APRIL 2014 BAD FAITH CASES: INSURED STATED CLAIM FOR COMMON LAW CONTRACTUAL BAD FAITH UNDER BIRTH CENTER AND COWDEN FOR COMPENSATORY DAMAGES, INCLUDING POSSIBILITY OF RECOVERING DAMAGES FOR EMOTIONAL DISTRESS; AND THE COURT PERMITTED THE CASE TO PROCEED ON BAD FAITH THEORY THAT THE INSURER SOUGHT A GLOBAL SETTLEMENT OF UNDERLYING COVERAGE AND BAD FAITH CLAIMS, EVEN THOUGH COURT QUESTIONED THE STRENGTH OF THAT POSITION (Philadelphia Federal)
In Perrugia v. American Home Assurance Company, the District Court revisited principles of common law contractual bad faith claims under Cowden and Birth Center, and found that under these principles, damages for emotional distress were recoverable even where the sum paid under the policy was no longer in dispute.
The insured worked for Verizon, and was seriously injured while driving in the course of his employment. The other driver had a $500,000 policy, and Verizon had a $2 million policy in first-party underinsurance coverage. The injured insured settled with the other driver’s carrier for $451,673; and Verizon’s insurer allegedly gave express consent to that agreement.
The injured party pursued Verizon’s carrier, and provided the insurer’s adjuster with medical records, reports from treating physicians, and a vocational expert’s report on lost earnings—said to be over $1.5 million. The insured alleged a dilatory response in the carrier’s adjustment of the claim, making its first settlement offer approximately two years after being provided with this data.
That offer would have included a global release of any claims in connection with the insured’s claim for underinsured motorist benefits and, subsequent to the offer, the insurer’s attorney asked the plaintiff’s attorney if he intended to bring a statutory or common law bad faith claim related to the adjustment of the insurance claim.
The insured alleges that the insurer willfully failed to adjust the claim in a timely manner; inadequately supervised outside counsel; failed to make timely requests for necessary materials; failed to evaluate damages fairly and in good faith; failed to make reasonable, good faith settlement offers; failed to negotiate without demanding a global release of claims; and failed to communicate with the insured in good faith. One week before binding arbitration, the parties reached settlement in an amount of $1.65 million, allegedly to resolve the underinsured motorist claim only.
The insured then brought suit claiming breach of contract and breach of the implied covenant of good faith and fair dealing and statutory bad faith. The carrier moved to dismiss.
First, the court rejected the notion that there was no common law claim for bad faith. Citing Birth Center and Cowden, it recognized that at least since Cowden was issued in 1957, insureds have possessed a ccommon law contract right permitting an insured to recover compensatory damages in bad faith actions. These principles revolve around a bad faith failure to settle that results in damages other than simply payment of the policy limits. Thus, the insurer’s payment of the amounts owed under the policy do not free it from other known or foreseeable damages it has caused its insured to incur.
The court further found that Pennsylvania Supreme Court case law specifically recognized the possibility that emotional distress damages may be recoverable on a contract where, for example, the breach is of such a kind that serious emotional disturbance was a particularly likely result.
The court further found that there was no “physical impact requirement” needed to establish a claim for emotional distress damages in the common law bad faith breach of contract setting. Whether the insured could ultimately prove that the insurer should have foreseen that severe emotional distress was a likely result of its conduct remained open, but the insured had set out a plausible claim for relief.
The court did note that, while the insured alleged that he suffered severe emotional distress as a result of delay in adjustment of his claims and that this was “foreseeable” to the insurer, the insured did not allege the insurer had actual knowledge of the emotional distress.
Next, the insurer sought to dismiss the breach of contract claim based on its alleged attempt to achieve a global settlement in its negotiations with the insured. The insurer asserted that it was not probative of bad faith to ask for a global settlement, and, in any event, the insured could not show damages from such a request. The insured contended the request was a delay-causing attempt to coerce him into releasing the bad faith claims at issue in the current litigation.
The court observed that there may be a valid cause of action where an insurer knows an insured is entitled to a policy limit but will only agree to make full payment if the insured agrees to a global release. In general, however, “it is not inappropriate for an insurance company to attempt to resolve all claims with one settlement, particularly when there is no indication of an attempt to mislead.” Under the circumstances, the court found it difficult to see how the claim based on the insurer’s request for global settlement could be successful.
However, it then found that the insured had alleged a plausible bad faith claim on this point. The court expressly stated that it would allow the parties to develop a more specific factual record through discovery, and address the issue again at summary judgment or at trial.