COURT FINDS 61 TO 1 RATIO OF PUNITIVE TO COMPENSATORY DAMAGES IMPLAUSIBLE (Philadelphia Federal)

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Plaintiff sued his dental insurer in federal court for breach of contract, bad faith, and various other claims.  He moved for permission to proceed in forma pauperis, and while the court granted that motion, it dismissed the claims for lack of subject matter jurisdiction. Specifically, the complaint could not make out a claim in excess of $75,000.

The actual damages alleged were $1,200.  The court recognized the bad faith statute allowed for punitive damages, which could be considered toward establishing the $75,000 jurisdictional minimum amount in controversy.  Judge Marston found this to mean the insured was seeking at least $73,800 in punitive damages on his $1,200 compensatory damages claim, an approximate 61:1 ratio.

“But, as the Supreme Court has explained, ‘in practice, few awards exceeding a single-digit ratio between punitive and compensatory damages will satisfy due process.’” In this case, even allowing a punitive damages award nine times compensatory damages “is a mere $10,800—far below the jurisdictional amount.”

Relying on the Third Circuit’s unpublished opinion in Kalick v. Northwest Airlines, Judge Marston found there was no plausible claim that could reach $75,000, and dismissed for lack of subject matter jurisdiction.

Date of Decision:  January 22, 2021

Berkery v. Metropolitan Life Ins. Co., U.S. District Court Eastern District of Pennsylvania No. CV 21-26-KSM, 2021 WL 229320 (E.D. Pa. Jan. 22, 2021) (Marston, J.)

BAD FAITH CLAIM STATED WHERE COMPLAINT MAKES OUT CLAIM INSURER KNOWINGLY DENIED BENEFITS DUE (Philadelphia Federal)

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This case involves a discrepancy over whether an insured timely renewed his life insurance policy, two months before his death.  There was a dispute of fact over the date when the premium payment was mailed and received.

The carrier insisted the premium check was not mailed and received before the date necessary to maintain the policy. It deposited the insured’s payment check, but later returned the payment sum and deemed the policy lapsed on the basis the payment was outside the policy’s grace period. The beneficiary children, through their mother, alleged the check in fact was mailed and received within the grace period for premium payments. They sued for breach of contract and bad faith.

The insurer moved for judgment on the pleadings as to both counts.

First, the court denied judgment on the pleadings regarding the breach of contract claim. There was a dispute of fact over the mailing and receipt dates that could not be resolved via a motion for judgment on the pleadings.

Judge Slomsky then rejected the motion to dismiss the bad faith claim.

The plaintiffs alleged the insurer denied their claims without a reasonable basis, knowing that it had in fact received the insured’s premium payment during the grace period for continuing the policy. Further, the plaintiffs adequately alleged the insurer “knew of or recklessly disregarded the lack of reasonable basis because it knew [payment was timely] when it received and deposited the July Payment [from the deceased insured].”  Despite this knowledge, the insurer “refused to pay the Policy’s benefits and never issued a denial letter.”

In denying the motion, Judge Slomsky concluded that, “[a]t this stage, viewing the facts in the light most favorable to Plaintiffs, they are sufficient to raise an inference that [the insurer] refused to pay under the Policy in bad faith.”

Date of Decision: January 21, 2021

Mullin v. Reliastar Life Insurance Company, U.S. District Court Eastern District of Pennsylvania No. CV 20-1438, 2021 WL 210962 (E.D. Pa. Jan. 21, 2021) (Slomsky, J.)

JUDGE BAYLSON DISMISSES STATUTORY BAD FAITH CLAIM ONLY SUPPORTED BY CONCLUSORY ALLEGATIONS (Philadelphia Federal)

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In this case, like many others in the recent past, the UIM bad faith claims are dismissed with leave to amend.

The tortfeasor’s carrier payed the injured insured its $15,000 policy.  The insured had $100,000 in UIM coverage from her own carrier.  In seeking UIM coverage, the insured provided her carrier with “documentation of her losses including medical bills and other economic losses totaling more than $34,263.47.” In bringing breach of contract and bad faith claims, she alleges her carrier refused to make any “bona-fide good faith offers of settlement to the Plaintiff that contemplate those substantiated and verified losses and to the contrary, has made no offer for purposes of resolving Plaintiff’s Underinsured Motorist’s Claim.”

The insurer moved to dismiss the statutory bad faith claim on the basis the insured only pleaded conclusory allegations. In response, the insured argued her complaint included allegations “that (1) she promptly provided Defendant with proof of the amount of her damages, (2) Defendant has refused to make a settlement offer, (3) Plaintiff provided additional medical documentation at Defendant’s request, and that (4) Defendant has had “ample time to properly evaluate Plaintiff’s claim.” As he has in other cases, Eastern District Judge Baylson dismissed the bad faith claim, without prejudice.

Judge Baylson cited his prior opinions in Eley (2011) and Kelly (2019) in holding the instant allegations merely conclusory, lacking in the kind of factual detail that could support a plausible bad faith claim. He finds the insured did not provide “any explanation of how Defendant responded to her claim, or what facts, beyond its failure to pay her claim, indicate bad faith. The fact that she provided Defendant with supporting documents regarding her claim does not alone indicate bad faith. Plaintiff has not provided any information regarding Defendant’s response to her claim. She has simply stated that she considers any response on its part to be unsatisfactory.”

In granting the motion to dismiss without prejudice, Judge Baylson observed that the insurer only sought dismissal of the insured’s statutory bad faith claim. Thus, this dismissal did not affect any other portions of the complaint.

Date of Decision:  January 15, 2021

Baxley v. State Farm Mutual Automobile Insurance Company, U.S. District Court Eastern District of Pennsylvania No. CV 20-5512, 2021 WL 149256 (E.D. Pa. Jan. 15, 2021) (Baylson, J.)

Note: It is only the beginning of the fourth full week in January, but this is our fifth UIM case posted to date this year.

NO BAD FAITH POSSIBLE WHEN CARRIER CONDUCTS A REASONABLE REVIEW, AND MAKES ITS DETERMINATION BASED UPON AN EXPERT REPORT (Philadelphia Federal)

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Like yesterday’s post, an insurer’s reliance on an expert report precluded bad faith.

The case involved first party coverage for a home heating oil spill.  The coverage issues involved whether the leak was caused by ongoing corrosion or was sudden and accidental, and/or or was subject to a pollution exclusion. The carrier denied coverage, and the insured brought breach of contract and bad faith claims. The insurer successfully moved for summary judgment on all counts.

No Coverage Due for Ongoing Corrosion and Under Pollution Exclusion

As to the corrosion issue, the insurer provided an unrefuted expert engineering report stating that long-term corrosion caused the leak. Thus, there were no dispute of fact on this coverage issue, warranting summary judgment for the insurer.

As to the pollution exclusion, the court did an exhaustive analysis of the case law on pollution exclusions and home heating oil.  Magistrate Judge Hey found, under the circumstances of this case, home heating oil qualified as a pollutant. “Here, Plaintiff contacted an environmental services firm about remediation and provided the court with the soil analysis identifying the same chemicals as were present in the soil in [prior precedent], and provided ample evidence that those chemicals were considered hazardous or pollutants.” Thus, “the record here presents more than sufficient evidence to allow the Court to apply the pollution exclusion to the facts of this case.”

No Bad Faith in Light of Expert Report

The court did not address the issue of whether the statutory bad faith claim had to be denied as a matter of law because no coverage was due. Rather, the court analyzed bad faith solely based on the quality of the insurer’s investigation.

Magistrate Judge Hey states, “[i]n order to determine whether an insurer acted in bad faith in conducting an investigation into whether an insured was entitled to benefits, courts have looked to the following: Judges of this court have held that an insurance company’s substantial and thorough investigation of an insurance claim, forming the basis of a company’s refusal to make or continue making benefit payments, establishes a reasonable basis that defeats a bad faith claim …. To defeat a bad faith claim, the insurance company need not show that the process used to reach its conclusion was flawless or that its investigatory methods eliminated possibilities at odds with its conclusion. Rather, an insurance company simply must show that it conducted a review or investigation sufficiently thorough to yield a reasonable foundation for its action.”

In this case, the court found the carrier “had a reasonable basis for its decision to deny Plaintiff’s claim based on the engineering report finding that the leak was caused by long-term corrosion, excluded by the policy, and that the heating oil was a pollutant based on environmental testing, government regulations and prior caselaw. Plaintiff has presented no evidence presenting a genuine issue of material fact in this regard.”

Thus, the insurer had a reasonable basis to deny the claim.

Biela v. Westfield Insurance Company, U.S. District Court Eastern District of Pennsylvania No. CV 19-4383, 2021 WL 181432 (E.D. Pa. Jan. 19, 2021) (Hey, M.J.)

NO BAD FAITH FOR EVEN NEGLIGENT CLAIM HANDLING, AND WHERE INSURER’S POSITION WAS SUPPORTED BY AN EXPERT (Philadelphia Federal)

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This UIM bad faith case had survived a motion to dismiss, but summary judgment ended the plaintiff’s bad faith claim.

Eastern District Judge Leeson had originally allowed the bad faith claim to proceed, as plaintiff had alleged more than a valuation dispute.  Our prior blog post can be found here.

The present bad faith summary judgment motion was before Magistrate Judge Perkin. His opinion goes through the claim handling history in minute detail.  Among other things, it shows nearly a year passed before the insured provided the claim handlers with all medical records and details on the specific injuries for which he was seeking full UIM policy limits.  The record shows the insurer assigned a specialist in medical resources (SMR) to review the medical file, and later had a medical examination performed by a physician. Discovery appeared to show potential errors in the SMR’s evaluation.

Based on the medical reviews, the insurer had not paid its full UIM limits, as plaintiff demanded, at the time suit was filed.  The insured challenged the conclusions of both the SMR and the physician on the origin and scope of his injuries in bringing the bad faith claim.

Magistrate Judge Perkin observed that an “insurance company need not show that the process used to reach its conclusion was flawless or that its investigatory methods eliminated possibilities at odds with its conclusions. Rather, an insurance company simply must show that it conducted a review or investigation sufficiently thorough to yield a reasonable foundation for its action.”  Thus, “[e]ven if Defendant’s claims-handling processes were not ideal, there is no evidence in the record, let alone clear and convincing evidence, to indicate that Defendant’s purported mishandling of Plaintiff’s claim was motivated by a dishonest purpose or ill will.”

Citing older case law, the court states, “while under Pennsylvania law bad faith may extend to an insurer’s investigation and other conduct in handling the claim, that conduct must ‘import a dishonest purpose.’” “Invariably, this requires that the insurer lack a reasonable basis for denying coverage, as mere negligence or aggressive protection of an insurer’s interests is not bad faith.”

[Note: In 2017, Pennsylvania’s Supreme Court made clear in Rancosky that “we hold that proof of an insurance company’s motive of self-interest or ill-will is not a prerequisite to prevailing in a bad faith claim under Section 8371, as argued by Appellant. While such evidence is probative of the second Terletsky prong, we hold that evidence of the insurer’s knowledge or recklessness as to its lack of a reasonable basis in denying policy benefits is sufficient.” A link to our Rancosky summary can be found here.]

Applying this law to the facts, Magistrate Judge Perkin found that “[a]lthough the plaintiff disagrees with the conclusions of both [the SMR and the carrier’s physician], it is clear that [the carrier] had a reasonable basis to value the claim based, at a minimum, on [the physician’s] report.” Assuming that the SMR “performed an insufficient and incorrect medical review of Plaintiff’s case, Defendant did not deny Plaintiff’s claim based upon that review, but rather continued its investigation of Plaintiff’s claim. Moreover, it is not apparent on the record that Defendant has ever denied coverage to Plaintiff.”

As to how the insurer handled the various bodily injury claims, the plaintiff’s doctors had sourced these all to the auto accident at issue, while the carrier’s physician only identified some of these injuries as being caused by the accident. Thus, Magistrate Judge Perkin found:

“Similarly, the fact that the plaintiff’s experts relate all of the plaintiff’s right knee and left ankle complaints to the accident does not provide a basis for bad faith. Defendant retained [an] orthopedic surgeon … to perform an independent medical examination and records review. After completing same, [defendant’s surgeon] concluded that that only the plaintiff’s initial meniscal tear and resultant arthroscopic surgery were related to the accident. None of the plaintiff’s left ankle complaints/treatments, or additional right knee treatment, was accident-related. Accordingly, [the carrier] had a reasonable basis for its claim handling.”

Date of Decision:  January 13, 2021

Perez-Garcia v. State Farm Mutual Automobile Insurance Company, U.S. District Court Eastern District of Pennsylvania, No. CV 18-3783, 2021 WL 131343 (E.D. Pa. Jan. 13, 2021) (Perkin, M.J.)

NO PLAUSIBLE BAD FAITH CLAIM WHERE THERE IS SIMPLY A VALUATION DISPUTE OR REFUSAL TO IMMEDIATELY PAY POLICY LIMIT DEMAND (Middle District)

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The insured failed to plead a plausible claim in this UM bad faith case.

The 18-year old insured was rear-ended by an uninsured motorist, and suffered a long list of injuries. She had $100,000 in UM coverage.  The carrier offered $11,300 to settle her claims, and rejected a policy limit demand.  The insured brought breach of contract and statutory bad faith claims, and the insurer moved to dismiss the bad faith claim.

In determining whether a plaintiff states a plausible bad faith claim, a court must separate conclusory allegations from factual allegations, because conclusory allegations are not entitled to an assumption of truth for Rule 12(b)(6) purposes.

Here, the complaint alleges at least 16 bases for bad faith (listed below). Magistrate Judge Schwab found, however, the complaint “contains mostly conclusory statements that are not supported by factual allegations.” Thus, “[a]lthough long, [the insured’s] list of how the defendant allegedly acted in bad faith contains conclusions, rather than facts.”

Magistrate Judge Schwab cites a number of cases finding these sorts of allegations to be conclusory, including Middle District Judge Caputo’s 2019 Peters decision, 2017 Meyers decision, and 2012 Sypeck decision, Middle District Judge Rambo’s 2018 Rickell decision, Middle District Judge Caldwell’s 2010 Muth decision, as well as the Third Circuit’s frequently cited 2012 Smith decision.

Next, in looking at the factual allegations, the insured merely alleges she was diagnosed with certain injuries, went through physical therapy, gave the insurer notice of her claim, and forwarded various records for the insurer’s review. The insured’s counsel spoke with the insurer’s claims department, and made the carrier aware the insured was 18 at the time of the accident, continued to suffer from visual impairment and post-traumatic headaches, among other injuries, as a result of the head trauma she suffered, and that the insurer offered $11,300 to settle.

“These factual allegations, however, are not enough to state a bad faith claim upon which relief can be granted.”

A disagreement over a claim’s value, without the facts needed to show bad faith, cannot alone create bad faith. Here, the insured did not allege “facts to support an inference that the defendant did not have a reasonable basis for its settlement offer or that the defendant knew or recklessly disregarded any lack of a reasonable basis for such an offer.” Citing the Third Circuit’s Smith decision (above), Judge Caputo’s 2019 Clarke decision and 2019 Moran decision, Eastern District Judge Baylson’s June 2020 Dietz decision, Middle District Judge Kane’s 2019 Rosenthal decision, and the 2009 Superior Court Johnson decision, Magistrate Judge Schwab observes that low but reasonable settlement offers do not constitute bad faith, and that a “low-ball” offer, standing alone, cannot make out a bad faith claim.

Nor can refusing immediately to pay a policy limit demand by itself constitute bad faith. “Indeed, courts have consistently held that a dispute or discrepancy in the valuation of a claim between the insurer and the insured is not alone indicative of bad faith.” The insured simply did not plead facts “from which it can plausibly be inferred that the defendant’s offer was unreasonable and made in bad faith, rather than made as part of the ordinary course of negotiations between insurers and insureds.” (internal quotation marks omitted)

Magistrate Judge Schwab dismissed the bad faith claim, but with leave to amend. This allowed for a second amended complaint to be filed “if appropriate, to state a bad faith claim upon which relief can be granted.”

Durdach v. LM General Insurance Company, U.S. District Court Middle District of Pennsylvania No. 3:20-CV-00926, 2021 WL 84174 (M.D. Pa. Jan. 11, 2021) (Schwab, M.J.)

The litany of conclusory allegations referenced above, include:

  1. unreasonably delay[ing] the processing of a valid claim;

  2. kn[owingly] or recklessly disregard[ing] the fact that the delay was unreasonable;

  3. failing to objectively and fairly evaluate Plaintiff’s claim;

  4. engaging in dilatory and abusive claims handling;

  5. failing to adopt or implement reasonable standards in evaluating Plaintiff’s claim;

  6. acting unreasonably and unfairly in response to Plaintiff’s claim;

  7. not attempting in good faith to effectuate a fair, prompt, and equitable settlement of Plaintiff’s claim in which the Defendant’s liability under the policy had become reasonably clear;

  8. subordinating the interests of its insured and those entitled under its insured’s coverage to its own financial monetary interests;

  9. failing to promptly offer reasonable payment to the Plaintiff;

  10. failing to reasonably and adequately investigate Plaintiff’s claim; k. failing to reasonably and adequately evaluate or review the medical documentation in Defendant’s possession;

  11. violating the fiduciary duty owed to the Plaintiff;

  12. acting unreasonably and unfairly by withholding underinsured motorist benefits justly due and owing to the Plaintiff;

  13. failing to make an honest, intelligent, and objective settlement offer;

  14. causing Plaintiff to expend money on the presentation of her claim; and

  15. failing to make a reasonable settlement offer despite knowing the severity of a visual injury and post-traumatic headaches in an 18-year old.

[The insured] also alleges that the defendant failed to act in good faith and “engaged in wanton and reckless conduct….”

NO BAD FAITH IN BRINGING INTERPLEADER ACTION (New Jersey Federal)

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The husband-beneficiary of his wife’s life insurance policy brought breach of contract, bad faith, and unfair trade practices counterclaims against an insurer for interpleading the policy proceeds into court.  The couple’s children were contingent beneficiaries on the policy.

The insured had died in unclear circumstances. She either was murdered or committed suicide (the central dispute being whether she did or could have stabbed herself 47 times while being intoxicated on oxycodone).  For a time the husband had been charged with murder, and was incarcerated.  The criminal case, however, was eventually dismissed, and the husband released.  The prosecutors, however, did not conclude the husband was innocent, instead stating that there was insufficient evidence to prove a case beyond a reasonable doubt and that they could not morally continue the prosecution. The charges were dismissed, but without prejudice.

The court held the insurer “properly invoked the interpleader device, due to a legitimate fear of multiple liability under the Slayer Statute.”  The court stated, “it takes little examination of the facts to see that they could support competing, colorable claims to the benefits.” The court found it clear the insurer faced a decision that was far from ordinary.

“Although the record is only minimally developed, the evidence thus far suggests two starkly divergent paths: the Insured either died from extreme Oxycodone use, which allowed her to self-inflict forty-seven stab wounds, or was killed by [her husband]. Factually, it is also undisputed that [he] was at home alone with the Insured when she died, touched the weapon used to stab her, and was found with blood on his hands. … Therefore, ‘[e]ven though no other claims have been made on the insurance,’ potential colorable claims exist. … In a case with such gruesome facts and conflicting narratives, [the insurer] seems entitled to invoke interpleader.”

The court next found that the insurer did not bear any responsibility “for the existence of the ownership controversy.” Nor did the insurer’s decision to interplead result from its own failure to resolve the dispute between potential claimants. The husband did not allege “any plausible facts that suggest a ‘bad faith’ motivation, besides [the insurer’s] legitimate concern for avoiding multiple liability.” He was simply claiming bad faith on the basis the carrier filed an interpleader action instead of paying him the policy proceeds.

Thus, interpleader was proper and all claims against the carrier were dismissed.

Date of Decision:  January 7, 2021

Prudential Insurance Company of America v. Ianetti, U.S. District Court District of New Jersey No. 19-21849 (SDW) (LDW), 2021 WL 71593 (D.N.J. Jan. 7, 2021) (Wigenton, J.)

NO COVID-19 BUSINESS LOSS COVERAGE DUE; NO BAD FAITH FOR DENIAL OF COVERAGE OR FAILURE TO INVESTIGATE (Philadelphia Federal)

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These two Covid-19 coverage cases ended in summary judgments against the insureds on their breach of contract and statutory bad faith claims.  Eastern District Judge Kenney decided both cases last Thursday (1/14/2021).

Case 1: Clear Hearing Solutions v. Continental Casualty

Covid-19 Business Coverage Issues

In Clear Hearing Solutions, the insured had two all-risk policies.  Plaintiffs were Pennsylvania entities, but they had hearing service stores closed in Maryland and North Carolina due to government shutdowns.  The insureds alleged they were entitled to “Business Income coverage, Extra Expense Coverage, Extended Business Income coverage, and Civil Authority coverage,” but the carrier denied coverage.

Judge Kenney observed that direct physical loss of property or damage to property were essential to all these coverages.  He followed the principles that “[t]he criteria for physical loss caused by a source unnoticeable to the naked eye is thus whether the functionality of the…property was nearly eliminated or destroyed, or whether the[ ] property was made useless or uninhabitable by that source.” (internal quotation marks omitted) The mere presence of the contaminating source material, however, “or the general threat of future damage from that presence, lacks the distinct and demonstrable character necessary for first-party insurance coverage.”

Judge Kenney states:

The Court agrees with and adopts the conclusion reached by another Court in this district. In 4431, Inc. et al v. Cincinnati Ins. Cos., the Court concluded that, “under Pennsylvania law, for Plaintiffs to assert an economic loss resulting from their inability to operate their premises as intended within the coverage of the Policy’s ‘physical loss’ provision, the loss and the bar to operation from which it results must bear a causal relationship to some physical condition of the premises.” No. 5:20-cv-04396, 2020 WL 7075318, at *11 (E.D. Pa. Dec. 3, 2020) (emphasis in original). There must also be an “element correlating to [the] extent of operational utility – i.e., a premises must be uninhabitable and unusable, or nearly as such.” Id; see also Brian Handel D.M.D. v. Allstate Ins. Co., No. 20-3198, 2020 WL 6545893 (E.D. Pa. Nov. 6, 2020) (finding Port Authority and Hardinger preclude a finding of “direct physical loss of or damage to” property where it remained inhabitable and usable, albeit in limited ways). In sum, while structural damage is not required to show “direct physical loss of” property, the source that destroys the property’s utility must have something to do with the physical condition of the premises.

The Clear Hearing insureds conceded there was no Covid-19 on the premises, and their losses resulted from government directed business closures.  “Because Clear Hearing expressly denies the existence of anything affecting the physical condition of its premises, its losses are a mere loss of use untethered to the physical condition of the property itself. Reading ‘direct physical loss of or damage to property’ to contemplate mere loss of use is not a reasonable interpretation because it renders two other Policy provisions superfluous or nonsensical.”

Judge Kenney then goes into a more detailed analysis as to why there is no covered physical damage or property loss from Covid-19, which are discussed in the opinion at length.

He further observes that simply because the policy lacks a virus exclusion, this does not create coverage by implication. “But ‘[a] loss which does not properly fall within the coverage clause cannot be regarded as covered thereby merely because it is not within any of the specific exceptions….’ And it is at least plausible that the physical manifestation of some type of virus could cause covered losses. That situation is just not present here.”

Judge Kenney also finds that the Maryland and North Carolina “government orders cannot constitute a covered cause of loss under either the Business Income and Extra Expense coverages or the Civil Authority Coverage provisions.”  Further, there was no genuine factual issue “as to whether the government orders were issued due to physical loss of or damage to nearby property,” and the insured could not show access to the premises was prohibited entirely for all purposes by these government orders.

Bad Faith Issues

[Note: We have observed numerous times over the years there is a strong argument that cognizable statutory bad faith claims in Pennsylvania require that the insured must have be denied an actual benefit, i.e., a payment of first party damages due or a refusal to defend and indemnify against third party claims due.  Thus, as repeated on this blog ad naseum, there is a genuine issue as to whether an independent statutory bad faith claim for poor investigation practices is cognizable when no coverage is otherwise due under a policy. For example, see this post from January 2020, this post from August 2020, and this post from earlier in August 2020.]

The Clear Hearing opinion states that statutory bad faith is an independent cause of action from a breach of contract action. If the statutory bad faith claim, however, “is premised solely on the denial of coverage, the claim must necessarily fail if a court finds that no coverage exists.” Judge Kenney adds, “[o]n the other hand, ‘if bad faith is asserted as to conduct beyond a denial of coverage, the bad faith claim is actionable as to that conduct regardless of whether the contract claim survives.’” Further, “[t]hat distinction has been accepted when, for example, an insured claims the insurer investigated his claim in bad faith in addition to a bad-faith denial of coverage.”

[Note: The legal support for these propositions goes back, in part, to the Third Circuit’s unpublished 2007 Gallatin Fuels decision, in which the court found bad faith was still possible even though there was not even a policy in effect at the time of the incident.  Here is a link to an article addressing the logic in Gallatin Fuels, and the effect the Pennsylvania 2007 Supreme Court decision in Toy v. Metropolitan Life should have had on Gallatin Fuels reasoning and authority, had the Gallatin Fuels Court looked to Toy, which was decided earlier in 2007.]

The bulk of Clear Hearing’s bad faith claims were based on coverage denials, and these claims were readily dismissed because no coverage was ever due. Judge Kenney then goes on to address the claim handling based bad faith arguments, accepting the possibility that statutory bad faith might still exist even when no coverage is due and no benefit has actually been denied.

Clear Hearing argued that there was bad faith based on the claim handling because Continental immediately denied the claim and did not conduct any investigation, while further failing to address or acknowledge the insureds’ interpretation of the policy language on direct physical loss.  Rather, Continental relied “on case law providing a restrictive interpretation of the term direct physical loss to deny its claim as part of a policy to limit the company’s losses during the pandemic.” (internal quotation marks omitted).

Judge Kenney rejected this argument:

To the extent that these allegations may be construed to extend beyond bad faith in the denial itself to bad faith in the investigatory process or process of denial, Clear Hearing has not met its burden. In the context of a claim for coverage based solely on government closure orders, and on Civil Authority orders where nearby property has not suffered direct physical loss of or damage to property and access to plaintiff’s property has not been prohibited, there is nothing to investigate: coverage does not exist on the face of that claim. Therefore, Clear Hearing has not shown bad faith in Continental’s lack of investigation or by denying Clear Hearing’s claim “in light of the current context of mass denials of COVID-19 related business interruption claims.” Discovery on this issue would not change that conclusion. Nor does Continental’s purported reliance on caselaw that this Court concludes correctly interprets “direct physical loss of or damage to” with respect to Clear Hearing’s claims indicate bad faith. Accordingly, Clear Hearing has not shown its entitlement to damages on its bad faith claim or an existence of a dispute of material fact as to Continental’s bad faith.

Case 2: Ultimate Hearing Solutions v. Twin City Fire Insurance

Plaintiffs were Pennsylvania entities with businesses located in Maryland, Delaware, Pennsylvania, and Virginia, which were subject to government closure orders due to Covid-19.  They likewise had all-risk policies, but with a different insurer than the Clear Hearing plaintiffs.  The Ultimate Hearing plaintiffs were represented by the same counsel as in the Clear Hearing case. These plaintiffs brought similar breach of contract and bad faith claims.

On the coverage, Judge Kenney applied the same reasoning found in Clear Hearing to conclude there was no covered direct physical loss or damage to property.

There were two differences, however, between the Ultimate Hearing and Clear Hearing all-risk policies. The Ultimate Healing policies included (1) limited coverage for fungi, wet rot, dry rot, bacteria, and viruses; and (2) a virus exclusion.

In rejecting limited virus coverage, Judge Kenney stated, “the Limited Virus Coverage clearly states that the Policy only covers ‘Direct physical loss or direct physical damage to Covered Property caused by … virus.’ Plaintiffs did not allege that the coronavirus was present at any of their insured properties. They also have not shown, as discussed above, physical loss or damage to their properties.”

Judge Kenney further rejected the argument that the limited virus coverage was illusory, because “Plaintiffs fail to acknowledge that this Limited Virus Coverage provision also applies to fungi, wet rot, dry rot, and bacteria, not just viruses. While it may be difficult to think of a hypothetical situation where a virus causes physical damage to a property, it is not difficult to imagine that wet rot, dry rot or fungi can cause damage that would satisfy the ‘direct physical loss or direct physical damage’ requirement. Further, while it may be difficult to imagine, Defendants did in fact identify a case where insured property was damaged due to a virus caused by a Covered Cause of Loss.”

Judge Kenney also found the virus exclusion precluded coverage.

The bad faith arguments were similar to those made in Clear Hearing, but without reference to the insurer’s improperly relying on caselaw to deny coverage. Rather, the argument was phrased as a refusal to consider the insureds reasonable interpretation of the policy language concerning direct physical loss.

Judge Kenney rejected the bad faith claim handling argument, stating as in Clear Hearing:

In the context of a claim for coverage based solely on the Closure Orders where there are no claims that the insured property or nearby property has been physically damaged and access to Plaintiffs’ property has not been entirely prohibited, there is nothing to investigate: coverage does not exist on the face of that claim. Therefore, Ultimate Hearing Solutions has not shown bad faith in Twin City’s lack of investigation or by denying Ultimate Hearing Solutions’ claim “in light of the current context of mass denials of COVID-19 related business interruption claims.” Discovery on this issue would not change that conclusion. Accordingly, Ultimate Hearing Solutions has not shown its entitlement to damages on its bad faith claim or an existence of a dispute of material fact as to Twin City’s bad faith.

Date of Decision:  January 14, 2021

Clear Hearing Solutions, LLC v. Continental Casualty Co., U.S. District Court Eastern District of Pennsylvania No. 20-3454, 2021 WL 131283 (E.D. Pa. Jan. 14, 2021) (Kenney, J.)

Ultimate Hearing Solutions II, LLC v. Twin City Fire Insurance Company, U.S. District Court Eastern District of Pennsylvania No. 20-2401, 2021 WL 131556 (E.D. Pa. Jan. 14, 2021) (Kenney, J.)

DECLARATORY JUDGMENT RULING ON COVERAGE CANNOT BE APPEALED WHILE BAD FAITH CLAIM IS PENDING (Superior Court of Pennsylvania)

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The Montgomery County Court of Common Pleas granted partial summary judgment on declaratory judgment claims concerning coverage, and an appeal was taken. The Superior Court quashed the interlocutory appeal as other claims remained undecided. In supporting its decision, the Superior Court observed, among other things:

“This Court has repeatedly applied Bolmgren [v. State Farm Fire and Cas. Co., 758 A.2d 689 (Pa.Super. 2000)],when discussing the appealability of orders that resolve declaratory judgment claims but leave other claims outstanding. See, e.g., Bombar v. West American Ins. Co., 932 A.2d 78, 85-86 (Pa.Super. 2007) (holding that trial court’s initial January 19, 2005 order granting summary judgment on declaratory judgment count of complaint was not final and appealable, where that order did not determine amount of damages for remaining bad faith claim; appeal from later December 30, 2005 order resolving outstanding bad faith claim was proper); Cresswell v. Pennsylvania Nat. Mut. Cas. Ins. Co., 820 A.2d 172, 176 n.2 (Pa.Super. 2003) (determining trial court’s initial December 20, 2001 order granting partial summary judgment in favor of appellee on declaratory judgment claim was interlocutory and unappealable, where court’s order left unresolved additional bad faith claim; trial court’s later order of May 28, 2002, which disposed of sole remaining bad faith claim, was final and appealable)….”

Date of Decision: January 11, 2021

Schmitt v. State Farm Mut. Auto. Ins. Co., Superior Court of Pennsylvania No. 1767 EDA 2019, 2021 WL 79808 (Jan. 11, 2021) (King, Stabile, Stevens, JJ.)

NO BREACH OR BAD FAITH WHEN INSURER REFUSES TO PAY REPLACEMENT VALUE ON BASIS THAT INSURED HAS TO PAY TO HAVE THAT WORK DONE IN THE FIRST INSTANCE (New Jersey Appellate Division)

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The insured suffered property damage. Under the policy, the insurer would initially pay actual cash value for the loss, and would subsequently pay replacement value if the insured first had the replacement work carried out at the insured’s own expense.  The insured raised various arguments, including a central argument that she could not afford to pay for the repairs in advance of receiving payments for those repairs from the insurer, i.e., she was in a Catch-22. (She alleged the repair costs were over $170,000 greater than the ACV payment.)

The insured sued for breach of contract, breach of the duty of good faith and fair dealing, and under the Consumer Fraud Act.  The insurer obtained summary judgment at the trial level, and the Appellate Division affirmed on the basis of the trial court’s reasoning.

Although the policy created this Catch-22, the trial court judge “recognized ‘a party to a contract may not avail itself of a condition precedent where its own conduct rendered compliance with the condition impossible.’” The trial judge did note his own “concern that defendant ‘appears to have no mechanism to provide payment of RCV value until the repairs or replacements are completed[,]’ thereby requiring the insured to ‘front’ the money and seek reimbursement later.’ But the [trial] judge nonetheless found ‘the plain language of the contract provides for a process whether RCV can only occur after the acceptance of a settlement amount or rejection thereof.’”

The trial judge rejected an impossibility of performance argument, and observed that the insured accepted the actual cash value payment and did not put on any expert evidence that the actual cash value sum the insurer paid was incorrect.

Date of Decision: December 31, 2020

Lanier v. Farmers Mutual Fire Insurance Company of Salem County, New Jersey Superior Court Appellate Division No. A-1398-19T2, 2020 WL 7822353 (N.J. Super. Ct. App. Div. Dec. 31, 2020) (Firko, Rose, Whipple, JJ.)