Archive for the 'PA – Claims Handling Procedures' Category

OCTOBER 2014 BAD FAITH CASES: NO BAD FAITH IN UIM CASE WHERE INSURER CORRECTLY DETERMINED COVERAGE BASED ON INSUREDS’ CONTRACTUAL CHOICE TO LIMIT UIM AMOUNTS, AND WHERE NO OTHER FORM OF BAD FAITH ASIDE FROM COVERAGE DENIAL WAS PLEADED (Philadelphia Federal)

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In Davis v. Allstate Property & Casualty Company, the UIM plaintiff brought claims for breach of contract and bad faith, based upon an alleged failure to pay $600,000 in connection with a fatal car accident.  The court found, however, that the insureds had complied with all the requirements necessary under Pennsylvania’s Motor Vehicle Financial Responsibility Act to reduce their policy’s underinsured motorist coverage to $15,000 per person and $30,000 per accident, and thus the insurer correctly denied claims in excess of the contractually agreed upon coverage amount.  The claim for breach of an implied covenant of good faith and fair dealing was likewise dismissed, because Pennsylvania law precludes that claim from proceeding independently of the contract claim on which it is based.

Further, there could be no statutory bad faith for denying coverage in these circumstances.  The court stated:  “When an insurer makes a correct determination of the amount owed under a policy, it has a reasonable basis for denying an insured’s claims for a higher amount,” and “plaintiff’s bad faith claim fails as a matter of law because a correct determination of coverage precludes a bad faith claim predicated on a theory that the insurer unreasonably denied coverage.”

Nor, was any other form of bad faith pleaded. The court stated that “Pennsylvania law does not limit bad faith claims to unreasonable denials of coverage. A bad faith [claim] can have various other bases, including an insurer’s lack of investigation, lack of adequate legal research concerning coverage, or failure to communicate with the insured.” However, no factual averments were pleaded to support even the inference that the insurer did not conduct an investigation, failed to conduct adequate legal research, or did not communicate with the insured.

That being said, the bad faith claims were dismissed without prejudice for plaintiff to file a second amended complaint which adequately sets forth her bad faith claims.

Comment:  This latter point raises the debated issue of whether a poor claims handling practice that may even be a violation of the UIPA, but which in no way results in, or is connected to, the actual delay or denial of a benefit because no benefit is owed under the policy, can constitute statutory bad faith.  See, e.g., Berks Mut. Leasing Corp. v. Travelers Prop. Cas., NO. 01-CV-6784,2002 U.S. Dist. LEXIS 23749, footnote 8 (E.D. Pa.  Dec. 9, 2002) (Yohn, J.) (“Accordingly, I find plaintiff’s interpretation of the statute unpersuasive. Instead, I conclude that Section 8371   is limited to causes of actions arising out of the bad faith handling or payment of claims and does not apply to conduct unrelated to the denial of a claim. In so holding, I join other courts that have expressly embraced this interpretation of Section 8371.”); Focht v. State Farm (“In this regard, it is relevant that the District Court for the Eastern District of Pennsylvania has held that, in determining whether a defendant had a “reasonable basis” for denying an insurance claim, the test elucidated in Terletsky “is an objective one” and that as long as “a” reasonable basis exists to deny the claim, “there cannot, as a matter of law, be bad faith.”); but see Shannon v. New York Cent. Mut. Ins. Co. (“Given the remedial purpose underpinning the Bad Faith Statute, we are not persuaded that permitting an insurer to evade its statutory obligation due to some fortuitous fact to which it was oblivious is consistent with the legislature’s intent.”).

Date of Decision: September 30, 2014

Davis v. Allstate Prop. & Cas. Co., Civil Action No. 13-cv-07038, 2014 U.S. Dist. LEXIS 138022 (E.D. Pa. September 30, 2014) (Knoll Gardner, J.)

OCTOBER 2014 BAD FAITH CASES: COURT FINDS “LACK-OF-FORTUITY” EXCLUSION IMPLIED IN EVERY ALL RISK INSURANCE POLICY, AND NO BAD FAITH WHERE DENIAL HAD A REASONABLE BASIS (Philadelphia Federal)

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In Fry v. Phoenix Insurance Company, the insured homeowners suffered a wall collapse, after a long history of issues with the wall. There were various expert reports on problems with the wall that led the court to conclude that the insureds had knowledge of both potential problems causing the collapse, and that they failed to timely act to prevent the collapse after having been specifically warned it would occur absent certain actions.

First, coverage was properly denied because the policy only covered collapses if the causes were hidden from the insured, and such was not the case here.

Second, and of significant interest, is the court’s then finding that there was no coverage because the collapse was not the result of chance or accident, i.e., it was not fortuitous. The court specifically found that “under Pennsylvania law, a lack-of-fortuity exclusion is implied in every all-risk policy, such as the Policy at issue here.”

The court ruled that Third Circuit precedent established this principle, citing support from appellate case law: “there is an implied exclusion in every all-risk insurance policy for losses that are not fortuitous”; the “Supreme Court of Pennsylvania would recognize a ‘judicially created “fortuity” exclusion from coverage’ based on the generally accepted principle that ‘every “all risk” contract of insurance contains an unnamed exclusion — the loss must be fortuitous in nature’”; “The fortuity requirement is based on ‘[p]ublic policy considerations and the general nature of insurance,’ preventing an insurance policy ‘from providing coverage for a policyholder’s losses unless those losses are fortuitous.’”; “[W]e predict that the Pennsylvania Supreme Court would place on the insurer the burden of proving that the circumstances of the loss were such that coverage would be inconsistent with that public policy.”

The court then addressed what the Third Circuit meant by “fortuity”. “A fortuitous event … is an event which so far as the parties to the contract are aware, is dependent on chance.” “Such an event ‘may be beyond the power of any human being to bring the event to pass; it may be within control of third persons, provided that the fact is unknown to the parties. The thrust of the definition is that the occurrence be unplanned and unintentional in nature.’” “’In essence, the doctrine precludes coverage from losses that are certain to occur.’” “’Typically, the inherent fortuity doctrines preclude coverage based on what the insured knew or should have known about its potential liability at the inception date of the insurance policy at issue….”

Moreover, the court ruled that the determination of whether a claimed loss is fortuitous is a question of law for the court. Although the court indicated the determination of fortuity was solely a legal issue, the court concluded its analysis that the loss in this case was not fortuitous because no reasonable jury could find the loss fortuitous, thus indicating there may be some role for the jury on the issue.

As to the specific record, independent of the precise cause, all of the experts had told the insureds the wall would collapse unless they took certain actions, they did not, and the wall collapsed, i.e., no fortuity.

Thus summary judgment was granted on the breach of contract claims, and the bad faith claim was dismissed as the court’s analysis demonstrated denial was reasonable.

Date of Decision:  September 19, 2014

Fry v. Phoenix Ins. Co., CIVIL ACTION NO. 12-4914, 2014 U.S. Dist. LEXIS 131504 (E.D. Pa. September 19, 2014) (Stengel, J.)

OCTOBER 2014 BAD FAITH CASES: NO BAD FAITH CLAIM WHERE INSURER CARRIED OUT REASONABLE INSPECTION AND CAME TO CONCLUSION THAT RESULT OF THE INSPECTION FELL WITHIN AN EXCLUSION, & INSUREDS DID NOT OFFER MATERIAL FACTS TO SHOW, EVEN IF WRONG, THAT POSITION WAS UNREASONABLE OR THE RESULT OF INTENT SUFFICIENT TO MEET THE BAD FAITH STANDARD (Middle District)

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In Focht v. State Farm Fire & Casualty Company, the homeowner insureds brought breach of contract and bad faith claims centering on a water based loss.  The coverage issue centered on whether the damage at issue was caused by flood damage arising up inside the house, or water penetrating the house during a storm and causing damage from above.  The former was not covered.  The insurer investigated and found that the storm damage in the upper part of the house did not correlate with water damage, but the water damage was consistent with flooding.  The insured’s public adjuster found evidence to support that the water did infiltrate from above.

The court ruled that while a reasonable jury could find for the insureds, there was no evidence to support a bad faith claim.  The insureds’ allegations at most added up to negligence or bad judgment, not bad faith.  That the insurer covered a water damage claim 8 years earlier that was arguably excluded, did not help the insureds make out a case.  Even if the exclusion had applied and the insurer paid anyway, “all that could mean is that Plaintiffs received money … to which they were not entitled.”  Such an oversight by the carrier 8 years earlier could not be evidence of bad faith in a separate claim, “when Plaintiffs’ policy specifically excludes the damage that [the insurer] determined was at issue [8 years later] and when there is no evidence in the record that that determination was motivated by dishonesty or a breach of known duty as would be required to establish bad-faith liability under Terletsky.”

In addressing the factual assertions the insureds made to defend against summary judgment, it was significant to the court that a number of facts or issues raised were not actually relevant to the coverage dispute actually at issue, particular observing that the dispute over surface vs. subsurface water was immaterial as neither was covered.  The court also found that the length of time the insurer’s inspector took with the property, 25-30 minutes, did not create an issue where there was no other evidence to indicate it should have taken longer.

Date of Decision:  September 5, 2014

Focht v. State Farm Fire & Cas. Co., 3:12-CV-01199, 2014 U.S. Dist. LEXIS 124561 (M.D. Pa. September 5, 2014) (Mariani, J.)

 

OCTOBER 2014 BAD FAITH CASES: (1) STATUTORY BAD FAITH CLAIM SUFFICIENTLY PLEADED BECAUSE PLAINTIFF ALLEGED BASIS FOR UNREASONABLE CANCELLATION; (2) NO STATUTORY BAD FAITH ACTIONABLE AGAINST A BROKER WHO IS NOT AN INSURER; (3) NO BREACH OF FIDUCIARY DUTY CLAIM PLEADED THAT GOES BEYOND CONTRACT CLAIM FOR DUTY OF GOOD FAITH AND FAIR DEALING (Philadelphia Federal)

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In Kofsky v. Unum Life Insurance Company of America, the insured purchased a disability insurance policy.  He alleged that the defendants, the insurer and the insured’s broker, unilaterally cancelled his insurance policy without prior notice. Thereafter, the insured claimed that he still forwarded payment under the policy, and that he fulfilled his duties under the policy, but the defendants refused to reinstate the policy. He brought claims for statutory bad faith, among others, against both the insurer and the broker, each of which sought to dismiss those claims.

The insurer’s motion to dismiss was denied. Although the complaint lacked details, it provided enough factual allegations to sufficiently state a bad faith claim. The insured alleged that the carrier unilaterally cancelled the policy even though the insured had fulfilled his obligations under the policy. This was enough to allege the carrier lacked a reasonable basis for cancellation, which can be the basis of a bad faith claim, and that there were issues of fact that remained.

The insurance broker was successful, however, because the bad faith statute only applies to insurers, not entities like brokers which do not issue policies, collect premiums, or assume risks or contractual obligations.

The court dismissed the breach of fiduciary duty claim against the insurer.  There were no allegations that some action was taken or agreement made that would take the insurer beyond its contractual obligations as an insurer, which did not automatically create a fiduciary duty; rather, this appeared to be akin to a claim for breach of the contractual duty of good faith and fair dealing, which is subsumed in the breach of contract claim.

Date of Decision:  September 2, 2014

Kofsky v. Unum Life Ins. Co. of Am., CIVIL ACTION NO. 13-5647, 2014 U.S. Dist. LEXIS 122220 (E.D. Pa. September 2, 2014) (Surrick, J.)

SEPTEMBER 2014 BAD FAITH CASES: WHERE INSURED GAVE MATERIALLY INACCURATE WRITTEN INFORMATION IN INSURANCE APPLICATION, EVEN IF SHE GAVE CORRECT INFORMATION ORALLY TO INSURER’S AGENT, INSURER HAD A REASONABLE BASIS TO DECLINE COVERAGE, AND SO THERE COULD BE NO VIABLE BAD FAITH CLAIM (Western District)

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In Jones v. State Farm Fire & Casualty Company, the insured suffered a fire to a home.  At the time, the home was not her primary residence, and it was being renovated.  The insured claimed that prior to obtaining the insurance policy at issue, she informed the insurer’s agent of this fact, and further that she had a previous fire.  However, her insurance application expressly stated that this home was her primary residence and that she had not suffered any previous losses in the last five years.  The carrier sought rescission of the policy based on these alleged misrepresentations.  The insured brought a bad faith claim, among other causes of action.

The court stated that the existence of a reasonable basis for denial will defeat a bad faith claim.  Further, “[i]n the specific context of a plaintiff challenging the denial of a claim, the insurer can demonstrate its reasonableness by highlighting material misrepresentations on a plaintiff’s application.”  The court also stated: “Because insurers are permitted under Pennsylvania law to rescind insurance contracts that contain material misrepresentations, denial on that basis is inherently ‘reasonable’ for purposes of the § 8371 cause of action.”

The court found that even if the insured had made oral representations to the insurer’s agent about the fact that she was not living in the home and that there had been an earlier fire loss, her stating contrary facts in the application contradicted those statements, and gave the insurer a reasonable basis for its decision to deny the claim.  “As [the insurer] correctly argues, even accepting as true that [the insured] told [the insurer’s agent’s] employee she had previously had a fire and that the dwelling was not her primary residence, and accepting that [the insurer] knew or should have learned of those statements, [the insurer] nonetheless was confronted with conflicting information. [The insured] intentionally or unintentionally provided untrue information on the rate quote and insurance application forms on which [the insurer] relied.” This provided a reasonable basis for the insurer’s decision, and the bad faith claim was dismissed.

Date of Decision:  September 9, 2014

Jones v. State Farm Fire & Casualty Co., Civil No. JFM-14-00185, 2014 U.S. Dist. LEXIS 125601 (W.D. Pa. September 9, 2014) (Motz, J.) (Judge Motz is a Senior Judge of the United States District Court for the District of Maryland)

SEPTEMBER 2014 BAD FAITH CASES: IN THIS SUPERSTORM SANDY CASE, INSURED ALLOWED TO PROCEED ON BAD FAITH CLAIM WHERE INSURER REFUSED TO ENGAGE IN APPRAISAL PROCESS, BUT COURT DISMISSES BAD FAITH CLAIM BASED UPON ALLEGED UNDUE INFLUENCE ON INSURED’S ROOFING CONTRACTOR (Philadelphia Federal)

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Currie v. State Farm Fire & Casualty Co., involved damage to the insured’s home from Superstorm Sandy, and a dispute over the homeowner insurer’s payment obligation. The matter was before the court on summary judgment. After finding summary judgment could not be granted on the breach of contract claim, the court then addressed the carrier’s motion for summary judgment on the insured’s two bad faith claims.

First, the insured claimed bad faith for the insurer’s failure to engage in the appraisal process. The insurer’s position was that appraisal was only required where the coverage obligation was agreed upon, but the amount of loss was not; and that the carrier disputed coverage. The court found that the carrier’s position was not actually over coverage differences but over the loss sustained, and allowed the bad faith claim to proceed on that basis.

It granted summary judgment on the second bad faith claim, however. The insured claimed that the carrier had unduly influenced the insured’s roofer to lower its repair estimate. However, the evidence presented on the motion did not support that position. The court also stated that the insureds did not submit “any support for their claim that negotiations regarding the amount of construction repair costs and services to be provided constitutes bad faith conduct on the part of an insurer.”

Date of Decision: August 19, 2014

Currie v. State Farm Fire & Cas. Co., CIVIL ACTION No. 13-6713, 2014 U.S. Dist. LEXIS 117970 (E.D. Pa. August 19, 2014) (Kelly, J.)

SEPTEMBER 2014 BAD FAITH CASES: NO BAD FAITH UNDER PENNSYLVANIA LAW WHERE INSURED FAILED TO DISCLOSE FACTS TO DISABILITY INSURER; NO BREACH OF FIDUCIARY DUTY UNDER NEW JERSEY LAW FOR SAME REASON (Philadelphia Federal)

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In Hayes v. American International Group, a case involving a disability insurance claim, the Magistrate Judge concluded in her Report and Recommendation that there could be no statutory bad faith under Pennsylvania law where the carrier paid total disability benefits for over four years until it learned that the insured had been working over the entire period. Further, a subsequent investigation of the insured, his work-related activities and his earned income, as well as his failure to provide relevant financial information, led to the insurer’s decision to terminate benefits. The insured did not present sufficient evidence to support that the insurer lacked a reasonable basis for denying total or residual disability benefits, or that the insurer disregarded a lack of a reasonable basis for doing so.

The insured also brought a claim for breach of fiduciary duty. The court observed that there was a difference in Pennsylvania and New Jersey law, with Pennsylvania law recognizing only a very limited fiduciary duty in insurers, and New Jersey law recognizing a broader fiduciary duty from insurers to insureds in the processing of first party claims. The court did a conflict of laws analysis, setting out, however, that both parties to the insurance contract owe a fiduciary duty to the other under New Jersey law. In light of that, New Jersey law was not contrary to Pennsylvania’s governmental interests, the conflict was false, and New Jersey law applied.

For the reasons set out above, there could be no breach of fiduciary duty. The insured had repeatedly and consistently reported his lack of income and inability to perform anything but sedentary activities to the insurer. Thus, the court stated that “it cannot be said that [the insurer] exercised bad faith in discontinuing benefits when confronted by evidence that Plaintiff was earning more from his private practice than he was earning before he allegedly became disabled.”

Date of Decision: July 29, 2014

Hayes v. Am. Int’l Group, CIVIL ACTION NO. 09-2874, 2014 U.S. Dist. LEXIS 103564 (E.D.Pa. July 29, 2014) (Hey, U.S.M.J.) (Report and Recommendation)

SEPTEMBER 2014 BAD FAITH CASES: STATE TRIAL COURT, FOLLOWING SUPERIOR COURT, HOLDS THAT BAD FAITH CAN GO BEYOND A PURE DENIAL, AND CAN INCLUDE BAD FAITH IN INVESTIGATING AND COMMUNICATING WITH INSURED; THEN FINDING THAT SOME OF THESE CLAIMS WERE TIME BARRED, BUT OTHERS MUST BE DETERMINED BY THE TRIERS OF FACT, IN ONLY GRANTING PARTIAL SUMMARY JUDGMENT TO EXCESS CARRIER (Centre County Common Pleas)

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In Mountainside Holdings, LLC v. American Dynasty Surplus Lines Ins. Co., the defendant insurers were excess directors and officers liability insurance carriers at the tertiary level, with primary coverage and the first layer of excess coverage providing $10,000,000 in coverage.  The dispute arose out of underlying claims against the insureds in a qui tam action.  They raised bad faith and breach of contract claims against the insurers.

The court observed that bad faith claims can include more than the pure denial of the claim.  “An action for bad faith may extend to the insurer’s investigative practices. Bad faith conduct also includes lack of good faith investigation into facts, and failure to communicate with the claimant.”  The court then cited an online dictionary definition: “To investigate is ‘to observe or study by dose examination and systematic inquiry.’”

Further, bad faith plaintiffs can attempt to prove bad faith by demonstrating that the insurer violated provisions of Pennsylvania’s insurance statutes or regulations, “even if those provisions do not provide for private rights of action.”

The first legal issue was whether the bad faith claims were time barred, and what acts caused the statute of limitations to begin running.  Plaintiffs attempted to argue that the statute couldn’t begin to run until the $10,000,000 had been paid by the first two lawyers of coverage, and the carrier refused to pay on the third layer, i.e., denied that benefit.  The court looked to the wider definition of bad faith cited above, and the plaintiffs’ own complaint which alleged various failures to investigate, a failure to communicate, interference with plaintiffs’ defense in the qui tam action, as well as a denial.  The court found that these acts triggered the statute of limitations, and these claims were time barred.

As to the remaining bad faith claims which were not time-barred, the court applied the same reasoning, i.e., that pure denial is not the sole source of bad faith, to reject the insurers’ summary judgment motion as to some of the bad faith claims.  First the court agreed that plaintiffs’ claims of interference with the defense in the qui tam case and interference with the other two layers of insurance carriers were attempts to circumvent the court’s prior ruling dismissing their tortious interference claims.  However, on the claims of an “alleged failure to promptly acknowledge and investigate” and alleged wrongful denial of coverage on the basis of a failure to cooperate, issues of fact remained. Going back to the dictionary definition cited that investigate means “to observe or study by close examination and systematic inquiry,” the court found that: “It remains unanswered whether Defendants’ request for more information was a systematic inquiry, or if more was required.”

Date of Decision:  June 30, 2014

Mountainside Holdings, LLC v. Am. Dynasty Surplus Lines Ins. Co., No. 2003-127, COMMON PLEAS COURT OF CENTRE COUNTY, 2014 Pa. Dist. & Cnty. Dec. LEXIS 73 (C.C.P. Centre County June 30, 2014) (Grine, J.)

In case you missed this Labor Day Weekend Post: WHERE POLICY EXCLUSION WAS CLEAR, AND INSUREDS OFFERED NO ACTUAL FACTS TO MEET THEIR HIGH BURDEN TO PROVE THAT INSURER’S POSITION LACKED A REASONABLE BASIS, SUMMARY JUDGMENT WAS GRANTED TO THE INSURER ON BAD FAITH CLAIM (Philadelphia Federal)

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In Leitner v. Allstate Insurance Company, the insureds alleged bad faith on the basis of improper denial of their claim and/or unreasonable delay in the investigation process.  The court cited the bad faith statute and the standards imposed by case law, emphasizing the “high bar” an insurance bad faith plaintiff had to leap to make out a case.  At issue was whether a loss was sudden and accidental, which would be covered; or was the result of action occurring over time.  The case involved flooding from a burst pipe.

The carrier had the loss inspected and followed up requesting further documentation.  It denied the claim on the basis that there was “seepage or leakage over a period of weeks, months, or years, of water, steam or fuel….”  The insured’s own plumber found the source of the problem two-fold:  the pipe became disconnected due to bad workmanship, and allowed waste to pour into the floor beneath the kitchen; and/or (2) another pipe made of terra cotta running underground just outside the property broke due to age and caused water to accumulate on the basement floor of the property. The plumber could not tell from the condition of the piping how long the problems had existed but he did state that, based mainly on the amount of accumulated waste and other debris, the piping underneath the kitchen had been leaking for “approximately more than a month” and that the outside piping had been leaking for “more than two weeks, definitely” and probably more than a month.  Even altering the number of dwellers using water, his estimate remained that the problems existed for a number of weeks.

The insureds did not offer evidence refuting this testimony or call it into question, which supported the carrier’s position that both the disconnected plastic pipe and the broken terra cotta pipe had been leaking for at least a number of weeks, and therefore the insured’s claim fell within the exclusion.  Thus, by the policy’s clear terms, the insurer’s determination did not lack a reasonable basis, and the bad faith claim was dismissed on summary judgment.

Date of Decision:  July 9, 2014

Leitner v. Allstate Ins. Co., CIVIL ACTION NO. 11-7377, 2014 U.S. Dist. LEXIS 95071 (E.D. Pa. July 9, 2014) (Tucker, C.J.)

2014 SEPTEMBER BAD FAITH CASES: COURT RULES THAT ATTORNEY CLIENT PRIVILEGE DOES NOT APPLY WHERE ATTORNEY ACTS AS A CLAIMS INVESTIGATOR; BUT REJECTS THE INSURED’S “THEORY OF WHOLESALE WAIVER” WHERE INSURER DENIES ACTING IN BAD FAITH IN ANSWER AND WHERE LEGAL OPINION AFFECTS ADJUSTER’S MIND, IN ABSENCE OF ADVICE OF COUNSEL DEFENSE; AND GENERAL ADMONITION THAT EACH REDACTED ITEM MUST BE ANALYZED INDIVIDUALLY BY COUNSEL (Philadelphia Federal)

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In Henriquez-Disla v. Allstate Property & Casualty Insurance Company, the insured brought bad faith and fraud claims against its insurers.  There were two discovery issues: (1) whether certain communications in the case involving a lawyer were subject to the attorney client privilege or whether the lawyer was acting as a claims adjuster rather than a lawyer; and (2) whether there was a waiver of the attorney client privilege simply on the basis of a defense that the carrier’s personnel acted in good faith.  In requiring production of certain information on the basis that the attorney was not performing the functions of an attorney, the court certified the issue for an interlocutory appeal and stayed its proceedings.

The insurer had provided redacted copies of the logs relevant to the insured’s claims, and the insured sought unredacted versions of the logs, as well as policy and procedural manuals used in the decision-making process. The court ordered the production of the policy and procedural manuals governing coverage decisions and the course of the investigation, subject to a confidentiality agreement.  Further, the court conducted an in camera review and ordered partially unredacted versions of the logs produced, on the basis that those portions reflected that counsel performed the ordinary business of claims investigation and not as a lawyer. While the court reduced the number of documents to be produced on reconsideration (the original decision is discussed here), the fundamental principle distinguishing counsel’s conduct as investigator vs. lawyer remained the applicable measure.

Generally, the log entries reflecting investigation, rather than legal work, include those containing direction to conduct routine investigation whether to be done by counsel or by a claims representative, scheduling examinations under oath, and memorializing efforts to pursue subrogation.  Directives to counsel as to what to pursue at the examination would be privileged.  The court noted that direction to counsel to retain a cause and origin specialist to determine the cause of the fire, investigating subrogation possibilities, determining the cause of the fire, gathering background information on the claimants, and arranging for examinations under oath are ordinary business functions in claims investigation. “The fact that they were performed by an attorney at the behest of a claims adjuster does not change the character of the activity — basic claims investigation.” Although the court has considered the timing of counsel’s entry “onto the claims scene” was a factor considered in determining counsel’s role, the log entries were the primary reason the court concluded counsel acted as a claims investigator.

In addition, the court generally observed that in the redacting documents on the basis of privilege, an insurer should not take the approach that every mention of the attorney’s name should be redacted, as some matters are clearly not privileged, e.g. that an attorney had been hired.  In the court’s words, the insurer should not redact by slashing with a sword where it should excise with a pen knife.  The court also observed that redacting certain entries while not redacting entries of the same nature worked against protection, and that each entry needed to be analyzed specifically prior to redaction.  The court stated that a “failure to analyze the specific entries at issue undermines its claim of privilege — wherein it has the burden to show that each entry meets the elements of the attorney-client privilege.”

Next, the court rejected the idea that the insurer had entirely waived the privilege by purportedly placing the advice of counsel at issue. The insurer pled as a defense that its alleged withholding of any benefits at issue was made in good faith and was reasonable.  The insured asserted that because the insurer’s decision-maker stated in her affidavit that counsel was hired to render legal and coverage decisions, this placed counsel’s advice in issue.

While a party may waive the attorney client privilege by asserting an advice of counsel defense, “advice is not placed in issue merely because it is relevant. . . . A waiver can be found only where a client has made the decision and taken an affirmative step in the litigation to place the advice of attorney in issue. . . . This occurs where the client attempts to prove a claim or defense by disclosing or describing an attorney client communication. . . . .” Asserting an answer that the insurer did not act in bad faith, and stating that it acted in good faith do not create such a waiver.  Nor does the assertion that an attorney was hired to render a legal opinion on coverage waive the privilege. Without actually asserting an advice of counsel defense, the mere idea that an attorney could have affected the adjuster’s mind does not create a waiver.  The court rejected this “theory of wholesale waiver.”

Date of Decision:  August 7, 2014

Henriquez-Disla v. Allstate Prop. & Cas. Ins. Co., CIVIL ACTION NO. 13-284, 2014 U.S. Dist. LEXIS 108820 (E.D. Pa. August 7, 2014) (Hey, U.S.M.J.)