Archive for the 'PA – Litigation Conduct Claims' Category

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

APRIL 2017 BAD FAITH CASES: ON REMAND TRIAL COURT MUST REVIEW POTENTIAL BAD FAITH CLAIMS FOR: (1) DENIAL OF COVERAGE, (2) INDEPENDENT CLAIMS HANDLING ALLEGATIONS, (3) PLEADING DEFENSES IN BAD FAITH, AND (4) DENIAL OF DUTY TO DEFEND (Pennsylvania Superior Court)

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In this case, among other things, the Superior Court stated the principle that statutory bad faith can exist independently of the insurer’s denying a benefit under the policy. The Court relied upon its earlier decisions in Condio (2006) and Nealy (1997). It did not address what effect, if any, that the Supreme Court’s 2007 decision in Toy v. Metropolitan Life Insurance Company had on those opinions, or to what extent Toy might limit the scope of cognizable claims for statutory bad faith to denial of benefits or conduct that is intertwined with a denial of benefits.

As to the particulars, this case involved title insurance. The insured believed she purchased two parcels, but the deed and title insurance policy only set out the legal description for one parcel. When she attempted to sell the properties years after her initial purchase, the potential buyer withdrew from the agreement and sued for damages because she had promised to convey both properties, but could not. She brought a third party action against the title insurer.

The Court found that the error in describing only one parcel in the original deed was in no way the insured’s fault. The insured alleged “that she … entered into a contract under which [the insurer] agreed to provide ‘real estate transactional services’ — including title searches and the drafting and filing of a deed — for her purchase of the property, and to issue a policy insuring title to the property.” The insured alleged that the title insurer was liable to her because the erroneous description on the deed and “in the Policy resulted from [the insurer’s] failure to conduct a proper title search and to provide a policy covering all of 4 Mill Street and the entire premises covered by her Agreement of Sale.”

In terms of insurance coverage, the Court looked at case law on reasonable expectations and estoppel. It cited numerous cases where mistakes in property descriptions could not be used to avoid coverage. It also looked to general case law on reasonable expectations, where the insurer could not evade the consequences of promises or conduct of its own agents in leading the insured to believe that certain coverage was being provided. (The Court cited the seminal Tonkovic case. It also cited Pressley v. Travelers, 817 A.2d 1131 (Pa. Super. Ct. 2003), where the agent at issue had authority to bind the insurer as its agent, but apparently was the insured’s agent as well). Thus, the court reversed the trial court’s finding that no coverage was due as a matter of law based on the policy language.

As to the bad faith claim, the finding of potential coverage undermined much of the insurer’s argument that it could not have acted in bad faith. In addition, the court found there could be distinct claims for “claims handling conduct which occurred over a six month period before finally advising” that coverage was denied. This would need to be addressed on remand. The Court further stated that the insured made bad faith allegations that the insurer improperly raised defenses alleging that the insured failed to cooperate and that the insured’s own actions, or that of her counsel, were the proximate cause of her own losses. The Court instructed the trial court to review these claims for bad faith on remand.

Finally, the Court remanded the bad faith claim on the insured’s argument that the insurer failed in its duty to defend the insured from the buyer’s claims for breach of the sales agreement.

Date of Decision: April 11, 2017

Michael v. Stock, No. 1229 EDA 2017, Pa. Super. LEXIS 245 (Pa. Super. Ct. Apr. 11, 2017) (Fitzgerald, Olson, Solano, JJ.)

JANUAY 2017 BAD FAITH CASES: INSURER’S LITIGATION CONDUCT CAN ONLY PROVIDE BASIS FOR BAD FAITH CLAIM WHERE CONDUCT IS EXTRAORDINARY OR EGREGIOUS – WHICH DID NOT OCCUR IN THIS CASE (Western District).

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The court predicted, and held, that evidence of litigation conduct is admissible as evidence of bad faith only “in the rare cases involving extraordinary facts.”

The insured was injured in a motor vehicle accident. There were underinsured policy limits of $500,000, which the insured demanded. The carrier rejected the policy limits demand, and the case went to trial. During trial, the parties signed a “Binding High-Low Settlement Agreement” that contained a provision dismissing all claims for bad faith occurring “prior to” the execution of the Agreement, but preserving all claims for bad faith occurring “after the date” of the Agreement’s execution.

On the same day the parties executed the Agreement, during trial, the insurer introduced videotaped testimony of two medical experts. During closing arguments, the insurer referenced their testimony. The jury returned a verdict in favor of the insured. The insurer filed a motion to mold the verdict to the “high” set forth in the Agreement, and further sought to dismiss the insured’s bad faith claim “as of” the date of the Agreement. The insured argued that, pursuant to the Agreement, only claims for bad faith occurring “prior to” the date of the Agreement should be dismissed. The trial court ruled for the insured.

The insured filed a separate lawsuit, alleging that the insurer acted in bad faith when it introduced the videotaped deposition of the medical experts, whom the insured felt was biased; referenced their testimony during closing; and filed the motion to mold the verdict with what the insured believed had inaccurate wording. The insurer filed a motion to dismiss the insured’s complaint.

In addressing the litigation conduct as bad faith issue, the Court found there was an: “ill-defined line… drawn between conduct which can be described as ‘defending the claim’ and that which suggests ‘that the conduct was intended to evade the insurer’s obligations under the insurance contract.’” The Court reviewed decisions from other jurisdictions that had “developed more comprehensive rules for dealing with bad faith claims premised on litigation conduct.” It found that the other jurisdictions employ four approaches.

In the first approach, there is a blanket prohibition on introducing evidence to show an insurer’s bad faith. In the second approach, an insured may introduce evidence of unreasonable settlement behavior, while introduction of litigation conduct, techniques and strategies is prohibited. In the third approach, an insured may introduce litigation strategies and techniques, “as long as the insurer knowingly encouraged, directed, participated in, relied upon, or ratified the alleged wrongful conduct.” In the fourth approach, utilized by most jurisdictions, evidence of litigation conduct is admissible evidence of bad faith in “rare cases involving extraordinary facts.”

The Court found that Pennsylvania’s Supreme Court has not adopted any of the four approaches. It predicted that the Supreme Court would adopt the fourth approach for three reasons: (1) The fourth approach “most effectively balances an insurer’s interest in defending itself and the ability of courts and rules of civil procedure to handle most litigation abuses with the relatively broad scope of § 8731.”; (2) Most of the other jurisdictions utilize the fourth approach; and (3) The fourth approach is the most consistent with the Pennsylvania case law that exists on the issue.

Applying this standard, the Court ruled that the insured’s allegations relating to the insurer’s medical experts were not rare, extraordinary, or egregious; and did not rise to the level of bad faith. Specifically, in regards to the first medical expert, the Court rejected the insured’s argument that the expert was biased, given the contradiction between the expert’s report and his deposition testimony. The insured’s allegations were merely conclusory. As to the second expert, the Court found that the insured was able to fully address his concerns through cross-examination, that the expert “always finds in favor of the party paying him”.

As to referencing the medical experts’ during closing argument, the Court held that if the insurer’s use of the expert testimony did not constitute bad faith, then referencing it during closing arguments similarly could not constitute bad faith. The Court stated that the insured did not suffer any prejudice. More importantly, the Court explained: “parsing an insurer’s closing argument after the fact through a bad faith action endangers an insurer’s ability to defend itself.” Furthermore, the Court stated that it would threaten the insurer’s attorney’s duty to competently and zealously represent a client.

Finally, with regard to the insured’s allegations based upon the insurer’s motion to mold the verdict, via putative improper wording, the Court held that the allegations did not rise to the level of bad faith. Specifically, the Court found that the insurer’s wording “seem[ed] reasonable given the somewhat ambiguous wording of the [A]greement itself.”

Ultimately, the Court granted the insurer’s motion to dismiss the insured’s complaint.

The case is currently on appeal with the U.S. Court of Appeals for the Third Circuit.

Date of Decision: August 26, 2016

Homer v. National Mutual Ins. Co., No. CV 15-1184, 2016 WL 4493689, 2016 U.S. Dist. LEXIS 114548 (W.D. Pa. Aug. 26, 2016) (Barry Fischer, J.)

FEBRUARY 2016 BAD FAITH CASES: STATUTE OF LIMITATIONS CAN BE TRIGGERED BY DENIAL OF BENEFIT, OR FAILURE TO INVESTIGATE THE SAME CLAIM AFTER DENIAL, WHERE INSURER IS PROVIDED WITH NEW INFORMATION (Pennsylvania Superior Court)

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In Rancosky v. Washington National Insurance Company, the Superior Court addressed a bad faith claim in the first party context, where the insured had purchased a “Cancer Policy”.  The Superior Court ruled that the bad faith claim fell within the two year statute of limitations period based upon poor investigative practices, even when the original denial of the benefit was beyond the two year period.

The insurance policy had a contractual “suit limitations clause,” providing legal actions for benefits.  However, for purposes of the bad faith claim, the court ultimately focused on the two year statute of limitations. The policy also contained detailed waiver of premium provisions based upon a manifestation of cancer and disability therefrom.  The policy also addressed the situation where an insured ceased making direct premium payments via payroll checks, but could convert to making direct payments personally, while keeping coverage.  After going into the facts in painstaking detail, the Superior Court concluded that the waiver of premium provision should have applied; that there was no need to address conversion for future premium payments; and thus that the insurer’s denial of benefits for missing premium payments was an unreasonable position for the insurer to take.

At trial level, after a jury ruled for the insured on the breach of contract claim, the trial court ruled for the insurer on the bad faith claim.  The Superior Court reversed, and among other things in its close factual analysis, stated: “The record reflects that [the insurer] did not purport to conduct any investigation regarding [the] claim until it received [the insured’s] request for reconsideration … eighteen months after it had first received conflicting information regarding the starting date of [her] disability.” Before that time, the insured had provided 8 authorizations, all of which permitted the carrier to contact her employer and physicians “regarding the date when she first became unable, due to cancer, to perform all the substantial and material duties of [her] regular occupation.”  Instead, “despite requiring that [the insured] sign these authorizations, [the insurer] never bothered to use them to obtain the information that it needed in order to make an accurate determination as to the starting date of her disability.”

LEGAL ANALYSIS

  1. Self Interest and Ill Will are not elements of a bad faith claim.

First, the trial court effectively ruled that a bad faith plaintiff must establish the insurer had a motive of self-interest or ill will.  As the Superior Court has stated numerous times in earlier opinions, this is not an element of proof in a statutory bad faith claim. Ill will or self-interest are only evidence that can be used to establish the second element of statutory bad faith, i.e., that the insurer knowingly or recklessly disregarded the first element, that there was no reasonable basis to withhold the benefit.  While the trial court had ruled that self-interest or ill will were considered in weighing the first element, absence of a reasonable basis, the Superior Court found this was merely a back door ruling that self-interest or ill will were required elements to establish the claim.

  1. Superior Court defines bad faith expansively.

Second, as stated above, the appellate court reviewed the record and concluded that the trial court erred in finding there was a reasonable basis to deny coverage.  In reaching this decision, the court rendered an expansive view of the bad faith statute.

It began by stating that “a heightened duty of good faith was imposed on [the insurer] in this first-party claim because of the special relationship between the insurer and its insured, and the very nature of the insurance contract.”  It then stated that statutory bad faith under section 8371 “is not restricted to an insurer’s bad faith in denying a claim.” The Superior Court then cited six of its prior decisions as examples to support this point.  It did not cite or discuss the Supreme Court’s 2007 Toy decision in this context, as to what constitutes a cognizable section 8371 bad faith claim. It solely cited language from the prior Superior Court decisions on, e.g., the breadth of the statute’s aim to stop all forms of bad faith, and that section 8371 was intended to address conduct that evades “the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of a power to specify terms, and interference with or failure to cooperate in the other party’s performance.”

  1. Bad Faith statute of limitations period can be extended by conduct of investigative practices, irrespective of the time when the claim was originally denied.

Third, and most significantly, the Superior Court addressed when the statute of limitations begins to run.  It observed that “there is an important distinction between an initial act of alleged bad faith conduct and later independent and separate acts of such conduct.”  It ruled that: “When a plaintiff alleges a subsequent and separately actionable instance of bad faith, distinct from and unrelated to the initial denial of coverage, a new limitations period begins to run from the later act of bad faith.” Thus, “[a]n inadequate investigation is a separate and independent injury to the insured.”

[Note: This conclusion is measured against a prior Superior Court opinion, and does not address the Supreme Court’s Toy decision. The court cites the Supreme Court’s Ash opinion on the bad faith statute’s limitations period, though it does not reference footnote 10 of the Ash opinion on the scope of the bad faith statute (“The bad faith insurance statute, on the other hand, is concerned with ‘the duty of good faith and fair dealing in the parties’ contract and the manner by which an insurer discharge[s] its obligation of defense and indemnification in the third party claim context or its obligation to pay for a loss in the first party claim context.”)]

The court then states that “a refusal to reconsider a denial of coverage based on new evidence is a separate and independent injury to the insured. The statute of limitations for such injuries begins to run, in the first instance, when the insurer communicates to the insured the results of its inadequate investigation, and in the latter instance, when the insurer communicates to the insured its refusal to consider the new evidence that discredits the insurer’s basis for its claim denial.” The Superior Court found that had the insurer conducted a “meaningful investigation” and “good faith investigation” into the additional information, or “undertaken to ‘research’ the new information” it would have discovered that there was no reasonable factual basis to deny coverage. Thus, the insurer’s “failure to conduct an meaningful investigation of [the] claim when it undertook to do so in [8 months after its original denial of the benefit], and its refusal to reconsider its denial of coverage based on the new information provided by [the insured] in her November 30, 2006 letter [7 months after the insurer’s original denial], constituted new injuries to the insured.”

By contrast, the Dissent in this 2-1 decision would have ruled that the statute of limitations began to run when the insurer first denied the benefit was due. In response, the majority stated that the Dissent unduly focused on the denial of the benefit as the basis for the bad faith claim, “without considering [the insured’s] claim for bad faith based on [the insurer’s] lack of good faith investigation.” Once again, citing prior Superior Court case law without reference to Toy or Ash, the court observed that “a claim for bad faith may be based on an insurer’s investigative practices.” Thus, “[i]n declining to acknowledge these tenets of Pennsylvania’s bad faith law, the Dissent has failed to acknowledge [the insured’s] claims for bad faith based on a lack of good faith investigation, or identify the date(s) on which such claims accrued. Thus, we abide by our conclusion that [insured’s] bad faith claim is not time-barred.”

4.  Failure to allege bad faith based on litigation conduct waived 

The insured also sought reversal on the basis that the trial court failed to consider the insurer’s litigation conduct during the bad faith litigation and trial itself.  However, the insured had never made this argument prior to trial, and such an argument was waived.

  1. Court finds bad faith claim by a distinct insured was properly dismissed on summary judgment.

Lastly, the court affirmed a summary judgment against the foregoing insured’s husband, who likewise had developed cancer and was seeking relief from the same insurer.  The court found that the husband insured had not provided evidence as to why it was not reasonably possible for him to have given the required notice under the policy.

While upholding this later judgment, the case was reversed and remanded on the wife insured’s bad faith claim.

Date of Decision:  December 16, 2015

Rancosky v. Wash. Nat’l Ins. Co., Superior Court No. 1282 WDA 2014, 2015 Pa. Super. LEXIS 822 (Pa. Super. Ct. December 16, 2015)

OCTOBER 2015 BAD FAITH CASES: ASSUMING THAT SUBJECTIVE BAD FAITH IS THE STANDARD OF REASONABLENESS, THE INSURER’S INTERPRETATION OF GOVERNING CASE LAW DURING LITIGATION WAS REASONABLE, EVEN IF WRONG (Middle District)

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In Douglas v. Discover Property & Casualty Insurance Company, Judge Mariani again identified the issue that there is a split in authority on whether an objectively reasonable basis to deny coverage can per se defeat the first prong of a plaintiff’s statutory bad faith claim, and preclude such a claim from going forward on an “objective” basis.  Put another way, if an insurer delays in paying a claim or denies a claim based on specific reasoning which is incorrect, but it is later determined that no coverage was due under the policy for a different reason, is it still possible to bring a bad faith claim even though no coverage was ever due under the policy.  The majority of cases stated stand for the proposition that a bad faith claim could not be pursued in those circumstances, because there is an objectively reasonable basis for denying coverage; and thus the plaintiff/insured cannot meet the first prong of the Terletsky test.  However, as in the prior cases identifying this issue, the court did not have to decide the issue, because there was no actionable bad faith claim in any event, and summary judgment was granted to the insurer on the basis that the insured could not even establish subjective unreasonableness.

In that UIM case the insured argued that the insurer relied upon a rejection form it knew to be invalid in denying coverage.  However, the insurer had other independent justifications for denying coverage even if the form was invalid.  Further, although an earlier decision went against the insurer on this issue, under the Superior Court’s Vaxmonsky decision, the insurer’s arguments distinguishing that case as to the form’s validity, asserted repeatedly during the litigation process, was not unreasonable.

On the later point, the court stated: “It does not matter that these arguments have been unsuccessful in court so far. ‘[T]o recover under a claim of bad faith, the plaintiff must show that the defendant did not have a reasonable basis for denying benefits under the policy and that defendant knew or recklessly disregarded its lack of reasonable basis in denying the claim,’ which requires some sort of dishonest purpose on the part of the Defendant. …. The record contains no reason to believe that Defendant’s legal arguments have been raised dishonestly. Instead, it simply appears that Defendants have hewn to good faith but unavailing legal theories. This does not qualify as bad faith conduct under the standards set forth above.”

Date of Decision: September 29, 2015

Douglas v. Discover Prop. & Cas. Ins. Co., 3:08-CV-01607, 2015 U.S. Dist. LEXIS 131601 (M.D. Pa. September 29, 2015) (Mariani, J.)

AUGUST 2015 BAD FAITH CASES: COURT (1) DENIES INSURER’S MOTION FOR RECONSIDERATION ON CONTRACTUAL AND STATUTORY BAD FAITH ISSUES; AND (2) DENIES MOTION FOR CERTIFICATION OF INTERLOCUTORY APPEAL ON NEGLIGENCE STANDARD IN CONTRACTUAL BAD FAITH CASES (Western District)

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In McMahon v. Medical Protective Company, as discussed at length in our prior blog posting the Court previously had held that that under Pennsylvania law, a contractually based bad faith claim may be supported by evidence that an insurer made a misrepresentation to the insured or failed to communicate with the insured, if the misrepresentation or failure to communicate caused the insured to make a personal contribution to a settlement within policy limits. Upon close analysis, the court found it was a close call with respect to the disclosure issue. It concluded, however, that a factual dispute existed as to whether the insurer acted in bad faith by not revealing to the insured the full settlement authority, even after the insured offered to contribute her own money, and denied summary judgment on the contractual bad faith claim.  As to statutory bad faith, the court allowed the claim to go forward because a jury could find the insurer’s conduct reckless, under Terletsky, “based on the details of the negotiations and the settlement numbers discussed between the insurer’s representatives with the insured and her personal counsel.”

This instant decision involved the insurer’s motion for reconsideration and request for an interlocutory appeal on the refusal to dismiss all bad faith claims. The Court did dismiss the breach of contract claim. The insurer asserted that the Court clearly erred by “overlooking” parts of the insured’s testimony and failing to apply the Terletsky standard to contractual insurance bad faith claims.

The deposition argument was based upon a putative lack of reliance.  The insurer argued that the insured’s deposition testimony showed the insured was not aware that the insurer’s employee told the insured’s counsel that the insurer would not offer more than $1.3 million, and thus the insured could not have relied on this alleged misrepresentation. The Court considered the testimony, and reasoned that the testimony did not support the definite and firm opinion that the Court had made a mistake. Viewed in the light most favorable to the insured, the statement made by the insurer’s employee that the insurer would not offer more than $1.3 million was untrue, “but it was likely not material from the standpoint of a fraudulent misrepresentation because [the insurer] later offered $1.5 million.” However, the conversation between the insurer’s employee and the insurer’s attorney was relevant because “the jury could infer from it and [the insurer’s employee’s] true statement that $1.5 million was the limit of his authority that ‘[the insured] was misled into believing that $1.5 million was the absolute limit of what [the insurer] was willing to offer.’”

The insurer correctly pointed out that a person “cannot rely upon what [she] does not know or be misled by something of which [she] is not informed.” However, the Court found that the insured’s attorney was informed and did rely on the statement made by the insurer’s employee, at least until the insurer raised its offer. Thus, this untrue statement informed the advice given to the insured by her attorney and may be considered by the jury as evidence of bad faith; and the insured’s testimony did not demonstrate a clear error by the Court that would serve as a basis for reconsideration of summary judgment.

The insurer next argued that the Court committed clear error by failing to apply the Terletsky recklessness standard to the contractual bad faith claim, which the Court had carefully reviewed in its original decision, concluding that the lower standard of proving liability set forth in DeWalt v. Ohio Casualty Insurance Co., 513 F.Supp. 2d 287 (E.D. Pa. 2007), applied to the insured’s contractual bad faith claim, as discussed in this Blog.

The insurer argued that it was error to apply DeWalt because DeWalt involved “excess verdicts resulting from an insurer’s failure to settle a case and there was no excess verdict in this case.” However, in the Third Circuit’s most recent Wolfe decision, the appellate court stated that it knew of no decision in which an excess verdict was necessary in order to bring a contractual bad faith claim, and in fact cited the summary judgment decision in the earlier McMahon opinion “as an example of a decision predicting that an excess verdict is not required for a third party bad faith claim under Pennsylvania common law.”

The Court acknowledged that other Pennsylvania courts have repeatedly held that “an insurer’s unreasonable refusal to settle a claim can subject an insurer to bad faith liability,” and reasoned that it carefully considered its prediction that the DeWalt standard applied to the contractual bad faith claim here. Thus, the Court found that its decision was not clearly erroneous and denied the insurer’s motion for reconsideration on this issue as well.

Finally, the insurer made an argument for certification of an order for interlocutory appeal, and cited three issues that it claimed satisfied the requirements: “(1) whether denial of summary judgment was appropriate in light of [the insured’s] testimony that allegedly conflicts with [the insured’s attorney’s] testimony about what [the insurer’s employee] told him; (2) whether denial of summary judgment was appropriate given [the insurer’s] alleged reasonable basis for not disclosing to [the insured] its settlement strategy, its urging [the insured] not to make a personal contribution, and other factual reasons; and (3) whether the application of a negligence standard to the contractual bad faith claim was appropriate.”

The Court reasoned that the first two issues were not appropriate for interlocutory appeal because they did not involve a controlling question of law. However, the Court acknowledged that “[w]hether a negligence standard applies to the contractual bad faith claim is a controlling question of law.” Nevertheless, the Court reasoned that an immediate appeal of this issue would not “materially advance the ultimate termination of the litigation” and would likely increase unnecessary costs and waste judicial resources. Thus, a trial would still be necessary to resolve the statutory bad faith claim even if the negligence standard was erroneous. The Court found that discovery had been completed and it would be most efficient to proceed to trial without an interlocutory appeal. Consequently, the insurer “did not meet its burden of showing that certification of the summary judgment order for interlocutory appeal is an appropriate exceptional circumstance.”

Date of Decision: August 3, 2015

McMahon v. Medical Protective Co., No. 2:13-cv-00991, 2015 U.S. Dist. LEXIS 101179 (W.D. Pa. August 3, 2015) (Conti, J.)

JUNE 2015 BAD FAITH CASES: (1) COURT PERMITS CLAIMS TO PROCEED ON ALLEGATIONS THAT INSURER REFUSED TO CONTINUE DAMAGE APPRAISAL PROCESS UNLESS INSURED WITHDREW PENDING BAD FAITH CLAIMS; (2) COURT WOULD NOT CONSIDER INSURER’S FACTUAL ARGUMENTS ON MOTIVE TO ASSESS INSURED’S BAD FAITH IN SEEKING AMENDMENT, AT THE MOTION TO AMEND STAGE (Middle District)

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In Militello v. Allstate Property and Casualty Insurance Company, the court granted the insured’s motion for leave to file a second amended complaint to add an additional claim for bad faith based upon: (1) an alleged refusal to conduct the appraisal process unless the pending bad faith claim was dropped; and (2) that bad faith conduct occurring during litigation can be actionable.  The insured originally filed a complaint and amended complaint alleging breach of contract and bad faith, among other things.

The insured allegedly submitted a claim to its insurer after its horse barn sustained significant damage. After the insurer refused to pay the full amount demanded, the insured alleged a breach of the insurance contract by “failing to accurately assess and pay the loss,” and that the insurer acted in bad faith “by intentionally or recklessly making false representations for the purpose of denying the full value of the claim.”

The bad faith claim alleged that the parties agreed to use an appraisal process set forth in the underlying insurance policy to resolve the breach of contract claim, but not the bad faith claim.

The insured averred that the insurer “repeatedly attempted to pressure [the insured’s] counsel to drop the pending bad faith claim.” After the insured refused to do so, counsel for the insurer allegedly sent an email indicating that he could not “proceed to appraisal with the bad faith claim hanging over [his] head.” The insurer eventually withdrew from the appraisal process after “both parties identified their individual appraisers and selected a neutral appraiser, and [the insured’s] appraiser had submitted his appraisal report to [the insurer’s] appraiser.”

The insured sought a second amendment to the complaint based on the insurer’s withdrawal from appraisal process “to which it had contractually committed”.  The insured further included allegations of bad faith relating to the insurer’s “withdrawal from the appraisal process due to [the insured’s] refusal to terminate his bad faith claim in federal court.”

The insurer opposed the motion on the basis that the facts would show it withdrew from the appraisal process because it concluded there was insurance fraud; and that it put the insured on notice it would be seeking to amend its answer to bring an insurance fraud counterclaim.  The insurer thus claimed the amendment was essentially a litigation tactic, and that the amendment should be denied for undue delay and bad faith.  The insurer also asserted the amendment was futile, chiefly based upon its factual arguments.

The court rejected all of the insurer’s positions.  First, the court was not convinced that the insured sought to amend its motion based on bad faith rather than “the otherwise colorable claims asserted in his second amended motion.” The court concluded that if it “should be found later that [the insured] lacks a good faith belief in the new facts upon which he bases his proposed amendment, [the insurer] is not without a remedy.”  The court found that the factual arguments the insurer asserted against permitting amendment raised disputes of fact which were matters to be addressed during the course of litigation. They were not accepted as true at this stage as a basis to deny an amended complaint.

As to the futility argument on the substance of the new bad faith allegations, the court first observed that bad faith conduct is actionable regardless of whether it “occurs before, during or after litigation.”  Distinguishing discovery disputes, the court stated that “an insurer can be held liable for bad faith conduct occurring during the pendency of litigation that was intended to evade a duty owed under the policy.” The bad faith alleged in this matter is the insurer’s allegedly “threatening to withdraw from the appraisal process if Plaintiff did not terminate his bad faith claim and by ultimately withdrawing from the process after Plaintiff refused to do so.” This stated a bad faith claim.

Date of Decision: June 16, 2015

Militello v. Allstate Prop. & Cas. Ins. Co., Civ. No. 14-cv-0240, 2015 U.S. Dist. LEXIS 77481 (M.D. Pa.  June 16, 2015) (Rambo, J.)

Go to this link for the summary of a prior decision in this case.

JUNE 2015 BAD FAITH CASES: COURT (1) FINDS RESERVES CAN BE ADMITTED INTO EVIDENCE; (2) SETS THE TIME PERIOD TO CONSIDER EVIDENCE OF BAD FAITH FROM ACTUAL NOTICE OF THE CLAIM UNTIL THE CLAIM WAS RESOLVED; (3) FINDS EVIDENCE OF OTHER CASES NOT ADMISSIBLE; AND (4) FINDS EXPERT TESTIMONY ON CLAIMS HANDLING ADMISSIBLE ON BAD FAITH (Middle District)

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In Clemens v. New York Central Mutual Fire Insurance Company, the court addressed numerous motions in limine, in a supplemental underinsured motorist action.  The motions directly addressing the bad faith claim are summarized below.

Reserves

The court rejected the insurer’s argument that evidence of reserves be barred from evidence.  The court cited case law going both ways on the subject: (1) “that the relationship between the amount an insurance company reserves for a claim and the amount it ultimately offers to resolve that claim is so tenuous as to make the size of the reserve irrelevant for purposes of determining a bad faith claim” vs. (2) “that the amount set aside in reserve necessarily reflects a company’s assessment of the potential worth of the claim and, to the extent the reserve is dissimilar from the amount offered in settlement, is germane to an analysis of whether the company acted in bad faith in pretrial settlement negotiations”.  The court adopted the second position accepting the evidence, but expressly made clear that the insurer would not be precluded “from producing testimony explaining the difference between its reserve and its settlement offer in this case.”

Time Period of Bad Faith Claim

The insurer took the position that the time period in which to consider the bad faith claim began when the insured’s attorney advised the carrier that the tortfeasor’s carrier had agreed to pay its policy limits; and ended the date suit was filed. The insured took the position that the relevant time frame should begin on the date that their counsel advised the insurer of a potential underinsured motorist claim, and never ended because the misconduct of an insurer, even after suit is filed, may constitute bad faith.

The court found that bad faith may not be predicated on the insurers “actions or lack of action before being notified of a claim”, and in this case counsel’s allusion to a potential claim did not trigger any duty.  Further, while case law does allow “for the introduction of evidence of an insurer’s bad faith even during the pendency of a lawsuit …. such evidence of bad faith cannot be provided simply by an insurer’s action of mounting an aggressive legal defense.”  The court ruled that resolution of the underinsured motorist claim ended any bad faith cause of action after that date, and no evidence of the insurer’s alleged bad faith occurring after that date would be permitted.

The cutoff date, i.e., the date the underinsured motorist claim was resolved, was June 20, 2014.  The insured’s suit was removed to federal court in September of 2013. Thus, the time period in which bad faith conduct could be considered encompassed part of the time period during the pendency of the bad faith litigation itself.

Other Cases

The court granted the motion in limine barring evidence of other insureds’ claims against the carrier.  The court found in particular that the U.S. Supreme Court had ruled that evidence of what happened to other insureds, not parties to the case at hand, could not be used to enhance punitive damages for the party actually in the case.

Expert Testimony on Bad Faith Claim Regarding Industry Standards & Claims Handling

The court observed its own broad discretion on evidentiary matters, and the Federal Rules favoring the admission of evidence to assist the trier of fact. It concluded that the insured’s expert testimony could be helpful to the jurors in their inquiry as to whether the insurer acted in bad faith. Thus, the court allowed the insured’s expert to testify regarding industry standards and claims handling practices.

Date of Decision:  June 15, 2015

Clemens v. New York Cent. Mut. Fire Ins. Co., Case No. 3:13-CV-2447, 2015 U.S. Dist. LEXIS 77180 (M.D. Pa. June 15, 2015) (Conaboy, J.)

This is the fourth opinion in this matter.  Here are links to the first three (1, 2, and 3).

 

FEBRUARY 2015 BAD FAITH CASES: BAD FAITH CLAIM DISMISSED DUE TO LACK OF FACTUAL SUPPORT TO MAKE OUT A PLAUSIBLE CLAIM; PUTATIVE DISCOVERY VIOLATIONS DURING LITIGATION CANNOT CONSTITUTE BASIS FOR INSURANCE BAD FAITH CLAIM (Philadelphia Federal)

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In Morrissey v. State Farm Fire & Cas. Co., plaintiffs’ home was damaged by a fire, making it uninhabitable.  Their homeowners’ insurance policy provided coverage limits of $220,000 for the house, $165,000 for personal property, and the actual value of the loss of use sustained. Plaintiffs filed claims for the damage to the home, damage to their personal property, and costs for alternative housing while the home was being repaired.   The insurer filed a motion to dismiss the bad faith (and consumer protection law) count, which the court granted, without prejudice to amend, though the court noted amendment would appear to be futile.

The insurer investigated the claims and obtained sworn statements from the plaintiffs. After completing its investigation, the insurer extended coverage for the claim on damage to the home itself.  The check was made payable to plaintiffs, their attorney, and plaintiffs’ former bank.  Plaintiffs made repeated requests for the bank to endorse the check so repair work could begin on the home, but the bank refused because it no longer held the mortgage.  Eventually, plaintiffs’ counsel returned the check to the defendant and requested it be re-issued to the plaintiffs, plaintiffs’ counsel, and the plaintiffs’ current mortgage holder.  The insurer refused to do so based on an internal policy which required checks to be made to the bank that held the mortgage at the time of the loss.  Ultimately, a second settlement check was issued and processed four months after the original check was issued.  The insurer then provided notice it would only cover four more months of alternative housing.

Plaintiffs brought suit alleging the insurer violated the bad faith statute by: 1) issuing the settlement check over one year after the fire occurred; 2) delaying reissuing the check for three and a half months “for no valid reason”; 3) filing boilerplate objections to Plaintiff’s discovery to gain an advantage in the litigation; 4) arbitrarily refusing to settle their claims; and 5) breaching fiduciary duties and other state laws.  The Court, however, dismissed the claims.

Plaintiffs failed to set forth factual information to show that the defendant lacked a reasonable basis for delaying payment of their benefits, and also failed to offer information about the alleged repeated attempts to negotiate with the carrier.  They provided no facts to explain why the delay in settlement was arbitrary, or that the investigation was unwarranted or inadequate.  Rather, the insureds simply asserted the delay represented bad faith; however, a delay in payments of claims alone cannot constitute bad faith.  Finally, even if the delay was unreasonable, plaintiffs failed to show the insurer knew or disregarded a lack of a reasonable basis.

Allegations that the insurer acted in bad faith during the litigation by filing “boilerplate objections to Plaintiff’s discovery … for the purpose of preventing the drafting of a Complaint to get an advantage in this case” did not show bad faith. The court observed that “bad faith may extend to the misconduct of the insurer during the pendency of litigation.  ….  However, the defendant’s objections to the plaintiff’s request for pre-complaint discovery were not unreasonable. The plaintiffs’ allegation that these objections were meant to give the defendant an advantage are unsupported and merely conclusory. The court noted: “This is especially true given that the state court judge accepted the defendant’s argument that this request was a ‘fishing expedition’ and was unnecessary for the plaintiffs to file their complaint.” Further, boilerplate discovery objections do not constitute a basis for an insurance bad faith claim.

In sum, the court found that the insureds’ “threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice” to state a valid cause of action. …. [and that the insureds] failed to assert a plausible bad faith claim under Pennsylvania law.”

Date of Decision: December 18, 2014

Morrisey v. State Farm Fire & Cas. Co., Civil Action No. 14-05193, 2014 U.S. Dist. LEXIS 174998 (E.D.Pa. Dec. 18, 2014) (Stengel, J.).

FEBRUARY 2015 BAD FAITH CASES: BAD FAITH CLAIM FUTILE BASED ON DISCOVERY DISPUTES INVOLVING DECLARATORY JUDGMENT CLAIM; AND WHERE POLICY PROVIDED INSURER A REASONABLE BASIS TO DENY CLAIM (Philadelphia Federal)

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In Byars v. State Farm Mut. Auto. Ins. Co., plaintiff sought leave to amend his complaint to add an additional count against the defendant-insurer alleging bad faith.  In the proposed amended complaint, Plaintiff alleged the insurer had acted in bad faith during the litigation process in the pending coverage action between the two parties.  In the proposed amended complaint, Plaintiff outlined the actions which he alleged constituted bad faith, including the insurer’s assertion of unreasonable objections during a deposition, as well as other discovery disputes including the redaction of files produced by the insurer to Plaintiff.

A court has broad discretion in determining whether to grant leave to amend a complaint, however, it must deny leave if the moving party has demonstrated undue delay, bad faith, or dilatory motives, the amendment would be futile, or the amendment would prejudice the other party.  Here, the Court found amendment would be futile, because the amended complaint failed to state a claim upon which relief could be granted.  The Court determined the bad faith statute provides an insured redress for an insurer’s bad faith conduct in its capacity as an insurer, not as a legal adversary in a lawsuit, and therefore the discovery violations did not fall within the statute’s ambit.

Plaintiff further alleged the insurer acted in bad faith by refusing to pay Plaintiff’s underinsured motorist claim.  However, the insurer based its continued denial of benefits on the belief that it was not bound by a state court judgment, citing a provision in the Policy regarding its consent to be bound.  (“We are not bound by any: a. judgment obtained without our written consent; and b. default judgment against any person or organization other than us.) Such consent clauses are enforceable under Pennsylvania law and not contrary to public policy, and therefore the insurer had a reasonable basis in law to refuse to pay plaintiff’s state court judgment where Plaintiff failed to obtain a default judgment against the insurer itself. Thus, the court denied Plaintiff leave to amend his complaint to add a count of bad faith on such factually insufficient claims.

Date of Decision:  January 12, 2015

Byars v. State Farm Mut. Auto. Ins. Co., Civil Action No. 13-6452, 2015 U.S. Dist. LEXIS 3524 (E.D.Pa. Jan. 12, 2015) (Dalzell, J.).