Archive for the 'Coverage Issues' Category

MAY 2012 BAD FAITH CASES: BAD FAITH CLAIM CANNOT BE RAISED AGAINST THIRD PARTY ADMINISTRATION WHICH DID NOT TAKE ON ROLE OF AN INSURER (Philadelphia Federal)

Published on May 18, 2012 in Coverage Issues and General Bad Faith and Litigation Issues. Closed
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In McLaren v. AIG Domestic Claims, Inc., the court dismissed an insured’s bad faith and breach of contract claims. The suit arose from an underlying negligence claim against the insured party, a nurse. She was insured by National Union Fire Insurance Company (NUFI). Although insured by NUFI, the claim against her was administered by AIG, a wholly owned subsidiary of NUFI.
AIG appointed her with defense counsel, and communications with NUFI went through AIG. The underlying case proceeded through a four-week trial, which resulted in a mistrial. The case was settled. Prior to settlement, she had signed a consent to settle, which gave AIG authority to settle up to policy limit; but she claimed this consent was coerced and she later withdrew the consent. She notified her personal legal counsel that she would refuse to consent to a settlement and that counsel likewise gave notice that the consent was withdrawn. However, settlement negotiations continued post-trial to at least some degree, and the plaintiffs in the negligence action took the position that they accepted a purported settlement offer from appointed defense counsel, which was later opposed by that counsel as well. The plaintiff moved to enforce and the state court enforced the settlement against the insured.
The insured/plaintiff claimed that the report of the settlement caused her harm, and she brought this suit. It included among other things a bad faith claim against AIG, whom she claimed she always believed to be her insurer. She claimed that AIG acted in bad faith and breached the terms of its policy by agreeing to an unauthorized settlement. She claimed that the act was not in her best interested and that in settling AIG breached its duty of good faith and fair dealing. She also alleged that AIG knew or recklessly disregarded the fact that there was no reasonable basis to settle for her $500,000 policy limits. Moreover, she claims that as a result of the settlement, her professional reputation as a midwife is forever tarnished.
AIG was not her insurer, and she claimed she was still entitled to relief under Pennsylvania’s bad faith statute because AIG was NUFI’s “alter ego”, was its agent and/or was her de factor insurer. However, her only contract was with NUFI as an insurer, and the court rejected all of these arguments. Thus, AIG was not an insurer in this matter and as such could not be subject to a statutory bad faith claim. Specifically, the court held that AIG, a non-party to the insurance contract who administered the claim, did not meet the criteria for being deemed an insurer. It did not issue an insurance policy or collect premiums, or assume certain risks and contractual obligations in exchange for those premiums. Concomitantly the court found in the absence of a privity of contract there was no basis for a breach of contract claim; and that the agent of a disclosed principal could not be sued for the breach of a contract between that principal and another with whom it had contracted.
Date of Decision: March 30, 2012
McLaren v. AIG Domestic Claims, Inc., No. 10-cv-04224, 2012 U.S. Dist. LEXIS 44808, U.S. District Court for the Eastern District of Pennsylvania (E.D. Pa. Mar. 30, 2012)

MAY 2012 BAD FAITH CASES: COURT GRANTS SUMMARY JUDGMENT FOR CARRIER WHERE “INHERENT RISK” EXCLUSION APPLIED TO FURNACE CONTAINING DEFECT KNOWN TO INSURED (Western District)

Published on May 18, 2012 in Coverage Issues. Closed
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In U.S. Fire Ins. Co. v. Kelman Bottles, the court heard cross-summary judgment motions between an insured glass-maker and its two carriers to determine the scope of coverage. While the insured asserted breach of contract claims against both carriers, it alleged bad faith conduct against its “all-risk” insurer for denying coverage.
The insured is an industrial glass-maker who operates a large furnace for melting glass. The company needed to replace the furnace every nine years and last replaced it in January 2004. In 2009, the furnace leaked and the insured replaced portions of the unit, but not the entire thing. In March 2011, there was a severe leak in the furnace that destroyed some of the insured’s property. This blog will only discuss the bad faith claim against the insured’s “all-risk” carrier, rather than the insured’s “equipment breakdown” carrier, because the latter only covered “sudden and accidental” breakdowns.
With respect to the all-risk insurer, the insured alleged breach of contract and bad faith for the carrier’s denial of coverage. However, the insured’s policy contained an “inherent vice exclusion,” which prevented coverage in this case. The court reasoned that, after the loss, the insured admitted that molten glass was an inherent risk to operating the furnace. As such, the insured’s breach of contract claim failed.
However, the insured argued that it should be covered as a “molten material loss” under the policy. The court disagreed, holding that the “molten material loss” clause is predicated upon the loss already being a covered loss under its policy. In this case, the escape of molten glass was an inherent risk and, as noted, the damage caused by the escape of molten glass is excluded under the policy’s inherent risk exception.
The insured also attempted to argue that it was covered via Pennsylvania’s adoption of the “Current Causation Doctrine,” which means that if two or more causes concurrently caused the insured’s loss and one of the causes is covered, the carrier must provide coverage. However, the court rejected this theory, holding that the only way coverage would be available is if “the inherent risk of operating a furnace containing molten glass [was] the proximate cause of the loss.”
Therefore, the court also rejected the insured’s bad faith claim – in the absence of a viable breach of contract suit, the insured was unable to maintain such an allegation.
Date of Decision: April 5, 2012
United States Fire Ins. Co. v. Kelman Bottles, No. 11cv0891, 2012 U.S. Dist. LEXIS 48684, U.S. District Court for the Western District of Pennsylvania (W.D. Pa. Apr. 5, 2012) (Schwab, J.)

MAY 2012 BAD FAITH CASES: COURT RULES THAT BECAUSE FAULTY CONSTRUCTION WAS NOT AN “OCCURRENCE” TRIGGERING INSURED’S POLICY, BAD FAITH CLAIM WAS NOT POSSIBLE (Philadelphia Federal)

Published on May 1, 2012 in Coverage Issues. Closed
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In Roman Mosaic and Tile Company v. Liberty Mutual Insurance Company, the court granted a carrier’s motion for summary judgment. The case arose from alleged faulty construction performed by the insured, a subcontractor. After his apartment sustained water damage in June 2011, the property owner received benefits from its insurer, which subsequently brought a subrogation claim against the subcontractor, among others.
The subcontractor thereafter brought suit against its carrier in this action seeking defense and indemnification under its CGL policy. That carrier removed this case to federal court and filed a later motion for summary judgment.
They key issue here was whether the damages alleged in the underlying lawsuit constitute an “occurrence,” as defined by the CGL policy issued to the insured subcontractor. If the damage was covered under the policy, the insured might be able to allege that the carrier’s rejection of its insurance claim for a defense was unreasonable, as a predicate to a bad faith claim.
The court reasoned that, despite the insured’s re-styling of the claims against it as mere “negligence” and “the foreseeable consequences of that workmanship,” the claim against the subcontractor/insured was really a claim for poor construction work. There is substantial Pennsylvania law that supports the carrier’s claim that faulty workmanship claims do not involve an “occurrence” under GCL policies. As such, the insured subcontractor was unable to raise a genuine issue of material fact sufficient to defeat the carrier’s summary judgment motion and prove that the carrier acted in bad faith by denying coverage.
Date of Decision: April 5, 2012
Roman Mosaic & Tile Co. v. Liberty Mut. Ins. Co., NO. 11-6004, 2012 U.S. Dist. LEXIS 48354, U.S. District Court for the Eastern District of Pennsylvania (E.D. Pa. Apr. 5, 2012) (Baylson, J.)

APRIL 2012 BAD FAITH CASES: COURT GRANTS CARRIER’S MOTION FOR SUMMARY JUDGMENT BECAUSE ISSUE PRECLUSION BLOCKED ASSIGNEES’ UNDERLYING BREACH OF CONTRACT CLAIM AND THERE WAS NO BREACH OF COMMON LAW DUTY OF GOOD FAITH AND FAIR DEALING (Philadelphia Federal)

Published on April 5, 2012 in Claims Handling Procedures and Coverage Issues. Closed
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In Grant v. State Farm Fire & Casualty, the court granted the carrier’s motion for summary judgment stemming from a breach of contract, breach of duty of good faith and fair dealing and fraud claims assigned by the putative insureds to the underlying plaintiff.
The original suit arose from a sexual assault that occurred in 2000. The carrier represented two brothers in a civil action brought in the Court of Common Pleas of Philadelphia. The brothers claimed insured status under their parents’ homeowners’ policy. The carrier defended them under a reservation of rights.
In 2003, the carrier was awarded a declaratory judgment by default in Federal District Court, which stated that the insurer did not have to defend or indemnify the brothers, under the policy at issue.
However, the carrier did continue to defend the brothers in the civil action against them, while denying any duty to indemnify. After a trial in 2005, the insureds were found not liable by the jury. The case was appealed and reversed by the Pennsylvania Supreme Court on the issue of affirmative defenses, and remanded to the trial court. At that point, in 2008, the carrier refused to provide a defense, and the carrier refused a $100,000 settlement demand from the underlying plaintiff, whose demand letter characterized a refusal of the demand to constitute bad faith. The carrier relied on the declaratory judgment in refusing to defend or settle, the matter went to arbitration and plaintiff was awarded $2,000,000. The brothers assigned their claims against the carrier to settle the matter with the plaintiff.
First, the assignees claimed that the carrier breached its contract to defend and indemnify the insureds in the sexual assault litigation. However, the District Court’s prior judgment precluded the assertion of this breach of contract claim because that decision adjudicated the precise question of the carrier’s contractual duties.
Second, the court turned to the assignees’ common law bad faith claims, which contained three specific allegations. The court ruled that, absent a contractual duty to the defendants in the sexual assault litigation, the carrier could not be liable for a bad faith failure to defend the insureds. The court also ruled that the carrier did not act in bad faith by controlling the underlying litigation. The carrier advised its insureds to obtain independent counsel, but the parties did not oblige, leaving the carrier to conduct the litigation on their behalf, which it chose to do. The court also refused to find that the carrier acted in bad faith pursuant to the assignees’ estoppel theory. Essentially, the carrier was not prevented from claiming that damages fell outside of the insureds’ policy because it submitted three reservation of rights letters to the insureds after choosing to act in their defense.
Third, the court rejected the assignees’ claim that the carrier acted fraudulently. The sole evidence of fraud was a self-serving affidavit that failed to establish anything other than a conclusory allegation of fraudulent conduct. As such, the court also denied this claim.
Date of Decision: March 2, 2012
Grant v. State Farm Fire & Casualty Company, No. 11-6283, U.S. District Court for the Eastern District of Pennsylvania, 2012 U.S. Dist. LEXIS 28695 (E.D. Pa. Mar. 2, 2012) (Schiller, J.)

JANUARY 2012 BAD FAITH CASES: NAMED CARIER NOT PROPER PARTY BECAUSE DID NOT UNDERWRITE POLICY; FAULTY WORKMANSHIP IS NOT AN “OCCURRENCE” SUFFICIENT TO TRIGGER COVERAGE (Middle District)

Published on January 16, 2012 in Claims Handling Procedures, Coverage Issues and Procedural Issues. Closed
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In L.R. Costanzo Company v. American Fire and Casualty Insurance Company, the court heard a defendant’s motion for summary judgment on the issue of whether it was a proper party to the suit. The suit commenced after the insured was sued for property damage upon conclusion of a project. As a result, the insured sued the carrier in the Lackawanna County Court of Common Pleas for a defense against the original suit. The insured allegedly possessed a commercial general liability policy with the carrier. Under the policy, the carrier’s duty to defend would be triggered by an “occurrence,” which means “an accident, including continuous exposure to substantially the same general harmful conditions.” The carrier removed the case to federal court.
The carrier, Ohio Casualty Insurance Company (“OCIC”) moved to dismiss, arguing that it did not issue the insurance policy in question, meaning that there was no contract between itself and the insured, but the Court denied the motion. After discovery, the carrier filed motions for summary judgment, seeking resolution upon the insured’s breach of contract and bad faith claims.
There were three primary issues before the court: 1) whether OCIC, the alleged carrier, is a proper defendant, 2) whether the carrier breached a duty to defend the insured in the underlying case, and 3) if so, whether the carrier acted in bad faith by not defending the insured.
First, the court found that American Fire (“AFCC”) issued the policy, not OCIC. Discovery had revealed that AFCC underwrote the policy – the insured’s insurance agent testified that AFCC underwrote the policy, while OCIC underwrote the umbrella policy. Much of the confusion also comes from the similarity of its name to Ohio Casualty Group (“OCG”). OCG is the parent company of AFCC, OCIC, and ten other insurance companies, and it is the trademark umbrella under which these subsidiary companies operate. Moreover, OCG’s letterhead says “Ohio Casualty,” “Ohio Casualty Group,” or “Ohio Casualty™.” The insured does not provide any evidence to dispute these findings. The only evidence that suggests OCIC is the underwriter is the initial denial of coverage letter that stated, “We have investigated this claim and have determined that the allegations fall outside of the coverage provided by your liability policy carried with Ohio Casualty Insurance Company.”
Second, the court held that there was no “occurrence” under the policy to trigger the carrier’s duty to defend. In the underlying complaint, the insured alleged that faulty workmanship was the basis for its claims. As such, the carrier’s duty to defend depends upon whether the faulty workmanship qualified as an “occurrence,” or “an accident, including continuous exposure to substantially the same general harmful conditions” under the policy. Relying on relevant precedent, the court ruled that faulty workmanship is not an occurrence, meaning that the carrier had no duty to defend.
Lastly, the court ruled that the carrier did not act in bad faith. First, the court held, because there was no “occurrence” under the policy, the carrier did not act in bad faith in denying a defense to Plaintiff in the underlying case. Second, the court recognized that the record shows that the carrier engaged in a thorough inquiry before determining there was no duty to defend. The insured’s main argument for bad faith was that the carrier conducted an inadequate investigation before declining to defend the insured in the underlying suit. As such, the court granted summary judgment to the carrier.
Date of Decision: January 6, 2012
L.R. Costanzo Co. v. Am. Fire & Cas. Ins. Co., No. 3:10-CV-774, 2012 U.S. Dist. LEXIS 1655 (M.D. Pa. Jan. 6, 2012) (Mariani, J.)

NOVEMBER 2011 BAD FAITH CASES
BREACH OF CONTRACT AND BAD FAITH DISMISSED BECAUSE CARRIER HAD ALREADY PAID POLICY LIMITS (Philadelphia Federal)

Published on November 22, 2011 in Coverage Issues. Closed
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In Holy Ghost Church of the Eastern Rite of Phoenixville, PA v. Church Mutual Insurance Company, the court was faced with a set of facts stemming from an insured’s duty to defend a claim against its carrier. The carrier moved to dismiss the action and the district court granted the motion, holding that the carrier had already paid to the policy limits.

The federal suit arose after the insured engaged in state court litigation to determine the true directors of the church. In 1938, the St. Nicolas Brotherhood purchased a parcel of land to be used by the Holy Ghost Church as a place of worship. The Brotherhood rarely met, but existed to ensure the perpetual ownership of the property by the Church. As of 2008, no new directors of the Brotherhood had been elected, although one member of the Brotherhood was still alive. In 2008, the Church devised a plan to sell part of the land to developers as a means of raising money for the Church. The Church sought to quiet title and attain a decree that the Church could act on behalf of the Brotherhood. The claim was denied and the membership of the Brotherhood was still undecided.

Soon after, several members of the Church appointed themselves directors of the Brotherhood without the knowledge of the actual surviving member. The newly constituted Brotherhood executed an agreement of the sale of land and granted an easement to AT&T. Representatives of the original Brotherhood filed suit in state court. The Court of Common Pleas of Chester County ruled that all members of the Church were members of the Brotherhood. The judge also held that the officers and directors of the Brotherhood and the Church were identical. Therefore, the sale of land by the self-appointed directors of the Brotherhood was binding.

The self-appointed directors then filed suit against the carrier, seeking a declaration that the carrier had a duty to defend them in the initial state court action. The multi-peril policies held by the insured contained Director and Officer Coverage (“D&O Coverage”), which included the following language: “We will pay on your behalf those sums that any of your Directors, Officers or Trustees become legally obligated to pay for loss arising from any claim or claims because of injury arising out of a wrongful act to which this insurance applies…and we will have the right and duty to defend the insured against any suit seeking payment for loss and to pay for the defense expenses.”

However, the policy contained several exclusionary provisions and endorsements. For instance, coverage for disputes over “any claim involving title to the Named Insured’s property” were explicitly excluded under policy exclusion (f). In addition, the D&O coverage was modified by the “Affiliated Entity Dispute Legal Defense Coverage Endorsement Clause,” which limits defense coverage to $25,000 in suits brought against the directors and officers of the insured by affiliated entities.

First, the court sought to determine if the policy issued to the insured applied at all in this case. The court found that because the Brotherhood was the only named Plaintiff in the state court action, the insured was not entitled to defense coverage for the underlying lawsuit. Therefore, the court only needed to adjudicate coverage under the policy issued to the Church itself, not the Brotherhood.

Second, the court determined that exclusion (f) of the policy did not apply to the dispute because the state court action was not a “claim to settle questions of property ownership…but to settle questions of membership in and leadership of the Brotherhood.” The action, therefore, was not a “claim involving title” to the named insured’s property as required for exclusion under the policy.

Third, the court recognized that the state action was fundamentally a dispute about the appointment or election of directors, officers or trustees. Therefore the instant dispute “falls within the scope of the Affiliated Entity Endorsement,” which “modifies the right to benefits under the D&O provisions.” However, the insured was not entitled to additional benefits under the D&O policy, over and above the policy limits already tendered.

Lastly, the court interpreted the policy to mean that recovery under the “Legal Defense provision” is precluded where defense costs are covered by the “Affiliated Entity Endorsement” provision, as they are in this case. The court therefore concluded that, because “the Legal Defense coverage is limited to $5,000 per defensible incident, and [the carrier] has already paid $25,000,” it was not required to pay any additional monies to the insured.

In conclusion, the court held that the carrier had satisfied its duties under the insured’s policy and dismissed the insured’s declaratory judgment, breach of contract, and bad faith claims.

Date of Decision: November 14, 2011

Holy Ghost Carpatho-Russian Greek Catholic Church of the Eastern Rite of Phoenixville, PA v. Church Mutual insurance Company, NO. 11-1800, U.S. District Court for the Eastern District of Pennsylvania, 2011 U.S. Dist. LEXIS 131449 (E.D. Pa. Nov. 14, 2011) (Rufe, J.)

OCTOBER 2011 BAD FAITH CASES
THIRD CIRCUIT AFFIRMS DISMISSAL OF BREACH OF CONTRACT AND BAD FAITH ACTION, RELYING UPON POLICY’S EMPLOYEE EXCLUSION CLAUSE (Third Circuit)

Published on October 12, 2011 in Coverage Issues. Closed
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In Brewer v. United States Fire Insurance Company, the Third Circuit heard an appeal from the district court’s dismissal of a breach of contract and bad faith action brought by an assignee of the insured.  The original suit stemmed from a 2006 car accident, during which the assignee, an employee of a delivery company, was injured in an automobile accident caused by the insured, an ambulance driver.  The assignee filed suit and obtained a $250,000 judgment against the insured ambulance driver.  In an effort to avoid execution of the judgment, the insured assigned his claims against the carrier to the injured driver.  At the time of the accident, the policy issued by the carrier named the employers of both individuals, though the companies were separate entities.

Invoking its policy’s employee exclusion clause, the carrier denied coverage.  The policy prohibited coverage for “bodily injury to an employee of the insured arising out of and in the course of employment for the insured.”  The exclusion applied “whether the insured may be liable as an employer or in any other capacity.”  The assignee filed suit to its rights against the carrier, seeking $250,000 in compensatory damages.  It also brought a bad faith claim.  The carrier filed a motion to dismiss, which the district court granted, ruling that the exclusion clause was triggered under the plain language of the policy.

On appeal, the assignee argued that the exclusion is not applicable to her because “(1) the injury is to her (2) the insured seeking coverage is [the ambulance driver, acting as the assignor]; and (3) [the assignee] is not the [assignor’s] employee.”

The appellate court upheld the district court’s ruling that the exclusion applied to the assignee because, under the policy, both the assignee’s and assignor’s employers are insured.  The court reasoned that, “if [the assignee] stands in [the assignor’s] stead and [the assignor] in the first instance is precluded from coverage, then so is [the assignee].”  Therefore, under the plain language of the policy, the assignor is an “employee” that is “insured,” by its employer’s policy.  Since the policy excludes him, it also excludes the assignee, who acted as a potential substitute recipient of the policy.

The assignee also argued that the policy would not be provided for bodily injury to “an employee of the insured against whom a claim or suit is brought, but that since she is not an employee of [the assignor],” the exclusion did not apply to her.

The appellate court disagreed, reiterating the district court’s rationale.  It held that, under the facts as pled, the assignee “suffered bodily injury while acting in the course and scope of her employment by a named insured.”  Since one of the named insureds was the assignee’s employer, the policy’s exclusion clause was triggered, preventing the assignee from stating a plausible claim.  The appellate court therefore also concluded that proceeding to discovery was inappropriate.

The assignee also claimed that the district court erred in dismissing her bad faith claim, contending that the carrier “(1) had a duty to provide coverage; and (2) acted with reckless indifference and conscious disregard in disclaiming coverage based on the exclusion discussed above.”  As the district court ruled, the Third Circuit rejected this claim because the pleadings did not state a proper bad faith claim, since the carrier properly denied coverage on the basis of the exclusion clause.

Date of Decision:  October 3, 2011

Brewer v. United States Fire Insurance Company, No. 10-4748, U.S. Court of Appeals for the Third Circuit, 2011 U.S. App. LEXIS 20072 (3d Cir. Oct. 3, 2011) (Greenaway, J.)

OCTOBER 2011 BAD FAITH CASES APPEALS COURT UPHOLDS DAMAGES AWARD(Third Circuit)

Published on October 10, 2011 in Coverage Issues. Closed
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In Spector v. Fireman’s Fund Insurance Co., the Third Circuit addressed the carrier’s appeal stemming from the district court’s award of damages to the insured.  The carrier had earlier won dismissal of the bad faith claim, as discussed in an earlier blog entry, which was not appealed by the insured.

In 2000, the insured purchased a homeowner policy from the carrier.  The policy excluded “water damage,” unless such damage “is sudden and accidental” or “hidden and concealed for a period of time.”  The policy required that “a hidden or concealed loss must be reported to us no later than 30 days after the date appreciable loss…is detected or should have been detected.”

In 2006, the paint around the insured’s windows began peeling.  The insured contacted a stucco inspector who suspected high moisture levels in the home.  The inspector advised the insured that it would need to deconstruct the walls in order to know the true status of the home’s substrate.

The insured consulted a plastering company, who advised them that to discover the problems existing behind the home’s stucco, they had to expose the space between the stucco and the drywall.  The company also advised the insured that their roof had been incorrectly installed. Based on this advice, the insured redid their roof and replaced their windows.  After that process, the plastering company removed the stucco for inspection.  In November 2007, the insured learned the extent of the water damage to their home.

The insured filed a claim with the carrier in December 2007, interpreting the notice provision to mean that, where damage was hidden, each new discovery of damage began a new thirty-day cycle.  An adjuster for the carrier denied the insured’s claim based on the policy exclusion for defective construction and failure to comply with the thirty-day notice provision for water damage. 

The insured subsequently filed a claim in Delaware County, alleging breach of contract, bad faith, and violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law.  The carrier removed to federal court, which denied summary judgment in favor of the carrier, held a bench trial, and awarded the insured $104,432 in damages.  The court also awarded attorney’s fees and interest.

On appeal, the carrier first contested the denial of summary judgment, claiming that disputes as to material fact regarding whether the insured met its burden of showing that the amount of costs attributable to home repair satisfied the policy’s water damage exception.  The appellate court examined copies of checks from November to December 2007, made out to the plastering company, which went towards payment of work related to hidden water damage discovered after removal of the external stucco.  Concurring with the district court, the appellate court found that genuine disputes of material fact existed as to which costs were attributable to home repair for defects versus water damage.

Second, the carrier argued that the insured failed to meet its burden of proving damages under the policy.  Under a highly deferential standard of review, the appellate court agreed that the insured adequately proved its loss in the amount of $104,432.50 for hidden water damage.  Specifically, the appellate court affirmed the district court’s finding that testimony from the insured and the plastering company supported the finding that two checks were issued for stuccowork related to the water damage.

Lastly, the carrier claimed that the insured failed to provide notice, as required in their insurance contract, and that the district court incorrectly interpreted the notice provision.  Specifically, the carrier argues that the policy’s notice provision is not a “rolling notice” policy and that the insured was obligated to give notice sooner than was done in order to be covered under the policy.

The Third Circuit held that, based on the plain language of the policy, the nature of the hidden damage, and the inspections that the insured had on the house, there cannot be a “definite and firm conviction that the District Court made a mistake.”  Until the stucco was completely off and the damage could be clearly seen, it was not possible for the insured to appreciate the underlying damage.

Although the carrier argued that expert reports concerning water damage should have triggered earlier notice, the appellate court disagreed, finding that a cancelled check made out to the plastering company on November 5, 2007 corroborates the notion that the water damage was discovered during the proper timeframe.

As such, the appellate court affirmed the damages award of the district court.  However, the appellate court overturned the insured’s $35,000 award of attorney’s fees, as the policy did not include an attorney’s fee provision, a point that the insured conceded on appeal.

Spector v. Fireman’s Fund Insurance Co., No. 10-4265, U.S. Court of Appeals for the Third Circuit, 2011 U.S. App. LEXIS 19843 (3d Cir. Sept 22, 2011) (Greenaway, J.)

SEPTEMBER 2011 BAD FAITH CASES
COURT REJECTS CARRIER’S MOTION TO DISMISS BECAUSE ITS DENIAL OF DELAY DAMAGES WAS IMPROPER (Philadelphia Federal)

Published on October 4, 2011 in Coverage Issues. Closed
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In Heebner v. Nationwide Insurance Enterprise, the court was faced with a carrier’s motion to dismiss, hinging upon whether insurance coverage for compensatory damages, provided under an uninsured/underinsured (UM/UIM) policy, includes delay damages.

The case stems from a car accident that occurred in 1997 between the insured and a UM/UIM motorist.  The insured sued the motorist and, in June 2008, was awarded $133,201.96.  The award was allocated as $85,000.00 for compensatory damages, and $48,201.96 for delay damages pursuant to Pa. R.C.P. 238, or Rule 238.  However, the carrier, acting pursuant to the insured’s UM/UIM policy, only paid the insured $85,000.00 in compensatory damages, refusing to pay the $48,201.96 in delay damages on grounds that it is not liable for such damages under the policy.  In response, the insured filed a motion for declaratory judgment in state court.  The carrier removed to federal court and filed a motion to dismiss.

The insured first pointed to the language of Rule 238, which states that delay damages shall be “added to the amount of compensatory damages…and shall become part of the verdict, decision or award.”  The insured claimed that, under its policy, the carrier “will pay damages that exceed such total amount” of a UM/UIM driver’s coverage.  As such, the insured argued that the carrier is responsible to pay all damages, including delay damages.  The insured also alleged that its policy is ambiguous as to whether delay damages are “compensatory.”  The second count of the insured’s complaint argues that the carrier acted in bad faith by refusing to pay the delay damages award.

In its motion to dismiss, the carrier asserted that, because Rule 238 states that delay damages are “added to the amount of compensatory damages,” they must be separate from compensatory damages.  Furthermore, the carrier claimed that the primary purpose of delay damages is only to quicken settlements and lessen the burden on courts, distinguishing them from compensatory damages.  Lastly, the carrier argued that the policy is not ambiguous and that the absence of coverage for delay damages reflects an intent not to cover these types of damages.

First, the court reasoned that, if the carrier desired not to provide coverage for delay damages, it could have easily done so.  The carrier chose not to specifically exclude delay damages, but did specifically exclude other types of damages from the policy, including “punitive or exemplary damages.”

Second, the court held that, under Pennsylvania law, delay damages are “merely an extension of the compensatory damages necessary to make a plaintiff whole.”  While the court did recognize, as the carrier argued, that delay damages under Rule 238 are meant to encourage quicker settlements, the rule’s main purpose is to fully compensate a victim for its loss.  The court denied the carrier’s motion to dismiss on these issues, finding that the insured stated a plausible claim under Pennsylvania law.

However, the court dismissed the insured’s bad faith claim because it did not allege facts sufficient to prove that the carrier acted in bad faith by refusing to cover delay damages.  According to facts alleged by the insured, the court concluded, the carrier’s interpretation of the policy was not so unreasonable that it amounted to bad faith.

Date of Decision: September 28, 2011

Heebner v. Nationwide Insurance Enterprise, No. 10-2381, U.S. District Court for the Eastern District of Pennsylvania, 2011 U.S. Dist. LEXIS 111382, 818 F. Supp. 2d 853 (E.D. Pa. Sept. 28, 2011) (Goldberg, J.)

SEPTEMBER 2011 BAD FAITH CASES
COURT DENIES MOTION TO DISMISS AS INSURED SUFFICIENTLY ALLEGED IMPROPER DENIAL OF COVERAGE ON BASIS THAT SHE FAILED TO DISCLOSE MEDICAL CONDITION (Middle District)

Published on October 3, 2011 in Coverage Issues. Closed
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In Wasko v. Coventry Health & Life Insurance Company, the court was faced with a carrier’s motion to dismiss, or in the alternative, for a more definite statement.  The case stemmed from the carrier’s denial of coverage for the insured’s back surgery. 

In August 2008, the insured applied for health insurance.  The carrier issued a policy in October 2008.  However, two weeks later, the insured began to suffer intense back pain.  Doctors concluded that the insured suffered from a serious back condition that required surgery to alleviate the pain.  In January 2009, the carrier approved a procedure for surgery requested by her doctor and paid for that surgery, but rejected her benefits request for a “CAPSTONE Spinal System as not medically necessary or otherwise experimental and investigational.”

In February 2009, the carrier began to investigate the insured’s medical history, revealing a history of chronic back problems, medical examinations, and painkiller usage for back pain.  The carrier sent a letter to the insured, rescinding coverage on the basis that she lied on her application.  The carrier rejected the insured’s request for reconsideration. 

As a result, the insured brought claims for bad faith and breach of contract against the carrier, arguing that she was truthful in her application and was entitled to coverage.

The court denied the motion, finding that she properly alleged that the carrier “denied benefits…based on the…unsubstantiated claim of fraud by the insured.”  Moreover, the court agreed that the carrier “failed…to investigate [the insured’s] application until [she] filed a financially significant claim,” warranting the denial of the carrier’s motion to dismiss.

The court also ruled that the insured stated a breach of contract claim.  The parties entered into a valid contract for insurance coverage – in return for a premium, the carrier would provide benefits to the insured.  Furthermore, the plaintiff set out a claim that the carrier denied benefits due under the contract, breaching its agreement with the insured. Accordingly, the court denied the carrier’s motion to dismiss.

Wasko v. Coventry Health & Life Ins. Co., 3:11cv618, U.S. District Court for the Middle District of Pennsylvania, 2011 U.S. Dist. LEXIS 109946 (M.D. Pa. Sept. 27, 2011) (Munley, J.)