Archive for the 'PA – Claims Handling Procedures' Category

AUGUST 2015 BAD FAITH CASES: (1) INTERPRETING SEMANTIC DIFFERENCES BETWEEN INSURER’S STATED BASIS FOR DENIAL COMPARED TO POLICY LANGUAGE LEFT TO JURY; (2) POST-LOST FRAUD CLAIM AS BASIS FOR RESCISSION ALSO LEFT TO JURY (Middle District)

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In Rizk v. State Farm Fire & Casualty, the homeowner was out of town for a few months, and left a friend to set the thermostat so his pipes would not freeze.  Bathroom pipes did freeze, resulting in flooding.  The insured made a claim and the insurer “would not commit to coverage until it determined whether heat had been maintained in the home.”  “Pursuant to the terms of the policy, unless the insured ‘used reasonable care to … maintain heat in the building … [the carrier] would not insure for any loss in an unoccupied structure that resulted from frozen plumbing.”

The insurer’s investigator spoke with the furnace repairman and learned that the furnace had malfunctioned, though the thermostat was set in the mid-50s. The investigator took the position that there was a lack of heat in the home because of an improper thermostat setting, which caused the furnace to malfunction and the pipes to burst.  In denying coverage, the carrier stated that “reasonable heat” had not been maintained.

The insured brought a bad faith claim and the insurer sought summary judgment. The insured claimed that the carrier was using the wrong standard to deny coverage, i.e., that there was reasonable heat in the home, rather than whether the insured used reasonable care to maintain the heat.  The insurer argued this misrepresented the policy terms and showed inadequate investigation. The insurer argued that the phrases were actually the same; but the court refused to reach that conclusion itself for summary judgment purposes, and left the issue to the jury.

The court addressed the insurer’s claim that the homeowner made fraudulent property loss claims, and the contract should be voided. The policy provided that: “This policy is void as to you and any other insured, if you or any other insured under this policy has intentionally concealed or misrepresented any material fact or circumstance relating to this insurance, whether before or after a loss.” The court stated that “to void an insurance contract for misrepresentation, the insurer must establish that (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 observed that in the post-loss investigation context, materiality requires that “the false statement must concern a subject relevant to the insurer’s investigation.”

The court denied summary judgment to the insurer, finding issues of fact on the legitimacy of the property loss claimed, and on an issue of policy interpretation as to whether a certain type of property loss was covered.  Further, the court noted favorably the insured’s position that since the coverage denial was based upon a lack of heat, representations about personal property losses were irrelevant to the investigation.

Date of Decision:  August 18, 2015

Rizk v. State Farm Fire & Cas. Co., CIVIL NO. 1:14-CV-0619, 2015 U.S. Dist. LEXIS 108988 (M.D. Pa. August 18, 2015) (Caldwell, J.)

 

AUGUST 2015 BAD FAITH CASES: DELAY IN PAYMENT OF CLAIM IS NOT A PER SE BASIS TO FIND BAD FAITH; INSURER HAS A RIGHT TO INVESTIGATE CLAIMS (Philadelphia Federal)

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In Great Lakes Reinsurance v. Stephens Gardens, the court addressed allegations of delayed payment, and specific denials of coverage, in granting the insurer’s motion for partial summary judgment.

The insured was in the business of selling aquatic flora and fauna, as well as aquatic designs.  There was a fire that destroyed certain real and personal property, and killed some of the insured’s fish. The insured also sought coverage for salaries paid because the policy covered ordinary payroll expenses for 60 days following the date of direct physical loss or damage, (unless a greater number of days is shown in the Declarations).

One aspect of the bad faith claim was for delay in payment of covered claims. The court stated that:  “An insurer’s delay in settling a claim ‘does not, on its own, necessarily constitute bad faith.’” Courts instead will review “the degree to which a defendant insurer knew that [it] had no reason to deny the [claim].” Thus, a “delay attributable to the uncertainty of the claim’s value or the insurer’s need to investigate further does not constitute bad faith.”

In this case, the insurer’s “delay stemmed from a dispute over the claimed damages and [its] need to investigate further, which does not evidence bad faith.”  There was a dramatic difference in damage estimates for the claimed loss, over $500,000,  andthe companies needed to ‘sort out an agreed scope and estimate’ before [the adjustor] would recommend payment to [the insurer].”Further, the adjustor “stated that she would not recommend payment for property damage until [the insurer] was able to ascertain whether there were liens on the property.”  Thus, the court found there was no evidence showing that the delay arose “from anything other than [the insurer’s] need to investigate further.”

In ruling on the bad faith counts for the insurer’s refusal to cover certain losses, the court focused on the reasonableness of the insurer’s various denials of coverage. It found in each instance of dispute that the insurer’s position was reasonable.  Under the well-established case law, if the insurer’s denial is reasonable, there can be no actionable bad faith.

Specifically, the court found that certain of the fish were not “stock”, which was the only type of fish that could have been covered; that the demands to cover salaries were for wages beyond the 60 day policy period; the insurer’s position rejecting the principal’s claim for his entire salary for a 10 month period as attributable to debris removal was reasonable; the insured did not meet its burden to show claims for shirts it purchased for its sales staff and for accounting fees in connection with the filing of sales tax returns were even covered by the policy; the insured did not provide the insurer with sufficient documentation on a plant loss claim; ambiguous testimony resulted in the court finding that a claimed loss for a shed had in fact been paid; that certain rocks remained salable after the fire; and there was no documentation to support the insured’s claim for loss of computer hardware.

Date of Decision: August 3, 2015

Great Lakes Reinsurance (UK) PLC v. Stephens Garden Creations, CIVIL ACTION NO. 14-539, 2015 U.S. Dist. LEXIS 100827 (E.D. Pa. August 3, 2015) (Dubois, J.)

AUGUST 2015 BAD FAITH CASES: COURT FINDS INSUREDS COULD NOT MAINTAIN A CLAIM FOR STATUTORY BAD FAITH WHERE INSURER’S BASIS OF DENIAL OF UNINSURED MOTORIST COVERAGE WAS CORRECT (Western District)

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In Cahall v. Ohio Casualty Insurance Company, the Court granted the insurer’s motion for summary judgment and denied the insured’s motion for summary judgment based on a waiver of underinsured motorist (UIM) benefits.

In the underlying action, one of the insureds was involved in a motor vehicle collision with another driver. After settling with the driver, the insured and her husband brought a UIM claim against their insurer, who denied the claim. The insurer had provided coverage to the insureds under an automobile policy, under which one of the insureds had executed a waiver form that rejected UIM coverage at the time of the policy’s issuance.

Later, during the time between the policy was issued and the motor vehicle accident, the insureds replaced both of the original vehicles insured under the policy.  They then added a third vehicle. After the new vehicle was added, the insureds did not execute a new waiver form rejecting UIM coverage.  The insurer took the position coverage was waived.

The complaint filed by the insureds included, among others, counts for breach of contract as to UIM coverage, and a statutory bad faith premised on the insurer’s “reasoning and rationale for denying UIM benefits.” The insureds filed for summary judgment, arguing they were entitled to coverage on grounds that the insurer was required to “provide them with another opportunity to reject UIM coverage and stacking.” The insurer filed a cross-motion for summary judgment, asserting that the insured’s original waiver of UIM benefits remained effective despite the subsequent addition of a third vehicle, and that the insureds could not maintain a claim for bad faith because the insurer had good cause to deny benefits.

In granting the insurer’s motion for summary judgment, the Court reasoned that “[t]he insured’s addition of a vehicle to an existing automobile insurance policy, as to which there is a prior properly noticed and executed waiver of UIM benefits, does not create an obligation/requirement that the insurer re-notice or re-obtain a subsequent waiver of such coverage.” Thus, because the insurer was correct in the basis of the denial of underinsured motorist coverage, the insureds could not maintain a claim for statutory bad faith.

Date of Decision: July 20, 2015

Cahall v. Ohio Cas. Ins. Co., No. 14-1246, 2015 U.S. Dist. LEXIS 93943 (W.D.Pa. July 20, 2015) (Lenihan, J.)

JULY 2015 BAD FAITH CASES: COURT DENIES MOTION TO COMPEL PRODUCTION OF CLAIMS NOTES UNDER ATTORNEY CLIENT PRIVILEGE AND/OR WORK PRODUCT DOCTRINE (Middle District)

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In Berry v. Ohio Casualty Insurance Company, the court addressed a dispute over whether certain notes in the claims files were protected from production. The court had received the unredacted notes for in camera review, prior to ruling.

This was a UIM case where the tortfeasor’s insurer paid its full policy limits, and the insured brought a UIM claim against her own insurer for her $100,000 in coverage.  After two and one-half years, the UIM claim settled at policy limits.  The insured then brought a bad faith claim. The insured alleged failure to conduct a prompt and thorough investigation,  continually requested medical records after being provided with them, lying about a pre-existing condition, making “unreasonable ‘low-ball’ offers”, increasing offers with no material changes in circumstances, “misleading or misrepresenting the amount of UIM benefits available”, “sending a release for the ‘policy limits’ when the release was for a sum that was less than the actual policy limits”, “retracting a ‘policy limits’ offer”, “attempting to leverage a potential bad faith claim as part of the UIM claim”, and “attempting to get plaintiff to release defendant insurance companies from a bad faith claim as part of the settlement of the UIM claim.”

The insurer asserted the attorney client privilege and the work product defense, claiming it anticipated litigation when it was planning to make the settlement offer of full policy limits.  The insured argued that anticipation of litigation only arose at the actual time of settlement.

The court described the claim file as “a collection of documents along with notes from the adjustors who handled plaintiff’s UIM claim. The notes include discussions and offers of settlement, along with determinations of defendants’ representatives as to what they believed was a fair value for the plaintiff’s injuries.” The court observed that institution of a bad faith claim does not work to automatically waive the attorney client privilege or work product doctrine, that “communications between [an] in-house counsel and claims adjustor are generally privileged”, and that “only when a defendant affirmatively pleads reliance on counsel’s advice is such a privilege waived as to the communications between the specific counsel and the client.” There was no such defense asserted in this case.

The court added, in comparing the attorney client privilege and attorney work product doctrine, that it “is the communications and not the underlying facts that are privileged. … Plaintiffs are entitled to discovery regarding the underlying facts of the investigation. It should be further noted, however, that: The protective cloak of [attorney-client] privilege does not extend to information which an attorney secures from a witness while acting for his client in anticipation of litigation. Nor does this privilege concern the memoranda, briefs, communications and other writings prepared by counsel for his own use in prosecuting his client’s case; and it is equally unrelated to writings which reflect an attorney’s mental impressions, conclusions, opinions or legal theories. … Such communications are generally protected by the work-product privilege instead.”

Further, “documents prepared in the regular course of business rather than for purpose of the litigation are not eligible for work-product protection, even if the prospect of litigation exists.” This raises the often difficult question of when a document is prepared in anticipation of litigation. “A document is prepared in anticipation of litigation when, ‘in light of the nature of the document and the factual situation in the particular case, the document can fairly be said to have been prepared or obtained because of the prospect of litigation.’” Thus, courts “should determine ‘the state of mind of the party preparing the document or … the party ordering preparation of the document.’” “This inquiry is limited by the requirement that the party’s anticipation of litigation be objectively reasonable.”

In this case, the court agreed with the insurer that litigation was anticipated at the time the policy limits settlement offer was contemplated, and that both the privilege and work product doctrine applied to the insurer’s claims files after that date. “Based on the court’s in camera line-by-line review of defendants’ redacted claim notes, these lines clearly contain notes of conversations with counsel, mental impressions, opinions, conclusions and strategy, as well as communications regarding defense costs….” Thus, the insurer’s representatives’ state of mind fell reasonably within the anticipation of litigation. Further, the claims note themselves showed redactions of material prepared anticipating litigation, as there was information exchanged with outside counsel in the nature of an attorney client communication regarding potential legal proceedings.  The court also found the presence of attorney opinion work product in the claims notes. In addition, the insurer’s documents containing case valuation, negotiation plans, and evaluations of the case’s strengths and weaknesses were not discoverable as “mental impressions, opinions, conclusions and strategy prepared in anticipation of litigation.”

The insured argued she should still be permitted discovery under the substantial need exception to the work product doctrine because the subjects “in the claim notes concern material issues and speak to the mental state and decision-making of defendants’ agents at a critical time during the negotiations where several acts of bad faith were allegedly committed.” The court rejected this argument because there was not a sufficient showing by the party seeking discovery of work product of a substantial need to (1) obtain these notes to prepare the case, and (2) that the information could not be obtained from another source.  The court specifically observed that no depositions had been attempted of the claims personnel.  The court concluded that “the plaintiff should be able to obtain much of the information in the claim notes from other means, including her own investigations and interviews with witnesses, and the depositions of the claims personnel who handled her UIM claim.”

Thus, the motion to compel production of the redacted material was denied in its entirety.

Date of Decision: July 2, 2015

Berry v. Ohio Cas. Ins. Co., CIVIL ACTION NO. 3:14-1262, 2015 U.S. Dist. LEXIS 86053 (M.D. Pa. July 2, 2015) (Mannion, J.)

JULY 2015 BAD FAITH CASES: COURT PERMITS BAD FAITH CLAIM TO PROCEED BECAUSE COMPLAINT PROVIDED SUFFICIENT FACTUAL ALLEGATIONS, AND INSURER’S ARGUMENTS WENT BEYOND THE BOUNDS OF WHAT THE COURT WOULD ADDRESS AT THE PLEADING STAGE (Western District)

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In Montgomery v. Allstate Property and Casualty Insurance Company, the court denied the insurer’s motion to dismiss the insureds’ bad faith claim based on averments set forth by the insureds that rose above conclusory allegations.

The insureds claimed that their mobile home and its contents were destroyed by fire. The insureds further attested that the insurer’s adjuster inspected the property and declared the home a “total loss”.  They allege that despite the home being a total loss, the insurer “refused to provide reimbursement for foundation repair/replacement, home jacks, replacement landscaping and other expenses that were assertedly covered under the policy.”

The insured filed suit for breach of contract and bad faith. The insurer moved to dismiss the bad faith count on the basis that the insureds failed to plead sufficient facts under Twombly.

The court found that the insureds did not “raise only conclusory allegations lacking specific factual support”.  They provided a “factual basis for [their] allegation of statutory bad faith.” In response to the insurer’s arguments for dismissal, the court specifically noted that a quick payment does not by itself preclude a bad faith claim where the insureds put at issue whether the payment was knowingly or recklessly unreasonable.  Further, the court added that the insurer’s defense of citing policy language and other assertions justifying its non-payment of the foundation expenses do not preclude a bad faith claim at the pleading stage.

The court then added, however, that the insurer could later raise the putative inadequacy of the bad faith claim, and that the insureds would ultimately have the burden of proving a bad faith claim by clear and convincing evidence.

Date of Decision: June 23, 2015

Montgomery v. Allstate Prop. & Cas. Ins. Co., Civ. No. 15-324, 2015 U.S. Dist. LEXIS 81163 (W.D. Pa. June 23, 2015) (Lenihan, U.S.M.J.)

JUNE 2015 BAD FAITH CASES: (1) COURT PERMITS CLAIMS TO PROCEED ON ALLEGATIONS THAT INSURER REFUSED TO CONTINUE DAMAGE APPRAISAL PROCESS UNLESS INSURED WITHDREW PENDING BAD FAITH CLAIMS; (2) COURT WOULD NOT CONSIDER INSURER’S FACTUAL ARGUMENTS ON MOTIVE TO ASSESS INSURED’S BAD FAITH IN SEEKING AMENDMENT, AT THE MOTION TO AMEND STAGE (Middle District)

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In Militello v. Allstate Property and Casualty Insurance Company, the court granted the insured’s motion for leave to file a second amended complaint to add an additional claim for bad faith based upon: (1) an alleged refusal to conduct the appraisal process unless the pending bad faith claim was dropped; and (2) that bad faith conduct occurring during litigation can be actionable.  The insured originally filed a complaint and amended complaint alleging breach of contract and bad faith, among other things.

The insured allegedly submitted a claim to its insurer after its horse barn sustained significant damage. After the insurer refused to pay the full amount demanded, the insured alleged a breach of the insurance contract by “failing to accurately assess and pay the loss,” and that the insurer acted in bad faith “by intentionally or recklessly making false representations for the purpose of denying the full value of the claim.”

The bad faith claim alleged that the parties agreed to use an appraisal process set forth in the underlying insurance policy to resolve the breach of contract claim, but not the bad faith claim.

The insured averred that the insurer “repeatedly attempted to pressure [the insured’s] counsel to drop the pending bad faith claim.” After the insured refused to do so, counsel for the insurer allegedly sent an email indicating that he could not “proceed to appraisal with the bad faith claim hanging over [his] head.” The insurer eventually withdrew from the appraisal process after “both parties identified their individual appraisers and selected a neutral appraiser, and [the insured’s] appraiser had submitted his appraisal report to [the insurer’s] appraiser.”

The insured sought a second amendment to the complaint based on the insurer’s withdrawal from appraisal process “to which it had contractually committed”.  The insured further included allegations of bad faith relating to the insurer’s “withdrawal from the appraisal process due to [the insured’s] refusal to terminate his bad faith claim in federal court.”

The insurer opposed the motion on the basis that the facts would show it withdrew from the appraisal process because it concluded there was insurance fraud; and that it put the insured on notice it would be seeking to amend its answer to bring an insurance fraud counterclaim.  The insurer thus claimed the amendment was essentially a litigation tactic, and that the amendment should be denied for undue delay and bad faith.  The insurer also asserted the amendment was futile, chiefly based upon its factual arguments.

The court rejected all of the insurer’s positions.  First, the court was not convinced that the insured sought to amend its motion based on bad faith rather than “the otherwise colorable claims asserted in his second amended motion.” The court concluded that if it “should be found later that [the insured] lacks a good faith belief in the new facts upon which he bases his proposed amendment, [the insurer] is not without a remedy.”  The court found that the factual arguments the insurer asserted against permitting amendment raised disputes of fact which were matters to be addressed during the course of litigation. They were not accepted as true at this stage as a basis to deny an amended complaint.

As to the futility argument on the substance of the new bad faith allegations, the court first observed that bad faith conduct is actionable regardless of whether it “occurs before, during or after litigation.”  Distinguishing discovery disputes, the court stated that “an insurer can be held liable for bad faith conduct occurring during the pendency of litigation that was intended to evade a duty owed under the policy.” The bad faith alleged in this matter is the insurer’s allegedly “threatening to withdraw from the appraisal process if Plaintiff did not terminate his bad faith claim and by ultimately withdrawing from the process after Plaintiff refused to do so.” This stated a bad faith claim.

Date of Decision: June 16, 2015

Militello v. Allstate Prop. & Cas. Ins. Co., Civ. No. 14-cv-0240, 2015 U.S. Dist. LEXIS 77481 (M.D. Pa.  June 16, 2015) (Rambo, J.)

Go to this link for the summary of a prior decision in this case.

2015 BAD FAITH CASES: INSURED ADEQUATELY PLEADED BAD FAITH CLAIM BASED ON DELAYS IN THE CLAIMS HANDLING PROCESS (Middle District)

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In Baker v. State Farm Mutual Automobile Insurance Company, the Court denied the insurer’s motion to dismiss an insured’s bad faith claim based on the delay in handling an underinsured motorist claim. The insured was involved in a motor vehicle accident caused by the other driver, and allegedly suffered serious injuries. The insured’s husband was covered under an auto insurance policy with liability limits of $50,000. The insured was covered for three automobiles under a separate insurance policy issued by the defendant insurer, which had underinsured motorist coverage limits of $300,000.

The insured retained counsel, who informed the defendant insurer that the husband’s policy limits were only $50,000. The insured sent her insurer various medical records and provided information about her treatment, which detailed “the failure of a pain control device implemented in [the insured] and upcoming surgeries to correct that problem.” As funds were running low for the insured and her husband, she requested a “without prejudice advance” of $10,000 for treatment. The insurer responded that it would not issue any payment until it had completed its claims evaluation, and further requested an independent medical evaluation (“IME”) from the insured.

The insurer originally scheduled the IME at an office over 100 miles from the insured’s home. The insured asked for the IME to be rescheduled, and the insurer scheduled it at a physician’s office over 200 miles from the insured’s home.

The insured filed suit, asserting a claim for UIM benefits in the full amount of $300,000, and a statutory bad faith claim.

The insurer sought to dismiss the bad faith claim, arguing that “there are no facts in the amended complaint to suggest that it acted without a reasonable basis, or with the knowledge that it lacked a reasonable basis in handling Plaintiffs’ UIM claim.” The insurer further claimed that it used “ordinary, reasonable, good-faith” claims-handling, and the complaint showed nothing more. The insured responded that the bad faith claim focused on the delays in the claims handling process.

The Court found the facts were sufficiently pleaded to state a claim for bad faith. Specifically, the insureds alleged “that they notified Defendant on November 1, 2012, that [the husband’s carrier] had tendered its [$50,000] policy limits,” and forwarded all medical records to the insurer’s claims adjuster in August 2013. The insurer allegedly failed to inform the insured of the status of her claim, and waited approximately 15 months after receiving the insured’s medical records to schedule an IME. The Court found this delay, if proven, could be so unreasonable as to amount to bad faith, and refused to dismiss the bad faith claim at this stage of the litigation.

Date of Decision: June 11, 2015

Baker v. State Farm Mut. Auto. Ins. Co., No. 4:14-CV-2295, 2015 U.S. Dist. LEXIS 75529 (M.D. Pa. June 11, 2015) (Brann, J.)

 

JUNE 2015 BAD FAITH CASES: BAD FAITH UIM CASE PROPERLY PLEADED WHERE INSURED DETAILED HISTORY OF COOPERATION WITH INSURER, AND INSURER REFUSED TO PAY POLICY LIMITS (Western District)

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In Vankirk v. State Farm Mutual Automobile Insurance Company, the Court found that the insurer was not entitled to Rule 12(b)(6) dismissal of the insured’s bad faith claim.

The case arose out of a car accident in which the insured was struck by another motorist insured by the same carrier. During litigation against the other driver for her insurance policy limits, the insured provided her own medical records. She and her treating physician were both deposed. The tortfeasor was underinsured.

The insured demanded the policy limits and provided her insurer with updated medical records and documentation. The insurer requested, and was provided with, a Statement under Oath, an additional deposition of the insured, another expert report from the insured’s treating physician concerning ongoing treatment and a second surgery, and additional imaging studies. After the insurer only offered $5,000, below the coverage limit of $25,000, the insured filed an action for underinsured motorist (“UIM”) benefits and damages for bad faith.

The insurer argued that the insured’s bad faith claim should be dismissed because she failed to plead sufficient facts to support such a claim. The Court disagreed, and noted the insured’s Amended Complaint provided specific information as to the insurer’s “five-year involvement in this case, the nature of [the insured’s] injuries, the medical evidence provided, the chronology of events, the parties’ course of conduct, and the factual bases for [the insured’s] allegation of statutory bad faith as to [the insurer’s] handling of her UIM claim.”

The insurer further maintained that “allegations regarding the underlying litigation should be stricken because (a) Pennsylvania is not a “direct action” state (i.e., an injured party cannot directly sue the insurance company of the alleged tortfeasor) and an injured party may not “bring a direct action for bad faith against the tortfeasor’s liability carrier.” The Court held this argument to be facially inapposite, and concluded that an assessment into the handling of the UIM claim must be properly informed by a “factual understanding of its conduct, an understanding which necessarily includes, e.g., the history of [the insurer’s] knowledge regarding [the insured’s] injury and treatment.” The Court let the case go forward.

Date of Decision: May 11, 2015

Vankirk v. State Farm Mut. Automobile Ins. Co., Civil Action No. 15-199, 2015 U.S. Dist. LEXIS 62067 (W.D. Pa. May 11, 2015) (Lenihan, J.)

JUNE 2015 BAD FAITH CASES: SUPERIOR COURT VACATES JUDGMENT ON BAD FAITH CLAIM AFTER CLOSE FACTUAL ANALYSIS; AND DIRECTS TRIAL COURT ON REMAND TO ALLOW EXPERT TESTIMONY CONCERNING ADJUSTER’S OBLIGATION TO CLARIFY LEGAL INTERPRETATION OF POLICY TERMS, BUT NOT TO CONSIDER INSURED’S POST-DENIAL CONDUCT (Superior Court)

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In Mohney v. American General Life Insurance Company, the Superior Court reversed the trial court, and remanded the insured’s statutory bad faith case against his disability insurer for a new trial.  At the time of this decision, the case had been pending in some form for 20 years.

The insurer originally paid total disability benefits, based upon policy definitions of the insured’s “total disability”.  The insurer’s adjuster later made the decision, on his own understanding, to terminate benefits on the basis that the insured’s doctor stated the insured could work in some limited capacity.  However, the doctor’s statements upon which the adjuster based his decision were in fact equivocal and highly qualified as to whether the insured could perform alternative work in the future.

In an earlier trial on the breach of contract claim, the court found the insurer breached its contract. In a second trial, on bad faith, the trial court found there was no bad faith. While the insurer was incorrect in terminating benefits, it had not been unreasonable in its position or investigation, nor had it knowingly or recklessly disregarded that fact.  The appellate court disagreed.

The Superior Court stated that “bad faith” encompasses a variety of possibilities including “a frivolous or unfounded refusal to pay the proceeds of a policy done with dishonest purpose, motivated by self-interest or ill will”, conduct “lack[ing a] good faith investigation into facts, and failure to communicate with the claimant”, “where the insurer intransigently refused to settle a claim that could have been settled within policy limits, where the insurer lacked a bona fide belief that it had a good possibility of winning at trial, thus resulting in a large damage award at trial”, and it “may also extend to the insurer’s investigative practices”. The appellate court recited the bad faith standards: proof must be by clear and convincing evidence, the insurer’s position must have been unreasonable, and the insurer must have knowingly or recklessly disregarded the unreasonable nature of its position. In a clarifying footnote, the court reiterated its rulings in Nordi (2010) and Greene (2007) that the insured is not required to prove a motive of self-interest in or ill will as a third element of statutory bad faith; rather, evidence of self-interest or ill will are probative of the second element, i.e., that the insurer knew or recklessly disregarded the unreasonableness of its position.

The Superior Court then firmly rejected the trial court’s factual conclusion that the insurer’s termination of benefits was reasonable; thus, the insured met the burden on the first prong of the bad faith test.  The court went into an extremely detailed analysis of the factual record in reaching this conclusion.

As to the second prong, the appellate court likewise drilled down into facts going to the insurer’s state of mind.  It approved a standard that the insurer “’was required to conduct an investigation sufficiently thorough to provide it with a reasonable foundation for its actions.’” The absence of a reasonable basis to deny coverage was the cornerstone of undermining the insurer on the knowing or reckless disregard standard.  The appellate court found that the trial court largely ignored substantial evidence that the insurer’s investigation “was not sufficiently thorough to obtain the necessary information regarding [the insured’s] ability to work.” The appellate court also referenced evidence from the record that could establish knowing or recklessly culpable conduct by the insurer, in the nature of misrepresentations of fact in terminating the benefits, and conduct constituting a lack of honest or objective review.

Thus, the Superior Court rejected the trial court’s conclusion that there was no evidence supporting the second bad faith prong.  However, it did not automatically then rule for the insured.  Rather, it held that “while [the] misrepresentations are evidence of bad faith, they do not without more establish knowing or reckless misconduct as a matter of law by clear and convincing evidence on the record before us.” That issue could not be decided on appeal.

The insurer argued that the adjuster making the decisions on the claim at issue had broad discretion, within his experience, to evaluate the claim based on available medical records and his common sense. In the insurer’s training practices, the key policy term “total disability” was left to the adjuster’s common sense interpretation, based on his prior experience.  While the adjuster could seek advice from an attorney, he did not do so “because he did not believe that any additional legal construction of the term ‘total disability’ was necessary. Instead, he applied a plain and common sense meaning to the certificates’ definition of ‘total disability.’”

The appellate court had already ruled that the adjuster’s interpretation was contrary to the policy language itself, as well as Pennsylvania appellate law.Thus, the court stated that “in the absence of a standard policy manual or other specific guidance, it was left solely to [the adjuster’s] ‘common sense’ and discretion to decide whether it was necessary to consult with legal counsel on the proper (legal) interpretation of the policy term at issue.” There was no evidence in the record of industry standards on training adjusters in legal interpretations of policy language, or providing adjusters guidance of when to seek guidance from staff attorneys.

Prior to trial, the insured did provide an expert report stating, among other things, that insurers and their professionals “be informed on the established law which they would be expected to apply in the course of handling claims, specifically including the law regarding the interpretation of policy provisions and definitions.” That expert’s trial deposition also stated that there was a “need for adjusters to be trained in the proper application of established case law on applicable policy terms.” However, the expert report and testimony were excluded at trial, on the basis that they “consisted of legal conclusions that were improper and inadmissible, the facts underlying [the] bad faith claim were ‘readily ascertainable by the Court without the aid of expert testimony,’ and [the expert’s] testimony would not assist in the resolution of [the] bad faith claim.”

The Superior Court found this was an abuse of discretion because: “The issue in question, involving the standards in the insurance industry for the training of claims adjusters in applying legal precedent when deciding insurance claims, is sufficiently complex to permit the introduction of expert testimony. The … Trial Court’s written decision does not reflect that it had any specific knowledge of the industry standards in this area. Instead, the … Trial Court merely accepted [the adjuster’s] testimony that there was no need to consult with staff attorneys in this case, and in the absence of expert testimony … [the insured] had no ability to offer contradictory evidence to rebut [the adjuster’s] testimony.”

Thus, the lower court’s ruling on bad faith was vacated, and the case remanded for a new trial.

On remand, the Superior Court instructed that the trial court was not to consider evidence of the insured’s post denial conduct, which it had earlier done.  Further, the trial court had precluded the insurer’s expert report as a sanction, and the appellate court left it to the trial court as to whether it would revisit that sanction; but it did not vacate the sanction itself. Finally, the appellate court upheld the trial court’s decision not to allow an amended complaint to add bad faith allegations based upon litigation conduct, as being so untimely as to be prejudicial; but the appellate court did note that the insured never raised the more general argument that the insurer’s litigating this matter for 20 years, when there was no reasonable basis to do so, could conceivably be the basis for a bad faith claim.

Date of Decision: May 8, 2015

Mohney v. American General Life Insurance Company, No. 2030 WDA 2013, SUPERIOR COURT OF PENNSYLVANIA, 2015 Pa. Super. LEXIS 250 (Pa. Super. Ct. May 8, 2015) (Donahue, Allen, and Strassburger, JJ.)

MAY 2015 BAD FAITH CASES: TERMINATING POLICY WITH KNOWLEDGE THAT PROPER NOTICES WERE NOT SENT STATED AN ACTIONABLE BAD FAITH CLAIM; STATUTE OF LIMITATIONS WAS TRIGGERED UPON CLEAR NOTICE OF DENIAL WHICH BARRED POLICY HOLDER CLAIMS, BUT NOT BENEFICIARY CLAIMS, UNDER THE DISCOVERY RULE (Philadelphia Federal)

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In Hilston v. American General Life Insurance Company, the plaintiff brought breach of contract and bad faith claims against her late father’s life insurer, the policy being held in a trust.  The court found that her claim as substitute trustee was barred by the two year statute of limitations, in light of notice to earlier trustees; but her bad faith claim as an individual beneficiary was not.

The pertinent facts are that the prior trustee paid the premiums every year for 12 years (1996-2008). The policy required the insurer to provide written notice at the beginning of each year, setting out that year’s  premium.  The complaint alleged that the proper notice was not provided in the 13th year, and the trustee did not make the premium payment.

After not receiving payment, the insurer decided to “lapse the Policy” for failure to pay premiums due. The plaintiff alleged the insurer sent no notice of the lapse, grace period, termination, or reinstatement of rights, and that neither she, her father, nor the trustee knew the policy had lapsed until years later. The policy could not be reinstated due to the insured’s poor health, and he died in July 2012.

Plaintiff sued the trustee in 2013, during which case she issued a subpoena to discover any notices the insurer had provided.  There was no response, and she demanded payment of death benefits in April 2012.  This demand was rejected later in April 2014, and plaintiff filed suit in December 2014.

In addressing the trustee’s claim, the court observed that “an action for bad faith denial of coverage accrues when the insured first learned that the insurance company was denying coverage.” This trigger does not always require an actual formal denial, as “[w]hile it is an unfounded refusal to pay proceeds of policy that is at the heart of a bad faith claim, at some point, the failure of the insurer to . . . provide coverage puts the insured on notice that the insurer has denied coverage.”  The court then cited a litany of cases for the idea that bad faith can be found for conduct other than denial of a benefit.

[Note:  As stated on this blog previously, there is an issue as to whether “bad faith” conduct that does not involve denial of a benefit, can, in and of itself, constitute section 8371 bad faith; or whether that conduct is an indicia or evidence of bad faith supporting that the delay or denial of a benefit is actionable under section 8371.  In a footnote, the court stated that: “We follow the federal courts within this Circuit and find that violations of the [Unfair Insurance Practices Act] cannot support a statutory bad faith claim.”]

In this case, the allegations indicated that the trustee did not actually learn the policy was not in effect for over two years, stating the trustee and insured were surprised when they learned that fact; especially in the absence of any notice from the insurer.  In ensuing correspondence in 2011, it was unambiguous to the trustee and the insured that the insurer took the position the policy lapsed.  The court was willing to apply the discovery rule to extend the trigger for the statute of limitations, but the statute was triggered in 2011 when the insurer made clear in writing that it was going to deny any benefits under the policy. “The subsequent denial of benefits in 2014 can simply be classified as a ‘continuing refusal’ to provide benefits under the policy and is not actionable.” Thus, the statute of limitations ran on the trust in 2013, over a year before suit was filed.

The analysis for the plaintiff as beneficiary had a different result.  A beneficiary does not have standing to sue until the death of the insured.  Although more than two years passed after she gained standing, before suit was filed, plaintiff pleaded that “she did not become aware of [the insurer’s] deficient notices until 2014.” Thus, for pleading purposes, the allegations were accepted as true and the claim could not be dismissed, applying the discovery rule.

The court further found that plaintiff had stated a bad faith claim, in alleging the insurer knowingly “failed to provide notices of premium due, grace period, lapse, reinstatement, or termination to [the trustee] or [the insured],” and still terminated the policy. She also alleged that the insurer had failed to investigate the propriety of letting the policy lapse, and whether the requisite notices were sent.  The court ruled that if the insurer “did in fact lapse the Policy with knowledge that it had not sent the required notices, then it arguably lacked a reasonable basis to terminate the Policy. Further, if [the insurer] had that knowledge and still terminated the Policy, it disregarded its lack of a reasonable basis.”

Date of Decision:  May 12, 2015

Hilston v. Am. Gen. Life Ins. Co., CIVIL ACTION NO. 14-7269, 2015 U.S. Dist. LEXIS 61804 (E.D. Pa. May 12, 2015) (Kearney, J.)