Monthly Archive for June, 2018
In May 2016, the trial court granted the insurer summary judgment on coverage because faulty construction work did not constitute an occurrence, ultimately relying on the Pennsylvania Supreme Court’s Kvaerner opinion. Absent any duty to defend or indemnify, the insurer’s policy interpretation could not have been a knowing or reckless disregard of a reasonable basis to provide coverage, and accordingly the trial court held there was no bad faith. The Third Circuit affirmed.
Among other things, the appeals court rejected the argument that damages flowing from faulty workmanship were an occurrence, even if the faulty workmanship was not an occurrence. The court observed there was no Pennsylvania Supreme Court case law to support this limitation on defining occurrence. Moreover, Third Circuit precedent (Specialty Surfaces International v. Continental Casualty) held that reasonably foreseeable damages resulting from faulty workmanship are “not covered, even when such damage occurs to areas outside the work provided by the insured.” The Third Circuit follows the Pennsylvania Superior Court’s reasoning in Millers Capital v. Gambone on this point. (This 2013 post describes the interplay of Kvaerner, Millers Capital and Specialty Surfaces).
The Third Circuit likewise affirmed the bad faith dismissal: “Because the duty to defend is broader than the duty to indemnify, [the insured’s] claim for indemnification also fails. … Its argument that [the insurer] acted in bad faith fails because it has presented no evidence that [the insurer] ‘did not have a reasonable basis for denying benefits under the policy and that [it] knew of or recklessly disregarded its lack of reasonable basis.’” The Third Circuit cites the Superior Court’s 2013 Grossi v. Traveler’s decision on this point.
Date of Decision: June 6, 2018
Lenick Construction, Inc. v. Selective Way Insurance Co., U.S. Court of Appeals Third Circuit, No. 16-1891, 2018 U.S. App. LEXIS 15197 (3d Cir. June 6, 2018) (Hardiman, Roth, Smith, JJ.)
The insured alleged that she “purchased an ‘all risk insurance policy’ from [the insurer], which covered [the insured’s] home and personal property, including coverage for water damages and for ‘loss of use’ from water damage.” The insured’s pipe broke inside the residence resulting in significant damage. After submitting her claim, she pleaded the insurer “paid for only a ‘small portion’ of the damages covered by the policy.” Subsequently, “it was discovered that the damages greatly exceeded the original amount paid by Defendant.” The insured alleged that her insurer refused “to perform a further inspection,” and refused to pay for contractually obligated living expenses of $28,225.62.
Under New Jersey law, “insurers are required to act in good faith and can be held liable for ‘bad-faith refusal to pay first-party claims or benefits.’ However, as to a bad faith claim, the New Jersey Supreme Court “adopted the ‘fairly debatable’ standard for tort recovery under insurance contracts.” Consequently, “if a claim is fairly debatable, no liability in tort will arise.” On the other hand, “if no debatable reasons existed for the denial of benefits, bad faith can be established.”
The court observed that an insurer’s “mere negligent inattention to a claim is not sufficient” to constitute bad faith. Moreover, an insured “must show that the insurer’s ‘conduct is unreasonable,’ or ‘the insurer knows the conduct is unreasonable or recklessly disregards the fact that the conduct is unreasonable.’”
Applying this law, the court determined that there is no “binding authority to support” the insurer’s argument that “as a matter of law, it cannot be liable because it first paid a claim but then refused to inspect (much less pay) later discovered-damage.” The court concluded that the insured’s allegations that the insurer “refused to reinspect the property once further damage was discovered” and “refused to pay an appraisal award despite its legal obligation” are sufficient facts to support a bad faith claim.
Date of Decision: June 6, 2018
Johnson v. Encompass Insurance Co., U. S. District Court, District of New Jersey Civil Action No. 17-3527, 2018 U.S. Dist. LEXIS 94775 (D.N.J. June 6, 2018) (Vazquez, J.)
The Tort Talk Blog has posted a recent Luzerne County decision where the court severed and stayed a UIM Bad Faith Claim. This excellent blog keeps close track of post-Koken UIM decisions.
Federal District Judge Wolfson recently issued two opinions in which the court reiterates that ERISA pre-empts New Jersey common law insurance bad faith claims.
Dates of Decision: May 31, 2018 and June 7, 2018
Atlantic Shore Surgical Assocs. v. Horizon Blue Cross Blue Shield of N.J., U. S. District Court, District of New Jersey Civil Action No.17-cv-07534 (FLW) (DEA), 2018 U.S. Dist. LEXIS 90734 (D.N.J. May 31, 2018) (Wolfson, J.)
Advanced Orthopedics & Sports Med. Inst. v. Empire Blue Cross Blue Shield, U.S. District Court New Jersey Civil Action No. 17-cv-08697 (FLW) (LHG), 2018 U.S. Dist. LEXIS 96814 (D.N.J. June 7, 2018) (Wolfson, J.)
The insureds’ water heater leaked resulting in $8,654 in water damage and $66,415 in mold damage. The insurer paid the $8,654, but only paid $10,000 for the mold damage, per the policy’s mold exclusion and sublimit. The insureds claimed that the refusal to pay the entire $66,415 violated the insurance policy.
In arguing for coverage beyond the $10,000 sublimit, the insureds argued “that their loss was caused by water, not mold, and that Defendants therefore are obligated to pay for the entire amount of the loss.” They focused on the allegation “that the mold growth was a result of the broken valve on the hot water heater, and argue that the mold is the ‘loss,’ rather than the ‘cause.’”
The court, however, recognized that the policy contained an anti-sequential provision: “We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.” It found there is no public policy violation “when parties to an insurance contract agree that there will be no coverage for loss due to sequential causes even where the first or the last cause is an included cause of loss.”
The court concluded that because the anti-sequential clause applied to the mold exclusion, the policy limited mold recovery to $10,000, regardless of whether the mold resulted from the valve leak. Therefore, the court ruled that the insurer did not breach the insurance contract.
As to the bad faith claim, under New Jersey law, an insurance company is required to act in good faith to the insured with respect to a first-party claim. However, an insurance company is not liable if a decision with respect to a claim is “fairly debatable.” Further, “[a] claimant who cannot establish a substantive claim that the policy was breached, however, cannot prevail on a claim for an insurer’s alleged bad faith refusal to pay the claim.”
Applying these principles, the court found no actionable bad faith claim: “[A] claim for bad faith is not plausible because Defendants responded to Plaintiffs’ claims, paid the amounts they determined were owed under the contract, and did not disregard any obligations or unreasonably fail to investigate or settle Plaintiffs’ claims.” Thus, the bad faith claim was “at a minimum, fairly debatable” and was dismissed.
Date of Decision: May 23, 2018
Hobbs v. US Coastal Ins. Co., U. S. District Court, District of New Jersey Civil Action No. 17-3673, 2018 U.S. Dist. LEXIS 86484 (D.N.J. May 23, 2018) (Rodriguez, J.)
On May 31, 2018, the Superior Court’s April 9, 2018, 2-1 decision reversing the trial court’s $21 Million award in Berg v. Nationwide was withdrawn, after the Court granted reconsideration. Just a few days later, on June 5, 2018, the Court issued another 2-1 decision along the same lines as the first decision, with the majority again vacating and directing entry of judgment for the insurer, and former Justice Stevens dissenting.
The analysis of the April 9th majority and dissent can be found here.
As noted in the Court’s May 31st Order, the plaintiffs are not precluded from seeking en banc reconsideration of the panel’s June 5th Opinion.
We’ve recently posted summaries of five federal district court bad faith opinions, issued between May 15 and May 23, 2018. These opinions all include some discussion of what kind of conduct could constitute the basis for statutory bad faith under Pennsylvania law.
There is no question that denying benefits due may form the basis of a bad faith claim. Similarly, the strong consensus is that a delay in paying benefits due may lead to actionable bad faith claims. The interesting question is whether bad faith can exist when no benefit is due.
Take this example. The insured sues for breach of contract and bad faith. The bad faith claim is based on two theories: (1) the insurer unreasonably denied coverage based on a misinterpreted policy exclusion, and (2) unreasonable claim handling. The court finds the exclusion applies and dismisses the contract claim, as well as the bad faith claim based on benefit denial. Can the bad faith claim still proceed solely on the basis of poor claim handling, absent any indemnification or defense obligation? Or, in those circumstances, should any claim handling misconduct solely be subject to review by the Insurance Commissioner under the Unfair Insurance Practices Act or Unfair Claims Settlement Practices regulations?
We have posted on this subject in the past, but case law indicates that some courts will find actionable statutory bad faith for poor claim handling even in the absence of any benefit being due.
These five very recent cases, issued within 8 days of each other, appear to show that the range of bad faith standards currently used by courts includes viable bad faith actions where no benefit is due, along with claims for denial or delay in providing benefits. Whether or not these cases be reconciled into a single theory will have to be clarified by Pennsylvania’s Supreme Court, though it has been argued the Supreme Court already did so in the Toy case.
Here are links to our summaries of these five cases.
In this case, a Middle District Judge found a section 8371 claim handling bad faith case viable, even though no coverage was due.
In this case, an Eastern District Judge found no bad faith because no benefit had been denied.
In this case, another Middle District Judge found there could be no bad faith where there was no coverage due.
In these two opinions, issued on consecutive days by another Eastern District Judge, the court set out criteria for actionable statutory bad faith based on either (1) benefit denial (2) poor claims handling or (3) unreasonable delay.