Archive for the 'PA – Claims Handling Procedures' Category

JULY 2014 BAD FAITH CASES: INSURED ADEQUATELY ALLEGED BAD FAITH CLAIMS BY PLEADING SPECIFIC FACTS CONCERNING DELAYS IN THE CLAIMS HANDLING PROCESS, A LACK OF COMMUNICATION, AND DISCREPANCY BETWEEN THE ALLEGED INJURY AND SETTLEMENT SUM OFFERED (Philadelphia Federal)

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In Padilla v. State Farm Mutual Automobile Insurance Company, the plaintiff brought a breach of contract and bad faith claim based on UIM coverage. The insurer took an examination under oath, had a medical examination done, and referred the case to counsel. The plaintiff alleged that the defendant acted in bad faith by delaying investigation of the plaintiff’s claim, offering a settlement that was unreasonable in light of the facts of the investigation, and failing to provide an evaluation of her claim, despite multiple requests for such information.

The plaintiff alleged serious injuries, that the same insurer insured both parties to the underlying accident which should presumably have expedited the process, that she made demands for settlement offers to her insurer with delays in getting any response, that her demands were made with requests for more information or ignored, that the settlement offer once made was unreasonably low based on the insurer’s own doctor’s report.

The insurer moved to dismiss the complaint. The court found that plaintiff pleaded unreasonable delays, lack of a reasonable basis for partial denial of benefits, and that the insurer acted out of its own self-interest. The court found that unreasonable delays and failure to communicate can go to an insurer’s bad faith. Further the court distinguished the insurer’s case law on the grounds that those cases either had thread bare allegations of wrongdoing, unlike the details in this case; and that the alleged delay in one other case once only a one-time event.

Thus, the motion to dismiss the complaint was denied.

Date of Decision: July 8, 2014

Padilla v. State Farm Mut. Auto. Ins. Co., CIVIL ACTION No. 14-cv-2102, 2014 U.S. Dist. LEXIS 92230 (E.D. Pa. July 8, 2014) (Stengel, J.)

JULY 2014 BAD FAITH CASES: COURT FINDS THAT VIOLATION OF UIPA CAN NOT BE BASIS FOR BAD FAITH CLAIM; AND FINDS THAT INSURED COULD NOT MEET CLEAR AND CONVINCING EVIDENCE STANDARD ON REASONABLENESS PRONG OF BAD FAITH TEST (Western District)

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In United States Fire Insurance Company v. Kelman Bottles, LLC, property damage occurred for the insured from an event concerning an industrial glass making furnace. The insured’s all risk carrier brought a declaratory judgment action against the insured. The insured also had a Boiler and Machinery insurance policy, and it joined that carrier by way of third party complaint, raising breach of contract and bad faith claims.

There was preliminary contact between the Boiler and Machinery insurer and the insured, prior to a formal written denial of coverage. There was also an inspection and a report from an expert for the insurer, on which the insurer ultimately based its denial of coverage, concerning the cause of the incident. The insurer argued that the cause did not fall within the policy definition of covered occurrences. The insured asserted that the insurer’s stated reasons set forth in its declination letter were at a minimum unclear, and at worst, were intentionally vague in violation of Pennsylvania insurance law; and that within a month of the breakdown, the insurer’s adjuster, retained engineering expert, risk control specialist, and a subrogation specialist all concluded that the “breakdown” was “sudden and accidental”, which was a term of art which should have triggered coverage, not a denial of coverage. The insurer moved for summary judgment.

The court first rejected the insured’s argument that the allegedly unclear letter violated Pennsylvania’s Unfair Claims Practices Act or Unfair Insurance Practices Act (“UIPA”), stating that there is no private right of action under the UIPA, and thus this claim failed as a matter of law.  (This decision adds to the split in federal district courts about whether the UIPA can be used to argue a statutory bad faith claim in Pennsylvania.) The court then analyzed the letter, and concluded it could not provide the insured with clear and convincing evidence that the carrier was either intentionally vague or unclear as to its reasons for a denial, and found no genuine issue of material fact suggesting that this letter was intentionally vague or unclear.

The court also concluded that the carrier’s position that the event was not sudden accidental was reasonable.  The carrier’s own adjuster included in his notes that the expert said the event was sudden and accidental, which was not the expert’s conclusion or analysis in his report. Thus, the court granted summary judgment, even though the contradictions existed within the insurer’s own records. The court explained that while it was technically correct that the claim note contradicted the carrier’s position, the putative contradiction was “of no moment” because the claim note was the adjuster’s interpretation/characterization of what the expert told him orally during a telephone conversation, the expert’s testimony that he would not have used the terms “sudden and accidental” during that  conversation with the adjuster, and the statements and conclusions set forth in the expert’s written report clearly contradict a “sudden and accidental” finding. Thus, the court concluded that the singular claim note did not provide clear and convincing evidence that the insurer engaged in bad faith.

The insured also asserted bad faith in the claims handling process, which argument ultimately was not based on UIPA violations. Rather, it asserted that the adjuster misrepresented the policy language; that letters from the carrier suggested it was investigating the claim when it was not; and that the carrier refused to provide any further explanation and factual support for its denial of coverage.

On the first point, the court found there was no evidence that the statement at issue was anything more than a simple mistake, and there was no evidence offered of ill will or intent, and therefore the insured could not meet its burden of showing bad faith on this point.

Next, as to the letters, the court found no bad faith.The insurer’s prior oral notification that a denial of coverage was imminent, but delay in issuing its written denial of coverage while monitoring the investigation of another insurance company, did not constitute bad faith.  The court found that the insured did not offer evidence as to how the delay between the oral and written denials illustrated breach of the duty of good faith and fair dealing through a motive of self-interest or ill will. Finally, the court ruled that the alleged refusal to supply additional information following the issuance of the denial letter was not bad faith. The court found that the carrier did not ignore the request for additional information. Rather, it directed the insured back to its denial letter for the answers. Furthermore, there was no evidence of a dishonest purpose in the alleged refusal to provide additional information outside of what was contained in the denial letter. Rather, the court viewed this aspect of the dispute as a disagreement on coverage, which was to be resolved via the breach of contract claim.

A motion for reconsideration, heard by Judge Fischer of the Third Circuit sitting as a trial judge by designation, was denied.  The Third Circuit has previously addressed a coverage issue in the case, but the court found that this ruling was not applicable in analyzing the bad faith claim.

Date of Original Decision: May 23, 2014

United States Fire Ins. Co. v. Kelman Bottles LLC, 11cv0891, 2014 U.S. Dist. LEXIS 71220 (W. D. Pa. May 23, 2014) (Schwab, J.)

Date of Decision on Reconsideration: June 27, 2014

United States Fire Ins. Co. v. Kelman Bottles LLC, 11cv0891, 2014 U.S. Dist. LEXIS 88256 (W.D. Pa. June 27, 2014) (Fisher, J.)

JULY 2014 BAD FAITH CASES: NO SEPARATE TORT CAUSE OF ACTION FOR BREACH OF DUTY OF GOOD FAITH; STATUTORY BAD FAITH CLAIM PLEADED MERE POSSIBILITY OF BAD FAITH, NOT A PLAUSIBLE BAD FAITH CLAIM, AND WAS DISMISSED WITH LEAVE TO AMEND (Western District)

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In Plummer v. State Firm Fire & Casualty Insurance Company, the insureds made a first party damage claim, involving storm damage to its roof. The insureds claimed that the insurer failed to pay anything toward the roof damage, while paying a claim for roof damage to their neighbor for damage to the neighbor’s roof from the same storm. There was a finding in arbitration in state court, solely on a breach of contract claim, that the carrier owed damage payments for the roof to the insureds.

After a somewhat complicated procedural history, the case was removed to federal court, and included breach of contract, breach of the duty of good faith and fair dealing, and statutory bad faith claims. As to the breach of the duty of good faith and fair dealing claim, the court treated this as a distinct tort claim and dismissed it under the gist of the action doctrine. Any such claim was subsumed in the breach of contract claim, and would have to be pursued as a breach of contract.

As to the statutory bad faith claim, the insureds/plaintiffs attached numerous documents to their response to the carrier’s motion to dismiss that claim. The court observed that it could not consider these documents to the extent they were outside the complaint. It found that although the insured listed 14 different kinds of bad faith in the complaint, these were conclusory allegations that did not meet the Twombly standard. The only specifically pleaded allegations addressing bad faith were that a claim was paid on the neighbor’s roof on the same storm, but not plaintiff. The court found that it was left to speculate as to why the neighbor’s circumstances were the same as the insured/plaintiff, and thus made the bad faith claim on this basis a mere possibility, and not a plausible claim under Twombly. However, the plaintiff was given leave to file an amended complaint if they could set out a plausible bad faith claim.

Date of Decision: June 27, 2014

Plummer v. State Farm Fire & Cas. Co., Civil Action No. 2:13-cv-01579, 2014 U.S. Dist. LEXIS 87570 (W.D. Pa.  June 27, 2014) (Conti, J.)

JULY 2014 BAD FAITH CASES: COURT FINDS THAT UIPA VIOLATIONS CAN SUPPORT STATUTORY BAD FAITH CLAIM; AND THAT INSURED PLEADED SUFFICIENT FACTS REGARDING ALLEGED UNDERVALUATION TO STATE A CLAIM FOR BAD FAITH (Middle District)

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In Militello v. Allstate Property & Casualty Insurance Company, the insured owned a horse barn that suffered damage when one of the horses struck a support.  The insured made a claim, and the carrier offered to pay approximately half the claim.  The insured asserted that the barn was otherwise in good condition, and it was the horse that caused the problem.  The insured alleged that the carrier asserted that there were a variety of structural problems independent of the horse’s actions, for which payment was not due under the policy.  The insured alleged that the carrier’s assertion concerning these independent structural issues were false representations.  The insured also asserted violations of the Unfair Insurance Practices Act (UIPA) as a basis for his claims.  The carrier moved to strike the references to the UIPA and to dismiss the bad faith claim as merely embodying a dispute over value, and that mere failure to accede to the insured’s demands cannot be bad faith.

Citing prior Middle District precedent and the Pennsylvania Superior Court, the court found that UIPA violations could form the basis of a bad faith.  Further, the court found that the complaint, on its face, involved allegations of more than a valuation dispute, and that the case involved more than a simple claim that the insurer failed to meet the insured’s demand.  “Although the amended complaint would have ideally included additional facts suggesting that Defendant’s payment on the claim was purposely less than the full amount to which Plaintiff was entitled, the complaint does allege that Defendant made multiple representations to Plaintiff for purposes of undervaluing his property claim.” Thus, the court stated that: “In light of the parties’ burdens at the motion to dismiss stage, and viewing the facts as true and granting Plaintiff all reasonable inferences, the court concludes that dismissal of Plaintiff’s bad faith claim would be premature. While discovery may provide a reasonable explanation for Defendant’s conduct, Plaintiff’s allegations raise a plausible inference of bad faith. As such, Defendant’s motion to dismiss Plaintiff’s bad faith claim will be denied.”

Date of Decision:  June 26, 2014

Militello v. Allstate Prop. & Cas. Ins. Co., Civ. No. 14-cv-00240 , 2014 U.S. Dist. LEXIS 86945, (M.D. Pa. June 26, 2014) (Rambo, J.)

JUNE 2014 BAD FAITH CASES: CONCLUSORY LEGAL ALLEGATIONS ARE INSUFFICIENT TO STATE BAD FAITH CLAIM UNDER TWOMBLY/IQBAL, BUT COURT GAVE PLAINTIFF OPPORTUNITY TO AMEND AND CURE PLEADING DEFICIENCIES (Middle District)

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In Warnstorff v. State Farm Automobile Insurance Company, the insured brought a bad faith claim against its carrier for unreasonably delaying the evaluation of her underinsured motorist claim, and withholding payment. The plaintiff alleged four specific actions in her complaint which she claimed constituted bad faith. These allegations were: “failing to promptly evaluate the claim and make an offer,” “failing to promptly request any additional information [the insurer] believes it needs and evaluate that information and make an offer [sic],” “attempting to find any unfounded reason to refuse to pay underinsured motorist benefits,” and “delaying in evaluating the claim and making an offer.” Applying the Twombly/Iqbal standards, the court found that these allegations were conclusory legal statements; and were therefore insufficient to create a cause of action for bad faith.

First, the insured did not provide any indication of the length of time over which all the events occurred to support her allegation of unreasonable delay. The court clearly found that it was necessary to plead facts indicating the time frame in which the claim was or was not evaluated, or the allegation was not factual but a mere legal conclusion. Next, without any factual support about the length of any delay, the allegation that the carrier failed to promptly request any information it would have needed to fully evaluate the claim was again a mere conclusion.

The plaintiff also alleged an unreasonable refusal to pay benefits, but she did not allege the total amount of her damages. She only pleaded that she received $90,000 from the underinsured tortfeasor, and that she felt entitled to more. These allegations only show that there is some dispute over her insurance contract that has, at the time of the complaint, not concluded in her favor. This failed to plead sufficient facts to state a claim to relief that is plausible on its face. Further, the plaintiff did not raise a reasonable expectation that discovery would reveal evidence of necessary elements to prove her bad faith claim.

Plaintiff attempted to flesh out her claims by attaching letters to her brief opposing the motion to dismiss, which were not part of the complaint.  The court declined to consider those documents outside the complaint, and, for the forgoing reasons dismissed the bad faith claim.  However, the court granted leave to amend to provide plaintiff with the opportunity to cure the pleading deficiencies.

Date of Decision: June 19, 2014

Warnstorff v. State Farm Auto. Ins. Co., CIVIL ACTION NO. 3:14-0077, 2014 U.S. Dist. LEXIS 83551 (M.D. Pa. June 19, 2014) (Mannion, J.)

 

JUNE 2014 BAD FAITH CASES: INSURED STATED A BAD FAITH CLAIM BY ALLEGING ENOUGH FACTS TO PUT REASONABLENESS OF THE INSURER’S COVERAGE DENIAL AT ISSUE, AND THUS DISCOVERY WAS NEEDED TO DETERMINE THE ISSUED OF REASONABLENESS (Middle District)

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In Rizk v. State Farm Fire & Cas. Co., the insured had a homeowners policy that excluded coverage for frozen plumbing pipes; however, the exclusion did not apply “if the insured used reasonable care to maintain heat in the building.” The insured alleged that although he was away from the home during the winter months, attending school, he had a friend come to the house to set the thermostat at an appropriate temperature to prevent freezing; and that they would come and check the house periodically during January. Still the pipes froze. The carrier denied coverage, and the insured brought breach of contract and bad faith claims. The carrier argued the bad faith count should be dismissed for not setting forth a plausible bad faith claim.

The court rejected this argument. First, the insured specifically alleged that he took reasonable care to maintain heat by having a friend set the thermostat to an appropriate temperature, and by checking on the property at various times in January 2013. Second, the insured further alleged that the carrier purposefully interpreted the policy to resolve ambiguities in favor of itself; failed to provide a reasonable basis for denial of the claim; and failed to reasonably and adequately investigate the claim.

The court cited Judge Conaboy’s February 2014 decision in Aldsworth for the proposition that “where the reasonableness of the defendant’s basis for denying coverage was a factual issue, dismissal of the plaintiff’s bad faith claim was premature.” Whether the insurer in this case had a reasonable basis for denying the claim depended on the factual issue of whether the insured took reasonable care to maintain heat in the residence. Again, citing Aldsworth: “While discovery may not provide Plaintiffs with the required clear and convincing evidence that Defendant ‘(1) did not have a reasonable basis for denying benefits under the policy; and (2) knew or recklessly disregarded its lack of a reasonable basis in denying the claim,’ a determination on these matters is not properly made on the record before us.”

Date of Decision: May 21, 2014

Rizk v. State Farm Fire & Cas. Co., CIVIL NO. 1:14-CV-619, 2014 U.S. Dist. LEXIS 70460 (M.D. Pa. May 21, 2014) (Caldwell, J.)

MAY 2014 BAD FAITH CASES: ON MOTION IN LIMINE, COURT DECIDES: (1) PLAINTIFF’S INSURANCE CLAIM HANDLING EXPERT CANNOT TESTIFY ON MEDICAL ISSUES OR RESERVES; (2) EVIDENCE OF RESERVES NOT PROPER IN DISABILITY INSURANCE CLAIM; (3) PAST GENERAL CLAIMS HANDLING PRACTICES NOT ADMISSIBLE, BUT PRE-CLAIM EVIDENCE CONCERNING ACTUAL INSURED ADMISSIBLE; (4) PLAINTIFF CAN RECOVER FOR EMOTIONAL DISTRESS UNDER COMMON LAW CONTRACT BREACH OF DUTY OF GOOD FAITH; BUT (5) PLAINTIFF CANNOT RECOVER FOR “LITIGATION STRESS” EXPERIENCED IN THE BAD FAITH LITIGATION ITSELF (PHILADELPHIA FEDERAL)

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In Leporace v. New York Life & Annuity Corp. the court addressed various motions in limine on a bad faith claim against a disability insurer.

On the first issue, both parties attempted to disqualify the other’s experts. Plaintiff’s expert was qualified on most issues, but was not permitted to testify on the strengths of medical opinions or medical care. Furthers, she was not permitted to testify on reserves. The Court concluded that introducing evidence on reserves would be contrary to the concepts behind competitive and confidential reserve practices of insurance companies, and should not be permitted in a bad faith case on a disability insurance claim.

As to the insurer’s expert, the court allowed expert testimony on the basis of the expert’s conclusions regarding the carrier’s claims manual that the insurer met its obligations; however, it found this expert’s reliance on Pennsylvania statutory and regulatory positions, the NAIC Market Regulation Handbook and various on-line websites “doubtfully relevant, if at all….”

The court would not allow a volume of evidence on the carrier’s practices, prior to the date that the court found the claim at issue started; however, the court did allow limited evidence under Federal Rule of Evidence 404(b) on the specific issue of the carrier identifying the insured as a “malingerer” during a five year period prior to the current claim.

Next, citing Birth Center and the recent Peruggia decision, the court did permit plaintiff to see damages for emotional distress under a common law contract claim for breach of the duty of good faith.

Finally, the court would not allow expert testimony, or recovery, on the insured’s claims for “litigation stress”. The court analyzed this issue closely, and gave two reasons that the insured could not seek recovery for the stress of the bad faith lawsuit itself. First, it cited a body of cases from various jurisdictions rejecting “litigation stress” because there is no question that filing a lawsuit is the plaintiff’s decision, and imposing additional damages on the defendant for defending against the plaintiff’s claims would impair the defendant’s right to defend itself. Second, once a lawsuit is instituted, the party becomes subject to the contentions of an opposing party and the rulings of a court, and the stress may be from the insurer’s counsel conduct of the case or even the court’s ruling, and not the insurer itself.

Date of Decision: May 7, 2014

Leporace v. N.Y. Life & Annuity Corp., CIVIL ACTION NO. 11-2000, 2014 U.S. Dist. LEXIS 62911 (E.D.Pa. May 7, 2014) (Baylson, J.)

 

MAY 2014 BAD FAITH CASES: COURT REJECTS INSUREDS’ ATTACK ON THEIR OWN APPRAISER, AND DENIES MOTION TO SET ASIDE APPRAISAL AWARD (Philadelphia Federal)

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In Mitchell v. Safeco Insurance Company, a fire loss action, the appraisers for the insured and insurer agreed to the value of the loss, without the need to go to the umpire, and stipulated in writing to the appraisal award. The insureds, however, challenged the result on the basis that their own appraiser suffered some form of mental breakdown which rendered him incompetent to adequately advocate for them; and they brought breach of contract and bad faith claims against the carrier. To pursue these claims, they moved to have the court set aside the appraisal award.

The court observed that judicial review of an appraisal award is severely limited. In order to set aside an appraisal award, a plaintiff must clearly establish that they were denied a hearing, or that fraud, misconduct, corruption or other irregularity caused the rendition of an unjust, inequitable, or unconscionable award. The court observed that it could determine whether appraisers exceed their authority. The court assumed arguendo that challenging their own appraiser’s mental capacity was a proper basis to overturn the appraisal; however, the insureds introduced no evidence in this regard at the hearing. At most, the evidence demonstrated that the insureds’ appraiser was somewhat dilatory and non-responsive to the insureds, their public adjuster, and to the insurer’s appraiser. However, the insureds’ appraiser inspected the property in question and had three meetings with the defendant’s appraiser. The two appraisers agreed that the insurer’s appraiser would prepare the first draft of the appraisal and forward it to the insured’s appraiser for his review and critique. The court observed that this not an uncommon appraisal procedure; and that both appraisers do not always prepare their own initial appraisals. At their final meeting, based on a suggestion by the insureds’ appraiser, the actual cash value of the loss was increased by $13,000 in the original draft; and this sum was incorporated in the jointly signed appraisal award. There was neither actual evidence that the insureds’ appraiser had any mental breakdown; nor any evidence of fraud, misconduct, corruption or other irregularity in the appraisal process. Neither appraiser exceeded his authority. Accordingly, the petition to set aside the appraisal was denied.

Date of Decision: May 6, 2014

Mitchell v. Safeco Ins. Co., CIVIL ACTION NO. 14-625, 2014 U.S. Dist. LEXIS 62661 (E.D. Pa. May 6, 2014) (Bartle, J.)

MAY 2014 BAD FAITH CASES: COURT ALLOWS AMENDMENT TO COMPLAINT ADDING BAD FAITH CLAIM OVER TWO YEARS INTO THE CASE WHERE COVERAGE DENIAL OCCURRED DURING THE LITIGATION, AND THE NEW ALLEGATIONS CONCERNED EVENTS OR OCCURRENCES THAT ONLY CAME TO LIGHT AFTER THE ORIGINAL COMPLAINT WAS FILED (Middle District)

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In Kump v. State Farm Fire & Casualty Company, the insured plaintiff sought to amend his complaint. The case arose out of a fire to the insured’s home. The insured claimed that the fire destroyed a valuable art and artifact collection worth many millions of dollars, or that the art and artifacts were stolen after the fire. The insured had a homeowner’s policy and personal articles policy. The insurer did not accept all of the claims as to the presence and existence of the art and artifacts claimed by the insured, and did not pay the full value of the policies. The insured wanted amend his complaint to assert two breach of contract claims, two breach of implied contract claims, and a statutory bad faith claim. The court did permit the bad faith claim to be added, but not the others.

The insured argued that the insurer’s investigation into the ownership and authenticity of his artwork was conducted in bad faith, alleging a series of events including witness intimidation, a biased investigation, inadequate legal research, and unreasonable interpretations of the policies. The original complaint had been filed in 2010. However, the insured’s central assertion in seeking the amendment on the bad faith claim was that a July 2013 letter denying coverage as to the paintings he claimed were lost in the fire or by theft ripened his bad faith claim. The court agreed with that argument. Further, the insured’s allegations contained in his proposed supplemental complaint are mostly events or occurrences that came to light after the original complaint was filed. Given the broad application of bad faith in Pennsylvania, the court found it appropriate to allow the plaintiff to file a supplemental pleading asserting the bad faith cause of action.

In its legal summary, the court emphasized that section 8731’s broad language wasdesigned to remedy all instances of bad faith conduct by an insurer, whether occurring before, during, or after litigation; and that bad faith conduct also includes lack of good faith investigation into facts, and failure to communicate with the claimant.

Date of Decision: April 28, 2014

Kump v. State Farm Fire & Cas. Co., CIVIL ACTION NO. 3:12-0072, 2014 U.S. Dist. LEXIS 58266, April 28, 2014, Decided, (M.D. Pa. April 28, 2014) (Mannion, J.)

MAY 2014 BAD FAITH CASES: THIRD CIRCUIT (1) UPHOLDS DISCOVERY RULINGS THAT RESERVES AND COMMUNICATIONS WITH REINSURER WERE NOT DISCOVERABLE; (2) REITERATES THAT INSURER IS NOT OBLIGATED TO MAKE PARTIAL PAYMENTS ON A DISPUTED CLAIM; AND (3) FINDS NO BAD FAITH IN INSURER NOT ALTERING ITS ORIGINAL POSITION BASED ON ITS FIRST EXPERT’S VALUATION – DESPITE A SUBSEQUENT HIGHER VALUATION BY ITS SECOND EXPERT– PENDING THE OUTCOME OF THE APPRAISAL PROCESS (Third Circuit)

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In Mirarchi v. Seneca Specialty Insurance Company, the Third Circuit affirmed the District Court’s judgment in the carrier’s favor on a fire loss claim.

The policy at issue had a $600,000 limit, directing that valuation on claims be done according to the property’s actual cash value (ACV). The policy defined ACV as the amount it would cost to repair or replace the property at the time of loss or damage, with material of like kind and quality, subject to a deduction for deterioration, depreciation and obsolescence. Further, per the policy, the carrier would not pay on any claim until it received a formal proof of loss from the insured. If a disagreement arose as to the value the property value or amount of loss, either party could seek an appraisal. A fire occurred, prompt notice was given, and each party retained experts.

The insurer estimated the ACV at approximately $332,000 and the insured’s expert came in at approximately $692,000. The insurer still paid the first $100,000 on the claim after the insured submitted a partial proof of loss. After receiving a proof of loss based on the $692,000 figure, the insurer paid the balance of the undisputed part of the claim, i.e., the difference between $100,000 and its experts ACV number ($332,000). The experts continued amicable discussions thereafter on the difference until the insured told his expert that he would not accept anything less than $500,000. The parties mutually agreed to enter the appraisal process, and each side hired an independent appraiser. The insurer’s appraiser estimated the ACV at $449,550, more than $100,000 higher than the insurer’s original estimate. The dispute was submitted to an umpire, who concluded that the ACV was $618,338.07. The insurer then paid the balance remaining on the $600,000 policy limit.

The insured brought a bad faith claim on the basis of delayed payment. As stated, the District Court granted the insurer summary judgment. The first issues on appeal were challenges to the trial court’s discovery rulings. First, the trial court found reserves not discoverable because they were irrelevant to the claims. This was a significant issue to the insured, because the carrier had set it reserves at the policy limit, $600,000, well above the initial valuation. The trial court explained that a loss reserve is the insurer’s own estimate of the amount which the insurer could be required to pay on a given claim. The lower court did recognize that reserve information is sometimes relevant in bad faith cases, but it concluded that the loss reserve figures in this particular case did not represent an evaluation of coverage based upon a thorough factual and legal consideration.

The Appellate Court found that the insured failed on appeal to show that the loss reserve figures were related to the carrier’s considered estimate of the ACV such that they would be relevant to his bad faith claim. Thus, the lower court did not err in its legal analysis of the relevance of loss reserve estimates generally in bad faith cases, and did not abuse its discretion in excluding the evidence in this case based on its lack of relevance to the bad faith claim.

In a footnote, the Third Circuit likewise upheld the lower court’s decision not to permit discovery of communications between the insurer and its reinsurer for the same reasons that it affirmed on the loss reserve issue, i.e., these communication were not evidence of the insurer’s considered evaluation of the value of the insured’s claim. The Third Circuit also found no abuse of discretion in the trial court’s refusal to extend discovery, compel additional discovery responses or reconsider earlier rulings after the insured retained new counsel.

Turning to the merits, because the insurer ultimately paid the full policy limit, the bad faith claim was based on delay, which required the insured to show that (1) the delay was attributable to the insurer, (2) the insurer had no reasonable basis for causing the delay, and (3) the insurer knew or recklessly disregarded the lack of a reasonable basis for the delay. The cornerstone of the insured’s argument was the insurer’s second appraiser came in at a significantly higher number than the first expert; and that the insurer acted in bad faith by standing by its adjuster’s initial estimate of ACV pending resolution by the umpire, failing to make an additional partial payment, and failing to make a higher settlement offer.

As to the partial payment issued, an insurer has no duty to advance partial payments, particularly where the claim is disputed. Further, the undisputed evidence showed that the insurer relied on a genuine and considered estimate of ACV by its first expert. That subsequent estimates assigned a higher value to the claim did not constitute clear and convincing evidence that the insurer acted in bad faith either in arriving at its initial estimate or by standing by that estimate until the appraisal process concluded. The Third Circuit stated: “That is, after all, what the appraisal process is for—settling disputes about the value of a claim.”

The insured failed to show by clear and convincing evidence that the insurer acted unreasonably in the manner it paid the claim, and that no reasonable juror could conclude otherwise. The insured’s breach-of-contract claim, based on a breach of the duty of good faith, failed for the same reasons as his statutory bad faith claim.

Lastly, the court noted that the insured’s used of mathematical calculations regarding the first estimate, the property’s purchase price, and the balance of the insured’s mortgage lacked sufficient explanation to make a persuasive argument for a conspiracy between the insurer and its experts.

Date of Decision: April 29, 2014

Mirarchi v. Seneca Specialty Ins. Co., No. 13-2129 , UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT, 2014 U.S. App. LEXIS 8015 (3d Cir. April 29, 2014) (Ambro, J.)