Monthly Archive for October, 2017

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.

OCTOBER 2017 BAD FAITH CASES: NO MERITORIUS DEFENSE TO DEFAULT JUDGMENT WHERE POLICY OBTAINED BY FRAUD; INNOCENT THIRD-PARTY NOT ENTITLED TO MINIMUM COVERAGE BECAUSE VEHICLE USED COMMERCIALLY (District of New Jersey)

Defendants owned a transportation company and used their van to transport passengers between states, for a fee. The insured alleged that a defendant/insured fraudulently used his ex-wife’s personal information to obtain insurance on the van. The van collided with another vehicle on the New Jersey Turnpike. One passenger was injured.

It is undisputed that the van operated as a livery vehicle or taxi at the time of the accident. The policy contains a liability coverage and medical expense exclusion precluding coverage for commercial conveyance.

The insurer asserted a claim for statutory insurance fraud under N.J.S.A. 17:33A-1 (Count I), declaratory relief stating that it has no liability or obligation to pay or indemnify anyone injured in the accident (Count II), and common law fraud (Count III). The insurer moved for default judgment against the defendants/insureds and for summary judgment as to the claims of its alleged coverage obligations. The passengers cross-moved for declaratory judgment, and alleged that they were entitled to minimum coverage pursuant to New Jersey state law.

“[I]n order to establish liability for insurance fraud, [the insurer] must demonstrate that the defendant ‘presented any knowingly false or misleading statement in an insurance application.” The defendant “admitted wrongdoing in procuring a personal policy in the name of [his ex-wife], despite knowing that the Policy would be used for commercial purposes . . . .” As such, the Court granted the insurer a default judgment on the insurance fraud claim, stating “no facts suggest that the . . . Defendants would have a meritorious defense against the common law fraud claim. “The Court further held the policy void ab initio.

Lastly, the Court addressed whether New Jersey’s public policy of compensating innocent third-party accident victims compelled the insurer to provide minimum coverage to the passengers. The Court observed that the New Jersey No Fault Act “is designed to ‘ensure that automobile accident victims are not left without the means to recover financially for their injuries from a judgment-proof tortfeasor[,]’” However, the Court ultimately held that because the van operated as a commercial vehicle at the time of the accident, it did not qualify as an “automobile” under the act. Therefore, the insurer is not required to remit minimum coverage to the third-party passengers.

Date of Decision: September 22, 2017

21st Century Insurance Co. v. Santana, No. 15-7075, 2017 U.S. Dist. LEXIS 155083 (D.N.J. Sept. 22, 2017) (Wolfson, J.)

OCTOBER 2017 BAD FAITH CASES: BAD FAITH STATUTE DOES NOT APPLY TO INSURANCE AGENTS (Common Pleas Lackawanna County)

The excellent Tort Talk Blog has posted an opinion from Judge Nealon in Lackawanna County reiterating that the bad faith statute does not apply to insurance agents.

OCTOBER 2017 BAD FAITH CASES: APPLYING CALIFORNIA LAW, MOTION TO DISMISS DENIED WHERE ALLEGATIONS SUPPORT BREACH OF CONTRACT, BREACH OF IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING, AND TORTIOUS BREACH OF THE IMPLIED COVENANT CLAIMS (Philadelphia Federal)

This action is similar to other life insurance litigation recently before Judge Pappert.  This case was determined under California law.

The insureds had flexible premium universal life insurance policies, and alleged breach of contract, breach of the implied covenant of good faith and fair dealing, and tortious breach of the implied covenant of good faith and fair dealing. Under these policies, policyholders may adjust both the amount and frequency of their premium payments, so long as they maintain sufficient funds in the account to cover a monthly deduction. The monthly deduction is comprised of a cost of insurance (“COI”) charge and other related expenses.

According to the insureds, the COI is the “largest and most significant charge” of the monthly deduction. A policyholder may elect to pay a premium in excess of the monthly deduction, and the policy provides that those excess funds will accrue interest at a rate of at least 4%. However, if the monthly deduction exceeds the value of the premium paid, the policy value is reduced.

The insureds allege that the insurer breached the policies by increasing the COI, because the COI rate increase was not based on a list of enumerated factors in the policies. The insureds further argued that the increase was not applied on a uniform basis for insureds of the same rate classes. The insurer moved to dismiss.

Specifically, the parties disagreed as to the proper interpretation of the insurer’s COI Notice Letter, which states, “the amount of the COI rate change depends upon the product, underwriting class and duration.” While the parties provided different explanations for their understanding of the terms in the Notice Letter, the Court stated that the insureds’ allegations are sufficient to state a claim for breach of contract.

The Notice Letter also contained language stating the COI increase was necessary because the insurer “was ‘operating in a challenging and changing environment as we continue to face nearly a decade of persistently low interest rates, including recent history lows, and volatile financial markets.’” Based upon this language, and other statements made to brokers and agents, the Court held that the insureds stated plausible allegations to support their breach of contract claim.

After conducting a choice of law analysis, the Court then addressed the insureds’ breach of the implied covenant of good faith and fair dealing claim. The insureds argued that the insurer deliberately attempted to force the insureds to either pay exorbitant premiums that the insurer knew would not justify the ultimate benefits of the policy, or force the insureds to surrender the policies upon lapse. The Court held again that the insureds’ allegations were adequate to allege that the insurer breached the implied covenant with its actions that were “unreasonable and unfair . . . with the bad faith intent of inducing lapses, frustrating policyholders’ expectations and depriving them of the benefit of the agreement.”

While Pennsylvania law does not recognize a cause of action for tortious breach of the implied covenant, California law does recognize such a claim where the plaintiff shows “(1) [that] benefits due under the policy were withheld; and (2) the reason for withholding the benefits must have been unreasonable or without proper cause.” To support this claim, the insureds alleged that the insurer’s COI increase was unlawful, excessive, and denied the insureds the benefit of their policies. Citing its previous reasoning, the Court held the insureds’ allegations were sufficient to state a claim for tortious breach of the implied covenant. The Court also declined to dismiss the insureds’ punitive damages claim at this stage of the litigation.

In sum, the Court denied the insurer’s motion to dismiss the breach of contract and both breach of the implied covenant claims.

Date of Decision: September 22, 2017

EFG Bank AG v. Lincoln National Life Ins. Co., No. 17-02592, 2017 U.S. Dist. LEXIS 154985 (E.D. Pa. Sept. 22, 2017) (Pappert, J.)

OCTOBER 2017 BAD FAITH CASES: BIFURCATION AND STAY OF BAD FAITH CLAIM DENIED ON ALL FOUR CRITERIA, INCLUDING SIMILARITY OF ISSUES, COMMON EVIDENCE, UNDUE EXPENSE TO THE INSURED, AND ABSENCE OF PREJUDICE (Middle District of Pennsylvania)

An underinsured motorist injured the insureds. The tortfeasor’s insurer ultimately tendered $15,000 to the insureds. The insureds’ own UIM policy contained maximum benefits of $100,000, or $200,000 with stacking. The insureds demanded full benefits under the policy.

After investigation, the insurer offered $10,000 to settle the UIM claim. The insureds filed suit in the Court of Common Pleas. The insurer removed the action to federal district court and filed a motion to dismiss. The Court denied the insurer’s motion to dismiss. The insurer then filed a motion to bifurcate the bad faith claim pursuant to Federal Rule of Civil Procedure 42.

In considering a party’s bifurcation motion, courts are careful to consider whether a stay would damage a party. Specifically, courts consider four factors in deciding a Rule 42 motion: “(1) whether the issues are significantly different from each other; (2) whether they require separate witnesses and documents; (3) whether the nonmoving party would be prejudiced by bifurcation; and (4) whether the moving party would be prejudiced if bifurcation is not granted.” The movant bears the burden to show that bifurcation is appropriate.

  1. First, the Court found that the claims are not “so profoundly different” as to justify bifurcation.
  2. The Court ruled that “both claims would utilize similar documents, such as the [insurer’s] claim file, relevant medical evidence . . ., and the [insurer’s] settlement attempts.” In addressing the insurer’s concerns on privileged materials pursuant to the attorney work-product doctrine, the Court ruled that the insurer failed to identify specific documents that enjoy such privilege. Furthermore, the Court reasoned that the insurer is free to file such motions going forward in order to assert its privilege at any time.
  3. The Court held that the insured would suffer economically if the bad faith claim was stayed, because the insured would have to pay its attorney to do twice the work. “Bifurcation would require two discovery periods, double the dispositive motions, and double pre-trial motions.”
  4. Lastly, the Court held that the insurer would not be prejudiced were its motion to bifurcate be denied, because the insurer could simply defeat the bad faith claim by showing a reasonable basis for its settlement offer and investigatory conduct.

In conclusion, none of the four factors weighed in favor of bifurcation and the Court denied the motion to sever and stay the bad faith claim.

Date of Decision: September 18, 2017

Newhouse v. GEICO Cas. Co., No. 4:17-CV-00477, 2017 U.S. Dist. LEXIS 150793 (M.D. Pa. Sept. 18, 2017) (Brann, J.)

OCTOBER 2017 BAD FAITH CASES: RESOLUTION OF COVERAGE DISPUTE IN INSURER’S FAVOR LED TO DISMISSAL OF BAD FAITH CLAIM BASED ON SAME COVERAGE DISPUTE (Middle District)

The insured’s property included a bulk liquid storage facility, and operated a propane gas distribution center containing six large liquid propane storage tanks. The policy included a variety of standard exclusions. Five months after the policy issued, the insured noticed sinkholes at the base of its propane tanks. The insured filed a property loss notice with the insurer, and retained an engineering firm to conduct a site inspection.

The engineering firm concluded that the sinkhole opened up after a period of excessive rainfall. The insurer began investigating the claim under a full reservation of its rights. It ultimately denied coverage pursuant to the policy’s “Cost of Excavation,” “Land and Water,” and “Earth Movement Exclusions”. However, the insurer invited the insured to submit further documentation that could alter its denial of coverage. After some back-and-forth, the insured ultimately brought suit for breach of contract and bad faith. The insurer moved for summary judgment on both claims.

The Court granted the insurer’s motion to dismiss the breach of contract claim for two reasons. First, the insured failed to meet its burden of establishing that the actual property covered under the policy was damaged. Second, the Court ruled that the policy’s flood exclusion precluded coverage. The flood exclusion excluded coverage for damaged caused by “surface water,” and the insured’s own engineering firm confirmed that rainfall/surface water contributed to the opening of the sinkholes.

As to the bad faith claim, the Court observed the heightened evidentiary standard “to provide evidence so clear, direct, weighty and convincing as to enable a clear conviction, without hesitation, about whether or not the [insurer] acted in bad faith.” The Court ruled that the undisputed facts showed that the insurer had a reasonable basis for its coverage denial, and that the insured failed to produce evidence that a reasonable jury could use to find bad faith by a clear and convincing standard.

The Court granted the insurer’s motion for summary judgment in its entirety.

Date of Decision: September 18, 2017

Heller’s Gas, Inc. v. International Insurance Co. of Hannover Ltd., No. 4:15-CV-01350, 2017 U.S. Dist. LEXIS 151072 (M.D. Pa. Sept. 18, 2017) (Brann, J.)

OCTOBER 2017 BAD FAITH CASES: PLEADING UIPA VIOLATIONS NOT FATAL WHERE THEY ARE NOT THE SOLE BASIS FOR STATUTORY BAD FAITH CLAIMS; COMPENSATORY AND CONSEQUENTIAL DAMAGES NOT WITHIN BAD FAITH STATUTE (Middle District of Pennsylvania)

This bad faith case asserting common law and statutory bad faith, as well as regulatory violations, alleged the following.

The insured owned property covered under a homeowner’s insurance policy. In June of 2014, the insured entered into a listing contract with a real estate agent for the sale of the property. The insured relocated out of state two months later. In October of 2014, the insured accepted an offer to sell the property for $275,000. Before the sale, the real estate agent discovered that water pipes had burst, causing significant damage.

It was alleged that an adjuster for the insurer estimated the damage at $80,000, and suggested that the insured may have sabotaged the property. The insured asserted there was no reason to sabotage the property because the $275,000 sale price far exceeded the amount left on the mortgage, and the buyer remained willing to purchase the property so long as repairs were made. The insurer wrote to the insured regarding coverage obligations and requesting further documentation. The insured timely responded to insurer’s request and provided the requested information.

The insurer referred the claim to its fraud unit. The insured provided requested information to the fraud unit, and sat for multiple examinations under oath. The insurer also requested phone records, financial information, and utility records.

The sale of the property fell through, and the property entered foreclosure proceedings. Counsel for the insured requested documentation from the insurer. The insurer allegedly failed to provide all of the requested documentation, but maintained its request for the insured’s cell phone records and financial information.

The insurer ultimately forwarded benefits totaling $110,510.20 to the insured. However, the insured estimated her damages at $155,785, and filed suit for breach of contract and bad faith, among other claims.

The insurer responded by filing a motion to dismiss the insured’s breach of contract claim. The Court refused to dismiss this claim, holding that the complaint “sufficiently sets forth the damages [the insured] purportedly suffered as a result of [the insurer’s] conduct.”

The insurer also filed a motion to strike the insured’s allegations of violations of the Unfair Insurance Practices Act (“UIPA”) and of Unfair Claims Settlement Practices Regulations (“UCSP”), arguing that these alleged violations cannot serve as the basis for private statutory bad faith claims. The Court stated that violations of the UIPA or UCSP are not per se violations of the bad faith statute, and added that the “Third Circuit and this Court have held that alleged violations of the Unfair Insurance Practices Act do not, in and of themselves, constitute bad faith….” The Court refused to strike those allegations, however, because the insured’s “bad faith claim does not rest solely on alleged UIPA or UCSP violations.”

The insured’s breach of contract claim included an alleged a breach of the implied covenant of good faith and fair dealing. The insurer also moved to strike this claim, arguing that the breach of contract claim subsumed it. The Court ruled that “as [the insured] has not pled a separate breach of contract claim, [the reference] may properly remain in the Complaint.”

Lastly, the Court struck the insured’s claims for compensatory and consequential damages, holding that such damages are not available under the Pennsylvania bad faith statute.

Date of Decision: September 19, 2017

Pratts v. State Farm Fire & Cas. Co., No. 16-2385, 2017 U.S. Dist. LEXIS 151650 (M.D. Pa. Sept. 19, 2017) (Caputo, J.)

OCTOBER 2017 BAD FAITH CASES: NO BAD FAITH WHERE INSUREDS MERELY ALLEGED A DENIAL OF CLAIMS UNDER THE POLICY (New Jersey Federal)

The insureds submitted claims under their homeowner’s insurance policy after Hurricane Irene damaged the property in August 2011, and after Hurricane Sandy damaged the property in October 2012. After the insurer initially denied coverage, the insureds filed a declaratory judgment action in state court seeking coverage under the policy. The insureds also alleged breach of contract and breach of the covenant of good faith and fair dealing, among other claims. The insurer moved to dismiss the breach of the covenant of good faith and fair dealing claim, among others.

The Court reiterated the test to establish a claim for bad faith in New Jersey. The insured must show “‘(1) the insurer lacked a “fairly debatable” reason for its failure to pay a claim, and (2) the insurer knew or recklessly disregarded the lack of a reasonable basis for denying the claim.’” The Court held, “[the insureds] do not allege that [the insurer] knowingly or with reckless disregard denied their claim without a ‘fairly debatable reason’ for doing so.” The insureds merely alleged that they suffered property damage because of Hurricanes Irene and Sandy, and that the insurer denied these claims in breach of the covenant of good faith and fair dealing. Such conclusory allegations cannot defeat an insurer’s motion to dismiss. However, the Court gave the insureds an opportunity to amend their complaint.

Additionally, the Court dismissed the insureds’ claim for coverage as to the Hurricane Irene damage because these claims are facially untimely, and the insured failed to plead facts suggesting that equitable tolling should apply. Lastly, the Court denied the insurer’s motion to dismiss the claim for coverage of the Hurricane Sandy damage due to a factual dispute as to whether the insured’s failure to cooperate prejudiced the insurer.

Date of Decision: September 19, 2017

Kurz v. State Farm Fire & Cas. Co., No. 16-8681, 2017 U.S. Dist. LEXIS 152540 (D. N.J. Sept. 12, 2017) (Bumb, J.)