Archive for the 'PA-Manuals' Category

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

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

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

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

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

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

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

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

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

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

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

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

Date of Decision: March 21, 2017

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

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

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

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

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

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

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

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

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

Date of Decision: March 7, 2017

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

 

2015 BAD FAITH CASES: THIRD CIRCUIT FINDS (1) INSURER HAS NO DUTY TO CONSIDER POTENTIAL FOR PUNITIVE DAMAGES WHEN NEGOTIATING SETTLEMENT OF UNDERLYING CASE; (2) PUNITIVE DAMAGES AGAINST INSURED MAY NOT BE CONSIDERED IN EVALUATING BAD FAITH CLAIMS AGAINST INSURER; BUT (3) CONTRACTUAL BAD FAITH CLAIM MAY PROCEED ON THEORY OF ENTITLEMENT TO NOMINAL DAMAGES; AND (4) STATUTORY BAD FAITH CLAIM MAY PROCEED EVEN IF NO COMPENSATORY DAMAGES DUE ON BREACH OF INSURANCE CONTRACT CLAIM (Third Circuit)

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In Wolfe v. Allstate Property & Casualty Insurance Company, the Third Circuit was presented with the question of “whether punitive damages awarded against an insured in a personal injury suit are recoverable in a later breach of contract or bad faith suit against the insurer.” The Court predicted that Pennsylvania’s Supreme Court would rule consistent with Pennsylvania public policy that “insurers cannot insure against punitive damages” either directly or indirectly through a later bad faith claim.  However, the Court did give more leeway on pursuing bad faith claims, even in the absence of any damages for unpaid benefits in breach of the insurance contract.

The insured was highly intoxicated at the time he injured the plaintiff in a motor vehicle collision. The insured had $50,000 in insurance, and his insurer defended him against the injured plaintiff’s claims. There were settlement negotiations where the injured plaintiff demanded $25,000 and the insurer offered less than $1,500. Two judges valued the case at $7,500, but the injured plaintiff would not reduce his demand below $25,000, and the insurer would not increase its offer unless the demand was reduced.

During the litigation, the injured plaintiff added a claim for punitive damages in light of the insured’s level of intoxication at the time of the collision, and his prior driving history.  Also during the course of the matter, the insurer gave notice to the insured that the insured could be liable personally for any verdict in excess of the $50,000 policy limit; and that there was no insurance coverage at all for punitive damages, which were not covered under the policy.

The jury awarded less than $50,000 in compensatory damages, which the carrier paid; and $50,000 in punitive damages, which the carrier refused to pay as these were not covered under the policy.  The insured assigned his breach of contract and bad faith claims to the injured plaintiff.  [This is the same litigation in which the Third Circuit certified to the Supreme Court the question of whether bad faith claims could be assigned, which the Supreme Court answered in the affirmative.]

The Court faced two general issues concerning punitive damages: (1) was it error to allow evidence of the punitive damages award from the underlying personal injury suit to establish damages in the bad faith case; and (2) did the insurer have any duty to consider the potential for punitive damages in evaluating settlement of the underlying personal injury suit, as part of how it valued the compensatory damage claim, where the compensatory damages award was paid in full.

The Court found that “in an action by an insured against his insurer for bad faith, the insured may not collect as compensatory damages the punitive damages awarded against it in the underlying lawsuit. Therefore, the punitive damages award was not relevant in the later suit and should not have been admitted.”  In reaching this conclusion, the Court looked to both Pennsylvania principles against insuring punitive damages, and to how other states addressed the issue on potentially indemnifying an insured for punitive damages at this second stage of litigation.  “California, Colorado, and New York have similar prohibitions on the indemnification of punitive damages, and those states’ highest courts have similarly held that an insured cannot shift to the insurance company its responsibility for the punitive damages in a later case alleging a bad faith failure to settle by the insurer.”

The Court specifically rejected the argument that if an insurer breached a common law contractual duty of good faith to settle within policy limits, and the case proceeded with a jury awarding punitive damages, then the punitive damages should be considered as consequential damages from the bad faith breach of an insurance contract. Rather, the Court ruled that punitive damages awarded in the underlying case are not properly considered compensable damages in the breach of contract claim against the insurer.

In sum, “an insurer has no duty to consider the potential for the jury to return a verdict for punitive damages when it is negotiating a settlement of the case. To impose that duty would be tantamount to making the insurer responsible for those damages, which … is against public policy.”

However, these rulings did not result in summary judgment on the contractual and statutory bad faith claims against the insurer.

The Court first looked at the contractual bad faith claim, citing to the leading Pennsylvania Supreme Court cases of Cowden and Birth Center. Looking to Cowden, the Court observed that an insurer “must consider in good faith the interest of the insured as a factor in deciding whether to settle a claim.” (Internal quotes omitted) Citing both cases, the Court further observed that only bad faith, not bad judgment, proven by clear and convincing evidence, can allow an insured to recover the “the known and/or foreseeable compensatory damages of its insured that reasonably flow from the bad faith conduct of the insurer.”

Even after eliminating punitive damages from this equation, the Court found that “if a plaintiff is able to prove a breach of contract but can show no damages flowing from the breach, the plaintiff is nonetheless entitled to recover nominal damages.” This makes summary judgment generally improper if sought solely on the basis that no damages can be proved. “Therefore, even without compensatory damages, an insurer can be liable for nominal damages for violating its contractual duty of good faith by failing to settle,” and summary judgment was properly denied on that ground as to the breach of contract claim.

On the statutory bad faith claim, the Third Circuit treaded onto the ground of whether bad faith claims can still exist when there is no contractual payment obligation remaining. [There are two general circumstances when this can occur. First, when the insurer eventually provides a benefit due, but has delayed in doing so in bad faith; second, when the insurer owes no benefit, e.g., because coverage is excluded, but has allegedly acted in bad faith in the manner it went about denying coverage. We have previously raised the issue of whether section 8371 was designed to provide a remedy in the second scenario. In this case the Third Circuit, as discussed below, appears to be focusing on the possibility that the insurer has unduly and in bad faith delayed in providing a benefit due, and that if there were no bad faith claim available in such circumstances, then a statutory goal of deterring intentional delays in providing reasonably known benefits due would fail.]

The Court cited the Superior Court’s Berg decision for the proposition that 42 Pa.C.S. § 8371 “sets forth no . . . requirement to be entitled to damages for the insurer’s bad faith,” and that “the focus in section 8371 claims cannot be on whether the insurer ultimately fulfilled its policy obligations, since if that were the case then insurers could act in bad faith throughout the entire pendency of the claim process, but avoid any liability under section 8371 by paying the claim at the end. . . . [T]he issue in connection with section 8371 claims is the manner in which insurers discharge their duties of good faith and fair dealing during the pendency of an insurance claim, not whether the claim is eventually paid.” (Emphasis in original)

Thus, “the policy behind section 8371—deterring insurance companies from engaging in bad faith practices—is furthered by allowing a statutory bad faith claim to proceed even where the insured has alleged no compensatory damages resulting from that conduct.” Under these principles, “removal of the … punitive damages award as damages in this suit has no bearing on the damages that can be awarded under the statutory bad faith claim.”

The Court then provided a footnote to further explain its position:

Recovery on [the] breach of contract claim and [the] statutory bad faith claim are entirely independent of one another. Section 8371 allows punitive damages awards even without any other successful claim. … (“[Because] claims under section 8371 are separate and distinct causes of action and as the language of section 8371 does not indicate that success on the contract claim is a prerequisite to success on the bad faith claim, . . . an insured’s claim for bad faith brought pursuant to section 8371 is independent of the resolution of the underlying contract claim.”)…. Furthermore, [the] claim under section 8371 does not affect [the insured’s] ability to obtain compensatory damages, if they exist, under a breach of contract claim. “The statute does not prohibit the   award of compensatory damages. It merely provides an additional remedy and authorizes the award of additional damages.  ….

The Court further observed that compensatory damages are not required to succeed on a statutory bad faith claim, which only permits recovery of punitive damages, interest, and costs.

In sum, the Court denied summary judgment on the statutory bad faith claim because the inability to collect punitive damages as compensatory damages, standing alone, does not preclude recovery on the bad faith claim.

Date of Decision: June 12, 2015

Wolfe v. Allstate Prop. & Cas. Ins. Co., No. 12-4450, 2015 U.S. App. LEXIS 9876 (3d Cir. June 12, 2015) (Rendell, Jordan, Lipez, JJ.)

JUNE 2015 BAD FAITH CASES: ALTHOUGH NO BAD FAITH ASSERTED, JUDGE NEALON PROVIDES EXCELLENT OVERVIEW OF BAD FAITH DISCOVERY LAW AS BASELINE FOR HIS RULINGS (Lackawanna Common Pleas)

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In Sharp v. Travelers Personal Security Insurance Co., although no bad faith claim was filed, the court used comparisons to discovery in insurance bad faith cases repeatedly throughout this detailed opinion.

On the issue of reserves, the court cited numerous opinions, pro and con, on the proposition that “insurance reserves are discoverable in bad faith litigation against insurers, where liability for the underlying claim has already been established, since such information may be relevant to the issue of whether the insurer acted in bad faith in failing to settle or pay the original claim.”  However, “[n]o Pennsylvania court has permitted discovery of insurance reserves in litigation not involving a bad faith liability claim against an insurer.”

On claims manuals, policy manuals, and training materials, the insurer argued that training and policy manuals have only been deemed discoverable in bad faith actions. The court stated: “It is beyond cavil that an insurer’s claims practice manual setting forth its procedures and guidelines for handling claims is relevant evidence in a bad faith action against an insurer.”

On the issue of claim representative personnel files, in general, there is a heightened standard of review for relevance. Further, “[p]roduction of personnel files has only been deemed appropriate in bad faith litigation where earlier discovery conducted by the parties has established a sufficient nexus between the personnel file and the bad faith claim.” And even in bad faith cases, the requests are often denied. “Those courts have rejected such discovery on the ground that the insureds may obtain the information sought through less invasive and burdensome means by deposing the claims representatives in question and their supervisors.”

On the issue of other litigation or administrative complaints involving medical expense benefit claims, “[s]everal federal district courts have denied discovery requests for ‘similar claims evidence,’ even in bad faith litigation, and have reasoned that evidence of other lawsuits or claims is irrelevant since they presumably involve different facts and circumstances.” “Some of those courts have also concluded that production of information concerning other bad faith suits or complaints would be unduly burdensome and cost prohibitive.” “The only state appellate authority addressing the discoverability of ‘similar claims evidence’ allowed such discovery, provided that it was restricted to the same type of claims at issue in the pending litigation.”  “More recent federal rulings have likewise determined that ‘other litigation’ evidence could lead to the discovery of admissible evidence and may uncover relevant ‘pattern and practice’ proof, so long as the discovery is confined ‘to those practices employed in handling plaintiff’s claim….’” “Such discovery may also unearth earlier depositions or statements by … claims personnel that may be pertinent to the issues in this case.”

Date of Decision: March 7, 2014

Sharp v. Travelers Personal Security Insurance Co., NO. 12 CV 6483, COMMON PLEAS COURT OF LACKAWANNA COUNTY, PENNSYLVANIA, 2014 Pa. Dist. & Cnty. Dec. LEXIS 282 (C.C.P. Lackawanna March 7, 2014) (Nealon, J.)

 

A copy of Judge Nealon’s exhaustive opinion, including voluminous authority on these discovery issues, can be found at the link of this page of the excellent Tort Talk blog.

JUNE 2015 BAD FAITH CASES: (1) ATTORNEY CLIENT PRIVILEGE AND WORK PRODUCT DOCTRINE PROTECT AGAINST PRODUCTION OF CLAIMS FILES; (2) COURT WILL NOT PRESUME COUNSEL IS MISREPRESENTING NATURE OF REDACTED MATERIALS AS BASIS TO CONDUCT IN CAMERA INSPECTION; (3) COURT RELIES ON PRIVILEGE LOG IN MAKING RULINGS; (4) RESERVES NOT DISCOVERABLE AS INSURED FAILED TO SHOW GOOD CAUSE FOR PRODUCTION; (5) PRESENCE OF BAD FAITH CLAIM ALONE CANNOT AUTOMATICALLY REQUIRE PRODUCTION OF ATTORNEY MATERIALS (Middle District)

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In Lane v. State Farm Mutual Automobile Insurance Company, the court provided a detailed discussion of the work product doctrine, in the context of a UM-bad faith claim against the insurer.  The court addressed three sets of materials on the insured’s motion to compel:

(1) whether the mental impressions of insurers employees recorded after the filing of the Complaint constitute protected work product;

(2) whether the reserve history for plaintiff’s claim and the procedures for setting reserves are irrelevant, confidential and privileged; and

(3) whether portions of the insurer’s “Auto Injury Evaluation” containing the mental impressions of defense counsel are protected by attorney-client privilege and attorney work product doctrine.

WORK PRODUCT AND ATTORNEY CLIENT PRIVILEGE

The court first addressed the work product issues, under Federal Rule of Civil Procedure 26(b)(3), and questions of attorney client privilege.

Redactions and Attorney Client Privilege

The court rejected plaintiff’s efforts to have the judge review redacted documents in camera.  Contrary to plaintiff’s assertions, the insurer’s privilege log adequately described the nature of the information being redacted, so that it could be addressed on the discovery motion.

Moreover, the vast majority of redactions were on billing invoices for legal services or correspondence between the insurer and privately-retained or in-house counsel, which the court concluded “very clearly involve classic cases of attorney-client privilege.”

The court was vehement in its response to plaintiff’s arguments that the insurer’s counsel may not have been forthcoming in claiming the redacted materials were what was purported: “But the hypothetical possibility that representations made by a duly licensed attorney and officer of this court could be found to be utter fabrications is insufficient to carry Plaintiff’s burden in overcoming the privilege. Nor does this Court believe it is appropriate to order the Defendant to submit these redacted materials for in camera inspection simply because the Plaintiff does not trust counsel’s representations. In the absence of any evidence that the statements made before this Court are fraudulent, we shall accept them as true.”

Claims File and Privilege Logs

As to the claims file, the insured sought production of items recorded after the complaint was filed, which the insurer redacted as containing protected mental impressions of its employees,  mental impressions of defense counsel or other attorney client privileged information or attorney work product. The insurer’s privilege log also included items created before suit was filed against the insurer, on the same bases.

A party claiming that documents were created in anticipation of litigation and are thus protected, may carry its initial burden by submitting a properly documented privilege log.  Such a privilege log “should identify each document and the individuals who were parties to the communications, providing sufficient detail to permit a judgment as to whether the document is at least potentially protected from disclosure.” (internal quotations omitted).  In this case, the privilege log was “just barely sufficient to meet Defendant’s initial burden that a privilege potentially applies[, because] [t]he Log identifies the documents, states that they were created by [the insurer’s] employees (albeit without naming those employees), and states that these documents were created as to Plaintiff’s claim file after the date on which a civil Complaint on this very matter was filed. While these representations do not contain detailed factual support, they are enough to carry the burden of proof that the documents were work product created in anticipation of (then-ongoing) litigation.”

Bad Faith Claims Alone Do Not Pierce Privilege

The insured argued it was still entitled to the discovery because post complaint mental impressions are necessarily relevant to the bad faith case. This argument was based on the theory that the “insurer had a continuing duty to investigate the insured’s [UM] claim even after suit was filed.”  The court rejected this argument for a number of reasons: (1) the insured did not provide any plausible justifications as to how the post-Complaint mental impressions could actually be relevant to the facts of his specific bad faith claim, as opposed to asserted an abstract proposition; (2) “the mere fact that Plaintiff has asserted a bad faith claim does not by itself overturn the work-product privilege” (no advice of counsel defense had been asserted); and (3) independently, the insured never addressed how he could not obtain the substantial equivalent by other means without undue hardship, as required under Rule 26(b)(3). Moreover, this plaintiff did have the opportunity to take bad faith discovery, which would include deposing claims adjusters.

Pre-Complaint Materials

This involved attorney client communications and attorney work product, and the court was not going to pierce these privileges under the circumstances.  The insured argued that the attorney materials can be discovered when they are placed at issue, but the court found they were not placed in issue, i.e., no advice of counsel defense was being asserted.  Further, “the mere fact that attorney-client communications may relate to the lawsuit does not expose them to discovery. Quite the contrary: it is in exactly these situations where attorney-client privilege is most properly invoked.”

Reserves

The insurer redacted reserve amounts, and refused to produce manuals and procedures for setting reserves. The court observed that: “Pennsylvania law requires casualty insurance companies to ‘maintain a claim reserve for incurred but unpaid claims and an active life reserve which shall place a sound value on its liabilities and be not less than the reserve according to appropriate standards set forth in regulations issued by the Insurance Commissioner.’”

The insured argued reserve information was relevant regarding the value of the claim and how it was being processed. However, the court found that “[t]he mere fact that Plaintiff’s Complaint alleges a bad faith refusal to pay his policy proceeds does not by itself indicate relevance, because the reserve history and procedures do not ipso facto have any necessary connection to the alleged bad faith.”  The court did not reject the notion that reserve information could be discoverable upon a showing of good cause, but this was a case specific matter; and here, the plaintiff provided “no explanation for how the reserve history is relevant or reasonably calculated to lead to the discovery of admissible evidence in connection with the issues presently before” the court.

Date of Decision:  May 18, 2015

Lane v. State Farm Mut. Auto. Ins. Co., 3:14-CV-O1045, 2015 U.S. Dist. LEXIS 64679 (M.D. Pa. May 18, 2015) (Mariani, J.)

JUNE 2015 BAD FAITH CASES: SUPERIOR COURT VACATES JUDGMENT ON BAD FAITH CLAIM AFTER CLOSE FACTUAL ANALYSIS; AND DIRECTS TRIAL COURT ON REMAND TO ALLOW EXPERT TESTIMONY CONCERNING ADJUSTER’S OBLIGATION TO CLARIFY LEGAL INTERPRETATION OF POLICY TERMS, BUT NOT TO CONSIDER INSURED’S POST-DENIAL CONDUCT (Superior Court)

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In Mohney v. American General Life Insurance Company, the Superior Court reversed the trial court, and remanded the insured’s statutory bad faith case against his disability insurer for a new trial.  At the time of this decision, the case had been pending in some form for 20 years.

The insurer originally paid total disability benefits, based upon policy definitions of the insured’s “total disability”.  The insurer’s adjuster later made the decision, on his own understanding, to terminate benefits on the basis that the insured’s doctor stated the insured could work in some limited capacity.  However, the doctor’s statements upon which the adjuster based his decision were in fact equivocal and highly qualified as to whether the insured could perform alternative work in the future.

In an earlier trial on the breach of contract claim, the court found the insurer breached its contract. In a second trial, on bad faith, the trial court found there was no bad faith. While the insurer was incorrect in terminating benefits, it had not been unreasonable in its position or investigation, nor had it knowingly or recklessly disregarded that fact.  The appellate court disagreed.

The Superior Court stated that “bad faith” encompasses a variety of possibilities including “a frivolous or unfounded refusal to pay the proceeds of a policy done with dishonest purpose, motivated by self-interest or ill will”, conduct “lack[ing a] good faith investigation into facts, and failure to communicate with the claimant”, “where the insurer intransigently refused to settle a claim that could have been settled within policy limits, where the insurer lacked a bona fide belief that it had a good possibility of winning at trial, thus resulting in a large damage award at trial”, and it “may also extend to the insurer’s investigative practices”. The appellate court recited the bad faith standards: proof must be by clear and convincing evidence, the insurer’s position must have been unreasonable, and the insurer must have knowingly or recklessly disregarded the unreasonable nature of its position. In a clarifying footnote, the court reiterated its rulings in Nordi (2010) and Greene (2007) that the insured is not required to prove a motive of self-interest in or ill will as a third element of statutory bad faith; rather, evidence of self-interest or ill will are probative of the second element, i.e., that the insurer knew or recklessly disregarded the unreasonableness of its position.

The Superior Court then firmly rejected the trial court’s factual conclusion that the insurer’s termination of benefits was reasonable; thus, the insured met the burden on the first prong of the bad faith test.  The court went into an extremely detailed analysis of the factual record in reaching this conclusion.

As to the second prong, the appellate court likewise drilled down into facts going to the insurer’s state of mind.  It approved a standard that the insurer “’was required to conduct an investigation sufficiently thorough to provide it with a reasonable foundation for its actions.’” The absence of a reasonable basis to deny coverage was the cornerstone of undermining the insurer on the knowing or reckless disregard standard.  The appellate court found that the trial court largely ignored substantial evidence that the insurer’s investigation “was not sufficiently thorough to obtain the necessary information regarding [the insured’s] ability to work.” The appellate court also referenced evidence from the record that could establish knowing or recklessly culpable conduct by the insurer, in the nature of misrepresentations of fact in terminating the benefits, and conduct constituting a lack of honest or objective review.

Thus, the Superior Court rejected the trial court’s conclusion that there was no evidence supporting the second bad faith prong.  However, it did not automatically then rule for the insured.  Rather, it held that “while [the] misrepresentations are evidence of bad faith, they do not without more establish knowing or reckless misconduct as a matter of law by clear and convincing evidence on the record before us.” That issue could not be decided on appeal.

The insurer argued that the adjuster making the decisions on the claim at issue had broad discretion, within his experience, to evaluate the claim based on available medical records and his common sense. In the insurer’s training practices, the key policy term “total disability” was left to the adjuster’s common sense interpretation, based on his prior experience.  While the adjuster could seek advice from an attorney, he did not do so “because he did not believe that any additional legal construction of the term ‘total disability’ was necessary. Instead, he applied a plain and common sense meaning to the certificates’ definition of ‘total disability.’”

The appellate court had already ruled that the adjuster’s interpretation was contrary to the policy language itself, as well as Pennsylvania appellate law.Thus, the court stated that “in the absence of a standard policy manual or other specific guidance, it was left solely to [the adjuster’s] ‘common sense’ and discretion to decide whether it was necessary to consult with legal counsel on the proper (legal) interpretation of the policy term at issue.” There was no evidence in the record of industry standards on training adjusters in legal interpretations of policy language, or providing adjusters guidance of when to seek guidance from staff attorneys.

Prior to trial, the insured did provide an expert report stating, among other things, that insurers and their professionals “be informed on the established law which they would be expected to apply in the course of handling claims, specifically including the law regarding the interpretation of policy provisions and definitions.” That expert’s trial deposition also stated that there was a “need for adjusters to be trained in the proper application of established case law on applicable policy terms.” However, the expert report and testimony were excluded at trial, on the basis that they “consisted of legal conclusions that were improper and inadmissible, the facts underlying [the] bad faith claim were ‘readily ascertainable by the Court without the aid of expert testimony,’ and [the expert’s] testimony would not assist in the resolution of [the] bad faith claim.”

The Superior Court found this was an abuse of discretion because: “The issue in question, involving the standards in the insurance industry for the training of claims adjusters in applying legal precedent when deciding insurance claims, is sufficiently complex to permit the introduction of expert testimony. The … Trial Court’s written decision does not reflect that it had any specific knowledge of the industry standards in this area. Instead, the … Trial Court merely accepted [the adjuster’s] testimony that there was no need to consult with staff attorneys in this case, and in the absence of expert testimony … [the insured] had no ability to offer contradictory evidence to rebut [the adjuster’s] testimony.”

Thus, the lower court’s ruling on bad faith was vacated, and the case remanded for a new trial.

On remand, the Superior Court instructed that the trial court was not to consider evidence of the insured’s post denial conduct, which it had earlier done.  Further, the trial court had precluded the insurer’s expert report as a sanction, and the appellate court left it to the trial court as to whether it would revisit that sanction; but it did not vacate the sanction itself. Finally, the appellate court upheld the trial court’s decision not to allow an amended complaint to add bad faith allegations based upon litigation conduct, as being so untimely as to be prejudicial; but the appellate court did note that the insured never raised the more general argument that the insurer’s litigating this matter for 20 years, when there was no reasonable basis to do so, could conceivably be the basis for a bad faith claim.

Date of Decision: May 8, 2015

Mohney v. American General Life Insurance Company, No. 2030 WDA 2013, SUPERIOR COURT OF PENNSYLVANIA, 2015 Pa. Super. LEXIS 250 (Pa. Super. Ct. May 8, 2015) (Donahue, Allen, and Strassburger, JJ.)

MAY 2015 BAD FAITH CASES: COURT ADDRESSES DISCOVERY DISPUTES OVER (1) CLAIMS MANUALS; (2) PERSONNEL FILES; AND (3) OTHER LAWSUITS, NARROWING DISCOVERY IN SOME INSTANCES TO SPECIFIC ADJUSTER WHOSE CONDUCT WAS AT ISSUE, AND NARROWING TIME PERIODS (Middle District)

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In Stephens v. State Farm Fire & Casualty Company, the insured under a homeowners policy brought breach of contract and bad faith claims for failure to pay benefits, and an Unfair Trade Practices and Consumer Protection Law claim for termination of the policy.  The court addressed various discovery disputes concerning the bad faith claims involving: (1) claims manuals, guidelines and instructions materials relating to insurance claims like those made by the plaintiffs, covering a four year period;  (2) access to performance reviews and performance incentive review programs for all of the defendants’ employees who played a role in insurance company decisions for a similar period; and (3) a demand that (i) the insurer compile information relating to other insurance lawsuits brought against the insurer involving theft, vandalism and water damages claims, as well as (ii) all lawsuits or complaints regarding the conduct of the particular claims adjuster whose conduct was at issue in the case at hand, again  for periods ranging between four and five years.

CLAIMS MANUALS AND INSTRUCTIONS

The court stated that “it is well-settled that manuals and other training materials are relevant in bad faith insurance litigation where they contain instructions concerning procedures used by employees in processing claims.” However, “[o]nly those portions ‘relevant to processing the claim in question’ are discoverable, as they may show inter alia that agents of an insurance company recklessly disregarded standard interpretations of a particular contractual provision in denying coverage or deliberatively omitted certain investigatory steps.” The court noted that it “has frequently granted such requests for discovery in the past, reasoning that agency claims processing policies, and non-compliance with those policies, may be relevant to a bad faith claim like the claim made by the plaintiffs in this case.”  The court ruled that the insurer was “entitled to have some topical and temporal limitations set on this disclosure, narrowing its scope somewhat.” Thus,  it “direct[ed] the disclosure of those portions of the claims manuals, guidelines and instructions materials relating to insurance claims like those made by the plaintiffs,” but only for the two years at issue in the complaint, not the four to five year period the insured sought.

PERSONNEL FILES AND INCENTIVE PROGRAMS

The insureds sought performance reviews and incentive review programs for all of the insurer’s employees who played a role in decision making in the case for a 5 year period.  The court first stated there is a strong public policy against disclosing personnel information, and thus the insured’s demands were “far too sweeping in their scope in terms of both personnel covered, files sought, and duration of the demanded disclosure.”  With one exception, these discovery requests were denied.  As to the exception, the court stated: “The conduct of the adjuster in this case is squarely at issue in this litigation[, and] [t]o the extent that the personnel files of the adjuster contain disciplinary findings or other material relevant to other claims of bad faith conduct by that adjuster, these materials should be provided to the court by the defendant for … in camera inspection to determine whether they are relevant to the issues in this litigation. If a review of the claims adjuster’s personnel file reveals no such information, the defendant shall certify that no such material exists.”

OTHER LAWSUITS

As to the demand that the insurer “compile information relating to other insurance lawsuits involving theft, vandalism and water damages claims, as well as all lawsuits or complaints regarding the conduct of this particular claims adjuster, for periods ranging between four and five years[,]”, the court found it had to balance two competing principles.

On the one hand, “it is clear that in some instances examples of similar, wrongful conduct in the processing other insurance claims may permit an inference that there is a pattern or practice of misconduct on a defendant’s part.” On the other hand, “it is equally clear that dissimilar conduct involving disparate claims would not be relevant or admissible in insurance bad faith litigation.”  The court observed: “Because the relevance and admissibility of this proof often turns on the degree of similarity between the other cases and the instant lawsuit, courts have frequently rejected sweeping demands for wholesale disclosure of other litigation over the span of many years, like the discovery demands made here.”

The court denied the request “for wide-ranging disclosure of all other lawsuits involving [the insurer] over four to five year periods….” However, “the request for information pertaining to the claims adjuster in this particular case may have greater relevance to the issues in this lawsuit.” Again, the demands were denied with the one exception of the adjuster at issue. Thus, “prior lawsuits or complaints alleging bad faith by this particular claims adjuster in the two years preceding this incident [at issue …] may be relevant to this action, [and] to the extent that this information exists, these materials should be provided to the court by the defendant for our in camera inspection to determine whether the information is relevant to the issues in this litigation. If a review reveals no such information, the defendant shall certify that no such material exists.”

Date of Decision: April 13, 2015

Stephens v. State Farm Fire & Cas. Co., Civil No. 1:14-CV-160, 2015 U.S. Dist. LEXIS 48024 (M.D. Pa. April 13, 2015) (Carlson, U.S.M.J.)

 

2014 SEPTEMBER BAD FAITH CASES: COURT RULES THAT ATTORNEY CLIENT PRIVILEGE DOES NOT APPLY WHERE ATTORNEY ACTS AS A CLAIMS INVESTIGATOR; BUT REJECTS THE INSURED’S “THEORY OF WHOLESALE WAIVER” WHERE INSURER DENIES ACTING IN BAD FAITH IN ANSWER AND WHERE LEGAL OPINION AFFECTS ADJUSTER’S MIND, IN ABSENCE OF ADVICE OF COUNSEL DEFENSE; AND GENERAL ADMONITION THAT EACH REDACTED ITEM MUST BE ANALYZED INDIVIDUALLY BY COUNSEL (Philadelphia Federal)

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In Henriquez-Disla v. Allstate Property & Casualty Insurance Company, the insured brought bad faith and fraud claims against its insurers.  There were two discovery issues: (1) whether certain communications in the case involving a lawyer were subject to the attorney client privilege or whether the lawyer was acting as a claims adjuster rather than a lawyer; and (2) whether there was a waiver of the attorney client privilege simply on the basis of a defense that the carrier’s personnel acted in good faith.  In requiring production of certain information on the basis that the attorney was not performing the functions of an attorney, the court certified the issue for an interlocutory appeal and stayed its proceedings.

The insurer had provided redacted copies of the logs relevant to the insured’s claims, and the insured sought unredacted versions of the logs, as well as policy and procedural manuals used in the decision-making process. The court ordered the production of the policy and procedural manuals governing coverage decisions and the course of the investigation, subject to a confidentiality agreement.  Further, the court conducted an in camera review and ordered partially unredacted versions of the logs produced, on the basis that those portions reflected that counsel performed the ordinary business of claims investigation and not as a lawyer. While the court reduced the number of documents to be produced on reconsideration (the original decision is discussed here), the fundamental principle distinguishing counsel’s conduct as investigator vs. lawyer remained the applicable measure.

Generally, the log entries reflecting investigation, rather than legal work, include those containing direction to conduct routine investigation whether to be done by counsel or by a claims representative, scheduling examinations under oath, and memorializing efforts to pursue subrogation.  Directives to counsel as to what to pursue at the examination would be privileged.  The court noted that direction to counsel to retain a cause and origin specialist to determine the cause of the fire, investigating subrogation possibilities, determining the cause of the fire, gathering background information on the claimants, and arranging for examinations under oath are ordinary business functions in claims investigation. “The fact that they were performed by an attorney at the behest of a claims adjuster does not change the character of the activity — basic claims investigation.” Although the court has considered the timing of counsel’s entry “onto the claims scene” was a factor considered in determining counsel’s role, the log entries were the primary reason the court concluded counsel acted as a claims investigator.

In addition, the court generally observed that in the redacting documents on the basis of privilege, an insurer should not take the approach that every mention of the attorney’s name should be redacted, as some matters are clearly not privileged, e.g. that an attorney had been hired.  In the court’s words, the insurer should not redact by slashing with a sword where it should excise with a pen knife.  The court also observed that redacting certain entries while not redacting entries of the same nature worked against protection, and that each entry needed to be analyzed specifically prior to redaction.  The court stated that a “failure to analyze the specific entries at issue undermines its claim of privilege — wherein it has the burden to show that each entry meets the elements of the attorney-client privilege.”

Next, the court rejected the idea that the insurer had entirely waived the privilege by purportedly placing the advice of counsel at issue. The insurer pled as a defense that its alleged withholding of any benefits at issue was made in good faith and was reasonable.  The insured asserted that because the insurer’s decision-maker stated in her affidavit that counsel was hired to render legal and coverage decisions, this placed counsel’s advice in issue.

While a party may waive the attorney client privilege by asserting an advice of counsel defense, “advice is not placed in issue merely because it is relevant. . . . A waiver can be found only where a client has made the decision and taken an affirmative step in the litigation to place the advice of attorney in issue. . . . This occurs where the client attempts to prove a claim or defense by disclosing or describing an attorney client communication. . . . .” Asserting an answer that the insurer did not act in bad faith, and stating that it acted in good faith do not create such a waiver.  Nor does the assertion that an attorney was hired to render a legal opinion on coverage waive the privilege. Without actually asserting an advice of counsel defense, the mere idea that an attorney could have affected the adjuster’s mind does not create a waiver.  The court rejected this “theory of wholesale waiver.”

Date of Decision:  August 7, 2014

Henriquez-Disla v. Allstate Prop. & Cas. Ins. Co., CIVIL ACTION NO. 13-284, 2014 U.S. Dist. LEXIS 108820 (E.D. Pa. August 7, 2014) (Hey, U.S.M.J.)

AUGUST 2014 BAD FAITH CASES: FAILURE TO FOLLOW INVESTIGATIVE AND CLAIMS HANDLING STANDARDS IN INSURER’S OWN MANUAL, ADJUSTER’S FAILURE TO CONSULT WITH OTHERS AND GO BEYOND HER OWN CONCLUSIONS, AND FAILURE TO CONDUCT IME DEFEAT MOTION TO DENY BAD FAITH CLAIM (Western District)

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Mineo v. Geico involved a UIM claim.  The insured was a Vietnam War Veteran who had suffered significant combat injuries during the War.  Years later he was in a motor vehicle accident and suffered a shoulder injury.  After the accident, there was some record that he suffered a further shoulder injury.  The insurer offered a settlement sum that the insured rejected.  The insured contended that the adjuster incorrectly placed too much emphasis on the post-accident injury in devaluing the extent of his injury from the accident.

In addressing the insurer’s motion for summary judgment on the bad faith claim, the court stated that in evaluating the insured’s bad faith claim it could consider insurer’s because bad faith can include a lack of good faith investigation into facts, and failure to communicate with the claimant.  The court stated that an “insurance company … is not required to show the process by which it reached its conclusion was flawless or that the investigatory methods it employed eliminated possibilities at odds with its conclusion.” However, it “must conduct a meaningful investigation, which may include an in-person interview, examination under oath, medical authorizations, and/or independent medical examinations.”

The adjuster relied on only one physical therapy record to justify her position that the injury was caused or aggravated by the post-accident fall. This was based on her review of the medical records, and her conclusion that no IME was needed.  The court observed she was not a doctor, knew that the insured disputed the record, and the insured’s physical therapist had explained that there was a significant left shoulder dysfunction prior to the post-accident fall.

The court cited to the insurer’s claims manual which “admonishes its adjusters to avoid drawing conclusions based on assumption or speculation,” and which “underscores the importance of completeness….”  The manual warned: “If the denial is unsound, the result may be a complaint or a lawsuit, either of which could have been avoided. Because some cases turn on very fine points, reports must be complete and accurate.”

The manual also included “a Sequence of Investigation, which ‘applies to the majority of cases,’ and sets forth that adjusters should: ‘Determine whether independent medical examinations are necessary, and if so, see your supervisor and then arrange for them. Determine whether medical peer review should be secured. If so, see your supervisor.’” The adjuster did neither, and the carrier only had an IME pursued post-litigation.

The court next addressed the issue of whether the insurer failed to meet its own standards of using a “90-Day Control” which is used to calculated and set reserves and to revisit these matters at 6, 12, and 18 months. Under the insured’s manual “Supervisors and managers review each summary and give direction, comments and instructions…. Each Summary and supervisor/manager review must be completed by the end of the month in which the 90th day falls.” The court questioned whether this was created or produced to the insured.In addressing stalled negotiations and the languishing nature of the process, the court stated that the insurer could have conducted an in-person interview, done an examination under oath, sought medical authorizations and/or an IME.  The IME eventually conducted appeared to favor the insured’s version of events; and the court cited case law for the proposition that a failure to conduct an IME could be the basis for a bad faith claim.  In this regard, the court was “mindful” of the Unfair Insurance Practices Act.

The summary judgment motion was denied.

Date of Decision:  July 15, 2014

Mineo v. Geico, Civil Action No. 12-1547, 2014 U.S. Dist. LEXIS 95686 (W.D. Pa. July 15, 2014) (Fischer, J.)

JULY 2014 BAD FAITH CASES: BERKS COUNTY TRIAL JUDGE AWARDS $18,000,000 IN PUNITIVE DAMAGES AND $3,000,000 IN ATTORNEY’S FEES AND COSTS (Berks County Court of Common Pleas)

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Following in temper the trial court judges’ decisions in Hollock v. Erie Insurance Exchange, 54 Pa. D.&C. 4th 449 (C.C.P. Luzerne 2002), and Corch Construction Company v. Assurance Company of America, 64 Pa. D.&C. 4th 496 (C.C.P. Luzerne 2003), a Berks County Judge has issued a decision imposing $18,000,000 in punitive damages, and $3,000,000 in attorney’s fees and costs, against an insurer for section 8371 bad faith.

In Berg v. Nationwide Mutual Insurance Company, after reversal and remand from a broad bad faith opinion in the Superior Court, Judge Sprecher’s finding of facts and discussion describe an auto damage property claim that could have been resolved for a $25,000 payment for the vehicle’s total loss.  Instead, the carrier was found to have paid $3,000,000 in legal fees to support the propriety of its decision that the car could have been repaired for half that sum. The litigation is over 15 years old, with the dispute starting earlier, and the plaintiff died of cancer prior to this judgment being entered, a fact mentioned to close the Court’s decision.

The Court found as fact numerous examples of bad faith conduct, beginning with the reversal of the appraiser’s initial position to pay the damages as a total loss, subsequent failures to disclose information about the vehicle’s repair and safety condition (including life threatening information), abusing the discovery and litigation process, failing to negotiate in good faith, violating the Unfair Insurance Practices Act, and paying a disproportionate sum in defending the case. The Court looked closely at the experts who examined the vehicle, and those who testified about claims handling practices in evaluating bad faith.  At its essence, however, was the Court’s finding that that the carrier did not go to these lengths simply to defeat Ms. Berg’s claim in this single dispute. Rather, the Court found, that the carrier’s conduct was part of an overall strategy regarding all of its insureds’ claims for $25,000 or less; a strategy expressly condemned by the Superior Court in Boneberger.

The Court found that this strategy was intended to send a message to insureds and the plaintiffs’ bar that it was not worth their while to bring suit against the carrier in cases worth $25,000 or less.  To quote the Court:

“What Defendant managed to do was send the ultimate message to Plaintiffs, their attorney, and the Plaintiffs’ bar in smaller cases of $25,000 or less. It screamed to the litigation world that it is “a defense minded carrier in the minds of the plaintiff legal community.” It fully accomplished its goal of broadcasting its litigation avoidance strategy. Simply put, what Plaintiff, and more importantly, what lawyer in his right mind, will compete with a conglomerate insurance company if the insurance company can drag the case out 18 years and is willing to spend $3 million in defense expenses to keep the policyholder from getting just compensation under the contract. Its message is 1) that it is a defense minded carrier, 2) do not mess with us if you know what is good for you, 3) you cannot run with the big dogs, 4) there is no level playing field to be had in your case, 5) you cannot afford it and what client will pay thousands of dollars to fight the battle, 6) so we can get away with anything we want to, and 7) you cannot stop us.”

In making its $18,000,000 punitive damages award, the court considered Pennsylvania’s criteria for evaluating a punitive damages claim: the character of the act; the nature and extent of the harm; and the wealth of the defendant.  The Court found that these factors mirrored the U.S. Supreme Court’s “guideposts” on punitive damages: the degree of reprehensibility of the defendant’s conduct; the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.

On the issue of reprehensibility, the court was most troubled by its finding of the life and safety risks to the insured’s in continuing to drive the vehicle, and that the defendant “knew that the vehicle was returned to Plaintiffs with hidden structural repair failures or in the alternative, … [but] Defendant did not care if the frame and all other repairs it required were done properly, by [the] body shop. Both scenarios equate to acts of omission or commission in bad faith against the Plaintiffs.” The court also focused on the scorched earth litigation policy, as an institutional policy.  It found the $18,000,000 represented no financial jeopardy to the insurer, constituting only 0.2% of the $9 billion in its excess Statutory Surplus.

The $3,000,000 in attorney’s fees awarded to plaintiff’s contingent fee counsel approximated the fees paid to defense counsel over the life of the litigation. The Court looked at the hours counsel had spent in over a decade on the complex litigation, that counsel themselves had advanced all legal fees and costs with no compensation over that time, and that counsel persevered while being “led through a murky, tumultuous sea of litigation facing deadly obstacles every stroke of the way,” but stayed with the case and its risks, even “when hit between the eyes by Defendant’s insurmountable defense strategy….” Given all of the facts recited in the Court’s ruling, as well as the foregoing, Judge Sprecher stated that: “in the interest of fundamental fairness this court is reluctant to award counsel fees to the Plaintiffs in any amount less than Defendant paid its own attorneys who were paid timely and without risk.”

Date of Decision:  June 12, 2014

Berg v. Nationwide Mutual Insurance Company, No 98-813 (C.C.P. Berks June 12, 2014) (Sprecher, J.)

Our thanks to the Tort Talk Blog for bringing this case to our attention, and for posting a copy of the Opinion.

We would also like to congratulate Daniel E. Cummins of Tort Talk for being awarded PDI’s annual award as Distinguished Defense Counsel.  Well done!