Monthly Archive for June, 2014

JUNE 2014 BAD FAITH CASES: CONCLUSORY LEGAL ALLEGATIONS ARE INSUFFICIENT TO STATE BAD FAITH CLAIM UNDER TWOMBLY/IQBAL, BUT COURT GAVE PLAINTIFF OPPORTUNITY TO AMEND AND CURE PLEADING DEFICIENCIES (Middle District)

In Warnstorff v. State Farm Automobile Insurance Company, the insured brought a bad faith claim against its carrier for unreasonably delaying the evaluation of her underinsured motorist claim, and withholding payment. The plaintiff alleged four specific actions in her complaint which she claimed constituted bad faith. These allegations were: “failing to promptly evaluate the claim and make an offer,” “failing to promptly request any additional information [the insurer] believes it needs and evaluate that information and make an offer [sic],” “attempting to find any unfounded reason to refuse to pay underinsured motorist benefits,” and “delaying in evaluating the claim and making an offer.” Applying the Twombly/Iqbal standards, the court found that these allegations were conclusory legal statements; and were therefore insufficient to create a cause of action for bad faith.

First, the insured did not provide any indication of the length of time over which all the events occurred to support her allegation of unreasonable delay. The court clearly found that it was necessary to plead facts indicating the time frame in which the claim was or was not evaluated, or the allegation was not factual but a mere legal conclusion. Next, without any factual support about the length of any delay, the allegation that the carrier failed to promptly request any information it would have needed to fully evaluate the claim was again a mere conclusion.

The plaintiff also alleged an unreasonable refusal to pay benefits, but she did not allege the total amount of her damages. She only pleaded that she received $90,000 from the underinsured tortfeasor, and that she felt entitled to more. These allegations only show that there is some dispute over her insurance contract that has, at the time of the complaint, not concluded in her favor. This failed to plead sufficient facts to state a claim to relief that is plausible on its face. Further, the plaintiff did not raise a reasonable expectation that discovery would reveal evidence of necessary elements to prove her bad faith claim.

Plaintiff attempted to flesh out her claims by attaching letters to her brief opposing the motion to dismiss, which were not part of the complaint.  The court declined to consider those documents outside the complaint, and, for the forgoing reasons dismissed the bad faith claim.  However, the court granted leave to amend to provide plaintiff with the opportunity to cure the pleading deficiencies.

Date of Decision: June 19, 2014

Warnstorff v. State Farm Auto. Ins. Co., CIVIL ACTION NO. 3:14-0077, 2014 U.S. Dist. LEXIS 83551 (M.D. Pa. June 19, 2014) (Mannion, J.)

 

JUNE 2014 BAD FAITH CASES: WORKERS’ COMPENSATION CARRIER HAD RIGHT TO PLACE A LIEN ON SETTLEMENT WITH THIRD PARTY, AND THUS BAD FAITH CLAIM DISMISSED (Philadelphia Commerce Court)

In Askew v. Insurance Company of the State of Pennsylvania, the court determined that a contractual provision requiring a construction company to waive its subrogation rights as against the owner, general manager, and any contractors involved in a construction project, did not apply to that contractor’s workers’ compensation insurance carrier. Thus, the workers’ compensation carrier could place a lien on the injured worker’s recovery from a third party related to the incident at issue, and that carrier did not act in bad faith in placing the lien on settlement proceeds.

Date of Decision: April 17, 2014

Askew v. Ins. Co. of  Pa., Case No. 01590, COMMON PLEAS COURT OF PHILADELPHIA COUNTY, PENNSYLVANIA, 2014 Phila. Ct. Com. Pl. LEXIS 122 (C.C.P. Phila. April 17, 2014) (Dembe, J.)

JUNE 2014 BAD FAITH CASES: ATTORNEY INSURED’S BREACH OF CONTRACT AND BAD FAITH CLAIMS DISMISSED UNDER PRIOR KNOWLEDGE EXCLUSION IN MALPRACTICE POLICY WHERE DRAGONETTI ACTION AGAINST ATTORNEY AND THE CLIENTS BRINGING SUBSEQUENT MALPRACTICE SUIT CREATED OBJECTIVELY REASONABLE BASIS TO KNOW OF POTENTIAL MALPRACTICE CLAIM (Philadelphia Federal)

In Ettinger & Assocs., LLC v. Hartford/Twin City Fire Ins. Co., the court addressed coverage under an attorney’s professional liability policy. The initial events concerned a suit against a realtor, who purportedly failed to inform his clients correctly about the zoning of a lot adjacent to a property. Although the realtor’s clients profited from the eventual sale of the property, they brought suit, alleging that the realtor’s errors and/or misrepresentations in connection with the zoning still resulted in lost profits. The court ultimately found against the realtor’s clients on summary judgment.

The realtor subsequently filed suit against the clients and their lawyer for wrongful abuse of civil proceedings pursuant to the Dragonetti Act in bringing the action against the realtor. The realtor alleged that the attorney “not only knew his filings and prosecution of the [Realtor Action] claims were wrongful and malicious under the law, but encouraged and/or permitted his clients to pursue those claims rather than terminating or withdrawing from the action as their counsel, even in the face of being forewarned of the consequences.”The realtor’s counsel had repeatedly warned the clients’ counsel that the claims were frivolous. The attorney represented both himself and the clients in the Dragonetti action, after telling the clients there was no conflict of interest in doing so.

The clients later fired the attorney and filed cross claims against him in the Dragonetti action, asserting professional negligence and malpractice, as well as a separate malpractice action. First, they alleged that he was negligent in advising them that the original claims against the realtor had merit, putting them in a position to be subject to the Dragonetti action. They further alleged that the attorney breached a fiduciary duty by failing to advise them about potential conflicts of interest stemming from his representation of both them and himself in the Dragonetti action, and of their right to file a cross claim against him in the Dragonetti action.

The attorney sought coverage from his insurance carrier under a Claims Made Professional Liability Policy, which the carrier declined. The attorney brought a declaratory judgment action against the carrier, seeking coverage for himself and his firm, and asserting statutory bad faith. The carrier denied coverage on the basis of the “prior knowledge” exclusion, and “Relation Back Provision”, and brought a motion for judgment on the pleadings, which is governed by the Twombly/Iqbal standards.

The attorney-insured obtained the policy approximately six months before the malpractice suit was filed. The policy provided coverage for claims made during the policy period, defining claims as “[a] demand received by an insured for money or services alleging a negligent act, error, omission, or personal injury in the rendering of or failure to render professional legal services…’ or “[s]ervice or receipt of a suit or arbitration dispute resolution proceeding in which damages are claimed”.

The policy contained a “prior knowledge” exclusion which stated that the policy did not apply to claims arising out of an act occurring prior to the inception date of the policy, if any insured knew or could have reasonably foreseen that such an act might be expected to be the basis of a claim. The insurer declined coverage on the basis that the attorney-insured knew from the Dragonetti action that his allegedly deficient representation of the clients in the Realtor Action could have been the basis for a future malpractice claim by those clients against the attorney. The insurer argued that a reasonable lawyer in that situation would have been on notice that its acts, errors, or omissions in prosecuting the underlying Realtor litigation could be the basis of a claim. The carrier also took the position that the policy’s Relation Back Provision applied because both the malpractice action and the Dragonetti action arose out of the same or related negligent acts, errors or omissions and would be treated as a single claim pursuant to the aforementioned policy provision, i.e. the original advice in bringing the action against the realtor.

In analyzing the Prior Knowledge Exclusion, the Court applied the two-part Selko test. First, the insurer must show that the insured knew certain facts related to the prior incident, and second, the knowledge must be sufficient to create a reasonable “basis to believe” that a professional duty had been breached. Selko v. Home Ins. Co., 139 F. 3d 146 (3d Cir. 1998). The court found that the Prior Knowledge Exclusion applied as a matter of law, reasoning that the filing of the Dragonetti action in itself constituted an allegation of professional negligence for purposes of the policy’s prior knowledge exclusion. Moreover, by that point, the attorney knew that the underlying action, which he filed on behalf of the clients, had been dismissed on the basis that the case lacked factual support for the claims asserted against the realtor (specially observing that the clients admitted the realtors statements were true at the time made). The court found knowledge existed from the language in the Dragonetti complaint that the attorney “not only knew his filings and prosecution of the [Realtor Action] claims were wrongful and malicious under the law, but encouraged and/or permitted his clients to pursue those claims rather than terminating or withdrawing from the action as their counsel, even in the face of being forewarned of the consequences.” It stated that these allegations were sufficient as a matter of law to show that a reasonable attorney would have had a basis to believe that he had breached a professional duty.

The Court also addressed the “Relation Back Provision”. The Policy contained a provision which stated that all claims arising out of the same or related incident will be deemed to have been made when the first claim is made. To determine whether claims relate back to the same facts, courts review the previous complaint to determine if the acts at issue, not the legal theories, are the same as, or related to, the alleged acts in the current dispute. The Court concluded that the “bad advice” aspect of the malpractice action arose from the same acts as the original action as a matter of law, reasoning that attorney’s advice in pursuing the original action and subsequently continuing a frivolous suit was proximate cause of legal fees and the eventual Dragonetti action against the clients. The Court, however, noted that the dual-representation aspect of the malpractice action, based on the attorney’s representation of his clients in the original suit and the Dragonetti Action, did not relate back for purposes of the policy exclusion.

Ultimately, this distinction did not affect the eventual disposition of the suit as coverage was still unavailable under the Prior Knowledge Exclusion. Therefore, the Court granted the insurer’s Motion for Judgment on the Pleadings.

Date of Decision: May 22, 2014

Ettinger & Assocs. v. Hartford/Twin City Fire Ins. Co., CIVIL ACTION NO. 12-3274, 2014 U.S. Dist. LEXIS 70265 (E.D.Pa. May 22, 2014) (Stengel, J.)

JUNE 2014 BAD FAITH CASES: IN A WIDE RANGING DECISION ON IMPORTANT DISCOVERY ISSUES, THE COURT RULED THAT: (1) CLAIMS LOGS WITH FACTUAL INFORMATION PROVIDED BY ATTORNEYS TAKING EXAMINATIONS UNDER OATH, PRIOR TO A COVERAGE DECISION, ARE NOT SUBJECT TO THE ATTORNEY-CLIENT PRIVILEGE (INCLUDING THE IDENTITY OF LAWYER DECISION MAKERS IN THE EUO PROCESS), WHILE OTHER INFORMATION CONCERNING ADVICE OR POST-DECISION INFORMATION IS PRIVILEGED; (2) INFORMATION RELATING TO SUBROGATION POSSIBILITIES, AND OBTAINING A CAUSE AND ORIGIN REPORT, ARE NON-PRIVILEGED ORDINARY BUSINESS FUNCTIONS IN CLAIMS INVESTIGATION; AND (3) SPECIFIC CLAIMS AND PROCEDURE MANUALS ACTUALLY GIVEN TO AN INDIVIDUAL CLAIMS HANDLER ARE DISCOVERABLE, BUT MUST BE KEPT CONFIDENTIAL (Philadelphia Federal)

In Henriquez-Disla v. Allstate Property and Casualty Insurance Company, the carrier had provided redacted claim files, asserting the attorney-client privilege, and including a privilege log. The insured moved to compel production of the unredacted files on the basis that the attorney was acting in the role of claims adjuster or investigator. The insured also sought certain information regarding the retention of counsel and counsels’ activities in the “investigation of Plaintiffs’ claims.” Again, the insured provided the redacted claim logs and claimed attorney-client privilege. The case actually involved two separate claims, one for theft and one for fire loss. The judge reviewed the unredacted document in camera prior to making her rulings. The underlying claims were for breach of contract and bad faith.

Counsel was retained early in the investigation of these claims, and this included an examination under oath (“EUO”). The carrier argued that counsel was retained for legal advice, which, the court observed, was “not unusual occurrence when an insurer is considering denying a claim.”

However, following New York case law, the court found that taking an examination under oath prior to a coverage decision is an ordinary business function, and is not subject to the attorney-client privilege. Reviewing the documents before her, it did “not appear from the claim logs that any coverage decision had been made at the time counsel was contacted to conduct the EUO’s.” The unredacted logs indicated “that counsel was charged, at least in part, with the duty of collecting financial and ownership information in connection with the EUO.” Thus, the court concluded “that log entries and emails related to the scheduling and taking of the EUO’s, including the collection of information for the EUO’s, are part of the ordinary business function of claims investigation and therefore fall outside the attorney-client privilege.”

The court did state that “any communication seeking counsel’s advice remains privileged.” Further, “once the EUO was taken, counsel’s observations and opinions concerning the content of the statement are privileged, as it was legal advice regarding the propriety of the denial of the claim.”

The court, again following New York law, further held that “log entries and information relating to subrogation possibilities and obtaining a cause and origin report (C&O) are ordinary business functions in claims investigation.”

However, with respect to the log entries once suit was filed, the communications between counsel and the carrier were clearly in anticipation of litigation, reflected discussion of strategy, and were privileged communications. These redactions remained in-tact.

The insured also sought the identities of the individuals who determined that counsel needed to investigate Plaintiffs’ claims, the identities of all individuals at the law firm representing the carrier who participated in the investigation of the claims, and the individuals at the firm who determined that EUO’s were necessary. The insured also sought all documents concerning that firm’s consulting in its investigation and in determining that the EUO’s were necessary. The court found those questions should be answered by the discovery already permitted. The court noted that that the unredacted log entries would reveal that counsel was retained to conduct the EUO’s and counsel’s investigation began in preparing to take the EUO’s. This adequately covered the identities of the specific lawyers making the decision to take the EUO’s.

Lastly, the insured sought certain documents, including policy and procedural manuals used to determine whether to deny a claim, whether to hire counsel to investigate claims, and whether to obtain EUO’s. The carrier argued that the information was confidential and proprietary, irrelevant, subject to the attorney-client and work product privileges, and that the requests were overbroad.The court observed that in the carrier’s response to the bad faith claim, it specifically denied “taking the depositions of Plaintiffs for the pretext of trying to find a reason to deny the Claims” and “applying improper standards to substantiate its denial of Plaintiffs’ first-party benefit claims.” Because of this, the court found that the insured had a right to test the legitimacy of these defenses, and thus needed to know the policies which inform the carrier’s decisions on these matters.

The court followed Judge Buckwalter’s November 16, 2011 decision in Platt v. Fireman’s Fund Ins. Co., which did a study to date on the discoverability of an insurance company’s internal claims-handling procedures, and permitted discovery on the subject, within limits, in concluding that “materials used by Defendant in processing Plaintiff’s insurance claims may be relevant to her cause of action for bad faith.” However, in light of the sensitive nature of the claims manuals and the overbroad request in Platt, he had limited discovery to “any material which pertains to instructions and procedures for adjusting claims and which was given to the adjusters who worked on [Plaintiff’s] claim,” and ordered that the material be kept confidential. The court then required the insurer to “produce copies of the claims procedures which inform its employees’ decisions to deny claims similar to Plaintiffs’, obtain EUO’s, and hire counsel to investigate claims (in the context of preparation for the EUO’s).” The court further ordered the insureds and their counsel to “maintain the confidentiality of these disclosures.”

Date of Decision: May 29, 2014

Henriquez-Disla v. Allstate Prop. & Cas. Ins. Co., CIVIL ACTION NO. 13-284, 2014 U.S. Dist. LEXIS 73014 (E.D. Pa. May 29, 2014) (Hey, M.J.)

JUNE 2014 BAD FAITH CASES: COURT FINDS INSURER COULD NOT ASSERT FORUM SELECTION CLAUSE AFTER IT CONSENTED TO REMOVAL TO FEDERAL COURT (Western District)

In Roman v. UniGroup Worldwide, the plaintiff insured contracted with the defendant shipping company and its agents to transport his household property from Israel to Pittsburg. Along with the shipping contracts, he also took out a policy with the defendant insurer. Plaintiff brought both statutory bad faith claims pursuant to the Pennsylvania Bad Faith statute, 42 Pa.Cons.Stat. § 8371, the Pennsylvania Unfair Insurance Practices Act, 40 P.S. § 1171.5(a), and Pennsylvania Unfair Insurance Practices Regulations, 31 Pa. Code § 146, et seq. Id. at ¶¶ 104-122 and common law breach of the implied duty of good faith, alleging that the insurer unreasonably refused to settle a claim by not investigating, adjusting, and paying the losses related to the claim promptly.

Plaintiff originally filed the action in state court, but the defendant shipping company filed a notice to remove to the Western District of Pennsylvania. The shipping company’s agents and the insurer both consented to the removal. The insurer filed a motion to dismiss for failure to state a claim based on an alleged violation of a forum selection clause. The insurer argued that the insurance contract contains a forum selection clause designating Israel as the exclusive forum for resolving disputes and a governing law clause requiring application of British law.The defendant further argued that Plaintiff could not state a valid claim under British law due to violations of Britain’s Marine Insurance Act of 1906. Specifically, they alleged that he had violated the Act’s affirmative duty to disclose risks by failing to notify the insurer of Hurricane Sandy’s impending landfall.

The Court held that the motion to dismiss for failure to state a claim was improper. Even if the forum selection clause was found to be valid, it would not deprive the District Court of jurisdiction, but rather, the Court could exercise its jurisdiction to decide the validity of the clause and then subsequently dismiss the case on a motion for summary judgment. Further, the Court found that the insurer consented to the jurisdiction of the federal court by consenting to the notice of removal.

Magistrate Judge Eddy cited the Third Circuit decision Coastal Steel Corp. v. Tilghman Wheelabrator Ltd., 709 F.2d 190, 202 (3d Cir. 1983) for the proposition that a forum selection clause would be presumptively valid unless: (1) it is the result of fraud or overreaching, (2) enforcement would violate a strong policy of the forum, or (3) enforcement would result in litigation in a jurisdiction so seriously inconvenient as to be unreasonable. Considering these factors, the Court found that it had insufficient information to make an informed decision regarding the validity of the forum selection clause. It recognized that there were inconsistencies in the language of the forum selection clause and also that there were still questions of fact involving whether the clause was properly signed and executed. Therefore, the court denied the motion to dismiss and ordered that the parties proceed to discovery.

Date of Decision: Report and Recommendation of Magistrate Judge April 14, 2014 (Eddy, M.J.) adopted by District Court, May 28, 2014

Roman v. Unigroup Worldwide, Inc., 2014 U.S. Dist. LEXIS 72338 (W.D. Pa. May 28, 2014) (Conti, J.)

JUNE 2014 BAD FAITH CASES: INSURED STATED A BAD FAITH CLAIM BY ALLEGING ENOUGH FACTS TO PUT REASONABLENESS OF THE INSURER’S COVERAGE DENIAL AT ISSUE, AND THUS DISCOVERY WAS NEEDED TO DETERMINE THE ISSUED OF REASONABLENESS (Middle District)

In Rizk v. State Farm Fire & Cas. Co., the insured had a homeowners policy that excluded coverage for frozen plumbing pipes; however, the exclusion did not apply “if the insured used reasonable care to maintain heat in the building.” The insured alleged that although he was away from the home during the winter months, attending school, he had a friend come to the house to set the thermostat at an appropriate temperature to prevent freezing; and that they would come and check the house periodically during January. Still the pipes froze. The carrier denied coverage, and the insured brought breach of contract and bad faith claims. The carrier argued the bad faith count should be dismissed for not setting forth a plausible bad faith claim.

The court rejected this argument. First, the insured specifically alleged that he took reasonable care to maintain heat by having a friend set the thermostat to an appropriate temperature, and by checking on the property at various times in January 2013. Second, the insured further alleged that the carrier purposefully interpreted the policy to resolve ambiguities in favor of itself; failed to provide a reasonable basis for denial of the claim; and failed to reasonably and adequately investigate the claim.

The court cited Judge Conaboy’s February 2014 decision in Aldsworth for the proposition that “where the reasonableness of the defendant’s basis for denying coverage was a factual issue, dismissal of the plaintiff’s bad faith claim was premature.” Whether the insurer in this case had a reasonable basis for denying the claim depended on the factual issue of whether the insured took reasonable care to maintain heat in the residence. Again, citing Aldsworth: “While discovery may not provide Plaintiffs with the required clear and convincing evidence that Defendant ‘(1) did not have a reasonable basis for denying benefits under the policy; and (2) knew or recklessly disregarded its lack of a reasonable basis in denying the claim,’ a determination on these matters is not properly made on the record before us.”

Date of Decision: May 21, 2014

Rizk v. State Farm Fire & Cas. Co., CIVIL NO. 1:14-CV-619, 2014 U.S. Dist. LEXIS 70460 (M.D. Pa. May 21, 2014) (Caldwell, J.)