Archive for the 'PA – Discovery and Evidence' Category

DECEMBER 2017 BAD FAITH CASES: MEDIATION PRIVILEGE INAPPLICABLE TO MOST COMMUNICATIONS; REINSURANCE INFORMATION DISCOVERABLE EVEN IF NOT ULTIMATELY ADMISSIBLE (Western District)

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The insured was involved in a deadly motor vehicle accident. The insurer could have settled the case within the $11,000,000 policy limit, but declined to do so. The case was mediated before two different mediators and the judge held a settlement conference. The case went to trial and the jury awarded $32,000,000. The insured sued for breach of contract and bad faith.

During the bad faith litigation, the insured sought discovery concerning the mediations and reinsurance. The insurer asserted the mediation privilege and that the reinsurance documents were not relevant. The insured argued that the purpose of Pennsylvania’s mediation privilege is to enable the parties to be frank and honest with the mediator and/or opposing parties without fear of reprisal in a subsequent bad faith lawsuit for doing so.” The insurer had the burden in asserting this privilege.

MEDIATION PRIVILEGE

As a practice point, the court observed the insurer “did not specify on its privilege log whether its decision to redact or withhold a document was because a portion of a document was ‘a mediation communication’ or a ‘mediation document’ as those terms are defined. Instead, [the insurer] merely opted to cite the statute and then let this Court attempt to discern what [it] meant by the following entry on its privilege log: ‘Mediation and/or settlement conference privilege pursuant to 42 Pa.C.S. §5949, F.R.E. 408, and/or applicable law.’” The court then stated that the insurer had reciting the statutory definitions of mediation communication and mediation document and then argued that “‘[a]ll of the documents withheld and/or redacted … and submitted to the Court in camera qualify as mediation documents or mediation communications.’” The court went on to describe this as a lack of pointed argument.

Pertaining to documents redacted or withheld, the court found that “none of the redacted or withheld documents qualify as ‘a mediation document’ under the plain meaning of Pennsylvania’s mediation privilege statute except for” a single document. As to that document, it should only have been “redacted where the mediator … wrote an email ….” Under 42 Pa.C.S. 5949, “mediation document” is defined as: “Written material, including copies, prepared for the purpose of, in the course of or pursuant to mediation. The term includes, but is not limited to, memoranda, notes, files, records and work product of a mediator, mediation program or party.”

The court then went on to address mediation communications within the documents, which the statute defines as: “A communication, verbal or nonverbal, oral or written, made by, between or among a party, mediator, mediation program or any other person present to further the mediation process when the communication occurs during a mediation session or outside a session when made to or by the mediator or mediation program.” The court refused to apply the mediation privilege to statements made outside the mediation that did not in some way include the mediator.

The court did protect communication from the insured’s expert consultant relaying something the mediator said. However, it did not protect “redacted statements a mediator or a party may have said during the course of a mediation” in other circumstances. Specifically, it did not protect these communications where the documents including those statements “are nothing more than reports and/or claims notes. These redacted documents contain statements which were made by a person who may have been present at the mediation session to someone (not the mediator) outside the mediation session. Thus, they do not meet the plain meaning of the definition of ‘mediation communication’ and therefore, are not protected by Pennsylvania’s mediation privilege.” (Emphasis in original)

REINSURANCE DISCOVERY

On the reinsurance documents, the court observed that there “is no absolute exclusion of reinsurance information, as discovery of such information has been readily permitted,” citing at least one case on the issue of reserves being discoverable in bad faith litigation to support this position. The court also quoted case law that “the purpose of permitting discovery of the existence of and content of any insurance agreement is to equalize the knowledge of both parties and give the plaintiff ‘assurance that there can be recovery in the event of a favorable verdict to justify the time, effort and expense of preparing for trial.’ … Although the discovered information may not be admissible at trial, it would allow parties to fairly evaluate settlement offers and foster a just, speedy and inexpensive determination.”

Relying on these cases, the court concluded that: “Given the nature of this case, and the allegations brought by Golon, this Court finds that all of [insurer’s] documents which were either withheld or redacted because the document either referenced or discussed reinsurance should be produced in their entirety.  However, this does not guarantee that these documents will be admissible at the time of trial. The Court is ordering them produced so that [the insured] can evaluate what [the insurer] did or did not do, and when [the insurer] took action with its own reinsurer, in relation to the underlying claim.”

The Court subsequently denied two emergency motions for reconsideration.

Date of Decision: December 7, 2017/December 14, 2017

Golon, Inc. v. Selective Ins. Co., No. 17cv0819, 2017 U.S. Dist. LEXIS 201792 (W.D. Pa. Dec. 7, 2017) (Schwab, J.)

Golon, Inc. v. Selective Ins. Co., No. 17cv0819, 2017 U.S. Dist. LEXIS 213966 (W.D. Pa. Dec. 14, 2017) (Schwab, J.)

 

DECEMBER 2017 BAD FAITH CASES: NO BAD FAITH WHERE NO COVERAGE OWED, APPLYING EXCLUSION FOR ACTIONS AS OFFICER OF ANOTHER ENTITY (Philadelphia Federal)

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The plaintiff served in various official roles for the insured corporation. The insurer issued a DO&E policy to the corporate insured.

The plaintiff and another entity filed a conservatorship petition over property owned by the Underlying Plaintiffs. The Underlying Plaintiffs sued the plaintiff, that other entity, and the insured corporation for allegedly making false statements in the conservatorship petition as part of a “plan to run the [property owners] out of the neighborhood.” The court in the underlying action, however, dismissed all claims with prejudice against the insured corporation. The jury returned a verdict for the Underlying Plaintiffs, and against the plaintiff, among others.

The DO&E policy contained a coverage exclusion that stated, “The Insurer shall not pay Loss . . . (I) of an Insured Person based upon, arising from, or in any way related to such Insured Person’s service, at any time, as a director, officer, trustee, regent, governor, or equivalent executive or as an employee of any entity other than an Insured Entity . . . .” The insurer withdrew its defense of the plaintiff under this exclusion after the the insured corporation was dismissed with prejudice. The plaintiff then brought this action against the insurer for bad faith and breach of contract.

The court converted the insurer’s motion to dismiss into a summary judgment motion. The court stated, “it is the duty of the insurer to defend until such time as the claim is confined to a recovery that the policy does not cover.” When an underlying plaintiff drops an insured claim, this constitutes “absolutely clear” evidence that the action seeks relief that is not covered under the policy.

The court held that the insurer had no duty to defend the plaintiff once the underlying court dismissed the insured from that action. The court rejected the idea that insured corporation tacitly approved the plaintiff’s actions in filing the conservatorship petition because the insured was in no way involved in that petition. Furthermore, the plaintiff did not serve the insured corporation’s interest in any official capacity at the time the conservatorship petition was filed and “it is undisputed that [the plaintiff] . . . filed the conservatorship petition . . . in his capacity as President and owner of [another entity].”

The policy exclusion thus barred any coverage. Because the insurer did not owe a duty to defend or indemnify the plaintiff, his bad faith claim against the insurer necessarily failed.

Date of Decision: November 20, 2017

Palmer v. Twin City Fire Ins. Co., CIVIL ACTION NO. 17-826, 2017 U.S. Dist. LEXIS 190993 (E.D. Pa. Nov. 20, 2017) (Beetlestone, J.)

OCTOBER 2017 BAD FAITH CASES: COURT ADDRESSES A WIDE RANGE OF BAD FAITH DISCOVERY ISSUES AS TO PRIVILEGE, WORK PRODUCT, AND RESERVES (Western District)

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This is a discovery opinion addressing a wide range of issues including the attorney client privilege, work product doctrine and discovery of reserves. A number of rulings were held in abeyance pending in camera review, which are not addressed below

1.        The attorney client privilege is not limited to claims handler communications with outside counsel.

“This Court is not aware of any authority that limits the attorney-client privilege to communications with outside counsel, as opposed to in-house counsel, and Plaintiff has cited none. Therefore, this Court rejects Plaintiffs’ claim that the attorney-client privilege could not have attached before Attorney McDonnell was retained as outside counsel to handle Plaintiffs’ claim.”

2.         The privilege is not abrogated simply because a document is relevant to a bad faith claim.

“Plaintiffs next assert that the documents listed in the privilege log titled ‘Communications with counsel regarding the value and merits of claim’ are not privileged because they “go to the heart of this bad faith action[.]” (ECF No. 20 at 8.) However, as Defendant notes, the Third Circuit has unequivocally held that ‘[r]elevance is not the standard for determining whether or not evidence should be protected from disclosure as privileged, and that remains the case even if one might conclude the facts to be disclosed are vital, highly probative, directly relevant or even go to the heart of an issue.’ Rhone-Poulenc Rorer Inc. v. Home Indem. Co., 32 F.3d 851, 864 (3d Cir. 1994). Moreover, ‘[a] party does not lose the privilege to protect attorney client communications from disclosure in discovery when his or her state of mind is put in issue in the action.’ Id. Thus, while Plaintiffs are correct that these communications ‘go to the heart’ of Plaintiffs’ bad faith claim, this fact does not change the analysis of whether these communications are protected by the attorney-client privilege.

3.     Documents prepared by claims adjusters and sent to attorneys are privileged.

“Plaintiffs also claim that ‘communications made by the claims representatives are not immune from discovery.’ This argument is easily dismissed. ‘[T]he attorney-client privilege operates in a two-way fashion to protect confidential client-to-attorney or attorney-to-client communications made for the purpose of obtaining or providing professional legal advice.’ The fact that the documents were prepared by the claims adjusters, rather than the attorney to whom the documents were sent, is immaterial to the analysis of whether those documents are protected under the attorney-client privilege.”

4.         Reserves discoverable in bad faith action.

The court found reserve information discoverable in bad faith cases. It wrote the following in explaining its position:

“There is competing treatment of whether reserve information is discoverable in a bad faith lawsuit.” Shaffer v. State Farm Mut. Auto. Ins. Co., No. 1:13-CV-01837, 2014 U.S. Dist. LEXIS 30436, 2014 WL 931101, at *2 (M.D. Pa. 2014). “Some courts have noted a ‘tenuous link between reserves and actual liability given that numerous considerations factor into complying with this statutory directive.'” Sharp, 2014 Pa. Dist. & Cnty. Dec. LEXIS 282, 2014 WL 8863084 at *8, quoting Fidelity & Deposit Co., 168 F.R.D. at 525 (citing Rhone-Poulenc Rorer, Inc. v. Home Indemnity Co., 139 F.R.D. 609, 613 (E.D. Pa. 1991)). However, as a court of common pleas recently stated:

Several trial courts, including this court, have reasoned that insurance reserves are discoverable in bad faith litigation against insurers, where liability for the underlying claim has already been established, since such information may be relevant to the issue of whether the insurer acted in bad faith in failing to settle or pay the original claim. See Consugar v. Nationwide Insurance Co. of America, 2011 U.S. Dist. LEXIS 61756, 2011 WL 2360208, at * 5 (M.D. Pa. 2011) (‘Since plaintiff here claims that defendant acted [*19]  in bad faith, a comparison between the reserve value of the claim and defendant’s actions in processing plaintiff’s claim could shed light on defendant’s potential liability.’); North River Ins. Co. [v. Greater New York Mut. Ins. Co.], 872 F. Supp. [1411] at 1412 [(E.D. Pa. 1995)] (finding reserve information “relevant to the question of whether or not [the insurer] acted in bad faith during the pre-trial settlement negotiations.”); McAndrew v. Donegal Mutual Ins. Co., 56 Pa. D. & C. 4th 1, 18 (Lacka. Co. 2002); Fretz v. Mutual Benefit Ins. Co., 37 Pa. D. & C. 4th 173, 180 (Alleg. Co. 1998). Sharp, 2014 Pa. Dist. & Cnty. Dec. LEXIS 282, 2014 WL 8863084 at *8.”

5.     Reserves concerning insured’s claim are discoverable, but reserves concerning other claims are not, and court will not indulge fishing expedition on setting reserves for other claims.

“Defendant’s boilerplate responses also contend that Plaintiffs’ requests are overly broad. … This Court disagrees with Defendant’s contention in regards to Interrogatory No. 5, in which Plaintiffs’ seek information regarding the reserve history for [the insured’s] own claim. Because the gist of Plaintiffs’ complaint is that Defendant acted in bad faith in handling [the insured’s] underinsured motorists claim, Plaintiffs’ request for the reserve history for [her] claim is not overly broad.”

“However, this Court agrees with Defendant that RPD No. 4 is overly broad. While Plaintiffs have demonstrated the relevancy of the reserve amounts for [the insured’s] own claim, Plaintiffs have not shown — nor even argued in their Motion to Compel — that reserve information for other insureds is relevant to Plaintiffs’ claim. Therefore, Defendant will only be required to produce any relevant documentation of the reserve history for [the insured’s] claim.”

“RPD No. 4 asks for “all documents relating to or involving the process used from 2011 to the present in setting or otherwise establishing or determining reserves for underinsured motorists claims.” (ECF No. 20-2 at 4.) However, neither Plaintiffs’ Motion to Compel nor Defendant’s Brief in Opposition contain any argument concerning whether or not discovery of Defendant’s reserve process for other insureds is appropriate. In other words, neither party addresses the issue of whether RPD No. 4 seeks documents that are outside of the context of Plaintiffs’ specific claim. To the extent that Plaintiffs’ ask for discovery of reserve information for other claims, this Court declines the invitation to allow Plaintiffs to embark on a fishing expedition.”

6.       Work product doctrine not applicable to reserve information in this case.

“The only other objection that Defendant has put forth is its boilerplate response that the information requested by RPD No. 4 and Interrogatory No. 5 ‘is protected from discovery by the work-product doctrine.’ … However, Defendant’s threadbare and conclusory invocations of the work product doctrine fail to establish that Defendant is entitled to the privilege it asserts. Moreover, Defendant does not even argue in its Brief in Opposition that this information is protected by the work-product doctrine. Further, according to the reserve history for [the insured’s] claim, the reserve values were set by non-attorneys. … In fact, Defendant has not asserted that the reserve amounts were set or altered at the direction of, or with the cooperation of, counsel. Therefore, Defendant has failed to establish that the information Plaintiffs seek is protected by the work-product doctrine.”

Date of Decision: October 2, 2017

Parisi v. State Farm Mut. Auto. Ins. Co., CIVIL ACTION NO. 3:16-179, 2017 U.S. Dist. LEXIS 162131 (W.D. Pa. Oct. 2, 2017) (Gibson, J.)

 

OCTOBER 2017 BAD FAITH CASES: BIFURCATION AND STAY OF BAD FAITH CLAIM DENIED ON ALL FOUR CRITERIA, INCLUDING SIMILARITY OF ISSUES, COMMON EVIDENCE, UNDUE EXPENSE TO THE INSURED, AND ABSENCE OF PREJUDICE (Middle District of Pennsylvania)

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An underinsured motorist injured the insureds. The tortfeasor’s insurer ultimately tendered $15,000 to the insureds. The insureds’ own UIM policy contained maximum benefits of $100,000, or $200,000 with stacking. The insureds demanded full benefits under the policy.

After investigation, the insurer offered $10,000 to settle the UIM claim. The insureds filed suit in the Court of Common Pleas. The insurer removed the action to federal district court and filed a motion to dismiss. The Court denied the insurer’s motion to dismiss. The insurer then filed a motion to bifurcate the bad faith claim pursuant to Federal Rule of Civil Procedure 42.

In considering a party’s bifurcation motion, courts are careful to consider whether a stay would damage a party. Specifically, courts consider four factors in deciding a Rule 42 motion: “(1) whether the issues are significantly different from each other; (2) whether they require separate witnesses and documents; (3) whether the nonmoving party would be prejudiced by bifurcation; and (4) whether the moving party would be prejudiced if bifurcation is not granted.” The movant bears the burden to show that bifurcation is appropriate.

  1. First, the Court found that the claims are not “so profoundly different” as to justify bifurcation.
  2. The Court ruled that “both claims would utilize similar documents, such as the [insurer’s] claim file, relevant medical evidence . . ., and the [insurer’s] settlement attempts.” In addressing the insurer’s concerns on privileged materials pursuant to the attorney work-product doctrine, the Court ruled that the insurer failed to identify specific documents that enjoy such privilege. Furthermore, the Court reasoned that the insurer is free to file such motions going forward in order to assert its privilege at any time.
  3. The Court held that the insured would suffer economically if the bad faith claim was stayed, because the insured would have to pay its attorney to do twice the work. “Bifurcation would require two discovery periods, double the dispositive motions, and double pre-trial motions.”
  4. Lastly, the Court held that the insurer would not be prejudiced were its motion to bifurcate be denied, because the insurer could simply defeat the bad faith claim by showing a reasonable basis for its settlement offer and investigatory conduct.

In conclusion, none of the four factors weighed in favor of bifurcation and the Court denied the motion to sever and stay the bad faith claim.

Date of Decision: September 18, 2017

Newhouse v. GEICO Cas. Co., No. 4:17-CV-00477, 2017 U.S. Dist. LEXIS 150793 (M.D. Pa. Sept. 18, 2017) (Brann, J.)

SEPTEMBER 2017 BAD FAITH CASES: COURT ADDRESS DISCOVERY OF RESERVES, SETTLEMENT AUTHORITY, CLAIMS MANUALS, AND THE RULES FOR ORGANIZING DOCUMENT PRODUCTION (Philadelphia Federal)

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This case involved the adjustment of a fire loss claim. The insurer made over $1 Million in payments during a two-year period. The insured brought a bad faith action over claims handling and payment during that two-year period. This opinion addresses the insured’s motion to compel discovery.

Once the party seeking discovery meets its initial burden by showing relevance, “the burden then shifts to the party opposing discovery to articulate why discovery should be withheld.” “The party resisting production must demonstrate to the court ‘that the requested documents either do not come within the broad scope of relevance defined pursuant to Fed. R. Civ. P. 26(b)(1) or else are of such marginal relevance that the potential harm occasioned by discovery would outweigh the ordinary presumption in favor of broad disclosure.’”

  1. Organization of Document Production

3,200 pages of documents were provided on an unsearchable pdf. The plaintiff objected that the documents were not as kept in the usual course of business or referenced to particular document requests. The insurer responded they were provided as kept in the ordinary course of business. The Court stated that “the producing party has the choice to either produce documents as they are kept in the ordinary course of business or to label them to correspond with the request categories.” Thus, “labeling is not required where the party otherwise complies with the rule by producing the documents as they are kept in the normal course of business.”

The Court accepted the insurer’s “representation that the documents were produced as kept in the usual course of business.” The insurer offered “some narrative explanation of what was produced, and how it was produced.” The Court would not require the insurer “to label the documents to correspond to [the] requests,” where it had “sufficiently described its document production as containing emails, claims notes,  and correspondence—all of which are pieces of the entire file that Plaintiff requested.” In asserting that the documents were “not produced … as kept in the usual course of business,” the insured’s argument was “devoid of any particularized factual basis for this claim.” Thus, this aspect of the motion to compel was denied.

  1. Discovery of Reserves and Settlement Authority

The Court first observed the split in authority on discovery of reserves. It “ordered in camera inspection of the loss reserves ‘to the extent that those documents contain information other than specific amounts set for loss reserves.’”

The Court stated that “the reserve information may be relevant to Plaintiffs bad faith claim based on the timeline of this case. For instance, Plaintiff alleges that Defendant insisted on a release before issuing payments because Defendant knew it was offering less than what it owed; that Defendant knowingly delayed the payment of claims to save money and to injure Plaintiff; and that the release is invalid.” The Court cited authority for the proposition that “reserve information relevant to whether insurer acted in bad faith in not settling case within policy limits before trial” could be discovered. “Accordingly, to the extent employees or agents of the company discussed the value of Plaintiffs claim or other factual information regarding the claim in connection with setting the reserves, such information may be relevant.” Still the Court did not order direct production of previously redacted material, but ordered the insurer to “produce unredacted copies of the reserve and settlement authority information to the Court for in camera inspection.”

  1. Discovery of Claims Manuals

“Courts within this district have found that limited portions of claims manuals are relevant in bad faith insurance cases.” The Court observed thatEastern District Judges “have typically found that information contained in claims manuals is discoverable to the extent that it concerns employee procedures for processing claims.”The insured sought “[t]he portion of the claims manual regarding any portion of the Policy relied upon by you in making a coverage decision on plaintiff’s claim.” The specific bad faith claim involved the manner and timing of payment.   The Court found the document request overly broad, and that it went further than the bad faith claim as asserted. The Court did disagree with the insurer’s argument that discovery can only be permitted for a total denial of coverage. The Court limited the document request “to include only portions of the claims manuals that discuss policies relating to valuation of claims, and the timing of claims payments.”

Date of Decision: August 9, 2017

Bala City Line, LLC v. Ohio Sec. Ins. Co., CIVIL ACTION No.: 16-cv-4249, 2017 U.S. Dist. LEXIS 126579 (E.D. Pa. Aug. 9, 2017) (Sitarski, M.J.)

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)

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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)

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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)

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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)

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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.)