respond to the tendered claims; the appropriate trigger of coverage for asbestos, silica, coal-mine-dust and similarly related claims; whether defendant properly has fulfilled its claims-handling responsibility; whether defendant’s chosen course of conduct can give rise to liability under Pennsylvania’s bad faith insurance practices statute; whether plaintiff’s claims-handling and settlement practices satisfy the requirements and obligations under the policy and so forth.Thus, it was readily apparent to the court that the parties’ dispute was not a garden-variety personal injury or breach of contract claim and its resolution had the potential to affect the rights and remedies of other carriers, insureds and third-party claimants, clearly involving issues of public importance that have the ability to affect directly and indirectly the rights of others not before the court. Consequently, the test for overriding the right of access must be applied with recognition of these potential consequences.

In one other aspect of this encyclopedic opinion, the court addressed the plaintiff’s assertion of the attorney client privilege in determining whether certain materials should be placed under seal because they embody privileged communications. The court took the position that attorney-client communications were not automatically subject to disclosure simply because the client’s state of mind was at issue; citing insurance bad faith cases on that point. The court further examined the common interest (different parties with different counsel sharing information in their common interest) and co-client (different parties with the same counsel) exceptions to the privilege where disclosure to third parties may still be barred, but not disclosures as between the parties in these circumstances. It observed the split in authority on whether the insurer in the tri-partite relationship is a co-client with the insured. In this case, however, neither exception applied to prevent disclosure to third parties as the insurer never provided or participated in the defense of the insured. The court further found that in the absence of the protective order, any privilege attaching to the materials and testimony that have been produced by the plaintiff were waived for at least two basic reasons: (1) disclosure to a third party and/or (2) being placed at issue in relation to plaintiff’s breach of contract and bad faith claims and the insured’s defense against the insurer’s position on exhaustion and meeting the prerequisites to the grant of coverage. Thus, the insurer had become a third-party to the underlying communications between (a) plaintiff and its underlying defense counsel; (b) plaintiff, its underlying defense counsel and its insurers; and (c) plaintiff’s insurer and its coverage counsel; and its disclosures were not for the purpose of obtaining legal advice. Again, we commend the reader to Judge Cercone’s opinion on the details on how this affected the sealing of these documents.

Date of Decision: March 31, 2014

Mine Safety Appliances Co. v. North River Ins. Co., 2:09cv348, 2014 U.S. Dist. LEXIS 42771 (W.D. Pa. March 31, 2014) (Cercone, J.)

 

MAY 2014 BAD FAITH CASES: WHILE DENYING SUMMARY JUDGMENT ON COVERAGE IN EARTHQUAKE/EARTH MOVEMENT CASE, SUMMARY JUDGMENT GRANTED ON BAD FAITH CLAIM WHERE INSURER REASONABLY RELIED ON ENGINEER’S REPORT AND OTHER FACTS OFFERED BY THE INSURED COULD NOT ESTABLISH BAD FAITH UNDER THE SUBSTANTIAL CLEAR AND CONVINCING EVIDENCE STANDARD; THOUGH COURT WOULD NOT CONSIDER INSURER’S EXPERT REPORT CONCLUDING THAT INSURER’S CONDUCT DID NOT CONSTITUTE BAD FAITH (Middle District)

Honesdale Volunteer Ambulance Corp. v. American Alternative Insurance Corp. involved a property damage claim in relation to an earthquake. The policy excluded coverage for “earth movement,” but covered earthquake damage and had an “earthquake deductible” of $57,910.00. The insured argued that the earthquake caused damage to the building, and the carrier contended that damage to the building pre-existed the earthquake, and was caused by erosion and settlement and not covered by the policy. The insurer also argued that the losses were caused by neglect, and not covered.

The court provided a detailed history of inspections of the property, both before and after the earthquake, including some colorful language of the insurer’s adjuster which the insured’s agent attributed to an intention to deny the claim. The carrier asserted that the insured failed to establish that it suffered a “direct physical loss” as a result of the earthquake, and that the evidence instead showed that any damage to the building was caused by preexisting, excluded conditions, including earth movement, building settlement, and neglect. Under the policy, coverage existed for “direct physical loss or damage to ‘real Property’ at a ‘premises’ caused by or resulting from any ‘covered cause of loss.'” “Direct physical loss” was not defined in the policy, but prior decisions found it to mean “that the loss must have a ‘close logical, causal, or consequential relationship’ with an earlier event.”The policy’s earth movement exclusion provided that any “sinking, rising, shifting, freezing, thawing, erosion, compaction, or expansion of the earth, including mine subsidence” is not covered. Building settlement is also not covered. However, “earthquake” damage was explicitly noted to be covered in the text of the exclusion. There was no dispute that the building suffered damage on account of earth movement. The question before the court was whether that movement was erosion and settlement, excluded under the policy, or earthquake. Citing the various expert reports and disparate facts, the court found that there was a material issue of fact on coverage. For similar reasons, the court also rejected the argument that the “lead-in” clause to the policy’s exclusions barred coverage.

The court then rejected the insurer’s known-loss doctrine argument, as the insured alleged an unknowable event. The court added that the doctrine requires some intentional or negligent act by the insured, or hiding the loss in question when applying for the policy; issues of fact that were in dispute.

Next, the court addressed the summary judgment motion on the insured’s bad faith claim. The court observed the rules that mere negligence is not sufficient to establish a bad faith claim, which must be proved by clear and convincing evidence. Further, an insurance company can defend itself by showing it had a reasonable basis for its conclusions, which need not have been correct. Nor must an insurer show that the process by which it reached its conclusion was flawless or that the investigatory methods it employed eliminated possibilities at odds with its conclusion. Rather, it must show that it conducted a review or investigation sufficiently thorough to yield a reasonable foundation for its action. At the summary judgment stage, as at trial, the insured must show that the evidence is so clear, direct, weighty and convincing as to enable a clear conviction, without hesitation, about whether or not the defendants acted in bad faith.

First, the insurer attempted to submit an expert report that it did not act in bad faith. The court did not consider that report because making a bad faith determination at the summary judgment stage does not require scientific, technical, or other specialized knowledge but only a consideration of the facts. Moreover, a district court need not give an expert report any weight in considering a bad faith claim, citing Federal Rule of Evidence 702.

The insurer also argued that there could be no bad faith because it responded promptly, agreed to reconsider the claim after receiving a report, and its reliance on an engineering report in reaching a decision. The insured argued that the carrier’s adjusters improperly judged the claim before even doing an investigation, that one of them improperly investigated the claim by looking at information online, and that the insurer failed to interview witnesses whose testimony supported the insured’s claim. The court found that the insured failed to meet its substantial burden of proof.

First, and most importantly an insurer’s reasonable reliance on an engineering expert’s report for a coverage decision does not constitute bad faith. In this case, the engineer made a prompt independent inspection, meeting with the insured’s expert and representative to review the claim. He made another inspection thereafter, and his opinion was consistent throughout. There was no evidence that the engineer shared in the mindset of the allegedly biased adjusters (who as lower level claims representatives had no authority in making a coverage decision themselves), nor evidence of any bias or impropriety. Rather, his reports were indicative of having undertaken a reasonable investigation. Under all the circumstances, the carrier’s reliance on this engineer was reasonable. Moreover, the adjusters’ rude conduct demonstrated poor behavior, but did not rise to the level of so tainting the investigation as to create bad faith by clear and convincing evidence. One other interesting point was the insured’s claim that the insurer’s adjuster looked at anonymous blog posting speaking ill of the insured. The court found no case law in the Third Circuit or Pennsylvania prohibiting claim investigators from researching on the internet. Moreover, an insurer does not act in bad faith by investigating and litigating legitimate issues of coverage. Thus, looking into whether there was serious preexisting damage to the building was legitimate and does not evince bad faith. Finally, there was no bad faith in the investigation simply because the insurer did not interview the employees working in the building on the day of the earthquake. While interviewing the employees may have been helpful in evaluating the claim, the insurer need not show that the process used to reach its conclusion was flawless or that its investigatory methods eliminated possibilities at odds with its conclusion. Rather, an insurance company simply must show that it conducted a review or investigation sufficiently thorough to yield a reasonable foundation for its action. The other evidence considered by the court showed that the insurer conducted a reasonable investigation.

Thus summary judgment was granted on the bad faith claim.

Date of Decision: March 24, 2014

Honesdale Volunteer Ambulance Corp. v. Am. Alternative Ins. Corp., CIVIL ACTION NO. 3:11-1488, 2014 U.S. Dist. LEXIS 38184 (M.D. Pa. March 24, 2014) (Mannion, J.)

2014 MAY BAD FAITH CASES: INSURED CANNOT BRING UNJUST ENRICHMENT CLAIM IN SUITS OVER INSURANCE POLICY (Middle District)

In Stephens v. State Farm Fire & Casualty Company, the court was faced with common law bad faith claims in the context of the insured pleading breach of contract and unjust enrichment. The insurer moved to dismiss the unjust enrichment claims. The Magistrate Judge recommended dismissal on the basis that where a written contract exists, a party cannot bring an unjust enrichment claim under Pennsylvania law. Citing recent Third Circuit case law, the court observed the principle that such unjust enrichment claims cannot be made in the insurance contract setting.

The District Court adopted the Report and Recommendation and the unjust enrichment count was dismissed.

Date of Decision: Report and Recommendation March 24, 2014, Adopted by District Court on May 5, 2014.

Stephens v. State Farm Fire & Cas. Co., Civil Action No. 1:14-CV-160, 2014 U.S. Dist. LEXIS 62559, March 24, 2014 (Report and Recommendation of Carlson, M.J.), adopted in Stephens v. State Farm Fire & Cas. Co., 2014 U.S. Dist. LEXIS 61750 (M.D. Pa. May 5, 2014) (Conner, J.)