Monthly Archive for August, 2016

AUGUST 2016 BAD FAITH CASES: INSURER MUST ALWAYS SHOW INTENT IN VOIDING A POLICY BASED ON MATERIALLY FALSE STATEMENTS (Middle District)

The insurer brought a declaratory judgment claiming that there was no policy coverage under a fraud and concealment exclusion, based on an inaccurate statement made at an examination under oath. The insurer asserted that the exclusion applied irrespective of the insured’s state of mind in making a false statement, i.e., false statement = no coverage independent of intent. The policy language apparently embodied this position.

The court still rejected it, finding that the weight of case law requires some level of intent, with the applicable test being that to void a policy for a false statement the insurer must show: “(1) the representation was false; (2) the insured knew it to be false when made or acted in bad faith; and (3) the representation was material to the risk being insured.” The court stated that Pennsylvania law “does not allow an insurer to rescind an insurance policy because of innocent mistakes by the insured, even if those mistakes involved misrepresentations of material facts.”

As the insured’s state of mind remained at issue, judgment on the pleadings for the insurer could not be granted.

Date of Decision: July 7, 2016

Cincinnati Ins. Co. v. Drenocky, No. 15-762, 2016 U.S. Dist. LEXIS 87711 (M.D. Pa. July 7, 2016) (Conner, J.)

Bee

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AUGUST 2016 BAD FAITH CASES: PLAINTIFF GIVEN CHANCE TO AMEND BAD FAITH CLAIM, IF COUNSEL CAN DO SO WHILE MEETING RULE 11 STANDARDS (New Jersey Federal)

In Product Source International, LLC v. Foremost Signature Insurance Co., the insured sought defense and indemnification for personal and advertising injury from a trademark infringement suit, and brought a bad faith claim. The insurer moved to dismiss. The court refused to dismiss the insured’s coverage claims, but did dismiss the bad faith claim without prejudice.

The court observed that a New Jersey bad faith plaintiff must show (1) absence of a reasonable basis to deny benefits; and (2) knowing or reckless disregard of its lack of a reasonable basis to deny that benefit. If there is a reasonable basis to deny benefits, or where coverage is “fairly debatable”, there cannot be bad faith. “Under this ‘fairly debatable’ standard, a plaintiff can only succeed on a bad faith claim against his insurer if he can establish that he would be entitled to summary judgment on the underlying claim —- that there are no factual issues over whether the plaintiff is entitled to insurance coverage under his policy.”

In its complaint, the plaintiff pleaded that there was no reasonable basis to deny defense and indemnification, referencing specific policy provisions covering trademark infringement claims. However, the court found that the plaintiff did “not adequately set forth the second element required … Defendants’ knowledge or reckless disregard for the fact that they had no reasonable basis for their denial of insurance benefits.” An allegation that the claim process was delayed with knowledge or reckless disregard that there was no valid basis is a legal conclusion, not a factual allegation under Twombly/Iqbal. Thus, the bad faith claim was dismissed without prejudice, leaving plaintiff an opportunity to re-plead; but in so ordering the court allowed the plaintiff time to cure while stating “if Plaintiff is able to do so consistent with counsel’s obligations under Rule 11….”

The plaintiff did amend, and was successful in defeating a subsequent motion to dismiss the amended bad faith claim.

Date of Decision: July 6, 2016

Prod. Source Int’l, LLC v. Foremost Signature Ins. Co., No. 15-8704, 2016 U.S. Dist. LEXIS 87030 (D.N.J. July 6, 2016) (Simandle, J.)

Open Flower

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AUGUST 2016 BAD FAITH CASES: INSUREDS’ ATTORNEY WHO CARRIED OUT CLAIM NEGOTIATION WITH CARRIER WAS A CENTRAL FACT WITNESS, AND WAS DISQUALIFIED BY THE COURT, AFTER THE COURT RAISED THE ISSUE SUA SPONTE (Philadelphia Federal)

In this UIM bad faith case, the insured’s counsel was also the sole person who communicated with the claims adjuster in attempting to negotiate the UIM claim. The parties were over $1,000,000 apart in settlement negotiations, and the insureds subsequently brought a breach of contract and bad faith action. The same counsel who negotiated with the insurance carrier also represented the insureds in bringing the bad faith claim.

There was no question that this counsel’s testimony was critical to both the insured’s affirmative claims for bad faith relief and the insurer’s defense. Further, counsel’s testimony conflicted with the adjuster’s going directly to the evidence of bad faith in the claims handling process. After summary judgment was denied and the case was to head to trial, the court sua sponte raised the issue as to whether counsel had to be disqualified under Rule of Professional Conduct 3.7 because counsel was to be a witness. Counsel was a solo practitioner.

The court disqualified counsel. The court found that “equities plainly weigh in favor of disqualifying” counsel, and that allowing counsel to handle the case as a lawyer and be a principal witness would “compromise the integrity of the tribunal.” As “a solo practitioner and sole counsel for the plaintiffs, [counsel] cannot effectively represent her clients while she is testifying at trial.” The court found “a real danger that the finder of fact would be unable to discern when she is acting in her role as an attorney and when she is testifying as a fact witness.”

Although the insurer did not move to disqualify counsel “in previously moving to obtain [counsel’s] deposition and in its brief on the current subject matter, [the carrier] has taken the position that [counsel’s] conversations with [the adjuster] render her a central fact witness in this case.” While recognizing disqualification would burden the insured: “This burden on the plaintiffs is minimal in comparison to the numerous factors weighing in favor of disqualification.” “Moreover, the plaintiffs and [counsel] knew that [counsel’s] testimony would be a central issue when they filed this lawsuit.” Of significance, the insureds would not be left without an attorney to go to trial. “At a hearing on this subject, [counsel had] informed the court that she would be able to assist the plaintiffs in locating a new attorney without much trouble.

Date of Decision: June 30, 2016

Adeniyi-Jones v. State Farm Mut. Auto. Ins. Co., No. 14-7101, 2016 U.S. Dist. LEXIS 85053 (E.D. Pa. June 30, 2016) (Bartle, J.)

Open skies

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