Archive for the 'PA – General Bad Faith and Litigation Issues' Category

NOVEMBER 2017 BAD FAITH CASES: NO CLAIM SEVERANCE BECAUSE (1) EXTRA LITIGATION STEPS PREJUDICE INSURED AND BURDEN COURT; (2) LOSING UIM COVERAGE CLAIM DOES NOT AUTOMATICALLY RESOLVE BAD FAITH CLAIM; (3) AND DISCOVERY AND EVIDENTIARY ISSUES COULD BE HANDLED DURING DISCOVERY PROCESS AND/OR AT TRIAL (Middle District)

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The Court denied a motion to sever and stay in this UIM bad faith case.

The tortfeasor’s insurer had paid its policy limits, the insured sought her $300,000 UIM limit, but her carrier offered $40,000 to settle. The insured brought breach of contract and bad faith claims. The insurer sought to sever and stay the insured’s bad faith claim.

The federal court found under the Federal Rules that “both the convenience of the parties and judicial economy weigh against severance.” Specifically, the court found that “if the bad faith claim is severed, Plaintiff would have to bear the costs of two trials and the resolution of both claims would be delayed.” Further, “although Defendant argues that resolution of the breach of contract action will greatly impact and potentially moot the bad faith claim, it is sufficient to note that ‘litigation on the bad faith claim is not contingent upon the success of the breach of contract claim.’” The court stated that an insured could “’simultaneously prevail on a bad faith claim and lose on a UIM claim.’”

The court went on that “severance would hinder judicial economy by requiring separate cases and separate trials instead of handling these claims in a single action.” The court did not “see how [bifurcation] is reasonable given the circumstances. Discovery, dispositive motions, pre-trial motions, and trial place a substantial burden on any party. Bifurcation would essentially double the life of this action requiring a second discovery period, more dispositive motions, more pre-trial motions, and a completely separate second trial.’” Any potential prejudice from simultaneous litigation of contract and bad faith claims did not outweigh “countervailing interests of judicial economy and the prompt resolution of this entire matter.”

“Additionally, the potential evidentiary problems identified by Defendant do not provide a sufficient basis for severing the claims in this matter.” Under the Federal Rules of Evidence, “documents and testimony to be entered for narrow purposes[, and at] this point it is premature to determine whether specific pieces of evidence would be admissible wholly or on a limited basis. The best way to make that determination is to keep the matters joined, allow discovery to proceed, and bring both claims to trial as quickly as possible. Any discovery disputes or questions of privilege can be handled through the discovery dispute procedures employed by the court.” The insurer’s “proffer of prejudice does not outweigh the interests of convenience and judicial economy, nor does it justify the severance and stay of Plaintiff’s bad faith claim.”

Date of Decision: October 11, 2017

Mulgrew v. Government Employees Insurance Co., No. 3:16-CV-02217, 2017 U.S. Dist. LEXIS 167770 (M.D. Pa. Oct. 11, 2017) (Caputo, J.)

OCTOBER 2017 BAD FAITH CASES: BAD FAITH STATUTE DOES NOT APPLY TO INSURANCE AGENTS (Common Pleas Lackawanna County)

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The excellent Tort Talk Blog has posted an opinion from Judge Nealon in Lackawanna County reiterating that the bad faith statute does not apply to insurance agents.

OCTOBER 2017 BAD FAITH CASES: PLEADING UIPA VIOLATIONS NOT FATAL WHERE THEY ARE NOT THE SOLE BASIS FOR STATUTORY BAD FAITH CLAIMS; COMPENSATORY AND CONSEQUENTIAL DAMAGES NOT WITHIN BAD FAITH STATUTE (Middle District of Pennsylvania)

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This bad faith case asserting common law and statutory bad faith, as well as regulatory violations, alleged the following.

The insured owned property covered under a homeowner’s insurance policy. In June of 2014, the insured entered into a listing contract with a real estate agent for the sale of the property. The insured relocated out of state two months later. In October of 2014, the insured accepted an offer to sell the property for $275,000. Before the sale, the real estate agent discovered that water pipes had burst, causing significant damage.

It was alleged that an adjuster for the insurer estimated the damage at $80,000, and suggested that the insured may have sabotaged the property. The insured asserted there was no reason to sabotage the property because the $275,000 sale price far exceeded the amount left on the mortgage, and the buyer remained willing to purchase the property so long as repairs were made. The insurer wrote to the insured regarding coverage obligations and requesting further documentation. The insured timely responded to insurer’s request and provided the requested information.

The insurer referred the claim to its fraud unit. The insured provided requested information to the fraud unit, and sat for multiple examinations under oath. The insurer also requested phone records, financial information, and utility records.

The sale of the property fell through, and the property entered foreclosure proceedings. Counsel for the insured requested documentation from the insurer. The insurer allegedly failed to provide all of the requested documentation, but maintained its request for the insured’s cell phone records and financial information.

The insurer ultimately forwarded benefits totaling $110,510.20 to the insured. However, the insured estimated her damages at $155,785, and filed suit for breach of contract and bad faith, among other claims.

The insurer responded by filing a motion to dismiss the insured’s breach of contract claim. The Court refused to dismiss this claim, holding that the complaint “sufficiently sets forth the damages [the insured] purportedly suffered as a result of [the insurer’s] conduct.”

The insurer also filed a motion to strike the insured’s allegations of violations of the Unfair Insurance Practices Act (“UIPA”) and of Unfair Claims Settlement Practices Regulations (“UCSP”), arguing that these alleged violations cannot serve as the basis for private statutory bad faith claims. The Court stated that violations of the UIPA or UCSP are not per se violations of the bad faith statute, and added that the “Third Circuit and this Court have held that alleged violations of the Unfair Insurance Practices Act do not, in and of themselves, constitute bad faith….” The Court refused to strike those allegations, however, because the insured’s “bad faith claim does not rest solely on alleged UIPA or UCSP violations.”

The insured’s breach of contract claim included an alleged a breach of the implied covenant of good faith and fair dealing. The insurer also moved to strike this claim, arguing that the breach of contract claim subsumed it. The Court ruled that “as [the insured] has not pled a separate breach of contract claim, [the reference] may properly remain in the Complaint.”

Lastly, the Court struck the insured’s claims for compensatory and consequential damages, holding that such damages are not available under the Pennsylvania bad faith statute.

Date of Decision: September 19, 2017

Pratts v. State Farm Fire & Cas. Co., No. 16-2385, 2017 U.S. Dist. LEXIS 151650 (M.D. Pa. Sept. 19, 2017) (Caputo, J.)

UPDATED: PENNSYLVANIA SUPREME COURT RULES MOTIVE OF SELF-INTEREST OR ILL-WILL NOT AN ELEMENT OF STATUTORY BAD FAITH CASE (Pennsylvania Supreme Court)

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Since 2007, Pennsylvania’s Superior Court has taken the position that proving statutory bad faith includes two elements: (1) the absence of a reasonable basis to deny a benefit and (2) knowledge or reckless disregard of the fact there was no reasonable basis to deny coverage. The elements were originally stated in Terletsky v. Prudential Property & Cas. Ins. Co., 649 A.2d 680 (Pa. Super. Ct. 1994). The Terletsky Court had also discussed the concepts of a carrier’s “motive of self-interest or ill-will,” and some courts concluded this was a third element of proof. The Superior Court rejected that position in 2007, holding that self-interest or ill-will (sometimes generically referred to as malice) can be evidence used to prove the second element, but was not an element of proof in itself. However, the position that self-interest or ill-will was a required third element of proof has continued in some Pennsylvania Federal District Court opinions.

Today, in Rancosky v. Washington National Ins. Co., Pennsylvania’s Supreme Court adopted the Superior Court’s position.

The Supreme Court stated:

we adopt the two-part test articulated by the Superior Court in Terletsky v. Prudential Property & Cas. Ins. Co., 649 A.2d 680 (Pa. Super. 1994), which provides that, in order to recover in a bad faith action, the plaintiff must present clear and convincing evidence (1) that the insurer did not have a reasonable basis for denying benefits under the policy and (2) that the insurer knew of or recklessly disregarded its lack of a reasonable basis. Additionally, we hold that proof of an insurance company’s motive of self-interest or ill-will is not a prerequisite to prevailing in a bad faith claim under Section 8371, as argued by Appellant. While such evidence is probative of the second Terletsky prong, we hold that evidence of the insurer’s knowledge or recklessness as to its lack of a reasonable basis in denying policy benefits is sufficient.

The Court instructed the Superior Court to remand the action to the Trial Court for factual findings. “However, because it is unclear to what extent the trial court’s findings on the reasonable basis prong of Terletsky were intertwined with its erroneous belief that proof of Conseco’s motive of self-interest or ill-will was required, upon remand the trial court should consider both prongs of the Terletsky test anew.”

Some of the other key points in the opinion include:

  1. Punitive Damages. The Bad Faith Statute provides for attorneys’ fees, super-interest, and punitive damages. There is no higher standard of proof for plaintiffs seeking to prove bad faith with punitive damages, i.e., self-interest or ill-will do not become elements of proof where the plaintiff demands punitive damages as part of the statutory bad faith claim. The Court stated, “we find no basis for concluding that the General Assembly intended to impose a higher standard of proof for bad faith claims seeking punitive damages when it created the right of action.”
  2. No Effect of Prior Supreme Court Precedent. In footnote 10, the Court cites to three of its bad faith opinions: Toy, Birth Center and Mishoe. The Court makes clear that these “prior decisions interpreting Section 8371 do not directly control our disposition of the instant matter. Moreover, nothing we say here should be read as casting doubt on the validity of the holdings in those cases. As we have stated over the years on this blog, Toy can be interpreted to limit cognizable bad faith claims to those cases where there has been a denial of benefits in a first party case, or denial of a defense or coverage in third party cases. That issue was not addressed in Rancosky.
  3. Statutory Interpretation. The Court offers general instruction on how to apply principles of statutory construction under Pennsylvania law. In this case, the focus was on the history of bad faith law leading up to the 1990 adoption of the 42 Pa.C.S. § 8371, and the contemporaneous meanings of bad faith at the time of its adoption. The driving factor was the universal understanding that the legislation was in response to the Pennsylvania Supreme Court’s 1981 D’Ambrosio decision, and how the issue of what constitutes bad faith was framed in that case.
  4. Interesting Comments in Justice Wecht’s Concurrence. Justice Wecht’s concurrence focuses of how inclusion of ill-will/self-interest as an element would functionally swallow the Terletsky test. In describing this flaw, he makes an interesting point about the relationship between poor claims handling being tied into the denial of benefits to make out a bad faith claim: “Knowing or reckless claims-handling leading to objectively unreasonable denial of benefits, if proven by clear and convincing evidence, embodies the principle that a patent absence of good faith is tantamount to the presence of bad faith.” 

    Date of Decision:  September 28, 2017

    Rancosky v. Washington National Insurance Company, Pennsylvania Supreme Court, 28 WAP 2016 (Pa. Sept. 28, 2017)

SEPTEMBER 2017 BAD FAITH CASES: MOTION TO DISMISS DENIED WHERE ALLEGED FACTS SUPPORT BREACH OF IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING (Philadelphia Federal)

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The insureds brought a consolidated class action against the insurer under certain life insurance policies. The policies are different from standard whole life insurance policies because the premium payments are flexible. Policyholders may adjust both the amount and frequency of their premium payments, so long as they maintain sufficient funds in the account to cover a monthly deduction. The monthly deduction is comprised of a cost of insurance (“COI”) charge and other related expenses.

The policies serve as an investment vehicle, whereby policyholders make payments into an interest bearing account. The insurer withdraws the monthly deduction from each account and deposits interest monthly. A policyholder may elect to pay a premium in excess of the monthly deduction. Those excess funds then increase the policy’s accumulated value. However, if the monthly deduction exceeds the value of interest generated and the premium paid, the policy value is reduced.

The insureds allege that the insurer unlawfully increased the COI under the policies by using impermissible considerations, and failed to provide some policyholders with illustrations of the COI increase upon request. Specifically, the insureds allege that the insurer cannot set the COI to recoup prior losses based on interest rate changes or miscalculations in previous mortality assumptions. The insureds allege “[the insurer] is impermissibly using its discretion to recoup past losses or ‘blunt the impact of the prevailing low interest rate environment.’” In many cases, the insurer allegedly increased COI rendered the policies economically burdensome.

The insureds brought claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and various other claims. As to the breach of the implied covenant of good faith and fair dealing claim, the insurer argued that this claim be dismissed as duplicative because it is based on the same facts as the breach of contract claim. The Court denied the motion. Pennsylvania “law does recognize an implied covenant of good faith where . . . the [insurer] is expressly given a constrained amount of discretion under the Policy.” For Rule 12(b)(6) purposes, the Court held that the insureds adequately alleged that the insurer breached the implied covenant “by exercising their limited discretion under the Policies in an unreasonable and unfair manner with the intent of . . . frustrating policyholders’ expectations and depriving them of the benefit of the agreement.”

Furthermore, the Court declined to dismiss the breach of contract claim, finding that the insureds’ allegations were plausible at this stage of the litigation.

Date of Decision: September 11, 2017

In re Lincoln National COI Litigation, No. 16-06605, 2017 U.S. Dist. LEXIS 146904 (E.D. Pa. Sept. 11, 2017) (Pappert, J.)

AUGUST 2017 BAD FAITH CASES: INJURED PARTY HAS NO STANDING TO BRING BAD FAITH CLAIM AGAINST TORTFEASORS’ INSURER (Middle District)

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An injured plaintiff attempted to assert bad faith claims against the tortfeasor’s insurer and its adjuster. In his Report and Recommendation, the Magistrate Judge observed that third-party claimants do not have a contractual relationship with such insurers, and thus have no standing to assert a bad faith claim. The District Court Judge agreed, and dismissed the putative bad faith failure to negotiate claim.

Dates of Decision: June 20, 2017 and August 9, 2017

Starrett v. Coe, No. 3:16-cv-02272, 2017 U.S. Dist. LEXIS 95793 (M.D. Pa. June 20, 2017) (Saporito, M.J.) (Report and Recommendation)

Starrett v. Coe, No. 3:16-cv-02272, 2017 U.S. Dist. LEXIS 126348 (M.D. Pa. August 9, 2017) (Caputo, J.)

JUNE 2017 BAD FAITH CASES: FINANCIAL ADVISOR RECOMMENDING INSURANCE PRODUCTS HAS NO FIDUCIARY DUTY TO CLIENT/INSURED ABSENT INSURED HAVING ACTUALLY OR FUNCTIONALLY CEDED ALL CONTROL IN DECISIONMAKING TO ADVISOR (Pennsylvania Supreme Court)

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This case involves the existence of a fiduciary duty between financial advisor and his clients. The facts include recommendations to buy certain life insurance policies, which the insureds later claimed were fraudulently represented to them. They brought various claims, including breach of fiduciary duty claims.

Those claims were rejected by the trial court, which found no fiduciary duty existed in the absence of the financial advisor having control over the insureds’ decisionmaking. The Superior Court reversed, finding the existence of a fiduciary duty based on the facts concerning the relationship between the advisor and his clients, rather than as a matter of law. The Supreme Court reversed that decision. It ruled, along the lines of the trial court, that in the absence of a traditional type of controlling and overmastering relationship, there is no fiduciary duty simply because the financial advisor has greater expertise where the clients made the ultimate investment decisions.

Among other things, the Supreme Court stated:

“While cases involving fiduciary relationships are necessarily fact specific, they usually involve some special vulnerability in one person that creates a unique opportunity for another person to take advantage to their benefit.”

“The Superior Court, in the case before us, erred in relying on our case law involving undue influence to support its conclusion that a fiduciary relationship can be established without evidence that decision-making power was effectively ceded to another. Its view misses the point that the exercise of undue influence, at its core, indicates that an individual so influenced has lost the ability to make an independent decision.”

“We conclude that the … summary judgment evidentiary record falls far short of establishing a fiduciary …. Fiduciary duties do not arise ‘merely because one party relies on and pays for the specialized skill of the other party.’ …. If this were the law in Pennsylvania, ‘a fiduciary relationship could arise whenever one party had any marginal greater level of skill and expertise in a particular area than another party.”

“The superior knowledge or expertise of a party does not impose a fiduciary duty on that party or otherwise convert an arm’s-length transaction into a confidential relationship. In this regard, the analysis is no different in a consumer transaction than in other fiduciary duty cases decided by this Court.”

“’[T]he critical question is whether the relationship goes beyond mere reliance on superior skill, and into a relationship characterized by ‘overmastering influence’ on one side or ‘weakness, dependence, or trust, justifiably reposed’ on the other side,” which results in the effective ceding of control over decisionmaking by the party whose property is being taken.”

“A fiduciary duty may arise in the context of consumer transactions only if one party cedes decision-making control to the other party.” Thus, “’a business transaction may be the basis of a confidential relationship only if one party surrenders substantial control over some portion of his affairs to the other.’”

The case before the court did not fall into these categories. Rather, it presented “an arm’s-length consumer transaction in which the [clients/insureds] accepted [the financial advisor’s] advice with respect to the purchase of the … whole life insurance policy[, and they] made the decision to purchase this policy, but also decided to reject other proffered products and services.” The complicated nature of the premium structure did not change the character of the transaction between the parties. The clients “purchased an insurance product from a captive financial advisor with whom they had a business relationship for a little more than a year, initiated by a cold-call. [Their] lack of post-secondary high school educations is not indicative of a weakness, dependence, or trust, justifiably reposed, nor is [the advisor’s] advanced training sufficient to establish an overmastering influence.”

“The record here establishes that [they] made the decision to purchase Appellants’ advice and financial products. Reliance on another’s specialized skill or knowledge in making the purchase, without more, does not create a fiduciary relationship. We acknowledge that [they] may have become comfortable with the Appellants’ expertise before deciding to purchase the … whole life insurance policy, which is to be expected when making a financial decision. It is part of the development of any business relationship — consumer or otherwise. It does not, however, establish a fiduciary relationship.”

“There is no evidence to establish that [they] were overpowered, dominated or unduly influenced in their judgment….” “[They] never ceded any decision-making authority….” Over the course of the relationship, they followed some of his recommendations and rejected others. Prior to the proposal for the whole life policy at issue, Appellants proposed a different whole life product that [they] did not purchase.”

It was of some significance to the Court that under appropriate circumstances, consumers “have various common law tort remedies (with burdens of proof less stringent than those required in fiduciary duty cases), as well as claims for common law fraud and the statutory relief provided by the current version of the UTPCPL, which provides a remedy for deceptive conduct. 73 P.S. § 201-2(4)(xxi).”

The majority “decline[d] to modify the law of fiduciary duty to encompass the particular pitfalls involved in the sale of insurance products by commissioned agents or financial advisors to less savvy customers. Moreover, we do not hold that a fiduciary duty cannot arise in a case with facts not present here, but absent evidence that a consumer of financial services and goods cedes control over the decision to purchase, either explicitly or implicitly because of over-mastering or undue influence, no fiduciary relationship arises.”

Date of Decision: June 20, 2017

Yenchi v. Ameriprise Financial, Inc., No. 8 WAP 2016, 2017 Pa. LEXIS 1405 (Pa. June 20, 2017) (Pennsylvania Supreme Court)

The dissenting opinion can be found here.

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JUNE 2017 BAD FAITH CASES: NO DIRECT ACTION FOR BAD FAITH WHERE PLAINTIFF WAS NOT INSURED BY DEFENDANT (Philadelphia Federal)

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In this case, the plaintiff attempted to bring various claims against an insurer, including a bad faith claim. Pennsylvania is not a direct action state. The pleadings revealed that the insurer defendant did not insure the plaintiff. The plaintiff thus had no claims against the insurer, and all claims against the insurer were dismissed.

Date of Decision: June 20, 2017

ABC Capital Invs., LLC v. CNA Financial Corporation, No. 16-CV-4943 2017 U.S. Dist. LEXIS 95433 (E.D. Pa. June 20, 2017) (Joyner, J.)

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JUNE 2017 BAD FAITH CASES: COURT DISMISSES SUIT AS SANCTION (Philadelphia Federal)

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This suit was brought by an insurer against its insured’s attorneys and an expert retained by its insured’s attorneys in a Washington State class action against the insurer. The following are excerpts from the court’s strongly worded opinion. The court dismissed the case as a sanction, under its inherent authority.

“A few years ago, two class actions were filed … in Washington state court. Not surprisingly, as in any litigation, a dispute arose about the use of documents in these Washington class actions. Rather than meet and confer with the plaintiffs’ lawyers (or file a motion in Washington court) about this dispute, [the insurer] sued them here in Philadelphia. That, however, was not enough to quench [the insurer]’s thirst for aggression. [It] also sued the plaintiffs’ lawyers’ expert witness and his company.”

“[The insurer] weaves some clever arguments in an attempt to justify its acts of obstruction. However, practicality, legal analysis, and common sense all make clear [the insurer] is attempting to stalemate the Washington class actions by suing the plaintiffs’ lawyers thousands of miles away from where those class actions are currently being litigated. The red herrings in this case are [the insurer]’s alleged ‘claims’ for trade secret misappropriation and unjust enrichment. Even if these ‘claims’ were anything more than red herrings—which they are not—they fail as a matter of law.”

“The defendants filed a motion to dismiss. In the alternative, defendants move to transfer this action to the U.S. District Court for the Western District of Washington. While transfer might be appropriate in this case, there is no need. I will not tolerate the attempted manipulation of our judicial process in this case. The case is dismissed.”

“In this case, while a close call, I cannot conclude that Rule 11 sanctions are proper because I do not find the [insurer]’s claims ‘patently unmeritorious or frivolous.’” “The claims are weak, to be sure, but they do possess a modicum of substance, thereby elevating them slightly above the level of ‘patently unmeritorious or frivolous.’” “Consequently, Rule 11 sanctions cannot be imposed.”

“However, I will impose sanctions, pursuant to my inherent power, for ‘conduct which abuses the judicial process.’” The insurer’s “conduct, in filing this lawsuit, was done in bad faith, vexatiously, and for oppressive reasons.” “This is the exact type of case where a response to ‘abusive litigation practices’ is warranted.”

The court dismissed the complaint “in its entirety, without prejudice. Whether [the insurer] will again be subject to sanctions under my inherent authority (or under Rule 11) will depend upon the renewed strength and plausibility of [the] claims in its amended complaint, should it decide to take this route and file one.”

Date of Decision: June 13, 2017

GEICO v. Nealey, No. 17-807, 2017 U.S. Dist. LEXIS 91219 (E.D. Pa. June 13, 2017) (Stengel, J.)

 

MAY 2017 BAD FAITH CASES: WHERE INSURED HAS SUFFERED NO HARM, THERE IS NO BAD FAITH CLAIM TO BE ASSIGNED (Pennsylvania Superior Court) (Not Precedential)

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Three brothers owned interests in a single property, but arguably only one of them insured his interests. Their tenants (the insured brother’s daughter and son-in-law), brought suit against her father and uncles for mold exposure. The father’s carrier provided a defense, and the case against him was dismissed on preliminary objections.

The uncles hired private counsel, who filed preliminary objections as well, but before those were decided, the uncles entered a joint tortfeasor release. The uncles assigned their contribution claims against the father and a bad faith claim against his insurer to their niece and nephew.

Subsequently, the attorney representing the niece entered appearances for the uncles (one was deceased, so his estate), and there was ultimately a $5.1 Million judgment entered against the uncles. Efforts to enforce that judgment against the father were denied by way of summary judgment. Still, the father later assigned any bad faith claims he might have against his insurer to his daughter and son-in-law, and they released the father from any claims arising out their original law suit.

The children brought bad faith claims against their father’s insurer. The resolution was simple because the $5.1 Million judgment obtained was not a judgment against the father. The father was both dismissed from the original case, and won a summary judgment motion that the judgment could not be enforced against him. Moreover, that judgment could not be enforced against any party in light of the releases.

As to the assigned claim, the Court concluded: “Since Appellants cannot enforce the [$5.1 Million] Judgment against [father], [father] suffered no harm and, therefore, had no bad faith claim to assign to Appellants.”

Date of Decision: April 26, 2017

Schriner v. One Beacon Ins. Co., No. 852 MDA 2016, 2017 Pa. Super. Unpub. LEXIS 1602 (Pa. Super. Ct. April 26, 2018) (Dubow, Lazarus, Stabile, JJ.) (Not Precedential)

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