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

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

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counsel that she would refuse to consent to a settlement and that counsel likewise gave notice that the consent was withdrawn.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

MAY 2012 BAD FAITH CASES: COURT RULES THAT BAD FAITH CLAIM MAY NOT BE PREDICATED UPON CARRIER’S CONDUCT IN DRAFTING AN INSURANCE POLICY, BUT REQUIRES DENIAL OF BENEFITS AFTER ISSUANCE OF THE POLICY (Middle District)

Published on May 1, 2012 in General Bad Faith and Litigation Issues. Closed
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In Sewell v. Liberty Life Insurance Company, the court heard a motion to file an amended complaint by the executrix of the insured’s estate. The case arose from an accidental house fire that killed the insured party, prompting his estate to file suit when the carrier denied benefits under the insured’s accidental death insurance policy. The carrier denied benefits because the insured party was allegedly under the influence of an intoxicant at the time of his death.
An exclusion in the insured’s life insurance policy stated that the carrier “shall not be liable for any loss sustained . . . in consequence of the insured’s being intoxicated . . . unless administered on the advice of a physician.”
In the instant action, the executrix of the insured’s estate sought to amend her original complaint to allege bad faith. Specifically, she sought leave to amend her complaint to allege that the carrier acted in bad faith because the terms of her son’s policy were less favorable to him than they were to the carrier. In response, the carrier argued that leave should be denied on the basis that the proposed amendment would be futile. Because the executrix’s proposed bad faith claim was premised upon the carrier’s conduct in drafting the insurance policy, as opposed to the unreasonable denial of benefits, the carrier defended that the proposed amendment should be denied as futile.
Opposing this claim, the estate asserted that Pennsylvania’s bad faith statute encompasses provisions that may be included in the policy and that her son’s policy contained provisions that were overly broad, amounting to statutory bad faith. However, the court disagreed with the insured’s estate, reasoning that leave to amend would be futile because “the essence of a bad faith claim [is] the unreasonable and intentional (or reckless) denial of benefits.”
The court relied upon a recent Eastern District of Pennsylvania decision, Mitch’s Auto Service v. State Automobile, where the court stated that bad faith claims pertaining to “the drafting of policy language itself [are] . . . not actionable.” According to Judge Robreno, who authored that opinion, some courts applying Pennsylvania law have extended bad faith beyond the denial of claims, but such cases all involved “bad faith claims related to specific conduct of the insurer following the issuance of a policy.”
Therefore, the court denied the estate’s motion for leave to amend its complaint because the proposed allegations do not set forth that the carrier acted in bad faith regarding its compliance with the terms of the policy as written. Instead, the estate merely raised a dispute over the provisions of the policy itself, and whether they violated Pennsylvania law. As such, the court found for the carrier, ruling that leave to amend would be futile.
Date of Decision: April 25, 2012
Sewell v. Liberty Life Ins. Co., NO. 3:11-01721, 2012 U.S. Dist. LEXIS 57801, United States District Court for the Middle District of Pennsylvania (M.D. Pa. Apr. 25, 2012) (Caputo, J.)

MAY 2012 BAD FAITH CASES: BAD FAITH CLAIM CANNOT BE ASSGINED, CONTINGENT FEE ATTORNEY NOT THIRD PARTY BENEFICIARY, CONTRACT CLAIM ASSIGNABLE BUT AGAINST PUBLIC POLICY TO DO SO (Philadelphia Federal)

Published on May 1, 2012 in General Bad Faith and Litigation Issues and Lawyer's - Attorney's Fees. Closed
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In Feingold v. State Farm Mutual Auto Insurance Company, the court partially granted the carrier’s motion to dismiss a breach of contract and bad faith suit brought by the insured and his alleged assignee, who was his prior case but had been subsequently disbarred. The case stems from a motor vehicle accident that occurred in 1998, where the insured was injured by an uninsured or underinsured motorist. The insured retained the assignee at that point prior to his disbarment.
After filing a motor for arbitration, the carrier never followed through with arrangements to schedule a medical exam. In 2010, the insured sought to schedule the arbitration but the carrier maintained that the statute of limitations on the insured’s claim had expired. The insured and his assignee then filed suit for breach of contract and bad faith. The carrier moved to dismiss the suit.
Turning to the plaintiff’s claims, the court partially granted the carrier’s motion to dismiss, ruling that the assignee had no standing to assert claims against the carrier. The court reasoned that “[a]n insured’s disbarred former attorney surely does not fall within the narrow class of individuals who may pursue a statutory bad faith claim.” The court also ruled that the former counsel’s claim that he was a “beneficiary” of the insured’s contract did not meet the standards for establishing third party beneficiary status.
Next, the court ruled, following an earlier decision against the same plaintiff, that statutory bad faith claims are in the nature of unliquidated tort claims which are un-assignable under Pennsylvania law. While breach of contract claims may be assignable, the court ruled that the assignment in this case, which permitted the disbarred assignee to function as the insured’s attorney, is contrary to public policy. As such, the court ruled that the assignee had no standing to bring these claims.
With respect to the insured’s claims, the court first ruled that the parties’ forum selection clause is ineffective, preventing the carrier’s claim of improper venue. The court also held that the pendency of arbitration in Delaware is not the proper ground for dismissal. Lastly, the court reasoned that the carrier was incorrect that the case should be dismissed because Delaware law, not Pennsylvania law, should apply.
Date of Decision: April 3, 2012
Feingold v. State Farm Mut. Auto. Ins. Co., NO. 11-6309, 2012 U.S. Dist. LEXIS 46696, U.S. District Court for the Eastern District of Pennsylvania (E.D. Pa. Apr. 3, 2012) (O’Neill, J.)

MARCH 2012 BAD FAITH CASES: COURT PERMITS CONSUMER PROTECTION CLAIM FOR MISFEASANCE TO PROCEED IN ABSENCE OF BAD FAITH CLAIM (Western District)

Published on March 18, 2012 in General Bad Faith and Litigation Issues. Closed
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In Leary v. State Farm Fire & Casualty, the insureds brought a claim against their home insurance carrier under Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (“UTPCPL”), to which the carrier responded with a motion to dismiss.
The claim stemmed from a fire that damaged the insureds’ residence in 2006. The damaged incurred was covered under its policy with the carrier, which investigated the damage. The carrier also recommended that the insureds select a contractor from their list of approved vendors, who were paid directly by the carrier. Unbeknownst to the insureds, the carrier had a financial stake in having its insureds utilize the services of participating contractors.
After selecting a contractor, who began working on the insureds’ home, the couple noticed that the quality of the work performed on their home was subpar. They also noticed that their property had been damaged and ordered the contractor to discontinue work. A Code Enforcement Officer later determined that the work was not in compliance with local building codes. Although the insureds paid for the work that had been done, they were forced to hire another contractor to complete the job, costing them $94,293.39.
The insureds commenced an action against the contractor in 2008, receiving a judgment against him. The insureds also commenced an action under the UTPCPL against their carrier, alleging that it engaged in deceptive practices. The carrier responded by filing a motion to dismiss.
Turning to the carrier’s motion, the court first held that the insureds had standing to sue the carrier because they had purchased “goods or services primarily for personal, family or household purposes” from the carrier as required under the UTPCPL statute. As the insureds had relied upon representations about the carrier’s list of preferred contractors, there existed a causal connection between the carrier’s conduct and the detriment caused by the insureds’ reliance thereupon. The court denied the carrier’s motion on this issue.
Next, the court ruled that the insureds had properly alleged that the carrier engaged in fraudulent conduct, denying the carrier’s motion on this allegation. Specifically, the court ruled that the insureds had plausibly alleged misfeasance under the UTPCPL statute.
However, the carrier disagreed, arguing that, in the absence of breach of contract and bad faith claims, which were now past the statute of limitations, the insureds could not proceed. The carrier reasoned that the insureds were trying to “circumvent the applicable limitations periods by recasting…bad faith claims” as misfeasance under the UTPCPL. The court found this argument unavailing, finding that the carrier’s affirmative misrepresentations were not simple nonfeasance.
Lastly, the court ruled that the carrier’s conduct satisfied both the “fraudulent” and “deceptive” requirements of the UTPCPL statute, allowing them to proceed in their consumer protection action.
Therefore, the carrier’s motion to dismiss was denied and the court ruled that the insureds plausibly stated a claim, permitting the suit to proceed to discovery.
Date of Decision: February 24, 2012
Leary v. State Farm Fire & Casualty Co., No. 3:11-145, 2012 U.S. Dist. LEXIS 23898 (W.D. Pa. Feb. 24, 2012) (Gibson, J.).

FEBRUARY 2012 BAD FAITH CASES: INSURED MAY RECOVER ATTORNEY’S FEES INCURRED IN DECLARATORY JUDGMENT ACTION ONLY IF IT CAN PROVE THAT THE CARRIER REFUSED TO DEFEND IN BAD FAITH (Western District)

Published on February 28, 2012 in General Bad Faith and Litigation Issues. Closed
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In UPS Freight v. National Union Fire Insurance Co. and C.C. Eastern, Inc., the magistrate judge issued a report and recommendation (“R&R”) in a declaratory judgment action by an insured against its carrier. The action stemmed from an underlying negligence suit in state court.
Specifically, the insured sought a declaration against both defendant carriers that (1) they owed a duty to defend in the underlying negligence suit, (2) that the carrier is obligated to reimburse the insured for defense costs and (3) that the carriers must afford coverage to the insured for any liability imposed on it in the state court action.
This motion was originally filed in 2006 and was followed by a 2008 motion for summary judgment by the insured, to which the carriers responded by filing a cross-motion for summary judgment. In 2008, the magistrate issued an R&R recommending that the carriers’ cross-motions be denied and that the insured’s motion be granted with respect to the second carrier, but not the first. The district judge declined to adopt the R&R in full, but granted the second carrier’s motion. The insured then appealed to the Third Circuit.
The Third Circuit ruled that the first carrier owed the insured a duty to reimburse all defense costs incurred in the underlying state court action and affirmed the grant of summary judgment to the second carrier.
The case was remanded and the insured filed a motion for entry of judgment, requesting that judgment be entered against the remaining carrier for $184,754.81 incurred in the state court action and $52,003.41 incurred in the instant action. The carrier objected to this motion, arguing that it required more documentation of attorney’s fees and costs incurred by the insured. In response, the insured submitted detailed billing statements documenting legal services rendered on its behalf in both the state and federal court actions.
The magistrate recommended that the insured be entitled to the $184,754.81 that it incurred in the state court action. However, the magistrate refused to recommend that the insured be reimbursed for the $52,003.41 incurred in bringing the instant declaratory judgment action.
While the Pennsylvania Supreme Court has yet to rule on the issue, the magistrate followed Third Circuit precedent, which predicted that “an insured who is compelled to bring a declaratory judgment action to establish his insurer’s duty to defend…may recover his attorneys’ fees incurred…if the insurer has, in bad faith, refused to defend the action brought by the third party.” The magistrate recommended that, because the insured had not proved that the carrier acted in bad faith, the insured not be entitled to reimbursement for $52,003.41.
In conclusion, the R&R stated that judgment should be entered for the insured with respect to costs incurred during the state court action, but not for costs incurred during its declaratory judgment action against its carrier.
Date of Decision: February 14, 2012 (On February 16, 2012, Judge Sean McLaughlin adopted Magistrate Judge Baxter’s Report and Recommendation as an Order of the Court)
UPS Freight v. National Union Fire Insurance Co. and C.C. Eastern, Inc., No. 06-137, 2012 U.S. Dist. LEXIS 19505 (W.D. Pa. Feb. 14th, 2012) (Baxter, M.J.)

FEBRUARY 2012 BAD FAITH CASES: COURT DISMISSES BAD FAITH CLAIM GROUNDED IN CONCLUSORY ALLEGATIONS OF “LOW-BALLING”; REMANDS BREACH OF CONTRACT CLAIM (Philadelphia Federal)

Published on February 25, 2012 in General Bad Faith and Litigation Issues and Procedural Issues. Closed
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In Smith v. State Farm Mutual Automobile Insurance Company, an insured driver sued her carrier for not adequately paying under her policy’s underinsured motorist provision (“UIM”). The suit alleged bad faith, violations of Pennsylvania’s consumer protection law and breach of contract. The carrier moved to dismiss all claims, except for the contract claim relating to amounts unpaid up to the policy’s coverage limit.
The action arose from a car accident that occurred in 2010, where an underinsured driver struck the insured while she was stopped at a red light. The driver was insured up to $15,000, but the insured’s losses exceeded that amount. The driver’s carrier tendered $15,000 to the insured, who subsequently requested UIM benefits, under her own insurance policy, in the amount of $26,474 to satisfy her policy’s $45,000 UIM limits.
The carrier’s agent requested a series of records from the insured, who complied. The agent then offered $21,000 to settle the UIM claim, which the insured rejected because of $28,000 in outstanding medical bills. The agent claimed he was willing to negotiate, but that his authority to settle was capped at $21,000. After a series of additional medical exams and continued denials from her carrier to tender the limits of her policy, she sued in the Philadelphia County Court of Common Pleas. The carrier removed to federal court and moved to dismiss the complaint.
First, the court addressed the insured’s bad faith claim, dismissing the allegation as unsupported by factual averments. The record clearly showed that the carrier actively solicited negotiations, sought the insured’s medical records, and offered a settlement of nearly three quarters of the policy limit. The court reasoned that the insured’s claim that the carrier engaged in an “intentional strategy of making low-ball offers” was conclusory and unsupported.
Second, the court dismissed the insured’s consumer protection claim, reasoning that the insured had failed to show that she justifiably relied upon wrongful conduct by the carrier. The insured was unable to even identify any misrepresentations upon which she could have relied, warranting dismissal of the claim.
The insured also alleged that the carrier engaged in fraudulent and deceptive conduct, refusing to pay the full amount of her UIM claim. However, the court reasoned that this was a mere conclusory allegation, unsupported by facts in the insured’s complaint. Relying on Third Circuit precedent, the court noted that there is a difference between “nonfeasance” and “malfeasance,” which is the improper performance of a contract and not actionable. As such, the court dismissed the insured’s claim of fraudulent conduct.
Third, the insured argued that the carrier was unjustly enriched at her expense. However, the court reasoned, unjust enrichment is not actionable where a contract exists between the parties. The court dismissed this portion of the insured’s complaint as well.
Lastly, the court addressed the insured’s claim for compensatory, incidental, consequential, and punitive damages for breach of contract. The court reasoned that the only available remedy is expectation damages in the amount of $24,000, which is insufficient to confer jurisdiction. As such, the court withheld judgment and remanded the case back to state court.
Date of Decision: February 16, 2012
Smith v. State Farm. Mutual Automobile Insurance Company, NO. 11-7589, 2012 U.S. Dist. LEXIS 19373 (E.D. Pa. Feb 16, 2012) (McLaughlin, J.)

FEBRUARY 2012 BAD FAITH CASES: COURT RULES THAT COMPLAINT ALLEGES PLAUSIBILE MISREPRESENTATION AND BREACH OF FIDUCIARY DUTY CLAIMS (Middle District)

Published on February 5, 2012 in General Bad Faith and Litigation Issues. Closed
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In Jones v. South Williamsport School District, the court examined a carrier’s motion to dismiss. After a failed appeal for health insurance coverage under an employer-sponsored insurance policy, the insured party filed suit for misrepresentation and breach of fiduciary duty against the carrier, who moved to dismiss the action. The court ruled that dismissal was improper because it was premature to determine who exercised control over the insured’s employee health plan. Second, the court ruled that the insured pleaded facts sufficient to sustain a breach of fiduciary duty claim, which the Third Circuit has permitted in ERISA cases where fiduciaries “materially mislead those to whom the duties of loyalty and prudence are owed.” Although Pennsylvania common law does not permit such a claim in tort, pursuant to Cowden v. Aetna Cas. & Sur. Co., the court interpreted the insured’s allegations as a contractual breach of fiduciary duty claim. The court denied the motion to dismiss and permitted this portion of the complaint to proceed to discovery.
Date of Decision: January 25, 2012
Jones v. South Williamsport School District, No. 4:11-cv-1179, 2012 U.S. Dist. LEXIS 10099 (M.D. Pa. Jan 25, 2012) (Kane, J.).

NOVEMBER 2011 BAD FAITH CASES
3d CIRCUIT AFFIRMS DISMISSAL, FINDING THAT POLICY OCCURRENCE LIMITS ARE GOVERNED BY AGGREGATE MONETARY LIMITS WITHIN A GIVEN POLICY PERIOD (Third Circuit)

Published on November 21, 2011 in General Bad Faith and Litigation Issues. Closed
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In Yellowbird Bus Company v. Lexington Insurance Company, the Third Circuit heard an appeal from the district court’s dismissal of an insured’s complaint. The insured is a transportation company whose bus collided with a tractor in July 2006. The numerous personal injury claims stemming from the incident have been resolved. This instant action involves a dispute over the insured’s coverage limits under a policy with its carrier.

Under the “coverage” provision of the policy, the insured had a $4,000,000 aggregate policy limit. The policy defined several pertinent terms, which the insured challenges on appeal. First, the “policy is subject to an aggregate limit of liability… which will be paid under this policy for all losses in excess of the underlying policy limits.” Second, the policy states, “Subject to the above provision respecting aggregate, the Limit of Liability stated in the Declarations as per occurrence is the total limit of our liability for ultimate net loss… as a result of any one (1) occurrence.” Third, the policy holds that “it shall cease to apply after the applicable limits of liability have been exhausted by payments of defense costs and/or judgments and/or settlements.”

Pursuant to these provisions, the carrier paid about $4,000,000 to the insured to effectuate the various settlements arising from the 2006 car accident. After paying however, the carrier informed the insured that it had reached its policy limits. The insured responded by filing suit in the Philadelphia Court of Common Pleas, seeking a declaration of its rights and damages for breach of contract and bad faith. The carrier removed to federal court, which the insured unsuccessfully moved to remand. The district court also dismissed the insured’s substantive claims. The insured filed two appeals to the Third Circuit.

First, the court examined its jurisdiction to decide the instant appeals. The court found that it possessed jurisdiction to hear the insured’s appeal from the dismissal of its case, but found that it lacked jurisdiction to hear the insured’s appeal from the rejected motion to remand.

The Third Circuit approached the substantive issues by distinguishing between the controverted policy terms. It found that “aggregate limits” set the “maximum amount which will be paid under this policy for all losses… occurring during the policy period, while the occurrence limit is the total limit of the carrier’s liability for ultimate net loss.”

Next, the court addressed the insured’s claims. First, it found that the insured’s argument that the policy contained no occurrence limit was unreasonable. As indicated by its annual $9,000 premium, the insured could not be entitled to unlimited coverage. Second, the court found that the insured was attempting to unfairly twist the language of the “limits of liability” provision. The court ruled that the occurrence limit “is subject to… rather than completely subsumed by, as the insured contended the stated aggregate limit, or the maximum amount that” the insured would pay in any policy period.

Therefore, the court ruled, the insured may bring liability claims for an infinite number of occurrences per policy period, but the coverage for each occurrence is limited to $4,000,000, as the carrier argued.

Date of Decision: November 8, 2011

Yellowbird Bus Company v. Lexington Insurance Company, No. 10-3396, No. 10-3859, U.S. Court of Appeals for the Third Circuit, 2011 U.S. App. LEXIS 22574 (3d Cir. Nov. 8, 2011) (Chagares, J.)

NOVEMBER 2011 BAD FAITH CASES AMBIGUOUS POLICY LANGUAGE AND CARRIER’S TWO MONTH DELAY IN PAYMENT OF CLAIMS ARE NOT ACTIONABLE FOR BAD FAITH (Philadelphia Federal)

Published on November 3, 2011 in General Bad Faith and Litigation Issues. Closed
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In Mitch’s Auto Service Center v. State Automobile Mutual Insurance Company, the court adjudicated a carrier’s motion for summary judgment that sought to dispose of an insured’s breach of contract and bad faith claims.  The suit relates to a claim that the insured submitted under a commercial insurance policy after a vehicle at its automotive repair garage combusted, causing great damage.  The carrier paid the insured for its claims, but withheld $64,118.86 on the basis of policy provisions that required the insured to first effectuate repairs and then submit receipts for repair costs before receiving benefits for depreciation.

The insured sued in state court in Philadelphia County, asserting breach of contract (Count I), detrimental reliance and misrepresentation (Count II), unfair insurance practices pursuant to 42 Pa. Cons. Stat. § 8371 (Count III), and violation of Pennsylvania’s Unfair Trade Practices Act, 73 Pa. Stat. § 201-2(4) (Count IV). 

In 2010, the carrier removed the case and the insured responded by moving to remand.  After the court denied the motion to remand, the carrier successfully moved for dismissal.  The court dismissed the insured’s claims for punitive damages and attorneys fees in Count I, Count II in its entirety, and Count IV in its entirety.  In 2011, the carrier moved for summary judgment on the remaining Counts I and III.

First, the court recognized the ambiguity inherent in the policy, finding that its vague language warranted the denial of summary judgment.  The insured and the carrier both disputed over which policy provision would apply to the recovery of depreciation funds.  The insured argued that their claim fell under the Loss Payment provision, while the carrier argued that the Replacement Cost provision governed the claim for depreciation funds.

The Loss Payment provision stated that the carrier will “pay the value of the lost or damaged property,” cross-referencing the policy’s Valuation provision.  This provision provided that the valuation of claims must be on an Actual Cash Value basis.  Because the Actual Cash Value specifically excludes depreciation, the insured could not recover under the Loss Payment provision.

On the other hand, the Replacement Cost provision allowed the insured to receive an Actual Cash Value payment and file a supplemental claim for depreciation within 180 days.  This finding, the court held, was supported by the insured’s Sworn Proof of Loss Statements, which provided that it was entitled to an Actual Cash Value payment, but first must file a supplemental claim pursuant to the Replacement Cost provision.  The court proceeded to analyze the claim under the Replacement Cost portion of the policy and not the Loss Payment provision.

The Replacement Cost provision limits recovery to “[t]he amount actually spent that is necessary to repair or replace the lost or damaged property.”  However, the Court found that there was a genuine issue of material fact as to whether the insured actually spent such money.  Moreover, there was a dispute of fact as to whether the insured even needed to provide documentation of these expenditures within a supplemental claim.

The carrier could only point to the “books and records” provision for support of its argument that the insured was required to submit proof of its repairs.  Under this provision, the carrier is permitted to audit the insured during and after the policy period.  However, the court found that this was ambiguous as a matter of law because the provision would necessarily preclude recovery for depreciation if the insured’s records were lost or unavailable.  The court denied summary judgment for Count I, finding that the matter should proceed to trial for determinations of fact.

The court then analyzed Count III of the insured’s complaint, which alleged bad faith.  The insured claimed that the confusing and contradictory nature of the policy amounted to bad faith.  The insured also argued that the denial of its claim for benefits was unreasonable.  The court rejected this argument, finding that the carrier was reasonable to rely upon the “books and records” provision as requiring the insured to provide documentation of its repair expenditures.  The court also held that the carrier did not act in bad faith by delaying payment of the insured’s claim, citing case law where a carrier waited as long as forty-two months before paying an insured’s claim.

The court lastly addressed, sua sponte, a potential remand to state court.  After dismissing the insured’s bad faith claims, the amount in controversy fell below $75,000, the amount required for diversity jurisdiction.  However, in the interest of judicial economy, the court exercised its discretion and declined to remand the case.

Date of Decision: October 24, 2011

Mitch’s Auto Service Center v. State Automobile Mutual Insurance Company, No. 10-3413, U.S. District Court for the Eastern District of Pennsylvania, 2011 U.S. Dist. LEXIS 123119 (E.D. Pa. Oct. 24, 2011) (Robreno, J.)

OCTOBER 2011 BAD FAITH CASES
COURT DENIES AND GRANTS PORTIONS OF MOTION TO DISMISS BAD FAITH CLAIMS IN UM/UIM CONTEXT (Western District)

Published on October 28, 2011 in General Bad Faith and Litigation Issues. Closed
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In Flaherty v. Allstate Property & Casualty Insurance Company, the court ruled upon a carrier’s motion to dismiss an insured’s breach of contract and bad faith claims.  The action stemmed from a 2008 car accident, during which the insured passenger suffered several injuries.  After the accident, the insured was unable to recall who was driving the vehicle.  The car was insured under a policy, issued in Ohio, by the owners of the vehicle.  The complainant was also insured by the same carrier, but in Pennsylvania.  The carrier refused to cover the insured under either policy.

The insured subsequently brought claims for Uninsured and/or Underinsured Motorist (“UM/UIM”) coverage under both policies in the Court of Common Pleas of Allegheny County.  The carrier removed to federal court in the Western District of Pennsylvania and moved to dismiss the insured’s seven-count amended complaint.

Count I alleged that the carrier breached the policy held by the insured because it failed to issue UM/UIM benefits.  As to the UM coverage, the court highlighted language in the policy that the carrier would pay damages that the insured is entitled to recover from the owner of an uninsured automobile.  However, the policy conditioned that recovery be a part of a “hit-and-run motor vehicle.”  As such, the court held that the insured did not state a plausible claim for UM benefits under its own policy. 

With respect to the UIM benefits, the insured’s policy covered damages that exceed “the bodily injury protection in effect at the time of the accident.”  However, the insured had yet to ascertain the precise amount of damages he sustained, warranting discovery on the issue.  The court therefore denied the carrier’s motion to dismiss the suit for UIM benefits.

Counts II and III included bad faith claims under Pennsylvania and Ohio law.  The court disposed of the Ohio bad faith claim in count III because the insured’s own policy was issued in Pennsylvania.  The court denied the motion to dismiss with respect to the Pennsylvania bad faith claim because the insured’s allegation that he was improperly denied coverage was plausible and warranted discovery.

Count IV contained a breach of contract claim under the car owner’s UM/UIM coverage.  The court began by noting that, according to the owner’s policy, Ohio law would apply.  Specifically, under Pennsylvania’s flexible “contacts/interest” methodology, the court would apply law of the state with the greatest interest in the underlying tort.  The court decided that Ohio law should apply because the car owner’s policy was executed and delivered in Ohio to two Ohio residents.  Moreover, Ohio has the most substantial contacts with the car owner’s policy.  Pursuant to the policy’s choice of law provision, the court ruled that Ohio law should govern the owner’s policy.

With respect to count IV, the carrier argued that, under the policy, “An Uninsured Auto Is Not: a motor vehicle which is insured under the Automobile Liability Insurance of this policy.”  Because the car involved in the accident was listed as the insured vehicle on the owner’s policy, it was not an uninsured vehicle for the purposes of the insured’s claim.

However, the insured insisted that Ohio’s Revised Code § 3937.18(B) contravenes the language of the policy, stating that “an ‘uninsured motorist’ is the owner or operator of a motor vehicle if…[t]he identity of the owner or operator cannot be determined, but independent corroborative evidence exists to prove that the bodily injury… of the insured was proximately caused by…the unidentified operator of the motor vehicle.”  The court disagreed, citing case law where Ohio courts have applied the language of similar UM policies over that of the statute.  Moreover, the court agreed with the carrier that the owner’s policy only provides UIM coverage in limited circumstances, where there is a “uninsured” auto.  Yet, the owner’s policy provides that a vehicle insured under the policy cannot also be deemed “an uninsured auto,” so it does not qualify for coverage under the policy’s UIM provision.  The court therefore dismissed count IV.

The court then examined counts V and VI, which alleged bad faith under Pennsylvania and Ohio law, respectively.  The court immediately dismissed count V because the owner’s policy was governed by Ohio law.  As for count VI, the court dismissed the Ohio bad faith claim because, as discussed in reference to the counts I-IV, the carrier had a “reasonable justification” for believing that the insured was not entitled to coverage under the owner’s policy.

Lastly, the carrier claimed that count VII, alleging negligence on behalf of the anonymous driver, should be dismissed or severed.  It argued that suits against fictitious, unidentified defendants are disfavored in Pennsylvania.  However, the court recognized the need for this claim to proceed to discovery, affording the insured an opportunity to identify the driver.  The court rejected the carrier’s motion on count VII, noting that it would revisit a possible severance of the negligence claim prior to trial.

Date of Decision: October 19, 2011

Flaherty v. Allstate Property & Casualty Insurance Company, No. 11-440, U.S. District Court for the Western District of Pennsylvania, 2011 U.S. Dist. LEXIS 120698 (W.D. Pa. Oct. 19, 2011) (Mitchell, U.S.M.J.)