Monthly Archive for October, 2017

OCTOBER 2017 BAD FAITH CASES: CASE REMANDED AFTER BAD FAITH CLAIM DISMISSED AS REMAINING $50,000 POLICY LIMIT WAS LESS THAN JURISDICTIONAL MINIMUM (Philadelphia Federal)

This UIM breach of contract and bad faith case was removed to federal court. The potential contract policy based recovery was limited to $50,000, but the bad faith claim was sufficient to take the potential claim above the $75,000 federal jurisdictional minimum.

The court dismissed the bad faith claim without prejudice. An amended complaint was filed, but without the bad faith claim. As the claim was now limited to the $50,000 policy amount, the court sua sponte raised the issue of federal jurisdiction. The parties recognized the court was correct that jurisdiction no longer existed because the claim was limited to $50,000, and the case was remanded to state court.

Date of Decision: October 5, 2017

Jones v. Allstate Ins. Co., CIVIL ACTION NO. 17-648, 2017 U.S. Dist. LEXIS 164949 (E.D. Pa. Oct. 5, 2017) (Hey, M.J.)

OCTOBER 2017 BAD FAITH CASES: BREACH OF DUTY OF GOOD FAITH CLAIM SUBSUMED IN BREACH OF CONTRACT CLAIM; NO BAD FAITH WHERE PARTIES SIMPLY DISAGREE OVER AMOUNT OF RECOVERABLE DAMAGES (Middle District)

The insured filed a UIM action against her insurer. Initially, the insured settled with the tortfeasor’s insurer for $85,000.

At the beginning of the litigation, the parties disputed the UIM coverage limits. The insured requested and paid for a policy of $50,000 per person and $100,000 per accident, yet some of the insurer’s documents indicated coverage limits of $100,000/$300,000. The insured’s counsel demanded $700,000 and threatened to bring a statutory bad faith claim against the insurer.

The insurer declined to settle, but clarified that the UIM coverage limits for the insured were $100,000 per person or $300,000 per accident. The parties then engaged in several efforts to clarify the coverage limits, and the insured produced requested medical records. The insured contended that material gaps existed in the disclosed medical records, however, and the insurer further attempted to obtain complete records. The insured sued for breach of contract and statutory bad faith.

The insurer successfully brought a partial summary judgment motion on the statutory bad faith claim. Nevertheless, the insured argued that the facts of the case allow her to bring a claim for breach of the common law contractual duty of good faith and fair dealing.

The insurer argued that such a claim is improper, and the Court agreed. “Pennsylvania law does not recognize a separate breach of contractual duty of good faith and fair dealing where said claim is subsumed by a separately pled breach of contract claim.” The Court reasoned that, for first-party claims of insurance benefits, a claim for breach of the duty of good faith and fair dealing merges with a separately pled breach of contract claim, where both claims arise out of the same facts.

Furthermore, the Court stated that the insured’s argument would lose on the merits. The insurer reasonably investigated the claim and offered coverage in excess of premiums charged to the insured. A disagreement between the parties on the amount of recoverable damages does not constituted bad faith. “[The] bad faith claim should be dismissed because the uncontested facts simply do not permit a reasonable inference of bad faith on the part of [the insurer] in this case.”

As such, the Court ruled that the insurer did not breach its contractual duty of good faith in a way that would support an independent contractual bad faith claim.

Date of Decision: October 5, 2017

Ridolfi v. State Farm Mut. Auto. Ins. Co., 2017 U.S. Dist. LEXIS 165013 (M.D. Pa. Oct. 5, 2017) (Carlson, J.)

 

OCTOBER 2017 BAD FAITH CASES: JURY FINDS POLICY VOID AB INITIO, AND COURT DENIES POST-TRIAL MOTIONS, ORDERS INSURED TO REMIT $285,000 IN LOSS PAYMENTS AND FEES/COSTS INCURRED, AND INSURER TO REMIT ALL PREMIUMS TO INSURED (Philadelphia Common Pleas)

The insured filed a claim with his insurer after his commercial property was vandalized. The insured’s adjuster estimated the total damage to be $444,325.71, while the insurer’s estimate was $102,302.45.

The insurer initiated an investigation, and the insured sat for multiple examinations under oath. During the course of these examinations, the insurer found several inconsistencies between the insured’s testimony and his initial application for insurance coverage. Nevertheless, the insurer payed out over $150,000 in claim payments, but did not pay the insured’s estimate. The insured filed suit for the insurer’s alleged failure to pay the full claim.

The insurer filed its answer with a new matter and counterclaims. These counterclaims included claims for (1) declaratory relief under 42 Pa. C.S. § 7531; (2) a violation of the Pennsylvania Insurance Fraud Statute; (3) common law fraud; (4) breach of contract; and (5) reverse bad faith. At the conclusion of a jury trial, the jury returned a verdict in favor of the insurer on both the insured’s claim and the insurer’s counterclaims. Post-trial motions were denied. The Court entered judgment on the verdict, declaring the policy void ab initio, and ordered the insured to pay the insurer $285,094.40 ($157,725.09 in previous claim payments under the policy and $127,369.31 for claim related expenses incurred by the insurer). The Court further ordered the insurer to remit $48,467.55 in premiums paid back to the insured.

In reiterating the rule of fraud in entering insurance contracts, the Court stated, “where the execution of a contract of insurance has been induced by fraudulent misrepresentations of the insured, the insurer may secure its cancellation.” During the trial, the insured admitted that he filed several insurance claims over a three-year period, though in his initial application for the instant policy, he only listed one. The insured also admitted to having a foreclosure action filed against him, even though he did not disclose this in the policy application. The insured also admitted he did not disclose a 2011 conviction for filing false tax returns, or a 2008 tax lien on the insurance application.

In light of this evidence, the Court stated that, “[t]he jury, as the fact finder, determined by a standard of clear and convincing evidence that the Policy was procured by fraud with the intent to deceive . . . and the Court properly declared the Policy void ab initio.” The Court also stated that, “the jury was presented with sufficient evidence to determine, under the clear and convincing standard, that [the insured] committed fraud with intent to deceive when he submitted his application for insurance.”

The insured further argued that the Court erred in failing to require the insurer to produce previous claim files relating to the insured. The Court disagreed, stating that the insured failed to obtain a court order commanding the production of these claim files, and that his post-trial attempt to do so was untimely.

Date of Decision: September 27, 2017

Smith v. United States Liability Insurance Co., Philadelphia Court of Common Pleas, June Term 2016 No. 2354, 2017 Phila. Ct. Com. Pl. LEXIS 292 (C.C.P. Phila. Sept. 27, 2017) (Butchart, J.)

Update to Prior Post on Discovery Opinion (New Jersey Federal)

We originally posted a summary of the New Jersey Federal District Court’s August 2017 opinion in Legends Management Co. v. Affiliated Insurance, concerning various discovery issues. Since that time, two more closely related discovery opinions have issued, as well as an opinion concerning severance and stay of the bad faith claim.  Of note in the third discovery opinion is the Court’s ruling that the insurer, which brought a claim under the Insurance Fraud Act and could be entitled to attorneys fees and costs, did not have to produce its attorney invoices until that claim had been determined on the merits.  Summaries of the three cases can be found here.

OCTOBER 2017 BAD FAITH CASES: COURT ADDRESSES A WIDE RANGE OF BAD FAITH DISCOVERY ISSUES AS TO PRIVILEGE, WORK PRODUCT, AND RESERVES (Western District)

This is a discovery opinion addressing a wide range of issues including the attorney client privilege, work product doctrine and discovery of reserves. A number of rulings were held in abeyance pending in camera review, which are not addressed below

1.        The attorney client privilege is not limited to claims handler communications with outside counsel.

“This Court is not aware of any authority that limits the attorney-client privilege to communications with outside counsel, as opposed to in-house counsel, and Plaintiff has cited none. Therefore, this Court rejects Plaintiffs’ claim that the attorney-client privilege could not have attached before Attorney McDonnell was retained as outside counsel to handle Plaintiffs’ claim.”

2.         The privilege is not abrogated simply because a document is relevant to a bad faith claim.

“Plaintiffs next assert that the documents listed in the privilege log titled ‘Communications with counsel regarding the value and merits of claim’ are not privileged because they “go to the heart of this bad faith action[.]” (ECF No. 20 at 8.) However, as Defendant notes, the Third Circuit has unequivocally held that ‘[r]elevance is not the standard for determining whether or not evidence should be protected from disclosure as privileged, and that remains the case even if one might conclude the facts to be disclosed are vital, highly probative, directly relevant or even go to the heart of an issue.’ Rhone-Poulenc Rorer Inc. v. Home Indem. Co., 32 F.3d 851, 864 (3d Cir. 1994). Moreover, ‘[a] party does not lose the privilege to protect attorney client communications from disclosure in discovery when his or her state of mind is put in issue in the action.’ Id. Thus, while Plaintiffs are correct that these communications ‘go to the heart’ of Plaintiffs’ bad faith claim, this fact does not change the analysis of whether these communications are protected by the attorney-client privilege.

3.     Documents prepared by claims adjusters and sent to attorneys are privileged.

“Plaintiffs also claim that ‘communications made by the claims representatives are not immune from discovery.’ This argument is easily dismissed. ‘[T]he attorney-client privilege operates in a two-way fashion to protect confidential client-to-attorney or attorney-to-client communications made for the purpose of obtaining or providing professional legal advice.’ The fact that the documents were prepared by the claims adjusters, rather than the attorney to whom the documents were sent, is immaterial to the analysis of whether those documents are protected under the attorney-client privilege.”

4.         Reserves discoverable in bad faith action.

The court found reserve information discoverable in bad faith cases. It wrote the following in explaining its position:

“There is competing treatment of whether reserve information is discoverable in a bad faith lawsuit.” Shaffer v. State Farm Mut. Auto. Ins. Co., No. 1:13-CV-01837, 2014 U.S. Dist. LEXIS 30436, 2014 WL 931101, at *2 (M.D. Pa. 2014). “Some courts have noted a ‘tenuous link between reserves and actual liability given that numerous considerations factor into complying with this statutory directive.'” Sharp, 2014 Pa. Dist. & Cnty. Dec. LEXIS 282, 2014 WL 8863084 at *8, quoting Fidelity & Deposit Co., 168 F.R.D. at 525 (citing Rhone-Poulenc Rorer, Inc. v. Home Indemnity Co., 139 F.R.D. 609, 613 (E.D. Pa. 1991)). However, as a court of common pleas recently stated:

Several trial courts, including this court, have reasoned that insurance reserves are discoverable in bad faith litigation against insurers, where liability for the underlying claim has already been established, since such information may be relevant to the issue of whether the insurer acted in bad faith in failing to settle or pay the original claim. See Consugar v. Nationwide Insurance Co. of America, 2011 U.S. Dist. LEXIS 61756, 2011 WL 2360208, at * 5 (M.D. Pa. 2011) (‘Since plaintiff here claims that defendant acted [*19]  in bad faith, a comparison between the reserve value of the claim and defendant’s actions in processing plaintiff’s claim could shed light on defendant’s potential liability.’); North River Ins. Co. [v. Greater New York Mut. Ins. Co.], 872 F. Supp. [1411] at 1412 [(E.D. Pa. 1995)] (finding reserve information “relevant to the question of whether or not [the insurer] acted in bad faith during the pre-trial settlement negotiations.”); McAndrew v. Donegal Mutual Ins. Co., 56 Pa. D. & C. 4th 1, 18 (Lacka. Co. 2002); Fretz v. Mutual Benefit Ins. Co., 37 Pa. D. & C. 4th 173, 180 (Alleg. Co. 1998). Sharp, 2014 Pa. Dist. & Cnty. Dec. LEXIS 282, 2014 WL 8863084 at *8.”

5.     Reserves concerning insured’s claim are discoverable, but reserves concerning other claims are not, and court will not indulge fishing expedition on setting reserves for other claims.

“Defendant’s boilerplate responses also contend that Plaintiffs’ requests are overly broad. … This Court disagrees with Defendant’s contention in regards to Interrogatory No. 5, in which Plaintiffs’ seek information regarding the reserve history for [the insured’s] own claim. Because the gist of Plaintiffs’ complaint is that Defendant acted in bad faith in handling [the insured’s] underinsured motorists claim, Plaintiffs’ request for the reserve history for [her] claim is not overly broad.”

“However, this Court agrees with Defendant that RPD No. 4 is overly broad. While Plaintiffs have demonstrated the relevancy of the reserve amounts for [the insured’s] own claim, Plaintiffs have not shown — nor even argued in their Motion to Compel — that reserve information for other insureds is relevant to Plaintiffs’ claim. Therefore, Defendant will only be required to produce any relevant documentation of the reserve history for [the insured’s] claim.”

“RPD No. 4 asks for “all documents relating to or involving the process used from 2011 to the present in setting or otherwise establishing or determining reserves for underinsured motorists claims.” (ECF No. 20-2 at 4.) However, neither Plaintiffs’ Motion to Compel nor Defendant’s Brief in Opposition contain any argument concerning whether or not discovery of Defendant’s reserve process for other insureds is appropriate. In other words, neither party addresses the issue of whether RPD No. 4 seeks documents that are outside of the context of Plaintiffs’ specific claim. To the extent that Plaintiffs’ ask for discovery of reserve information for other claims, this Court declines the invitation to allow Plaintiffs to embark on a fishing expedition.”

6.       Work product doctrine not applicable to reserve information in this case.

“The only other objection that Defendant has put forth is its boilerplate response that the information requested by RPD No. 4 and Interrogatory No. 5 ‘is protected from discovery by the work-product doctrine.’ … However, Defendant’s threadbare and conclusory invocations of the work product doctrine fail to establish that Defendant is entitled to the privilege it asserts. Moreover, Defendant does not even argue in its Brief in Opposition that this information is protected by the work-product doctrine. Further, according to the reserve history for [the insured’s] claim, the reserve values were set by non-attorneys. … In fact, Defendant has not asserted that the reserve amounts were set or altered at the direction of, or with the cooperation of, counsel. Therefore, Defendant has failed to establish that the information Plaintiffs seek is protected by the work-product doctrine.”

Date of Decision: October 2, 2017

Parisi v. State Farm Mut. Auto. Ins. Co., CIVIL ACTION NO. 3:16-179, 2017 U.S. Dist. LEXIS 162131 (W.D. Pa. Oct. 2, 2017) (Gibson, J.)

 

OCTOBER 2017 BAD FAITH CASES: LOW BUT REASONABLE LOSS ESTIMATE NOT BAD FAITH (Middle District)

The excellent Tort Talk Blog today posted a federal Middle District case, Davenport v. USAA Casualty Ins. Co., No. 1:16-CV-2378 (M.D.Pa. Oct. 11, 2017) (Jones, J.), where the court granted the insurer summary judgment on the bad faith claims.  Among other things, the court observed that low but reasonable loss estimates are not bad faith.  You can find the summary, with a case link, here.

OCTOBER 2017 BAD FAITH CASES: AN INSURED MUST “SHOW” ITS ENTITLEMENT TO RELIEF FOR BAD FAITH WITH FACTS (Philadelphia Federal)

In this UIM action, the insured sustained serious and permanent injuries. After recovering $15,000 from the underinsured tortfeasor’s insurer, the instant insurer offered the insured $500 for his UIM claim. The insured rejected this offer, and sued for bad faith and breach of contract. The insurer moved to dismiss the bad faith claim. In its complaint, the insured enumerated several allegations of the insurer’s bad faith conduct. The insured alleges the insurer acted unreasonably and unfairly, failed to advance a reason for its denial of the full value of the claim, intentionally and/or recklessly disregarded the insured’s injuries, and refused to pay benefits owed under the policy.

The Court stated “[a] complaint must do more than allege a plaintiff’s entitlement to relief, it must ‘show’ such an entitlement with its facts.” The Court held that the undisputed facts only show a disagreement between the parties to negotiate and settle the UIM claim. Furthermore, “[t]hese facts do not show that [the insured] has a plausible claim for bad faith because they do not shed light on the reasonableness of [the insurer’s] actions.”

The Court reasoned that the insured’s allegations are merely conclusory and are thus insufficient to state a claim for bad faith. The Court then dismissed the bad faith claim, but gave the insured twenty days leave to amend its complaint.

Date of Decision: October 4, 2017

Irving v. State Farm Mut. Auto. Ins. Co., No. 17-1124, 2017 U.S. Dist. LEXIS 164390 (E.D. Pa. Oct. 4, 2017) (Slomsky, J.)

 

OCTOBER 2017 BAD FAITH CASES: NO BAD FAITH WHERE NO COVERAGE OWED PER POLICY EXCLUSION (Philadelphia Federal)

The insured engaged in basic grout and tile work, and had a CGL. While performing work in the lobby of a commercial premises, grout dust and other particulates settled in other parts of the premises. The owner submitted a claim for the clean-up costs to its insurer, which ultimately paid the claim and then made demand on the CGL insurer. That insurer denied coverage under the “Deleterious Substances Exclusion”.

The property’s owner’s insurer sued the contractor, which notified its CGL insurer and requested defense and indemnification. Again, the CGL insurer denied coverage pursuant to the deleterious substances exclusion. The insured engaged private counsel, who asserted that the type of grout dust involved is not included in the policy exclusion. The insurer hired an expert who concluded that the grout dust was of a type precluded from coverage by the exclusion.

The insured executed a stipulated judgment to limit its legal expenses, and then sued its insurer for breach of contract and bad faith. The insurer moved for summary judgment.

The Court held that the deleterious substance exclusion was unambiguous, and the insurer did not owe coverage under the CGL policy. As such, the insurer did not breach its contract with the insured.

The insured argued that the insurer should be estopped from denying coverage because it initially failed to raise a deleterious substances exclusion specifically including silica, which is ultimately what precluded coverage. However, the Court ruled, “[i]t cannot be said in this matter that [the insurer’s] failure to cite the relevant policy language about silica . . . prejudiced [the insured], as [the insured] was already on notice that [the insurer] was disclaiming coverage, albeit under a different provision of the exclusion.” The Court further reasoned that the insurer could not have known about the applicability of this particular silica exclusion prior to the retaining of its own expert.

Lastly, the Court granted the insurer’s motion for summary judgment as to the bad faith claim, holding that “[t]here can be no finding of bad faith where the insurer did not have a duty to provide coverage under the provisions of the Policy.”

Date of Decision: September 29, 2017

Ginther v. Preferred Contrs. Ins. Co. Risk Retention Group, No. 16-686, 2017 U.S. Dist. LEXIS 161720 (E.D. Pa. Sept. 29, 2017) (Schmehl, J.)

 

OCTOBER 2017 BAD FAITH CASES: BAD FAITH PLEADED BASED ON FACTUAL HISTORY OF TIMING AND AMOUNT OF SETTLEMENT OFFERS, AND INCLUSION OF DEMAND TO RELEASE BAD FAITH CLAIM TO OBTAIN A SETTLEMENT (Western District of Pennsylvania)

This is a UIM bad faith case. The insurer did not meet the insureds’ demand, and sought a release of bad faith claims during the negotiation process. Suit followed for breach of contract and bad faith.

In the fall of 2015, the insureds rejected a $4,335 offer. The insureds’ counsel demanded the insurer’s best and final offer in January of 2016, and the insurer responded with $5,000. The insureds rejected this offer.

The insurer increased its offer to $5,100, but the insureds remained uninterested in settlement for that amount. In the fall of 2016, the insurer increased its offer to $12,500, contingent on an agreement that the insureds execute a full and final release of all claims, including the bad faith claim.

The insureds rejected this offer as well, and subsequently brought suit for breach of contract and bad faith. The insurer moved to dismiss both claims, and the matter was referred to the Magistrate Judge for a Report and Recommendation.

As to the bad faith claim, the Magistrate Judge cited the Pennsylvania Superior Court as defining bad faith in the insurance context as “conduct [that] imports a dishonest purpose and means a breach of a known duty (for example, good faith and fair dealing), through some motive of self-interest or ill will; mere negligence or bad judgment is not bad faith.” [Pennsylvania’s Supreme Court recently made clear the motive of self-interest or ill will do not constitute an additional element of proof.]

The Magistrate Judge observed case law indicating bad faith may exist where an insurer attempts to obtain a release of a bad faith claim before it will pay any settlement under the policy. The court also reasoned that the insureds’ factual allegations concerning the length of time over which the offers were made, and the allegations that low offers were followed by dramatic increases were sufficient to support that claim. Thus, the Magistrate Judge recommended denying the insurer’s motion to dismiss as sufficient facts were pleaded to make out a plausible claim.

Date of Decision: September 29, 2017

Winschell v. Encompass Home & Auto Ins. Co., No. 17-CV-522, 2017 U.S. Dist. LEXIS 162384 (W.D. Pa. Sept. 29, 2017) (Pupo Lenihan, M.J.)

OCTOBER 2017 BAD FAITH CASES: SEVERANCE AND STAY OF BAD FAITH CLAIM GRANTED ON ALL FOUR CRITERIA; RESOLUTION OF BREACH OF CONTRACT CLAIM DETERMINITIVE OF BAD FAITH CLAIM (New Jersey Federal)

The insureds owned commercial property damaged due to storm-related incidents. They retained an outside adjusting firm. After the adjusting firm first notified the insurer of the claims, the insurer sent its own adjusters to investigate the property claims and to make a coverage decision. Upon investigation, the insurer concluded the commercial property had not been open to the public for three years, and that the insureds had apparently demolished whole portions of the building. The insurer retained legal counsel to analyze the coverage issues. It ultimately denied coverage.

The insured sued for breach of contract and bad faith. The insurer moved to sever and stay the bad faith claim. The Court stated that the practice of severing the claims “is appropriate where the claims . . . are ‘discrete and separate’ in that one claim is ‘capable of resolution despite the outcome of the other claim.” In making its determination, the Court considers four factors: “(1) whether the issues sought to be tried separately are significantly different from one another; (2) whether the separable issues require the testimony of different witnesses and different documentary proof; (3) whether the party opposing the severance will be prejudiced if it is granted; and (4) whether the party requesting severance will be prejudiced if it is not granted.”

  1. First, the Court found that the breach of contract claim concerns coverage under the policy, and that the bad faith claim deals with the insurer’s “general claims handling procedures, its claims conduct in this case, and its knowledge and state of mind about the grounds for denial of coverage.” As such, the Court held that this factor weighs in favor of bifurcation.
  2. Next, the Court ruled “the contract and bad faith claims require the testimony of different witnesses and different documentary proof.” Thus, it held that this factor also weighs in favor of bifurcation.
  3. The Court then found the insured would not suffer prejudice if the two claims are severed, reasoning that “relatively little discovery has been exchanged and it is therefore uncertain whether the initial coverage claim will be denied. If so, the bad faith claims would similarly fail.” The Court also stated that should the insureds prevail on the breach of contract claim, they could then pursue their bad faith claim.
  4. Lastly, the Court held that the insurer would be prejudiced if it were forced to litigate the bad faith claim coextensively, because permitting discovery on the bad faith claim, prior to the resolution of the breach of contract claim would be premature.

In conclusion, all four factors weighed in favor of bifurcation and the Court granted the insurer’s motion to sever and stay the bad faith claim.

Date of Decision: September 26, 2017

Legends Mgmt. Co. v. Affiliated FM Ins., No. 16-CV-1608, 2017 U.S. Dist. LEXIS 158898 (D.N.J. Sept. 26, 2017) (Mannion, J.)

It is interesting to compare this analysis with the recent Federal Rule 42 decision in Pennsylvania’s Middle District, which denied the motion to bifurcate.