Monthly Archive for October, 2014

OCTOBER 2014 BAD FAITH CASES: NO BAD FAITH IN UIM CASE WHERE INSURER CORRECTLY DETERMINED COVERAGE BASED ON INSUREDS’ CONTRACTUAL CHOICE TO LIMIT UIM AMOUNTS, AND WHERE NO OTHER FORM OF BAD FAITH ASIDE FROM COVERAGE DENIAL WAS PLEADED (Philadelphia Federal)

In Davis v. Allstate Property & Casualty Company, the UIM plaintiff brought claims for breach of contract and bad faith, based upon an alleged failure to pay $600,000 in connection with a fatal car accident.  The court found, however, that the insureds had complied with all the requirements necessary under Pennsylvania’s Motor Vehicle Financial Responsibility Act to reduce their policy’s underinsured motorist coverage to $15,000 per person and $30,000 per accident, and thus the insurer correctly denied claims in excess of the contractually agreed upon coverage amount.  The claim for breach of an implied covenant of good faith and fair dealing was likewise dismissed, because Pennsylvania law precludes that claim from proceeding independently of the contract claim on which it is based.

Further, there could be no statutory bad faith for denying coverage in these circumstances.  The court stated:  “When an insurer makes a correct determination of the amount owed under a policy, it has a reasonable basis for denying an insured’s claims for a higher amount,” and “plaintiff’s bad faith claim fails as a matter of law because a correct determination of coverage precludes a bad faith claim predicated on a theory that the insurer unreasonably denied coverage.”

Nor, was any other form of bad faith pleaded. The court stated that “Pennsylvania law does not limit bad faith claims to unreasonable denials of coverage. A bad faith [claim] can have various other bases, including an insurer’s lack of investigation, lack of adequate legal research concerning coverage, or failure to communicate with the insured.” However, no factual averments were pleaded to support even the inference that the insurer did not conduct an investigation, failed to conduct adequate legal research, or did not communicate with the insured.

That being said, the bad faith claims were dismissed without prejudice for plaintiff to file a second amended complaint which adequately sets forth her bad faith claims.

Comment:  This latter point raises the debated issue of whether a poor claims handling practice that may even be a violation of the UIPA, but which in no way results in, or is connected to, the actual delay or denial of a benefit because no benefit is owed under the policy, can constitute statutory bad faith.  See, e.g., Berks Mut. Leasing Corp. v. Travelers Prop. Cas., NO. 01-CV-6784,2002 U.S. Dist. LEXIS 23749, footnote 8 (E.D. Pa.  Dec. 9, 2002) (Yohn, J.) (“Accordingly, I find plaintiff’s interpretation of the statute unpersuasive. Instead, I conclude that Section 8371   is limited to causes of actions arising out of the bad faith handling or payment of claims and does not apply to conduct unrelated to the denial of a claim. In so holding, I join other courts that have expressly embraced this interpretation of Section 8371.”); Focht v. State Farm (“In this regard, it is relevant that the District Court for the Eastern District of Pennsylvania has held that, in determining whether a defendant had a “reasonable basis” for denying an insurance claim, the test elucidated in Terletsky “is an objective one” and that as long as “a” reasonable basis exists to deny the claim, “there cannot, as a matter of law, be bad faith.”); but see Shannon v. New York Cent. Mut. Ins. Co. (“Given the remedial purpose underpinning the Bad Faith Statute, we are not persuaded that permitting an insurer to evade its statutory obligation due to some fortuitous fact to which it was oblivious is consistent with the legislature’s intent.”).

Date of Decision: September 30, 2014

Davis v. Allstate Prop. & Cas. Co., Civil Action No. 13-cv-07038, 2014 U.S. Dist. LEXIS 138022 (E.D. Pa. September 30, 2014) (Knoll Gardner, J.)

OCTOBER 2014 BAD FAITH CASES: COURT REFUSES TO BIFURCATE BAD FAITH AND UIM CLAIMS WHERE SIGNIFICANT FACTUAL OVERLAP EXISTS (Middle District)

In Hoffer v. Grange Insurance Company, the court addressed the insurer’s request to bifurcate the bad faith and UIM claims.  The insured had settled with the other driver and made a UIM claim to his carrier. The insurer denied the claim on the basis that the insured was the one responsible for the collision.  The insured alleged that the carrier failed to objectively and reasonable evaluate the claim, misrepresented the investigation that occurred, and ignored relevant information from official reports in denying the claim without justification.  He brought claims for breach of contract and statutory bad faith.

The court observed the following general legal principles regarding the law of bifurcation: (1) a court may bifurcate separate claims or issues “[f]or convenience, to avoid prejudice, or to expedite and economize,” Fed. R. Civ. P. 42(b), subject to the court’s “informed discretion,”;  (2) “[T]he power to stay proceedings is incidental to the power inherent in every court to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants.”; (3) proper analysis requires the court to “weigh the various considerations of convenience, prejudice to the parties, expedition, and economy of resources,”; (4) bifurcation is not meant to be routine practice, citing the advisory committee note to Fed. R. Civ. P. 42(b); and (5) the moving party bears the burden of showing that bifurcation is appropriate.

The court further observed that bad faith and UIM claims are separate and distinct, and that a plaintiff could lose a UIM claim and still win the bad faith claim.

In this case, the court found that there would be substantial overlap in the discovery relevant to the two claims because they are based upon the same set of facts and they both turn on the determination of responsibility for the collision at issue.

In response to the carrier’s concerns that discovery would reveal documents protected from discovery in the breach of contract claim because they could be discovered in the bad faith case, which worked a prejudice, the court found that: (1) litigating insurers do not automatically waive attorney-client and work product privileges by defending against bad faith claims; and (2) that motions in limine and jury instructions may serve to limit the use of evidence introduced at trial.

Thus, the court ruled that the insurer failed to demonstrate that bifurcation was appropriate and denied the motion to bifurcate the litigation and to stay the bad faith claim.

Date of Decision:  September 29, 2014

Hoffer v. Grange Ins. Co., CIVIL ACTION NO. 1:14-CV-0262, 2014 U.S. Dist. LEXIS 137078 (M.D. Pa. Sept. 29, 2014) (Conner, J.)

OCTOBER 2014 BAD FAITH CASES: NEW JERSEY TRIAL JUDGE DISMISSES BAD FAITH CLAIM WHERE DISPUTED FACTS WOULD NOT PERMIT INSURED TO OBTAIN SUMMARY JUDGMENT ON SUBSTANTIVE COVERAGE CLAIMS (New Jersey Law Division, Bergen County)

In Omega Financial Services v. Aspen Specialty Insurance Company, a New Jersey Superior Court Law Division case, the court addressed whether a mortgage broker’s claims for indemnification were excluded under its professional liability policy, as well as the insured’s bad faith claim.  The insurer had filed a motion for summary judgment.  After a close analysis on the coverage issues, including whether the insured subjectively and objectively knew that the claim at issue could arise at the time it filled out its application failing to indicate the existence of the claim at issue, the court found summary judgment for the insurer inappropriate.  There were disputed issues of fact that a jury would have to decide as to the insured’s knowledge, as well as the nature of a putative regulatory investigation.

For the same reasons, however, the insured’s bad faith claim could not proceed. An insured claiming bad faith must be able to establisha right to summary judgment on the substantive coverage claim, as a predicate to assert a claim for insurer bad faith in refusing to pay.  No jury could reasonably find that the insured could have established a right to summary judgment as a matter of law on its claim for payment “based on the closely contested issues of fact in this case.”

The insured detailed its efforts to investigate the claim prior to denial, and the court’s “close rulings” in denying the insurer summary judgment “underscore the reasonableness of [the insurer’s] denial of coverage, and the extent to which [the insured] is relying on the deferential summary judgment standard to proceed to trial.”

Date of Decision:  September 22, 2014

Omega Fin. Servs. v. Aspen Specialty Ins. Co., DOCKET NO.: BER-L-7903-12, SUPERIOR COURT OF NEW JERSEY, LAW DIVISION, BERGEN COUNTY, 2014 N.J. Super. Unpub. LEXIS 2333 (N.J.L.Div. September 22, 2014) (Polifroni, J.)

OCTOBER 2014 BAD FAITH CASES: NO BAD FAITH CLAIM STATED FOR DENIAL OR DELAY ON DISABILITY POLICY WHERE MATERIAL ISSUES OF FACT CONCERNING RELIANCE ON CONSULTANTS AND CAUSES OF DELAY MADE OUTCOME “FAIRLY DEBATABLE”; NO STATUTORY ATTORNEY'S FEES AVAILABLE ON FIRST PARTY CLAIMS (New Jersey Federal)

In Onex Credit v. Atrium 5 Ltd., a company has purchased a disability policy on its CEO.  The policy provided that if the terms were met, the company could receive a large lump sum payment.  There were numerous conditions and exclusions, and after a lengthy investigation by the carrier’s representative coverage was denied.  The company brought suit for breach of contract, bad faith (breach of the implied covenant of good faith and fair dealing), and also sought statutory attorney’s fees.

As to the bad faith claim, the company argued that there was a bad faith delay, and a bad faith refusal to pay.  To show a bad faith denial of payment, an insured must show that the insurer lacked a “fairly debatable” reason for denying coverage and that it knew or recklessly disregarded the absence of a reasonable basis to deny the claim.  To establish an unreasonable delay case, the delay must be shown to be lacking any valid reason, and that the insurer knew or recklessly disregarded the fact that there was no valid reason justifying the delay.  These tests are essentially the same. Thus, to make out a case, the insured has to show that it would be entitled to summary judgment on the bad faith claim, i.e., there can be no material issues of disputed facts that would favor the insurer in precluding summary judgment on the bad faith issue.

In this case, there were disputed issues of material fact as to the reasonableness of the insurer’s denial, specifically concerning its reliance on third party consultants in reaching a conclusion as to their qualifications and findings.  On the delay claim, the court found that the insured overstated the delay by one year and that its objection to producing certain documents resulted in another 6 month delay.  The insurer had promised at one point a decision in 30 days, and had not requested the belatedly produced documents until a year after the original claim.  The court indicated that a jury could find that, at most, this was the result negligence or mistake, which do not constitute bad faith.

The court rejected the argument that there was a need for more discovery concerning the consultants, as this simply circled back to establishing the presence of disputed facts that would not permit a grant of summary judgment in the insured’s favor.  Thus, the company could not overcome the fairly debatable obstacle to relief.  The same result applied to the delay issue, as the reasons for the delay were fairly debatable, and neither negligence nor mistake could make out bad faith. Finally, the court would not entertain the statutory attorney’s fee claim under Rule 4:42-9(a)(6), in connection with having to bring suit to enforce coverage.  This court found that this rule did not apply in the first party context.

Date of Decision:  September 26, 2014

Onex Credit v. Atrium 5, Civil Action No. 13-5629 (ES),  2014 U.S. Dist. LEXIS 135778 (D.N.J. September 26, 2014) (Salas, J.)

OCTOBER 2014 BAD FAITH CASES: NEW JERSEY FEDERAL JUDGE ELUCIDATES HOW INSUREDS ADEQUATELY PLEAD BAD FAITH UNDER TWOMBLY TO AVOID DISMISSAL UNDER “FAIRLY DEBATABLE” STANDARD (New Jersey Federal)

Laing v. American Strategic Insurance Corporation is a Hurricane Sandy case, alleging that the insurer failed to properly adjust the claim and underpaid under the terms of the policy. The insureds alleged that the insurer both misrepresented the scope of the insurance policy and made false representations regarding scope of the damage to their home. Among other claims, the insureds sought relief for breach of the implied covenant of good faith and fair dealing and for bad faith.

The court found that New Jersey’s Supreme Court has held these two putative causes of action amount to the same claim, with the cause of action now being seen as rooted in contract rather than tort.  In interpreting the breach of the implied contractual covenant of good faith and fair dealing in the first party context, an insured must prove (1) the absence of a reasonable basis to deny benefits; and (2) that the insurer knew or recklessly disregarded the lack of a reasonable basis for denying the claim. There is no bad faith if an insurance claim is “fairly debatable”.  The presence of a “fairly debatable” claim is found where the insured “cannot establish ‘as a matter of law a right to summary judgment on the substantive claim,’ i.e., the underlying contract claim.”

In this case, the insurer moved to dismiss the breach of good faith claims under Twombly/Iqbal in federal court; however, the court found that the pleadings were sufficient to make out a bad faith claim. The court cited with approval the following allegations being sufficient to support plaintiffs’ case at the pleading stage:  the insurer “refused to pay [Plaintiffs’ claim] in full, despite there being no basis whatsoever on which a reasonable insurance company would have relied to deny the full payment”: the insurer “knew or should have known that it was reasonably clear that the claim was covered”; the insureds “hav[ing] complied with all policy provisions and hav[ing] cooperated fully with the investigation of this claim,” “[the insurer] and/or its agents improperly adjusted the Plaintiffs’ claim”;  the “adjuster misrepresented the cause of, scope of, and cost to repair”; and the insurer “denied at least a portion of the claims without an honest investigation.” Assuming these allegations to be true as it must under Rule 12(b)(6), this did not make out a fairly debatable case for the insurer at this stage of the litigation. Thus, the court refused to dismiss the claims.

Date of Decision:  October 1, 2014

Laing v. Am. Strategic Ins. Corp., Civil Action No. 14-1103 (MAS) (TJB),  2014 U.S. Dist. LEXIS 139739 (D.N.J. Oct. 01, 2014) (Shipp, J.)

 

OCTOBER 2014 BAD FAITH CASES: COURT FINDS “LACK-OF-FORTUITY” EXCLUSION IMPLIED IN EVERY ALL RISK INSURANCE POLICY, AND NO BAD FAITH WHERE DENIAL HAD A REASONABLE BASIS (Philadelphia Federal)

In Fry v. Phoenix Insurance Company, the insured homeowners suffered a wall collapse, after a long history of issues with the wall. There were various expert reports on problems with the wall that led the court to conclude that the insureds had knowledge of both potential problems causing the collapse, and that they failed to timely act to prevent the collapse after having been specifically warned it would occur absent certain actions.

First, coverage was properly denied because the policy only covered collapses if the causes were hidden from the insured, and such was not the case here.

Second, and of significant interest, is the court’s then finding that there was no coverage because the collapse was not the result of chance or accident, i.e., it was not fortuitous. The court specifically found that “under Pennsylvania law, a lack-of-fortuity exclusion is implied in every all-risk policy, such as the Policy at issue here.”

The court ruled that Third Circuit precedent established this principle, citing support from appellate case law: “there is an implied exclusion in every all-risk insurance policy for losses that are not fortuitous”; the “Supreme Court of Pennsylvania would recognize a ‘judicially created “fortuity” exclusion from coverage’ based on the generally accepted principle that ‘every “all risk” contract of insurance contains an unnamed exclusion — the loss must be fortuitous in nature’”; “The fortuity requirement is based on ‘[p]ublic policy considerations and the general nature of insurance,’ preventing an insurance policy ‘from providing coverage for a policyholder’s losses unless those losses are fortuitous.’”; “[W]e predict that the Pennsylvania Supreme Court would place on the insurer the burden of proving that the circumstances of the loss were such that coverage would be inconsistent with that public policy.”

The court then addressed what the Third Circuit meant by “fortuity”. “A fortuitous event … is an event which so far as the parties to the contract are aware, is dependent on chance.” “Such an event ‘may be beyond the power of any human being to bring the event to pass; it may be within control of third persons, provided that the fact is unknown to the parties. The thrust of the definition is that the occurrence be unplanned and unintentional in nature.’” “’In essence, the doctrine precludes coverage from losses that are certain to occur.’” “’Typically, the inherent fortuity doctrines preclude coverage based on what the insured knew or should have known about its potential liability at the inception date of the insurance policy at issue….”

Moreover, the court ruled that the determination of whether a claimed loss is fortuitous is a question of law for the court. Although the court indicated the determination of fortuity was solely a legal issue, the court concluded its analysis that the loss in this case was not fortuitous because no reasonable jury could find the loss fortuitous, thus indicating there may be some role for the jury on the issue.

As to the specific record, independent of the precise cause, all of the experts had told the insureds the wall would collapse unless they took certain actions, they did not, and the wall collapsed, i.e., no fortuity.

Thus summary judgment was granted on the breach of contract claims, and the bad faith claim was dismissed as the court’s analysis demonstrated denial was reasonable.

Date of Decision:  September 19, 2014

Fry v. Phoenix Ins. Co., CIVIL ACTION NO. 12-4914, 2014 U.S. Dist. LEXIS 131504 (E.D. Pa. September 19, 2014) (Stengel, J.)

OCTOBER 2014 BAD FAITH CASES: NO BAD FAITH CLAIM WHERE INSURER CARRIED OUT REASONABLE INSPECTION AND CAME TO CONCLUSION THAT RESULT OF THE INSPECTION FELL WITHIN AN EXCLUSION, & INSUREDS DID NOT OFFER MATERIAL FACTS TO SHOW, EVEN IF WRONG, THAT POSITION WAS UNREASONABLE OR THE RESULT OF INTENT SUFFICIENT TO MEET THE BAD FAITH STANDARD (Middle District)

In Focht v. State Farm Fire & Casualty Company, the homeowner insureds brought breach of contract and bad faith claims centering on a water based loss.  The coverage issue centered on whether the damage at issue was caused by flood damage arising up inside the house, or water penetrating the house during a storm and causing damage from above.  The former was not covered.  The insurer investigated and found that the storm damage in the upper part of the house did not correlate with water damage, but the water damage was consistent with flooding.  The insured’s public adjuster found evidence to support that the water did infiltrate from above.

The court ruled that while a reasonable jury could find for the insureds, there was no evidence to support a bad faith claim.  The insureds’ allegations at most added up to negligence or bad judgment, not bad faith.  That the insurer covered a water damage claim 8 years earlier that was arguably excluded, did not help the insureds make out a case.  Even if the exclusion had applied and the insurer paid anyway, “all that could mean is that Plaintiffs received money … to which they were not entitled.”  Such an oversight by the carrier 8 years earlier could not be evidence of bad faith in a separate claim, “when Plaintiffs’ policy specifically excludes the damage that [the insurer] determined was at issue [8 years later] and when there is no evidence in the record that that determination was motivated by dishonesty or a breach of known duty as would be required to establish bad-faith liability under Terletsky.”

In addressing the factual assertions the insureds made to defend against summary judgment, it was significant to the court that a number of facts or issues raised were not actually relevant to the coverage dispute actually at issue, particular observing that the dispute over surface vs. subsurface water was immaterial as neither was covered.  The court also found that the length of time the insurer’s inspector took with the property, 25-30 minutes, did not create an issue where there was no other evidence to indicate it should have taken longer.

Date of Decision:  September 5, 2014

Focht v. State Farm Fire & Cas. Co., 3:12-CV-01199, 2014 U.S. Dist. LEXIS 124561 (M.D. Pa. September 5, 2014) (Mariani, J.)

 

OCTOBER 2014 BAD FAITH CASES: (1) STATUTORY BAD FAITH CLAIM SUFFICIENTLY PLEADED BECAUSE PLAINTIFF ALLEGED BASIS FOR UNREASONABLE CANCELLATION; (2) NO STATUTORY BAD FAITH ACTIONABLE AGAINST A BROKER WHO IS NOT AN INSURER; (3) NO BREACH OF FIDUCIARY DUTY CLAIM PLEADED THAT GOES BEYOND CONTRACT CLAIM FOR DUTY OF GOOD FAITH AND FAIR DEALING (Philadelphia Federal)

In Kofsky v. Unum Life Insurance Company of America, the insured purchased a disability insurance policy.  He alleged that the defendants, the insurer and the insured’s broker, unilaterally cancelled his insurance policy without prior notice. Thereafter, the insured claimed that he still forwarded payment under the policy, and that he fulfilled his duties under the policy, but the defendants refused to reinstate the policy. He brought claims for statutory bad faith, among others, against both the insurer and the broker, each of which sought to dismiss those claims.

The insurer’s motion to dismiss was denied. Although the complaint lacked details, it provided enough factual allegations to sufficiently state a bad faith claim. The insured alleged that the carrier unilaterally cancelled the policy even though the insured had fulfilled his obligations under the policy. This was enough to allege the carrier lacked a reasonable basis for cancellation, which can be the basis of a bad faith claim, and that there were issues of fact that remained.

The insurance broker was successful, however, because the bad faith statute only applies to insurers, not entities like brokers which do not issue policies, collect premiums, or assume risks or contractual obligations.

The court dismissed the breach of fiduciary duty claim against the insurer.  There were no allegations that some action was taken or agreement made that would take the insurer beyond its contractual obligations as an insurer, which did not automatically create a fiduciary duty; rather, this appeared to be akin to a claim for breach of the contractual duty of good faith and fair dealing, which is subsumed in the breach of contract claim.

Date of Decision:  September 2, 2014

Kofsky v. Unum Life Ins. Co. of Am., CIVIL ACTION NO. 13-5647, 2014 U.S. Dist. LEXIS 122220 (E.D. Pa. September 2, 2014) (Surrick, J.)