Monthly Archive for November, 2009

NOVEMBER BAD FAITH CASES
COURT’S RULING ON INSURED’S MOTION TO COMPEL DISCOVERY, DEPOSITIONS AND PRODUCTION OF DOCUMENTS (Western District)

Published on November 16, 2009 in PA - Agents and Administrators, PA - Discovery and Evidence and PA - Punitive Damages. Closed

In Smith v. Life Investors Ins. Co. of Am., the plaintiff in a class action suit filed a motion to compel discovery pursuant to Fed. R. Civ. P. 37 and a motion to compel production of documents.  Plaintiff asserted a bad faith claim, although the case primarily involved the interpretation of the term “actual charges” in a supplemental cancer insurance policy.  In the motion, Plaintiff sought an order compelling the insurer: (1) to provide complete responses to certain interrogatories and document requests; (2) to produce in-house counsel for deposition; and (3) to perform an additional search for documents.

The plaintiff sought the names and addresses of all insureds covered by particular policies on or after April 2006 and of all persons who had submitted “actual charges” claims to the insurer.  The court held that the insurer was required to provide the names and addresses of persons who filed claims.  However, the court concluded that the plaintiff failed to articulate a sufficient basis for discovery as to the broader category of policyholders who had not submitted claims.  The court stated that the burden of such discovery is greater and the likelihood that such policyholders would have relevant knowledge of the insurer’s treatment of “actual charges” claims is lower.

The plaintiff sought the identity of agents who sold the insurance policies in question within Pennsylvania.  Plaintiff contended that the agents had highly relevant information, particularly as to the bad faith claim.  Plaintiff’s daughter, Mary Pennington, was the insurance agent who sold the policy.  The court found that due to Ms. Pennington’s unique relationship to the case, her testimony may not be representative of that of an “independent” insurance agent.

Additionally, the court found that the knowledge of the insurer’s agents as to the “actual charges” policies and practices may be highly relevant.  In granting the plaintiff’s motion to compel the identity of the agents, the court stated that it would not impose any limitations upon plaintiff’s ability to contact the agents beyond the Federal Rules of Civil Procedure and Rules of Professional Conduct, but suggested that the parties cooperate to facilitate any such discovery.

The plaintiff sought information about the personal financial incentives which might have motivated the insurer’s decision-makers to revise the company’s interpretation of “actual charges.”  The court found that plaintiff had appropriately demonstrated a justifiable need for the sensitive employee compensation information for certain named employees to explore whether the insurer had a motive of financial self-interest.  However, the court found that the plaintiff had not met its heightened burden to undertake similar discovery as to other employees.

The court granted the plaintiff’s request to compel the insurer’s production of financial information and financial statements of the insurer and its corporate parent companies.  The plaintiff contended that such information was relevant in considering punitive damages.  The court found that plaintiff had set forth a prima facie case for punitive damages arising out of bad faith and that the protective order would adequately address the insurer’s concerns regarding the confidential and proprietary nature of the information.  The court further stated that a defendant’s wealth is a fact that may be considered in awarding punitive damages.

Date of Decision: October 16, 2009

Smith v. Life Investors Ins. Co. of Am., 2:07-cv-681, United States District Court for the Western District of Pennsylvania, 2009 U.S. Dist. LEXIS 96310 (W.D. Pa. October 16, 2009) (McVerry, J.)

NOVEMBER BAD FAITH CASES
NO BAD FAITH WHERE INSURER SETTLED CLAIMS AND EXHAUSTED POLICY LIMIT BEFORE ALL POTENTIAL CLAIMS HAD BEEN FILED (Philadelphia Federal)

Published on November 14, 2009 in PA - Coverage Issues and PA - Settlement related issues. Closed

In NIA Learning Ctr., Inc. v. Empire Fire & Marine Ins. Cos., the insured was involved in a car accident with Kim Stewart.  As a result of the accident, Stewart’s vehicle was damaged and a pedestrian, Aaron Jones, was struck and injured.  The insured’s policy with Empire provided coverage in the amount of $100,000 for “all claims arising out of the same accident.”  Stewart’s car insurance company made a subrogation claim, which Empire settled for approximately $13,000.

A “policy limits” demand was made on behalf of Jones for injuries he sustained in the accident.  The insurer paid $87,739.68 to Jones for his injuries and obtained a joint tortfeasor release.  Two years after the accident, Stewart sued the insured for personal injury damages from the accident.  The insurer sent a letter to the insured that it would not provide a defense to in the lawsuit.  The insured retained private counsel to defend the suit and Stewart was awarded $20,000 in arbitration.

The insured sued the carrier for bad faith pursuant to 42 Pa. Cons. Stat. § 8371, among other causes of actions.  The insured alleged that the insurer voluntarily exhausted the policy limit “despite the fact that it knew or should have known that there were other potential claims,” thereby “knowingly and intentionally exposing its insured to loss that would not be indemnified under the policy.”  The insurer argued that the insured’s entire claim should be dismissed because its duty to defend and indemnify was terminated when the insured’s policy limit was exhausted based on the explicit language in the insurance policy concerning the insurer’s duty.

The court stated that an insurer is under no obligation to wait to settle a claim until all possible claims have been filed.  The court held that the insured failed to make any showing of bad faith conduct on the part of the insurer. The court concluded that the claim files demonstrated that the insurer had conducted a reasonable and good faith investigation into the liability regarding the accident in question and that, based on the investigation’s results, the insurer had acted in good faith when entering into the settlements that exhausted the insured’s policy limits.

Date of Decision: October 1, 2009

NIA Learning Ctr., Inc. v. Empire Fire & Marine Ins. Cos., Civil Action No. 05-5178, United States District Court for the Eastern District of Pennsylvania, 2009 U.S. Dist. LEXIS 92991 (E.D. Pa. October 1, 2009) (Baylson, J.)

NOVEMBER BAD FAITH CASES
INSURER’S FAILURE TO FOLLOW BEST PRACTICES AND SPEAK WITH INSURED BEFORE DENYING COVERAGE NOT BAD FAITH WHERE NO COVERAGE (Third Circuit)

Published on November 13, 2009 in PA - Claims Handling (general), PA - Negligence not bad faith and PA - No coverage duty, no bad faith. Closed

In Smith v. Continental Casualty Company, the assignees hired an agent of an insurance broker-dealer to perform financial planning services.  The agent allegedly recommended investments in trusts that in turn invested in an unregistered off-shore entity.  That entity later filed bankruptcy and was alleged to have been a Ponzi scheme.  The assignees sued the agent for breach of contract and bad faith.

The carrier providing insurance for the broker-dealer’s agents denied coverage, and refused to provide a defense to the agent against the assignees’ claims.  The assignees and the agent settled, and the agent assigned its rights against the insurer to the assignees.  The court found that the assignees’ claim was excluded from coverage because the assignees’ investments did not involve approved products, and a policy exclusion precluded coverage for any claim “involving services or products not approved by” the broker-dealer.  The court held that the assignees’ bad faith claim failed because the insurer had a reasonable basis for the denial of coverage.  The court held that although the insurer should have spoken with the agent before denying coverage, a failure to follow best practices did not constitute bad faith.

Date of Decision: October 8, 2009

Smith v. Cont’l Cas. Co., No. 08-4140, U.S. Court of Appeals for the Third Circuit, 2009 U.S. App. LEXIS 22240, (3d Cir. October 8, 2009) (Barry, J.) (not precedential)

NOVEMBER BAD FAITH CASES
NO BAD FAITH WHERE INSURER PARTIALLY DENIED CLAIM FOR WATER DAMAGE BASED ON POLICY EXCLUSION (Philadelphia Federal)

Published on November 12, 2009 in PA - No coverage duty, no bad faith. Closed

The insured had a commercial building insurance policy on a three-story property.  The insured notified its insurer that a drain line from the roof had separated and caused damage to the first floor and basement.  The insurer had an engineer investigate the site.  The engineer determined that a leak from the roof drain caused water to enter the interior of the building near the basement stairs.

Additionally, the engineer determined that water from a ground source infiltrated the basement of the building, which accounted for the large amount (42 inches) of water and the silt along the floor and walls of the basement.

The policy excluded damage caused by “ground water, surface water and flood water.”  The insurer denied the insured’s claim for the damage to the basement, but offered to pay for the damage to the first floor caused by “a failed roof drain.”  The insured sued the insurer for bad faith, among other causes of action.

The court found that the insured’s claim for the damage to the basement was excluded from coverage, and therefore, the insurer’s partial denial was proper.  Additionally, the court observed that the insured’s bad faith claims would be dismissed because the insured failed to present any evidence that the insurer did not have a reasonable basis for partially denying coverage.

The district court granted summary judgment in favor of the carrier.

Date of Decision: October 21, 2009

Pisano v. Nationwide Mut. Fire Ins. Co., U.S. District Court, Eastern District of Pennsylvania, Civil Action No. 08-2524, 2009 U.S. Dist. LEXIS 98213 (E.D. Pa. October 21, 2009) (Goldberg, J.)

NOVEMBER 2009 BAD FAITH CASES
INSURER SUED FOR BAD FAITH COULD BE ENTITLED TO CONTRIBUTION FROM NEGLIGENT INSURANCE BROKER

Published on November 11, 2009 in PA - Agents and Administrators. Closed

The insured’s facility was flooded causing damage to its building, materials and inventory.  At the time of the flood, the insured had two insurance policies covering the facility, one from Harleysville Mutual Insurance Company and a commercial policy through Indiana Lumbermens Mutual Insurance Company (“ILM”).  Insured’s loss was estimated to be $3,293,993.38.

Insured received a payment in the amount of $1,165,751.70 under the Harleysville policy after its deductible was subtracted.  Insured then submitted the unpaid portion of the claim to ILM, who deducted its $500,000.00 deductible and then paid $1,625,514.68.  Insured alleged that it was permitted to apply the proceeds from its Harleysville policy to the deductible under the ILM policy, and that ILM breached its policy by refusing to allow it to do so.  Insured sued ILM for bad faith and breach of contract.

ILM joined the insured’s broker, Chamberlin & Reinheimer Insurers, Inc. (“CRI”), as a third party defendant.  ILM contended that CRI was partly responsible for the harm to the insured for which ILM could be found liable.  The court stated that as an insurance broker, CRI was the insured’s agent, and therefore, owed CRI a duty of care to act as a reasonably prudent insurance broker.

The court stated that if CRI breached this duty, which caused the indivisible (alleged) harm that resulted when ILM did not apply the Harleysville policy proceeds to the ILM policy deductible, it could bear culpability.  Accordingly, the court held that, on the complaint as pleaded for purposes of a motion to dismiss, CRI could be a joint tortfeasor whose negligence, along with ILM’s bad faith, caused the harm to the insured.  Thus, as joint tortfeasors, ILM could be entitled to contribution from CRI.

Date of Decision: October 23, 2009

Pine Grove Manufactured Homes v. Ind. Lumbermens Mut. Ins. Co., U.S. District Court, Middle District of Pennsylvania, Civil Action No. 3:08-CV-1233, 2009 U.S. Dist. LEXIS 98926 (M.D. Pa. October 23, 2009) (Caputo, J.)

A subsequent motion for reconsideration was granted in part on the contribution issue.  A summary of that opinion can be found on this blog.

NOVEMBER 2009 BAD FAITH CASES
NO REMAND WHERE REASONABLE VALUATION OF PLAINTIFF'S CLAIMS DOES NOT CREATE A LEGAL CERTAINTY THAT CLAIM IS WORTH LESS THAN $75,000 (Western District)

Published on November 7, 2009 in PA - Removal & Remand. Closed

The court was asked to remand a case where there were damages pleaded in excess of $30,000, and where attorneys’ fees and punitives were sought under the bad faith statute.  Plaintiff’s position was unclear on whether the claims could be in excess of $75,000, never amending the Complaint to commit to any position one way or the other.

Following Third Circuit precedent the Court looked at the value of the claim at the time the Complaint was filed, to determine the reasonable reading of the value.  The Plaintiff’s stipulation of value after removal is of no legal significance, and the only meaningful act would be an actual amendment to the Complaint that capped damages.  Further the Third Circuit applies the “legal certainty test” in weighing a remand, i.e., “it must be evident to a legal certainty that the Plaintiff cannot recover an amount greater than the [$]75,000 required for diversity jurisdiction.”

In this case, because of the severity of the injuries and the claims for punitives, the Court found that a reasonable reading of the damages exceeded $75,000 and absent a legal certainty that it would be less than $75,000, there would be no remand.

Date of Decision:  November 4, 2009

Friel v. State Farm Mut. Auto. Ins. Co., U. S. District Court, Western District of Pennsylvania, No. 09-cv-1253, 2009 U.S. Dist. LEXIS 102536  (McVerry, J.)