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.

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