Archive for the 'PA – Discovery and Evidence' Category

MAY 2017 BAD FAITH CASES: COURT DISCUSSES STAY AND SEVERANCE OF BAD FAITH CLAIMS, IN CONTEXT OF SETTING STANDARD FOR DISCOVERY OF EXTRINSIC EVIDENCE ON COVERAGE/CONTRACT CLAIMS (Middle District)

Print Friendly

This exhaustive opinion on discovery of extrinsic evidence sets forth a working standard for determining permissible discovery in declaratory judgment insurance coverage contract actions. After a detailed overview of pertinent case law and the 2015 rule amendments focusing on proportionality, the court held that “litigants who wish to discover extrinsic evidence in a contract interpretation case must (1) point to specific language in the agreement itself that is genuinely ambiguous or that extrinsic evidence is likely to render genuinely ambiguous; and (2) show that the requested extrinsic evidence is also likely to resolve the ambiguity without imposing unreasonable expense.” In this case, the discovery sought did not fall within those aims and a motion to compel was denied.

To provide context by contrast, the court included an analysis of discovery in bad faith cases within its overall discussion. In instances where a plaintiff seeks underwriting files and claims manuals, the presence of a bad faith claim makes their “discoverability more likely, yet it by no means guarantees it.” In that context, “[t]he issue in a bad faith case is whether the insurer acted recklessly or with ill will towards the plaintiff in a particular case, not whether the defendants’ business practices were generally reasonable.” By contrast, under Pennsylvania law, declaratory judgment actions for coverage are contract-based claims controlled by the express language in the contract, and the language of such integrated contracts will “often will suffice to dictate the proper outcome without reference to any external sources.”

To provide further contrast, the court looked at district court case law in the Third Circuit on stays, and severance of bad faith claims from coverage actions, where courts bifurcated the two claims and the different discovery related to them. These cases observe the differences between discovery and proof in bad faith cases and coverage cases, and that the coverage/contract claims can require less discovery in reaching resolution. [The court in this case had previously dismissed plaintiff’s bad faith claim].

Date of Decision: May 12, 2017

Westfield Insurance Company v. Icon Legacy Custom Modular Homes, No. 15-539, 2017 U.S. Dist. LEXIS 72624 (M.D. Pa. May 12, 2017) (Brann, J.)

glad-2017-2

APRIL 2017 BAD FAITH CASES: NO ACTIONABLE BAD FAITH CLAIM FOR NORMAL LITIGATION CONDUCT (Centre County Common Pleas)

APRIL 2017 BAD FAITH CASES: CONSUMER PROTECTION LAW VIOLATIONS MAY BE EVIDENCE IN BAD FAITH CASES (Middle District)

Print Friendly

The insured brought a consumer protection law claim for allegedly abusive claims handling practices and denial of her insurance claim. The court observed that in the insurance context, Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (UTPCPL) “applies only to conduct related to the sale of an insurance policy, not to the handling of insurance claims.” However, in a footnote, the court added that in Berg v. Nationwide Mut. Ins. Co., Inc., 44 A.3d 1164 (Pa. Super. Ct. 2012), the Superior Court dealt with whether a UTPCPL violation is evidence of statutory bad faith under. Under that case, while the UTPCPL did “not provide for a separate cause of action for a UTPCPL violation, … such violation may constitute evidence to support a bad faith cause of action.”

Date of Decision: April 7, 2017

Machado v. Safeco Ins. Co., No. 16cv1685, 2017 U.S. Dist. LEXIS 53604 (M.D. Pa. Apr. 7, 2017) (Munley, J.)

MARCH 2017 BAD FAITH CASES: FINEMAN, KREKSTEIN & HARRIS OBTAINS SIGNIFICANT VICTORY FOR INSURER IN DEFEATING UIM BAD FAITH CLAIM AT TRIAL IN PHILADELPHIA’S COMMERCE COURT (Philadelphia Commerce Program)

Print Friendly

In a bad faith case that actually went to trial, in Philadelphia’s Commerce Court, Fineman, Krekstein & Harris won a finding in favor of the insurer in a hard fought case, involving a myriad of bad faith issues. The court issued a 37 page Findings of Fact and Conclusions of Law, vindicating the positions argued and case presented for the insurer.

The insureds argued, among other things, that there were undue delays in claims handling, adjusters did not keep claims files in accordance with policy manuals, and reserves were improperly set. Among other things, the insurer focused its arguments on the timing of the insureds first making a demand for payment; reliance upon competent counsel in reaching decisions; and that the insureds’ original demand for the $1,000,000 policy limits was never lowered through the course of the UIM case.

In its conclusions, among other things, the court observed there is no heightened duty to insureds in the UIM context, and that even negligence or bad judgments do not equate to bad faith. The court made clear that delay is not bad faith per se, and that evaluating delay includes an analysis of the reasonableness of denying a claim. Moreover, even if unreasonable, to constitute bad faith the delay must be knowing or reckless. Bad faith is measured from the time demand is made.

The court also stated that undervaluing a claim is not bad faith if there is a reasonable basis for the valuation. Thus, a low but reasonable valuation is not bad faith. A settlement offer in the insurer’s low range of estimated value also is not bad faith. On the facts of this case, the court observed that the insurer never took the position that it would pay nothing on the claim, and as described below, made a number of offers.

The court found it was reasonable under the circumstances for the insurer to decline mediation two weeks before the arbitration was to take place. The insurer’s counsel testified that it was too late to mediate, and that there was no indication the insureds would lower their demand. The court observed that in evaluating bad faith, courts weigh the insureds’ decision not to negotiate down from a policy limit demand, even though the insured is not required to negotiate. The court found that settlement almost always requires a mutual give and take, which did not occur in this case.

The insurer was required to pay $600,000 under the UIM arbitration award. The court found, however, there was no evidence the insureds would have accepted $600,000 to settle the case prior to arbitration.

The court also took into consideration the actual difference between the ultimate UIM arbitration award, the insurer’s final offer, and the insured’s demand. In this case, the insured’s final offer was approximately $182,000 below the ultimate award, but the insureds’ policy limit demand was $400,000 greater than the award. The court found the insurer’s final settlement offer was reasonable, and that earlier offers for lesser sums were permissible interim offers. The court explained the reasonableness of each offer in its context.

Among other facts addressed in the court’s conclusion of law, the court gave weight to the fact that the insurer’s UIM defense counsel received a report from his own expert that counsel had not requested. Furthermore, defense counsel disagreed with the report’s conclusions. However, instead of withholding the report, counsel and the insurer’s representatives produced it to the insureds.

Moreover, the insurer used a high-end number from this same report in coming up with the basis for its final offer. The arbitration panel also used that number, rather than the insureds’ expert’s even higher number, in coming up with its arbitration award. The court stated that the insurer did not have to base its decision upon the insured’s expert rather than the insurer’s own expert.

The court found the insurer’s investigation was lengthier than it should have been, but did not constitute bad faith. The court found the insurer’s request for an independent medical examination was not evidence of bad faith. Nor was this a case of setting a reserve and never moving from that number during the course of the claim. The court found no discrepancy in the manner of setting reserves and the nature of the investigation that showed intent or recklessness in undervaluing the claim. As to the claims handling, even if unduly lengthy or negligent, this did not constitute bad faith.

The court further found that the carrier’s representatives sought UIM defense counsel’s advice in good faith, and that counsel was competent to give advice on defense and valuation of the claim. Although this was not a strict advice of counsel defense, since the insurer’s representatives ultimately made their own decisions, the thorough nature of counsel’s advice, when considered as a component of their decision making, supported the reasonableness of their claims handling decisions.

Date of Decision: March 21, 2017

Richman v. Liberty Insurance Underwriters, Sept. Term 2014, No. 1552, Court of Common Pleas of Philadelphia (C.C.P. Phila. Mar. 21, 2017) (McInerney, J.) (Commerce Program)

S. David Fineman and Christina L. Capobianco of Fineman, Krekstein & Harris were defense counsel.

MARCH 2017 BAD FAITH CASES: INSUREDS ALLOWED DISCOVERY OF UNDWRITING MANUAL AND FILES, BUT NOT PERSONNEL FILES (Western District)

Print Friendly

This case involves cross actions for declaratory judgments on a lawyer’s professional liability policy, and bad faith claims by the attorneys against the carrier. The attorneys moved to compel production of the insurer’s underwriting manual and the underwriting files, as well as the personnel files of three employees identified as having worked on the coverage file.

There was no clear case law on production of underwriting files, though the 2011 Consugar case decided by Judge Munley in the Middle District had some relevance. Thus, as with most discovery issues, the court looked at the particulars of the case before it.

The court found that production of the underwriting materials was proper. Although the insured did not bring any underwriting claims, the court observed that in supporting their bad faith claim, the attorneys argued that there were premium increases imposed by the insurer relating to commencement of the underlying litigation. Thus, “[g]iven the bad faith claim and the related allegations, the underwriting materials may well be relevant.” [Note: The opinion does not indicate whether the bad faith claims are under section 8371, common law contractual bad faith, or both. Thus, the question as to whether a premium increase can constitute the actionable denial of a benefit under a statutory bad faith claim is not clear.]

The insureds were not successful in obtaining the personnel files. They argued they were entitled to the information in the personnel files to gain knowledge about “the insurer’s corporate policy, standards, and procedures … relating to [the insurer’s] state of mind and relationship with its employees, and information regarding the relationship between the corporate policies and the training of the claims employees”

“Because there is a strong public policy against disclosure of personnel information, such requests are subject to a heightened relevancy standard.” Again, there was no clear case law, and the court stated it must look at the particular facts of the case. Relevant factors in the discovery of personnel files include “whether there is another way for the requesting party to obtain the information sought … whether there is other evidence suggesting the personnel files are likely to include relevant information … how broad the request is … and how closely the personnel files relate to the requesting party’s claims.”

The balance weighed against production. Although the “request is relatively narrow in that it asks for only the files of the employees who worked on its claim and has agreed to a number of redactions, the other factors do not meet the heightened relevancy requirement.” “The reasons supplied … for wanting the personnel files such as whether the claims employees had some incentive to deny its claim and the nature of the relationship between the company and its employees could likely be obtained through the depositions of those employees.” “Likewise, [the insured] has not presented any other evidence to support the[] theory that the personnel files are likely to include information relevant to their claims.” Thus, the insureds could not meet the heightened standards in obtaining personnel files.

Date of Decision: March 7, 2017

Westport Ins. Corp. v. Hippo Fleming & Pertile Law Offices, NO. 15-251, 2017 U.S. Dist. LEXIS 31659 (W.D. Pa. Mar. 7, 2017) (Gibson, J.)

 

FEBRUARY 2017 BAD FAITH CASES: INSURER BAD FAITH AT ISSUE IN EVALUATING SETTLEMENT PAYMENT; ADVICE OF COUNSEL NOT AT ISSUE UNLESS ASSERTED (Middle District)

Print Friendly

An insurer sued its appointed defense counsel in connection with counsel’s defense of a UIM claim. The insurer claimed that counsel failed to assure that the UIM arbitration panel was instructed on the limits of insurance ($2 million), and that the carrier was subjected to the risk of having to pay an excess arbitration award of nearly $4 million above policy limits. The UIM plaintiff settled the claim with the carrier, which included receiving the full amount of the arbitration award above policy limits. Defense counsel asserted a defense of contributory negligence based on the insurer’s alleged bad faith handling of the UIM claim; and further argued that the settlement was not entirely for the $ 6 million arbitration award (to which sum it was identical), but included monetary consideration for the UIM plaintiff’s threatened bad faith claim as well.

The court granted partial summary judgment to strike the affirmative defense of contributory negligence, but only to the extent that this defense was based on the insurer’s conduct that was not causally related to the arbitration award. The court accepted counsel’s argument that part of the settlement payment was to get a release for the bad faith claim, and thus was part of the damages at issue. Therefore, it would permit some discovery on the argument that the insurer acted in bad faith in handling the underlying UIM claim, and paid some portion of the settlement to address that issue.

Thus, the Court found that “the fact and extent of [the insurer’s] bad faith handling of the [UIM] claim and concomitant exposure to bad faith liability are directly relevant to the question of the amount of damages it sustained due to [defense counsel’s] conduct. If [the insurer] is successful on its malpractice claim, it will have to prove actual losses that it suffered as a result of Defendants’ negligence. Because [the insurer] did not pay the arbitration award directly, it cannot claim that the excess award is the damages it now seeks. However, if [the insurer] attempts to prove that the settlement payment constitutes actual losses proximately caused by Defendants’ negligence, it must also prove with reasonable certainty what portion of the settlement payment in excess of its policy limits was paid to satisfy the arbitration award. Discovery on [the insurer’s] exposure to bad faith liability is therefore relevant to the scope of damages [the insurer] alleges to have sustained. And because [the insurer’s] bad faith conduct affects the amount of damages sought, the Court will not preclude Defendants from pursuing discovery on … bad faith.”

Next, the court addressed discovery issues.

The carrier had argued that certain documents in its own files were subject to the attorney-client privilege or work product doctrine. In addition, defense counsel sought discovery of the files of the attorney that replaced him in the UIM case.

As to the second category, the court could not rule because the privilege log was inadequate. The privilege log “entries do not contain specific sender and recipient information, and the Attorney Work Product entries do not state the specific party who created the work product. Additionally, the descriptions are too vague to permit the Court to find that each element of the privilege claimed is satisfied. [The insurer] therefore must supplement its privilege log with this information in order for the Court to determine whether the documents are in fact privileged.”

As to the insurer’s own documents, the court found that the work product doctrine applied to claim notes containing the mental impressions and strategies of the insurer’s attorneys and representatives. These notes were authored by an attorney or claim handler of the insurer.

The insurer also sought to withhold documents that were sent by the defendant defense counsel to the insurer regarding post-arbitration strategy. The court found the attorney-client privilege waived once the insurer sued its attorney, and that the attorney himself held the work product privilege, not the insurer.

The court found the carrier did not waive the privilege concerning communications with in-house counsel, and with the outside counsel subsequently retained. The carrier had disclosed a limited privileged document, but the court found this did not constitute waiver of the privilege as to every communication with counsel.

The court further found that the insurer was not asserting an advice of counsel defense, which could waive the privilege. The court observed that “an attorney’s ‘[a]dvice is not in issue merely because it is relevant, and does not necessarily become in issue merely because the attorney’s advice might affect the client’s state of mind in a relevant manner.’” “Rather, ‘[t]he advice of counsel is placed in issue where the client asserts a claim or defense, and attempts to prove that claim or defense by disclosing or describing an attorney client communication.’” Those circumstances were not present.

Date of Decision: January 20, 2017

N.J. Mfrs. Ins. Co. v. Brady, No. 15-2236, 2017 U.S. Dist. LEXIS 8268 (M.D. Pa. Jan. 20, 2017) (Caputo, J.)

DECEMBER 2016 BAD FAITH CASES: COURT REFUSES TO BIFURCATE UIM CONTRACT AND BAD FAITH CLAIMS, OR STAY BAD FAITH DISCOVERY WHERE INSURED RESISTED THE STAY AND WAS WILLING TO RISK POTENTIAL PREJUDICE TO THE INSURED HIMSELF DURING CONSOLIDATED DISCOVERY (Philadelphia Federal)

Print Friendly

The insurer sought to bifurcate the breach of contract and bad faith claims in this UIM case, and a stay of discovery on the bad faith claim. In its second bad faith opinion of the day, the court denied the motion as the factors concerning convenience to the parties, avoidance of prejudice, or efficiency did not warrant separation of the two claims or a stay on discovery. The details of the court’s decision are quoted, in part, below: “In commercial or property damage cases, there may be complexities that warrant bifurcation; however, this is a personal injury case arising out of a motor vehicle accident. The key issue in the breach of contract claim is damages and the principal basis of the bad faith claim is delay: neither is a complex issue.”

“[B]ifurcation is not warranted … because [the insurer] has not shown that the level of prejudice it will face from proceeding to one trial on both claims outweighs the detrimental effects of severance. First, we note that although … the issues in the two claims are distinct, they are not as dissimilar as [the insurer] contends.” In arguing that the contract claim focuses on determining damages and the bad faith claim on the insurer’s case evaluation, the insurer “fails to recognize that an evaluation of the reasonableness of an insurer’s investigation necessarily includes analysis of the documentation the insurer relied on in coming to its conclusion. Indeed, ‘[the insurer’s] investigation did not occur in a vacuum,’ and the facts regarding the underlying accident and its consequent damages are relevant to it.”

“There is considerable overlap in the evidentiary proof relevant to each claim. Analysis of both claims is likely to require testimony from [the insured], [his] treating physicians, and [the insurer’s] medical expert as well as documentation regarding the accident, [the insured’s] injuries and the damages he suffered. Although foreseeable additional witnesses for the bad faith claim are the [insured’s] personnel responsible for handling [the] claim, and counsel for either or both parties, it is likely that many witnesses, and much of their testimony, will be the same for both claims. It would be inconvenient and wasteful of judicial resources to require them to appear in two separate trials to testify on overlapping issues.”

The court distinguished two other cases because of the difference in the progress of discovery on the contract and bad faith claims; and because it was unclear in the present case if counsel would have to testify, because counsel’s role was not pivotal to the bad faith claims at issue.

Finally, the insurer contended “without citation to any authority, that separate trials and a stay on discovery in the bad faith claim is necessary in order to assuage the potential for prejudice to both parties in the discovery process.” It argued “that work product it generated in preparation for litigation of the contractual claim would be relevant and discoverable in the bad faith claim, forcing [it] to either forfeit its privilege or claim it and thereby hamper Plaintiff’s litigation of the bad faith claim.”

The court found this did not warrant staying the bad faith claim. “[T]he insurer’s privilege would ‘not disappear merely because work product prepared in anticipation of litigation over one claim may also be relevant to a second claim.’” “Rather, the insurer would simply have to ‘prove its entitlement to work product protection, . . . [a fact] that does not justify the necessary expenditure of judicial resources and time’ that severance would occasion.”

Moreover, “the party most at risk of prejudice under the instant circumstances is [the insured], and he opposes [the insurer’s] motion. By opposing severance, [he] takes the risk that he may be vulnerable to not obtaining documents [the insurer] would otherwise be willing to produce. [He] has chosen this course rather than go through ‘the time and expense of having to participate in two separate rounds of discovery (and inevitable motion practice) accompanied by two separate jury trials.’” The insured’s stance therefore weakened the carrier’s position that severance was necessary to prevent prejudice in the course of discovery.

Date of Decision: November 21, 2016

Zinno v. Geico Gen. Ins. Co., No. 16-792, 2016 U.S. Dist. LEXIS 161250 (E.D. Pa. Nov. 21, 2016) (Baylson, J.)

AUGUST 2016 BAD FAITH CASES: INSUREDS’ ATTORNEY WHO CARRIED OUT CLAIM NEGOTIATION WITH CARRIER WAS A CENTRAL FACT WITNESS, AND WAS DISQUALIFIED BY THE COURT, AFTER THE COURT RAISED THE ISSUE SUA SPONTE (Philadelphia Federal)

Print Friendly

In this UIM bad faith case, the insured’s counsel was also the sole person who communicated with the claims adjuster in attempting to negotiate the UIM claim. The parties were over $1,000,000 apart in settlement negotiations, and the insureds subsequently brought a breach of contract and bad faith action. The same counsel who negotiated with the insurance carrier also represented the insureds in bringing the bad faith claim.

There was no question that this counsel’s testimony was critical to both the insured’s affirmative claims for bad faith relief and the insurer’s defense. Further, counsel’s testimony conflicted with the adjuster’s going directly to the evidence of bad faith in the claims handling process. After summary judgment was denied and the case was to head to trial, the court sua sponte raised the issue as to whether counsel had to be disqualified under Rule of Professional Conduct 3.7 because counsel was to be a witness. Counsel was a solo practitioner.

The court disqualified counsel. The court found that “equities plainly weigh in favor of disqualifying” counsel, and that allowing counsel to handle the case as a lawyer and be a principal witness would “compromise the integrity of the tribunal.” As “a solo practitioner and sole counsel for the plaintiffs, [counsel] cannot effectively represent her clients while she is testifying at trial.” The court found “a real danger that the finder of fact would be unable to discern when she is acting in her role as an attorney and when she is testifying as a fact witness.”

Although the insurer did not move to disqualify counsel “in previously moving to obtain [counsel’s] deposition and in its brief on the current subject matter, [the carrier] has taken the position that [counsel’s] conversations with [the adjuster] render her a central fact witness in this case.” While recognizing disqualification would burden the insured: “This burden on the plaintiffs is minimal in comparison to the numerous factors weighing in favor of disqualification.” “Moreover, the plaintiffs and [counsel] knew that [counsel’s] testimony would be a central issue when they filed this lawsuit.” Of significance, the insureds would not be left without an attorney to go to trial. “At a hearing on this subject, [counsel had] informed the court that she would be able to assist the plaintiffs in locating a new attorney without much trouble.

Date of Decision: June 30, 2016

Adeniyi-Jones v. State Farm Mut. Auto. Ins. Co., No. 14-7101, 2016 U.S. Dist. LEXIS 85053 (E.D. Pa. June 30, 2016) (Bartle, J.)

Open skies

Photo by M. M. Ginsberg

JUNE 2016 BAD FAITH CASES: COMMUNICATIONS BETWEEN IN-HOUSE COUNSEL OF (1) TPA AND (2) AUHTORIZED CLAIM REPRESENTATIVE WITH INSURER USING THEIR SERVICES IS PRIVILEGED (Middle District)

Print Friendly

In Heller’s Gas v. International Insurance Company of Hannover, a breach of contract and bad faith case, the insured claimed that documents withheld or redacted did not fall within the attorney-client privilege, the work product doctrine, or reserve information. The insured argued that all but one document was either sent to or from employees of the insurer’s third party administrator (TPA) or its authorized claim representative, and as neither of these entities were subsidiaries of or owned by the insurer, the communications were not privileged.

In the Answer, the insurer did not assert an agency relationship with either the TPA or the authorized claims representative. It took the opposite position in the motion papers, arguing that communications between the TPA’s in-house counsel and/or the claim representative’s in-house counsel with the insurer fell within the scope of attorney-client privilege.

The court reviewed the unredacted documents in camera. The court stated: “After thoroughly examining the documents, this Court finds that the information redacted appropriately falls within the attorney-client privilege and work product doctrine and is consequently information directly related to or referencing legal strategy regarding the instant litigation. The correspondence further supports [the insurer’s] latterly-advanced argument that [the TPA and authorized claims representative] are essentially agents of [the insurer].”

Date of Decision: June 1, 2016

Heller’s Gas, Inc. v. Int’l Ins. Co. of Hannover Ltd., 4:15-CV-01350, 2016 U.S. Dist. LEXIS 71069 (M.D. Pa. June 1, 2016) (Brann, J.)

IMG_0235

Photo by M. M. Ginsberg

JUNE 2016 BAD FAITH CASES: ALLEGED DISCOVERY VIOLATIONS CANNOT FORM BASIS OF BAD FAITH CLAIM (Third Circuit)

Print Friendly

In Duda v. Standard Insurance Company, the Third Circuit reiterated the longstanding rule that statutory bad faith claims cannot be based on alleged discovery violations in the bad faith litigation.

Date of Decision: May 10, 2016

Duda v. Std. Ins. Co., 2016 U.S. App. LEXIS 8602 (3d Cir. Pa. May 10, 2016) (McKee, Jordan, and Roth)