SEPTEMBER 2012 BAD FAITH CASES: COURT RULES THAT LIMITATIONS PERIOD FOR COMMON-LAW BAD FAITH CLAIM STARTS WHEN VERDICT IN UNDERLYING CLAIM IS RENDERED, NOT WHEN THE RIGHT TO INSTITUTE A SUIT AGAINST CARRIER ARISES, AND THEN REJECTS CLAIM AS CARRIER HAD REASONABLE BASIS NOT TO SETTLE (Philadelphia Federal)

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In Katzenmoyer v. Allstate Ins. Co., the court heard cross-motions for summary judgment stemming from an insurance dispute. A person was injured while driving with the insured in his ATV. Suit was brought and a jury verdict was entered against the insured. The insured eventually assigned his claims against his homeowners insurance carrier to the injured passenger, after a long period of litigation. The assignee brought a breach of contract/common law bad faith claim against the insurer, as assignee, for failure to settle at a policy limits demand. The insurer had taken the position that the accident occurred in a woods near the home, not on the premises of the home, and so there was no coverage.

The case history is over a decade long, and it was almost that long before the assignment actually occurred.

The injury occurred in 2001. The injured party requested the $100,000 policy limit of the insured homeowner’s insurance policy with the carrier, and subsequently filed a personal injury action in 2002 against the insured party, who unsuccessfully asked the carrier to settle the claim. In 2003, the carrier filed a declaratory judgment action in District Court, and the Court ruled on summary judgment that the carrier had no duty to defend or indemnify the insured in the underlying personal injury action. An appeal was taken to the Third Circuit.

In 2004, while that appeal was pending, the Pennsylvania Superior Court heard a case with similar facts and ruled against the carrier. Using this case as leverage, the assignee unsuccessfully sought to settle and against made a policy limits demand for a full release, which was rejected on various bases, including an alleged material difference in the facts and that a petition for allocator was pending on the Superior Court decision.
Soon after, the Third Circuit vacated the declaratory judgment in favor of the carrier on the basis of the related Superior Court decision and remanded: and after that allocator was denied on the Superior Court’s decision.

After the trial judge on remand indicated she was likely to rule against the carrier on the remand, the carrier thereafter offered the limits of the insured’s policy, i.e., $100,000, to the assignee, but the assignee declined the offer. In 2005, the trial judge ruled that the carrier had a duty to defend and indemnify, and the assignee demanded $750,000 to settle while an appeal to the Third Circuit was pending, which the carrier rejected. The Third Circuit affirmed, the insurer again offered the $100,000 and the assignee again demanded $750,000.

In 2009, a state court jury in the underlying personal injury case rendered a verdict against the insured party for $1,500,000. The carrier requested a release of all claims in exchange for the insured’s policy limits, but the parties again failed to settle. In 2010, the insured assigned all claims or rights to the claimant in this action. The carrier thereafter tendered the $100,000 policy limits to the assignee. However, the assignee bought a common-law bad faith claim against the carrier, prompting the parties to file competing summary judgment motions.

The carrier defended against the assignee’s bad faith claims on timeliness grounds, claiming that the four-year limitations period for common-law bad faith claims had expired. Specifically, the carrier argued that the claim was time-barred because the limitations period began when that party rejected the insured’s 2004 settlement offer. The assignee disagreed, arguing that the limitations period started after the 2009 jury verdict in the underlying personal injury suit.

The court ruled that the limitations period began when the jury rendered its verdict in the underlying state court action, not when the carrier declined the assignee’s settlement offer. The assignee could not have maintained a suit for common law contractual bad faith in 2004 because he had not yet suffered any damages. While the court acknowledged that Pennsylvania law is unclear on this issue, it nevertheless ruled that the limitations period could not have begun until 2009.

With respect to the common-law bad faith claim itself, however, the court ruled that the assignee failed to show that the carrier had acted in bad faith. In common law, Cowden, bad faith, a contract claim for bad faith requires evidence that an insurer acted negligently or unreasonably in handling the potential settlement of claims against its insured, and that . dven questionable conduct giving the appearance of bad faith is not sufficient to establish it so long as the insurer had a reasonable basis to deny coverage. An insured must prove its bad faith claim by clear and convincing evidence.

Essentially, the court reasoned, the carrier could not have acted unreasonably in denying the assignee’s settlement offers because it had no way of knowing that the Third Circuit would overturn its favorable district court ruling. The carrier was acting under a “bona fide belief” that it would win the suit and was justified in not settling the case. The court therefore granted the carrier’s motion for summary judgment. It also granted the assignee leave to amend, but stated that it would “not change the decision of the court.”

Date of Decision: August 30, 2012

Katzenmoyer v. Allstate Ins. Co., No. 11-3427, 2012 U.S. Dist. LEXIS 123483, U.S. District for the Eastern District of Pennsylvania (E.D. Pa. Aug. 30, 2012) (Shapiro, J.)

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