Monthly Archive for March, 2016

MARCH 2016 BAD FAITH CASES: (1) BAD FAITH CLAIM FOR FAILURE TO COMMUNICATE SETTLEMENT DEMANDS WITHIN POLICY LIMITS REQUIRE SAME PROOF UNDER PENNSYLVANIA OR NEW JERSEY LAW; (2) POTENTIAL LOWER STANDARD FOR PUNITIVE DAMAGES IN PENNSYLVANIA NOT A BASIS TO DISMISS CLAIM; (3) ACTIONABLE CLAIM AGAINST AN INSURER’S MANAGING AGENT FOR CONTRIBUTION (New Jersey Federal)

In Allegheny Plant Services v. Carolina Casualty Insurance Company, the insured was subject to personal injury tort claims. The carrier provided defense counsel, and the case went to trial.  The jury verdict exceeded policy limits by nearly $700,000.  The insured brought suit against its insurer for failing to settle and/or inform the insured that there was an opportunity to settle within policy limits.  The insurer also sued appointed defense counsel.  Defense counsel joined the insurer’s agent that was allegedly engaged to monitor and manage the defense litigation, on a theory that the agent knew the policy limits and failed to manage the litigation prudently.

Although the case was transferred to New Jersey, the insured brought a Pennsylvania statutory bad faith claim against the insurer. The insurer sought to dismiss that claim on summary judgment. The court denied that motion.  Likewise the court denied the managing agent’s motion to dismiss defense counsel’s claim for contribution.

The court applied a conflict of laws analysis on the bad faith claim. Although New Jersey’s insurance bad faith claim is based in common law (the “fairly debatable” standard), not statute, the basic standards of proof are the same:  the lack of a reasonable basis to deny benefits, and a knowing or reckless disregard of that fact in denying benefits. The court observed that Pennsylvania’s courts had rejected proof of self-interest or ill-will as a third element.

The court then addressed the potential conflict between Pennsylvania’s right to punitive damages under the Bad Faith statute, and New Jersey’s general statute on punitive damages. It found a lack of clarity in the law on when punitive damages may be allowed under Pennsylvania’s Bad Faith statute, i.e., can punitive damages be awarded solely on a finding of statutory bad faith, and is that a different, lower, standard than an award of traditional punitive damages?

The court then stated: “I find it plausible that Pennsylvania would permit, if not require, a punitive damages award based on a bad faith verdict. Such a verdict, however, would have to carry within it the factual basis for a traditional award of punitive damages. Otherwise, punitive damages would be awarded in every bad faith case; if that had been intended, I would have expected a much clearer legislative statement to that effect. At any rate, such a conflict as to punitive damages—even if it existed—would not require me to dismiss Count 3, the relief sought here.”

Without resolving this critique of Pennsylvania law, the court went on to observe that should this issue arise at trial, Pennsylvania and New Jersey law could apply to proving bad faith, as both state’s laws are identical on that issue.  And, if it came down to it at trial, the parties could again move to determine which state’s law applied to punitive damages. Thus, there was still no basis to dismiss the case under either state’s law. Further, were there a true conflict, the court concluded that Pennsylvania law would apply; which would seem to resolve the punitive damages issue, but the court appeared to leave that open up to the time of trial.

As to the managing agent’s motion to dismiss, the court observed that the key to a viable claim for contribution among joint tortfeasors  is “common liability to the plaintiff at the time the cause of action accrued.” The court found that defense counsel’s third party complaint against the alleged agent adequately set forth a claim that that the managing agent contributed to a unitary injury suffered by the insured. Factual issues concerning the ability to control the defense, and the alleged agent’s contractual relations with the insurer, among other things, could not be disposed of at the motion to dismiss stage.

Date of Decision:  March 17, 2016

Allegheny Plant Servs. v. Carolina Cas. Ins. Co., No. 14-4265, 2016 U.S. Dist. LEXIS 35189 (D.N.J. Mar. 17, 2016) (McNulty, J.)

MARCH 2016 BAD FAITH CASES: LENGTHY INVESTIGATION ALONE INSUFFICIENT TO MAKE OUT BAD FAITH CASE; LATER LARGE JURY VERDICT ALONE COULD NOT SHOW BAD FAITH; TRIAL COURT HAS BROAD DISCRETION IN REJECTING EXPERT’S LEGAL CONCLUSIONS ON BAD FAITH (Third Circuit)

In Shaffer v. State Farm Mutual Automobile Insurance Company, the Third Circuit upheld the trial court’s summary judgment decision in this underinsured motorist case, affirming that “no reasonable fact finder could conclude that there is “clear and convincing” evidence that the insurer acted in bad faith”.

In evaluating a bad faith claim the court observed that:  “A claim for bad faith may be premised on an insurer’s bad faith in investigating a claim, such as by failing to conduct a good faith investigation into the facts or failing to communicate with the claimant. ….  Although a delay between a demand for benefits and an insurer’s determination of whether to pay a claim is relevant, delay “does not, on its own, necessarily constitute bad faith.” ….  Rather than focusing solely on delay, courts have looked “to the degree to which a defendant insurer knew that it had no basis to deny the claim[].” Thus, “’[i]f delay is attributable to the need to investigate further or even to simple negligence,’ bad faith has not been shown.”

The insureds focused on the alleged delay in investigating and evaluating their UIM claim.  The court found that the insurer’s request to obtain the injured insured’s extensive medical file was not undertaken for the purpose of delaying the claim. Nor was there evidence that retaining a doctor to review the file was merely a pretext to effect a low payment the claim.  Even if the claims handling process was flawed, no evidence was presented that the delays or the insurer’s objectives were anything other than an effort to evaluate the insured’s medical history and determine the claim’s value.

After summary judgment on bad faith had been entered below, the case went to trial and the insureds won a substantial jury verdict.  The Third Circuit did not find this a basis to rewrite the lower court’s decision. The “jury’s later determination regarding the credibility of [the] medical review does not affect the reasonableness of [the insurer’s] earlier reliance on that review. Similarly, the fact that [the insurer’s] settlement offer was much lower than the amount the jury ultimately awarded would not necessarily affect the reasonableness of [the insurer’s] reliance on the review in making that offer.”

The court further ruled that the timing of the insurer’s opening the UIM file was not a basis for reversal; nor was the manner in which the carrier assessed medical expenses from the incident at issue vs. prior injuries.

Finally, the Third Circuit upheld the trial court’s decision to disregard the insured’s expert regarding the bad faith issue.  A trial court “has considerable discretion to accept or reject an expert’s conclusions on the question of bad faith.” And in this case, the expert review provides a legal conclusion without adding any additional facts, and so provides no factual evidence to support a claim of bad faith.”

Date of Decision:  March 10, 2016

Shaffer v. State Farm Mut. Auto. Ins. Co., No. 15-1196, 2016 U.S. App. LEXIS 4448 (3d Cir. March 10, 2016) (Jordan, McKie, Vanaskie, JJ.)

MARCH 2016 BAD FAITH CASES: WHERE EXCLUSION APPLIES AND THERE IS NO DUTY TO DEFEND THERE CAN BE NO BAD FAITH CLAIM (Superior Court of Pennsylvania, Non-Precedential)

In Peoplekeys, Inc. v. Westfield Insurance Company, the Superior Court affirmed the trial court’s decision, in which the trial court had concluded: “It is evident that the former employee’s counterclaim against Plaintiffs falls within an exclusion for coverage. Accordingly, Defendant had no duty to defend, and the counts for breach of contract and bad faith, necessarily, must fail.”

Date of Decision:  February 25, 2016

Peoplekeys, Inc. v. Westfield Ins. Co., No. 100 WDA, 215, 2016 Pa. Super. Unpub. LEXIS 599 (Pa. Super. Ct. February 25, 2016) (Bender, Shogan, Stabile, JJ.) (Non-Precedential)

MARCH 2016 BAD FAITH CASES: EXISTENCE OF FIDUCIARY DUTY BETWEEN SELLER AND BUYER OF INSURANCE REQUIRES FACT SENSITIVE INQUIRY (Superior Court of Pennsylvania)

In Dibish v. Ameriprise Financial, Inc., the Superior court rejected a blanket rule that there is no fiduciary relationship between a seller and buyer of insurance.  Rather, “the existence of a confidential relationship requires a fact-sensitive inquiry, which may not be rigidly disposed of as a matter of law.”

Date of Decision: February 16, 2016

Dibish v. Ameriprise Fin., Inc., No. 70 WDA 2015, 2016 Pa. Super. LEXIS 102, (Pa. Super. Ct.  February 16, 2016) (Bender, Musmanno, Shogan, JJ.)

MARCH 2016 BAD FAITH CASES: BAD FAITH CLAIM NOT SUBJECT TO REMAND IN LIGHT OF POTENTIAL PUNITIVE DAMAGES UNDER BAD FAITH STATUTE (Philadelphia Federal)

In West Chester University Foundation v. Metlife Insurance Company, the court had to decide a motion to remand after the case has been removed from the Court of Common Pleas of Chester County.  The court’s focus was on the potential punitive damages claim in the statutory Bad Faith count, as pushing the potential claim over the $75,000 jurisdictional minimum.  It found that under applicable case law, a punitive damage award on a potential $57,000 claim (the number the court had calculated) would put the case over the jurisdictional minimum, and declined the motion to remand.  The court observed attorney’s fees were also available for statutory Bad Faith, but did not need to speculate about potential attorney’s fees to make its decision.

Date of Decision:  February 8, 2016

West Chester Univ. Found. v. Metlife Ins. Co., 2016 U.S. Dist. LEXIS 15437 (E.D. Pa. Feb. 8, 2016) (Jones, J.)

MARCH 2016 BAD FAITH CASES: NO BAD FAITH IN CASE WHERE PROFESSIONAL LIABILITY INSURER COVERED SUMS IT ALLOCATED TO INSURANCE BAD FAITH CLAIMS AGAINST ITS INSURED – A LIABILITY INSURER – BUT DID NOT COVER SUMS ALLOCATED TO UNCOVERED BREACH OF CONTRACT AND PUNITIVE DAMAGE CLAIMS (Philadelphia Federal)

In United National Insurance Company v. Indian Harbor Insurance Company, the insured was itself an insurance company, which had been sued for bad faith (Insurer-1).  The insurer-defendant in this action had issued a professional liability policy (Professional Liability Insurer). Two of Insurer 1’s insured had been sued, and both of those matters ultimately resulted in bad faith claims against Insurer 1, which were settled.  Professional Liability Insurer contributed to the settlement of one of the claims, but Insurer 1 claimed it was required to pay more. Professional Liability Insurer did not pay anything toward settlement of the second claim on the basis that the professional liability policy’s self-insured retention had not been reached on covered claims.  Insurer 1 sought some, but not all, of the settlement it paid from Professional Liability Insurer.

There was no dispute that the “bad faith” claims against Insurer 1 were covered as “Wrongful Acts”; however, breach of contract damages in settlement of the first action were not covered. As to the second settlement, again “bad faith” claims were covered, but punitive damages were not.  The parties disputed the applicability of the allocation of sums to the settlement based on covered and uncovered claims against Insurer 1.

The court ruled in favor of Professional Liability Insurer with regard to the amounts contributed towards the settlements, and found that it had the right to allocate the settlements between covered and non-covered amounts pursuant to an unambiguous allocation provision in the policy. The court noted that under Pennsylvania law, the insured has the burden to prove what portion of each settlement is covered under the policy, and the insured here failed to meet that burden. Thus, summary judgment was granted to Professional Liability Insurer on the coverage issues.

Insurer 1 had also brought a claim for “breach of duties”.  While not specifically pleading a legal theory, Insurer 1 alleged that Professional Liability Insurer was liable for “engag[ing] in a pattern or practice of improperly investigating claims, refusing to pay defense costs and demanding improper allocation of loss in violation of its common law and statutory obligations.” It also made allegations against Professional Liability Insurer for “misrepresenting policy provisions, demanding reinsurance information, relying on provisions of the … policy that do not apply, and wrongfully denying payments….”  The court found this adequate to plead both statutory and common law bad faith claims.

As to the second lawsuit against Insurer 1, however, Professional Liability Insurer successfully argued that this claim was barred by the statute of limitations being two years for statutory bad faith and four years for common law contractual bad faith. “[W]here an insurer clearly and unequivocally puts an insured on notice that he or she will not be covered under a particular policy for a particular occurrence, the statute of limitations begins to run and the insured cannot avoid the limitations period by asserting that a continuing refusal to cover was a separate act of bad faith. …  Repeated or continuing denials of coverage do not constitute separate acts of bad faith giving rise to a new statutory period.”  The present suit was not instituted until four years after notice had been given that no payment would be made toward the second settlement.

As to settlement of the first action, where Professional Liability Insurer had allocated some payment to Insurer 1, the court found that there was nothing in the record showing bad faith conduct, and summary judgment was granted as to all claims for bad faith. Date of Decision:  February 8, 2016

United Nat’l Ins. Co. v. Indian Harbor Ins. Co., No. 14-6425, 2016 U.S. Dist. LEXIS 14791 (E.D. Pa. February 8, 2016) (Bartle, J.)

MARCH 2016 BAD FAITH CASES: IN EASTERDAY V. FEDERAL MUTUAL, COURT REMANDS DECLARATORY JUDGMENT ACTION INVOLVING NOVEL ISSUE OF STATE LAW (Philadelphia Federal)

Easterday v. Federated Mutual Insurance Company involved a class action claim for a declaratory judgment concerning underinsured motorist, coverage, breach of contract and bad faith.  Applying the Third Circuit’s analysis in Reifer on when a district court should entertain a declaratory judgment action, the federal district court remanded the case to state court.  It found the heart of the case would be decided in the declaratory judgment action, and the results of the contract and bad faith claims were entirely dependent on that decision.

The court found that the plaintiffs were seeking a declaration that they are entitled to underinsured motorist benefits under the business insurance policy at issue. Thus, “[t]he outcome of the bad faith and breach of contract claims depends on the resolution of the declaratory judgment claims. This action neither presents a federal question nor does it promote a federal interest. The dispute over the scope of coverage of the insurance contract is purely a matter of state law and there are no federal interests at stake. In fact, this action involves novel issues involving purely state law. As this action is inherently one for declaratory judgment, coupled with claims for breach of contract and bad faith, I will exercise my discretion to decline jurisdiction and grant the motion to remand this matter to state court.”

Date of Decision:  February 8, 2016

Easterday v. Federated Mut. Ins. Co., 2016 U.S. Dist. LEXIS 15440 (E.D. Pa. Feb. 8, 2016) (Stengel, J.)

MARCH 2016 BAD FAITH CASES: COURT USES ADVISORY JURY IN PROCESS OF DECIDING POLICY RESCISSION CLAIM (Western District)

In H. J. Heinz Company v. Starr Surplus Lines Insurance Company, the court addressed the carrier’s rescission claim, and employed an advisory jury prior to reaching its conclusions.  Interestingly, the court agreed with the advisory jury that there had been some level of misrepresentation in the application process, but differed from the jury in finding the insured’s affirmative defenses on waiver unavailing.  As the case was governed by New York law, we are not including a detailed analysis, but post this solely to note the use of an advisory jury.

Date of Decision: February 1, 2016

H.J. Heinz Co. v. Starr Surplus Lines Ins. Co., 2016 U.S. Dist. LEXIS 11737 (W.D. Pa. Feb. 1, 2016) (Schwab, J.)

MARCH 2016 BAD FAITH CASES: NO STAY OF DISCOVERY ON BAD FAITH CLAIM; INSURED FAILED TO MAKE SUFFICIENT ARGUMENT AGAINST WORK-PRODUCT ASSERTION, BUT COURT DEFINES TIME AT WHICH REASONABLE ANTICIPATION OF LITIGATION AROSE FOR WORK PRODUCT TO APPLY (Philadelphia Federal)

In Wagner v. Allstate Insurance Company, an underinsured motorist case, the court (1) refused the insurer’s effort to stay the bad faith claim, but (2) rejected most of the insured’s discovery requests.  The issues were made less dramatic because the parties appeared to agree that the breach of contract and bad faith claims would not be tried simultaneously to the jury; rather the issues would be bifurcated for trial if necessary.  However, the insurer continued to press the issue that bad faith discovery should still be stayed, pending the outcome of the breach of contract trial, which would have prevented consecutive trials before the same jury – an argument the court rejected.

Stay of Bad Faith Claim

The insurer’s primary argument was that it would be prejudiced in allowing discovery on the bad faith claim, because it would putatively “have to forfeit protection for work product that it prepared in anticipation of litigating Plaintiffs’ breach of contract claim because that information may be relevant to the bad faith claim (and therefore discoverable).” However, the court observed that a “mere claim of bad faith is not enough to shatter the work-product privilege.” The only issue was then really whether the materials were work product or not, and the court did not believe there was a need to avoid its deciding those issues that merited a stay.

Rather, the only prejudice at issue was to the insured, because either (a) discovery on all issues would proceed and the insurer might put up a fight on discovery as to material it would otherwise turn over without objection, or (b) a stay of the bad faith claim would subject the insureds “to the time and expense of having to participate in two separate rounds of discovery (and inevitable motion practice) accompanied by two separate jury trials.” “For Plaintiffs, neither alternative is free from hardship. By opposing [the insurer’s] request to stay the bad faith claim, the [insureds] have taken the position that the former represents the lesser of these two evils, and [the insurer], which bears the burden of demonstrating that separating the claims is proper, … has not shown otherwise.” The court also rejected the notion that the insurer’s victory on the breach of contract claim would moot the bad faith claim. The court stated that even if that were to occur, the bad faith claim could proceed on the basis of alleged delays in evaluating or investigating the claim.

In sum, the stay was not needed to eliminate prejudice or promote economy. The court observed the different trends in granting/denying stays in Pennsylvania’s federal and state courts, but attributed this to the fact that bad faith is tried by a judge in state court, but a jury in federal courts.

Discovery Issues

The court then went on to address the work product issue, citing the Borgia case as summarizing the matter: “[a]n insurance company cannot reasonably argue that the entirety of its claims files are accumulated in anticipation of litigation when it has a duty to investigate, evaluate[,] and make a decision with respect to claims made on it by its insureds.  … This does not mean, however, that the work product doctrine is wholly inapplicable to insurers’ claims files. … Rather, [a]t some point in its investigation, . . . an insurance company’s activity shifts from mere claims evaluation to an anticipation of litigation.”  Thus, the insureds’ assertion that all of the insurer’s claims and investigations files were created in the ordinary course of business was untenable. Rather, “[w]hether Plaintiffs may be entitled to a subset of that information would hinge upon a fact-specific inquiry into the nature of the information that they seek, when [the insurer] reasonably anticipated litigation, Plaintiffs’ need for the particular information, and whether they can obtain the information through other means.”

The court observed this requires very specific arguments and typically the need for in camera review by the court of the documents at issue.  The insureds made no such arguments on this motion; nor did it address other non-work product arguments.  Their sole position appeared to be that there was no work product privilege in the first instance, and so this detail was not required.  Thus, the motion was denied, but without prejudice.

However, the court did go on to determine the date when the insurer reasonably anticipated litigation, thus providing resolution for the production of documents prior to that date.  This date occurred after the insureds first demand for policy limits, because the insurer had asked for certain additional information to be able to evaluate the claim and the demand.  It was only after receiving that information that litigation could have been reasonably anticipated.

Lastly, the court observed that even materials prepared after litigation was reasonably anticipated might be discoverable if the exceptions to work product protection could be established. Thus, if the insureds “are able to show that they have a substantial need for particular materials and cannot, without undue hardship, obtain their substantial equivalent by other means, Plaintiffs may be permitted to obtain the discovery they seek, provided Plaintiffs are not seeking mental impressions, conclusions, opinions, or legal theories of [the insurer’s]  attorneys or other representatives.” The court observed that deposition testimony from the insurer’s employees may be an alternative source of this information. Date of Decision:  January 19, 2016

Wagner v. Allstate Ins. Co., No. 5:14-cv-07326, 2016 U.S. Dist. LEXIS 6364 (E.D. Pa. January 19, 2016) (Leeson, J.)

MARCH 2016 BAD FAITH CASES: NO BAD FAITH IN DELAYING PAYMENT OF MEDICAL BENEFITS UNDER MVFRL, WHERE NO NEGLIGENCE OR PREJUDICE IN INVESTIGATIVE PROCESS (Philadelphia Court of Common Pleas)

In Freedom Medical Supply v. Allstate Fire & Casualty Insurance Company, the court addressed alleged bad faith concerning medical payments under Pennsylvania’s Motor Vehicle Financial Responsibility Law.

The court observed that a delay in paying such a benefit is “a relevant factor in determining whether bad faith has occurred”.  However, “a long period of time between demand and settlement does not, on its own, necessarily constitute bad faith …. [I]f delay is attributable to the need to investigate further or even to simple negligence, no bad faith has occurred.”  In this case, there was no bad faith.  The insurer kept in regular communication with the insured and the insured’s attorney during the investigation process, and there was no prejudice from any failure to send regular updates. Negligence in failing to keep relevant parties informed of the investigation’s progress in the precise manner required under Pennsylvania’s Unfair Insurance Practices Act did not constitute bad faith in the case at hand.

The court looked to case precedent addressing section 8371 bad faith in reaching its conclusion on this issue.

Date of Decision: December 29, 2015

Freedom Med. Supply v. Allstate Fire & Cas. Ins. Co., 2015 Phila. Ct. Com. Pl. LEXIS 449 (Phila. C.C.P. Dec. 29, 2015) (Powell, J.)