Archive for the 'PA – Reverse Bad Faith' Category

JUNE 2017 BAD FAITH CASES: COURT IMPOSES SPOLIATION SANCTONS ON INSURED DEFENDING INSURANCE FRAUD COUNTERCLAIM (Philadelphia Federal)

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The case involved a fire loss. The insured brought claims seeking coverage, and the insurer filed insurance fraud counterclaims under Pennsylvania’s Insurance Fraud Statute. Before suit, the insurer took the insured’s examination under oath, and during that examination had asked the insured to preserve his cell phone data.

During litigation, the insurer requested cell phone data in discovery. The insured objected, and later reported that he had lost his cell phone. The insurer brought a motion for sanctions, asserting spoliation.

The court observed no material difference between the law governing spoliation under state or federal practice. “Spoliation occurs where ‘the evidence was in the party’s control; the evidence is relevant to the claims or defenses in the case; there has been actual suppression or withholding of evidence; and, the duty to preserve the evidence was reasonably foreseeable to the party.’” “Failure to produce evidence can have the same practical effect as destroying it and so, ‘under certain circumstances, nonproduction of evidence is rightfully characterized as spoliation.’”

Sanctions rest within the court’s discretion. In federal court, the court’s authority comes for the Federal Rules of Civil Procedure and the court’s inherent power. Sanctions may include “dismissal of a claim or granting judgment in favor of the prejudiced party, suppression of evidence, an adverse inference, fines, and attorneys’ fees and costs.” “In considering what sanctions to impose, the trial court should consider ‘(1) the degree of fault of the party who altered or destroyed the evidence; (2) the degree of prejudice suffered by the opposing party; and (3) whether there is a lesser sanction that will avoid substantial unfairness to the opposing party and, where the offending party is seriously at fault, will serve to deter such conduct by others in the future.’”

The court readily found that three of the four spoliation elements met, e.g., the cell phone location history, text messages and search history were “hugely relevant to both parties’ claims.”

However, the question of actual suppression or withholding goes to intent, and is much harder to establish. The court examined the evidence closely, and found the insured lacked credibility, and that other evidence supported a finding of spoliation.

The court found that the insured’s degree of fault in the spoliation was unmitigated, and the spoliation was prejudicial, but chose not to impose the harshest sanction. The court retained the right to impose more severe sanctions, however, if it was later established that the spoliation was more prejudicial to the insurer than the court presently believed.

The court ruled that it would instruct the jury “they may infer that if Defendants were permitted to inspect [the] cell phone, any evidence would have been unfavorable to Plaintiff.” The court ordered the insured to pay all fees and costs association with the spoliation motion and all efforts to obtain records from the cell phone carrier.

Date of Decision: June 9, 2017

Brown v. Certain Underwriters at Lloyds, London, 2017 U.S. Dist. LEXIS 89527, *5 (E.D. Pa. June 9, 2017) (Joyner, J.)

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MAY 2017 BAD FAITH CASES: MATERIAL MISREPRESENTATIONS IN APPLICATION MAKE POLICY VOID AB INITIO EVEN IF NOT MADE IN BAD FAITH (Philadelphia Commerce Court)

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In this Commerce Court case involving a declaratory judgment action concerning coverage for the horrific 2013 wall collapse on the Salvation Army store in Philadelphia, the court found the policy void ab initio “[b]ecause the misrepresentations in this case are palpably and manifestly material to the insurance company’s decision to take on a risk.” This action concerned the policy issued to the contractor involved in the collapse.

The court found that the contractor made palpably and manifestly material misrepresentations in its application, allowing for rescission. Specifically, the court found that the contractor “misrepresented that he had documented the condition of nearby structures before undertaking the demolition work, and he knew his statement was a lie. He similarly lied when claiming he had a safety program in place. He lied when he told insurance companies that he had a risk manager or safety director assess the demolition job on Market Street. And he lied when he said he was not using a subcontractor when in fact” he was. These falsehoods were material “since each one, ‘if given, would have influenced the judgment of … [the insurer] in issuing the policy, in estimating the degree and character of the risk, or in fixing a premium rate.’” Moreover, “a showing of bad faith is unnecessary where the misrepresentations contained in an insurance application were palpably and manifestly material to the risk assumed by the insurer.”

Date of Decision: April 18, 2017

Berkley Assurance Co. v. Campbell, Aug. Term 2013, No. 129, 2017 Phila. Ct. Com. Pl. LEXIS 110 (Phila. C.C.P. April 18, 2017) (Djerrasi, J.) (Commerce Program)

MARCH 2017 BAD FAITH CASES: COURT DENIES CARRIER SUMMARY JUDGMENT ON VOIDING POLICY FOR FRAUD, AND DENIES BOTH PARTIES’ MOTIONS ON BAD FAITH CLAIM BECAUSE NUMEROUS ISSUES REMAINED OPEN FOR FACT-FINDERS, INCLUDING LITIGATION CONDUCT CLAIMS (Western District)

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The insured, as an administrator of the estate of his son, filed suit against the insurer. His son was injured by a drunk driver, and later died of an accidental heroin overdose. The father alleged that the injuries suffered in the accident led his son into a downward spiral, eventually resulting in the son’s death.

Initially, the insured settled for the $10,000 limit of his medical payments coverage, and submitted a claim for underinsured motorist (“UIM”) coverage. The insurer set reserves at $30,000. During the lengthy claim process, the insured sought to settle for the $400,000 policy limit, relying on his son’s history of medical treatment, and the effect of the accident on the insured’s mental and physical health. The insurer never made a settlement offer.

The court went through the detailed history of the claim process in its 77 page opinion, reciting the back and forth between the insured’s counsel and the insurer’s agents and various counsel, identifying gaps in insurance activity, among other things, and identifying questions concerning communications among the insurer’s agents and counsel. The court also considered the conduct of the litigation at hand when eventually evaluating the bad faith claims.

The matter did not resolve, and the insured brought breach of contract and bad faith claims. The insurer asserted an affirmative defense that the claims were barred because the son intentionally misrepresented or concealed material facts concerning his illegal drug use during the claim investigation.

The insured filed for summary judgement on its breach of contract claim and bad faith claims. The insurer filed a cross motion for summary judgment: claiming the son violated the policy’s fraud provision, failure to cooperate, heroin use should bar recovery as a matter of public policy, death was not proximately caused by the accident, and the record did not reach the clear and convincing evidence standard on bad faith.

In addressing the insurer’s claim that the son violated the concealment or fraud provision, the court stated that “in the context of an insurer’s post-loss investigation, the materiality requirement is satisfied if the false statement concerns a subject relevant and germane to the insurer’s investigation as it was then proceeding.” However, even though the son misrepresented his drug use and criminal record, at the time of the misrepresentations drug use was not part of the UIM claim. Thus, it “could not have been germane to the investigation as it was then proceeding.”

The court also rejected the duty to cooperate argument, and that heroin use should bar recovery as a matter of public policy. Additionally, the court held proximate cause was an issue for trial.

In addressing the insured’s bad faith claims, the court relied on Terletsky, and the current state of the law that self-interest and ill-will are not elements of the claim (a matter now pending before Pennsylvania’s Supreme Court). Under the applicable standards, genuine issues of fact existed precluding summary judgment for either side, which the court went through seriatim.

Among other issues, the fact-finder had to determine the reasonableness of the insurer’s refraining from making a settlement offer, and whether there was an intent to delay the claim process. In addition, there was an issue concerning the level of investigation of the son’s living situation in relation to the insured father as to whether the policy extended to the son, and the propriety of the carrier’s determining he was not covered. Further, there was an issue as to whether simply mailing a copy of the policy to the insured’s attorney qualified as meeting the carrier’s obligation to inform the insured about available coverage under a policy. The court also left open the possibility that the insurer’s pursuing the concealment and fraud defense was unreasonable and done in bad faith. Moreover, the court discussed the investigation conduct of the insurer’s attorneys and agents in the claim handling process, including both conduct toward the insured and his attorney, and communications internally among each other.

Date of Decision: September 28, 2016

Paul v. State Farm Mut. Auto. Ins. Co., No. CV 14-1382, 2016 U.S. Dist. LEXIS 133699 (W.D. Pa. Sept. 28, 2016) (Conti, J.)

 

FEBRUARY 2017 BAD FAITH CASES: INSURER CAN UNILATERALLY RESCIND POLICY ON BASIS OF MATERIAL MISREPRESENTATION IN APPLICATION (Philadelphia Federal)

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This case involved an alleged material misrepresentation in a health insurance policy application. The court found that the insurer did not have to seek rescission via bringing suit in court, but could “unilaterally rescind” the policy, and take the risk that the insured would bring future claims against the insurer for breach or bad faith. Thus, in the court’s reading of Pennsylvania law, “unilateral rescission of a contract remains an optional remedy for an insurance carrier. The fact that carriers often choose to proceed conservatively by bringing suit does not limit the array of remedies permitted by common law….”

Date of Decision: December 19, 2016

King v. Golden Rule Ins. Co., No. 16-3614, 2016 U.S. Dist. LEXIS 175157 (E.D. Pa. Dec. 19, 2016) (McHugh, J.)

NOVEMBER 2016 BAD FAITH CASES: MISREPRESENTATION ALONE CANNOT VOID POLICY WITHOUT PROOF OF INTENT AND MATERIALITY; ISSUE OF INSURER BAD FAITH IN CLAIMS HANDLING WAS FOR JURY (Philadelphia Federal)

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This case involved accusations of bad faith running in both directions. The insurer sought to void numerous life insurance policies on the deceased insured, based on claims that the insured made material misrepresentations in his insurance applications (he had multiple life insurance policies). The insured’s estate brought claims of bad faith based on the insurance investigation (alleging that the insurer at different times claimed the insured was not dead, had committed suicide and/or had been the victim of foul play, in addition to arguing that the policy should be voided on the basis of misrepresentations in the applications). Summary judgment was sought all around.

There was no issue that misrepresentations were made on the insurance application. However, there were genuine issues regarding both the insured’s intent in making those misrepresentations, and whether they were material, i.e., whether the policies still would have been issued if the truth were known to the carrier. Thus, summary judgment was denied to the insurer, since determination of the insured’s intent and how the insurer would have handled the true information were jury questions.

The court denied summary judgment to both parties on the insured’s bad faith claim. This being a federal action, plaintiff’s statutory bad faith claim was subject to a jury trial. The issue was the manner in which the insurer investigated the death of the insured, and a delay in paying benefits. The court found that the jury had to decide issues regarding whether the estate provided sufficient proof of death, and whether the insurer’s investigation “demonstrated a reasonable basis for questioning and refusing the claims.”

Date of Decision: October 20, 2016

Lincoln Benefit Life Company v. Bowman, No. 15-6697, et al., 2016 U.S. Dist. LEXIS 145327 (E.D. Pa. Oct. 20, 2016) (Savage, J.)

NOVEMBER 2016 BAD FAITH CASES: ALLOWING REINSURER TO IMPROPERLY HANDLE CLAIM EXPOSES INSURER TO BAD FAITH CLAIMS; REINSURER CANNOT BRING DIRECT CLAIMS AGAINST INSURED FOR REVERSE BAD FAITH OR INSURANCE FRAUD (Western District)

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This factually complicated case involved reverse bad faith and 18 Pa.C.S. § 4117 insurance fraud claims by an insurer and reinsurer, and bad faith claims by the insured against its insurer.

The court first ruled that a reinsurer could not void an insurance policy to which it was not a party, since it had no contractual privity with the insured. It then concluded that the reinsurer could not be considered an insurer for purposes of section 4117(g) fraud claims. Finally, after discussing the state of the law on “reverse bad faith”, the court again found this to be a contractually based claim, and the reinsurer simply did not have a contract with the insured. Summary judgment was granted against the reinsurer on all of these issues.

The insured claimed that the insurer breached the insurance contract by allowing the reinsurer to adjust the claim and to take the lead in decision making on claims handling. The court ruled this was an issue for the jury to decide and would not grant summary judgment. However, the court also left it to the jury whether the insured could recover if the insured’s conduct also breached the insurance agreement.

As to the insurer’s summary judgment motion on the insured’s counterclaims, the court found that in electing to affirm the contract and pursue money damages, rather than to seek rescission, the insured cannot argue that a breach of its own obligations under the policy can somehow be ignored in addressing the insurer’s defense.

As to the alleged fraud claim against the insured, the insured took the position that the alleged fraud was carried out by a third party. The insurer argued apparent authority, and the court concluded that the issue of apparent authority in making out a fraud claim against the insured was a jury issue. There was also extensive and detailed discussion of the particulars of the alleged fraud, which will not be addressed here.

The insured also brought claims for common law and statutory bad faith against its insurer. [In looking at the statutory bad faith case law, the court cited authority reiterating the questionable theory that the bad faith statute was intended to address conduct beyond the denial of a benefit.] The court found that the both claims survived summary judgment.

The insured’s basic theory was that the insurer “essentially abandoned its insured during the claims adjustment process by turning [the insured’s] fate over to an unrelated third party that, as a practical matter, was not subject to [the insurer’s] control, had no contractual accountability to [the insured], and had a financial incentive to minimize the amount of payments that would be made to [the insured] under the Policy.” The third party is the reinsurer, and evidence was presented to the court that the reinsurer “was given the final say on various issues that were important, if not critical, to the adjustment of [the] loss and the continuation of [the insured’s] business, including the valuation of [the insured’s] daily revenue value (which were important for purposes of calculating its business income losses), the determination that business income payments would cease upon [the insured’s] relocation to the new … facility, and the ultimate decision to cancel the Policy. [The insured] has also produced evidence from which a factfinder could infer that [the reinsurer], in exercising its discretion, placed its own financial interests ahead of [the direct carrier’s] insured.

The court also cited to conflicts in claims handling mandates of the reinsurance treaty, and evidence suggesting that the insurer disagreed with the reinsurer’s “course of action in important respects, yet failed to take any corrective action for the benefit of its insured.” The court stated that the direct insurer “may be held liable … for the acts committed by [the reinsurer] in connection with the investigation and adjustment of its claim.” Thus, the court concluded that the evidentiary record construed in the non-movant insured’s favor “could support a finding of bad faith on the part of [the insurer] as it relates to the investigation and adjustment of [the insured’s] loss.” Summary judgment was thus denied to the insurer on the bad faith claims.

Date of Decision: September 29, 2016

Hartford Steam Boiler Inspection & Insurance Company v. International Glass Products, LLC, No. 2:08cv1564, 2016 U.S. Dist. LEXIS 135045 (W.D. Pa. Sept. 29, 2016) (Cercone, J.)

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AUGUST 2016 BAD FAITH CASES: INSURER MUST ALWAYS SHOW INTENT IN VOIDING A POLICY BASED ON MATERIALLY FALSE STATEMENTS (Middle District)

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The insurer brought a declaratory judgment claiming that there was no policy coverage under a fraud and concealment exclusion, based on an inaccurate statement made at an examination under oath. The insurer asserted that the exclusion applied irrespective of the insured’s state of mind in making a false statement, i.e., false statement = no coverage independent of intent. The policy language apparently embodied this position.

The court still rejected it, finding that the weight of case law requires some level of intent, with the applicable test being that to void a policy for a false statement the insurer must show: “(1) the representation was false; (2) the insured knew it to be false when made or acted in bad faith; and (3) the representation was material to the risk being insured.” The court stated that Pennsylvania law “does not allow an insurer to rescind an insurance policy because of innocent mistakes by the insured, even if those mistakes involved misrepresentations of material facts.”

As the insured’s state of mind remained at issue, judgment on the pleadings for the insurer could not be granted.

Date of Decision: July 7, 2016

Cincinnati Ins. Co. v. Drenocky, No. 15-762, 2016 U.S. Dist. LEXIS 87711 (M.D. Pa. July 7, 2016) (Conner, J.)

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JUNE 2016 BAD FAITH CASES: COURT REFUSES TO DISMISS INSURER’S CLAIM FOR EQUITABLE RESCISSION OF POLICY; EQUITABLE RESCISSION ACTION DOES NOT REQUIRE PRIOR RETURN OF PREMIUMS (Philadelphia Federal)

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In Aspen Specialty Insurance Company v. Hospitality Supportive Systems, LLC, an insurer sought equitable rescission of its policy. The insured moved to dismiss the rescission claims or for a move specific pleading of fraud under Rule 9. The motion was denied.

The court observed the applicable standard: “an insurer must demonstrate that (1) the insured made a false representation, (2) the insured knew the representation was false or made the representation in bad faith, and (3) the representation was material to the risk being insured.” The court found the insurer clearly pled facts sufficient to state a plausible claim for equitable rescission under Pennsylvania law by averring that the insured knew of potential claims additional named insured faced, while representing that no claims existed. The court found the claims were material to the insured risk, as the insurer potentially would have had the duty to defend and indemnify the insured and the additional named insureds on those claims.

The court distinguished rescission at law, which requires return of premiums before seeking rescission, from equitable rescission which has no such requirement. Moreover, even an expired policy can be rescinded, since it would never have been issued if the relief sought were warranted.  The court further found the insurer did not sit on its rights, but acted promptly after completing its investigation. The court also found the allegations of fraud sufficiently pleaded.

Date of Decision: June 9, 2016

Aspen Specialty Ins. Co. v. Hospitality Supportive Sys., LLC, 2016 U.S. Dist. LEXIS 75110 (E.D. Pa. June 9, 2016) (Dalzell, J.)

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JANUARY 2016 BAD FAITH CASES: COURT DENIES SUMMARY JUDGMENT ON INSURANCE FRAUD CLAIM AGAINST INSURED AFTER FINDING GENUINE ISSUES OF MATERIAL FACT EXIST REGARDING WHETHER INSURED MADE MATERIAL MISREPRESENTATIONS (Eastern District)

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In Reese v. Allstate Vehicle & Property Insurance, the insured brought a breach of contract claim against the insurer based on a fire loss, and the insurer responded with a civil insurance fraud claim against the insured, as well as a third party complaint for civil insurance fraud against the insurer’s boyfriend, under 18 Pa.C.S. § 4117. Before the court was the insurer’s motion for summary judgment seeking judgment in its favor on the insured’s complaint, along with the insurer’s counterclaim and third party complaint.

The court declined to grant summary judgment for the insurer on the breach of contract claim, finding that genuine issues of material fact existed regarding whether the insured made material misrepresentations that would preclude coverage under the policy.

The court next addressed the insurer’s argument that summary judgment should be granted in its favor with regard to its counterclaim against the insured for insurance fraud. Finding that inconsistencies in the record may have resulted from misconstrued evidence or improperly performed investigations, rather than knowing misrepresentations by the insured, the court declined to grant summary judgment on the insurance fraud counterclaim.

Finally, the court denied summary judgment on the insurer’s third party claim for insurance fraud. The insurer argued that throughout the course of its investigation of the fire loss, the insured’s boyfriend continually assisted the insured in presenting a claim containing false or incomplete information, as well as falsified documents concerning facts of things material to her claim for benefits. However, the court reasoned that the record was replete with genuine issues of material facts as to whether the insured’s boyfriend intentionally and fraudulently misrepresented facts about the alleged loss. Accordingly, the court declined to grant summary judgment to any claim in the case, noting that the evidence created a highly disputed record.

Date of Decision:  December 9, 2015

Reese v. Allstate Vehicle & Prop. Ins., CIVIL ACTION NO. 14-1034, 2015 U.S. Dist. LEXIS 164772 (E.D. Pa. December 9, 2015) (Buckwalter, J.)

NOVEMBER 2015 BAD FAITH CASES: INSURANCE FRAUD CLAIMS BARRED BY STATUTE OF LIMITATIONS; LIMITS ON EXPERT TESTIMONY AS TO ULTIMATE ISSUE OF BAD FAITH (Philadelphia Federal)

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In Schatzberg v. State Farm Mutual Automobile Insurance Company, the insurer brought a statutory insurance fraud claim against a medical provider, under 18 Pa.C.S. § 4117, among other fraud based claims.  This claim has a two year statute of limitations. The court found that the insurer was on notice of the alleged fraudulent billing scheme well beyond the limitations periods applicable to the various claims; and the court rejected all tolling theories. Thus, summary judgment was granted against the insurer.

In an interesting alternative holding, the court found there could be no justifiable reliance on the alleged fraud after a certain period, because the insurer was aware of the fraud but kept making payments anyway.

In a second opinion the same day, granting the insurer partial summary judgment on the plaintiff’s defamation claims, the court made observations as to how experts could not testify on the ultimate legal issue of bad faith; and footnoted various statutory and regulatory provisions addressing the Pennsylvania Legislature’s concern with combating insurance fraud.

Dated of Decisions: October 7, 2015

Schatzberg v. State Farm Mut. Auto. Ins. Co., CIVIL ACTION NO. 10-2900, 2015 U.S. Dist. LEXIS 136722 (E.D. Pa.  October 7, 2015) (QUIÑONES ALEJANDRO, J.)

Schatzberg v. State Farm Mut. Auto. Ins. Co., CIVIL ACTION NO. 10-2900, 2015 U.S. Dist. LEXIS 136730 (E.D. Pa.  October 7, 2015) (QUIÑONES ALEJANDRO, J.)