Monthly Archive for May, 2021

BAD FAITH CLAIM PROCEEDS EVEN AFTER CONTRACT CLAIM DISMISSED FOR UNTIMELY FILING (Western District)

The insurer denied auto theft coverage based on an exclusion.  The insured sued for breach of contract and bad faith, and also alleged breach of a fiduciary duty. The carrier moved to dismiss the breach of contract and bad faith claims, and to strike the fiduciary duty language.

The court dismissed the breach of contract claim for failing to bring action within the time period required under the policy.

The court, however, allowed the insured’s bad faith claim to proceed.  The bad faith claim was based on an unreasonable investigation theory.  The court stated:

“On the existing record at this early stage of the litigation, [the insured] states a plausible claim for coverage and, while he will have to prove his bad faith claim by ‘clear and convincing evidence,’ … the allegations in the Complaint that [the insurer] failed to investigate his claim and knowingly set the date of loss outside the policy period “may … show bad faith.’ … Because [the] well-pleaded assertions of unreasonable claims processing and investigation adequately state a plausible bad faith claim under Section 8371, dismissal is not warranted and the Motion to Dismiss Count II of the Complaint is denied.”

The court did strike the allegation that the carrier’s breach of fiduciary duty constituted bad faith, observing:

In Keefe v. Prudential Prop. & Cas. Ins. Co., 203 F.3d 218, 227–28 (3d Cir. 2000), the United States Court of Appeals for the Third Circuit held that an insurer’s fiduciary obligations to an insured are limited to claims handling and resolution of third-party claims against an insured. “Under Pennsylvania law, a fiduciary duty higher than the duty of good faith and fair dealing does not arise out of an insurance contract until an insurer asserts a stated right under the policy to handle all claims asserted against the insured.” … Keefe has been applied to the cancellation of a life insurance policy and to policyholders’ uninsured and underinsured motorist claims where, like the present claim, the insurer has not asserted a right to resolve third-party claims against the insured. … Accordingly, given [the insured’s] failure to respond to the Motion to Strike, and the weight of precedential authority limiting an insurer’s fiduciary obligations to the resolution of third-party claims against an insured, the Motion to Strike is granted.

Date of Decision:  May 11, 2021

Peltz v. State Farm Mutual Automobile Insurance Company, U.S. District Court Western District of Pennsylvania No. 21-0005, 2021 WL 1893125 (W.D. Pa. May 11, 2021) (Kelly, M.J.)

NO BAD FAITH WHERE REASONABLE BASIS TO DENY COVERAGE (Philadelphia Federal)

The insurer denied plaintiff’s first party fire loss claim because it concluded that the insured set the fire himself.  The insured brought breach of contract and bad faith claims, and the insurer counterclaimed for insurance fraud.

Eastern District Judge Surrick granted the insurer summary judgment on the bad faith claim, and denied plaintiff summary judgment on coverage and the insurance fraud counterclaim.

A bad faith plaintiff must show that an insurer acted unreasonably in denying a benefit, and either knew or recklessly disregarded the fact that its position was unreasonable.  The insured must prove bad faith by clear and convincing evidence.  The reasonable basis prong is measured objectively, i.e., would a reasonable insurer have denied payment under the facts at issue.  In making this determination, courts “examine the factors that the insurer relied on in evaluating a claim to determine whether the insurer had a reasonable basis for denying benefits.”

Judge Surrick closely examined the record and concluded the insurer has a reasonable basis to conclude the insured himself started the fire.  He found “substantial evidence in that record that reasonably leads to the conclusion that the fire was intentionally set, and that Plaintiff had both the motive and the opportunity to intentionally set it.” Thus, “based on all the information before Defendant at the time, Defendant’s conclusion that Plaintiff had intentionally set the fire was not unreasonable.”

Conversely, Judge Surrick denied the insured’s motion for summary judgment on coverage and the insurance fraud counterclaim.  “Having determined that it was not unreasonable for Defendant to conclude that Plaintiff had intentionally set his property on fire, the issue of coverage is not appropriate for this Court to decide on summary judgment. Nor is there a basis for dismissing Defendant’s counterclaim of insurance fraud at this juncture. These issues are more appropriate for a jury.”

Date of decision:  May 7, 2021

Ly v. Universal Property & Casualty Insurance Company, U.S. District Court Eastern District of Pennsylvania No. CV 19-1239, 2021 WL 1837468 (E.D. Pa. May 7, 2021) (Surrick, J.)

 

THE ROLE OF BAD FAITH IN AN EQUITABLE SUBROGATION CASE (Third Circuit – Pennsylvania Law)

In this case, the Third Circuit addresses the elements of equitable subrogation between insurers, a useful opinion for coverage counsel dealing with insurer vs. insurer disputes.  Here, we only mention the role bad faith played in the court’s analysis.

This case involves the tragic Salvation Army building collapse in Philadelphia, where six people died and thirteen others were injured.  The neighboring property owner had hired a contractor to do construction work on its property. The improperly carried out work ultimately caused the building to collapse onto the neighboring Salvation Army building.

The property owner had a commercial general liability (CGL) policy on which it was a named insured.  The contractor also had its own insurance policy. This policy appeared to provide coverage to the property owner as an additional insured.

Over time, the CGL carrier, through counsel, repeatedly demanded that the contractor’s insurer provide a defense to the property owner as an additional insured.  The CGL carrier stated in one communication that a defense was due to the property owner as an additional insured, and that failure to provide such a defense was bad faith.

The contractor’s carrier eventually agreed to provide a defense to the property owner as an additional insured, under a reservation of rights. Eventually, the additional insured carrier withdrew its defense, and obtained a judgment rescinding its policy based on material misrepresentations the contractor made in the insurance application.

A court eventually found the contractor’s policy void ab initio. The contractor’s carrier, however, already had paid over $667,000 in defense costs for the property owner as an additional insured. The additional insurer brought the present claims for equitable subrogation and unjust enrichment against the property owner’s CGL carrier.

The district court rule in favor of the additional insurer, and had awarded almost all of the damages sought. The Third Circuit affirmed.

On the bad faith related issues, the Third Circuit found the following.

First, an insurer seeking equitable subrogation against another insurer has to show that in providing a defense and coverage, it acted to protect its own interest, and that it did not act as a volunteer.  In this case, while the contractor’s insurer might have believed the policy should have been rescinded, it did not have any judgment to that effect. Moreover, it had been threatened with a bad faith claim by the CGL carrier’s counsel.  The Third Circuit found this sufficient to establish that the contractor’s carrier acted in its own interest, and not as a volunteer, in providing a defense.

Second, the CGL carrier argued that the contractor’s carrier had unclean hands, and therefore could not obtain equitable relief. The Third Circuit rejected this argument. The panel observed that the unclean hands doctrine requires proof of fraud, unconscionable conduct, or bad faith affecting the balance of equities. The court could not find that the carrier’s conduct was unconscionable or affected the balance of equities between the two carriers.

Date of Decision:  April 27, 2021

Berkley Assurance Co. v. Colony Insurance Co., U.S. Court of Appeals for the Third Circuit No. 20-2673, 2021 WL 1625521 (3d Cir. Apr. 27, 2021) (Ambro, Rendell, Restrepo, JJ.)

“LEGAL THEORIES ALONE ARE NOT ENOUGH TO SUSTAIN LITIGATION. A PLAINTIFF MUST ALSO PLEAD FACTUAL ALLEGATIONS TO SUPPORT HIS LEGAL THEORIES.”

Legal theories alone are not enough to sustain litigation. A plaintiff must also plead factual allegations to support his legal theories.

The Honorable Joshua D. Wolson, May 6, 2021

In this breach of contract and bad faith case, Eastern District Judge Wolson dismissed all claims.

As to the alleged breach of contract, the insured made conclusory allegations about failures to pay sums due. He did not plead any facts as to what sums were due that the insurer failed to pay, or what provisions in the insurance contract were breached.  Further, he admitted that certain sums asserted as allegedly due were paid.

Finally, even when payment is delayed, there is still payment.  The delay does not create a breach of the insurance agreement when payment is eventually made.  Thus, delay is really an issue of bad faith, not breach of contract.

Moving on to the bad fad faith claim, the insured argued that the delayed payment, “in and of itself” established bad faith.  Judge Wolson disagreed, observing that “a delay in payment is not a per se violation of 42 Pa. C.S.A. § 8371. Although an unreasonable delay can be considered a bad faith insurance practice under the statute, ‘a long period of delay between demand and settlement does not, on its own, necessarily constitute bad faith.’”

Rather, a plaintiff alleging delay based bad faith “must plead facts sufficient to demonstrate that (1) the defendant had no reasonable basis for the actions it undertook, which resulted in the delay, and (2) that the defendant knew or recklessly disregarded the fact that it had no reasonable basis to deny payment. … If the delay is attributable to a need for further investigation or even to simple negligence, there is no bad faith.”

Judge Wolson found nothing in the complaint suggesting the insurer knew or recklessly disregarded the lack of a reasonable basis to delay payment. “On the contrary, according to the Complaint, after [the insured] filed suit, ‘the matter was looked at with greater scrutiny,’ and [the insurer] sent him an additional check … eight to nine months after denying him additional benefits.”

Judge Wolson observed that, taken as true, the Complaint asserts facts that might show negligence. However, the plaintiff did not “attribute this delay to [the insurer’s] knowledge or recklessness that it had no basis for the delay.” The court could not “infer recklessness based only on a nine-month delay of an additional payment.”

Interestingly, while Judge Wolson would not grant leave to file a new amended complaint, he did grant plaintiff an opportunity to correct deficiencies in the existing complaint.

Date of Decision: May 6, 2021

Elansari v. The First Liberty Insurance Corporation, U.S. District Court Eastern District of Pennsylvania No. 2:20-CV-5901-JDW, 2021 WL 1814980 (E.D. Pa. May 6, 2021) (Wolson, J.)

“EXPECTING AN INSURER TO BOTH INVESTIGATE CLAIMS PLACED AT ISSUE BY THE INSURED AND TO DO SO ONLY IN A MANNER THAT IS ACCEPTABLE TO THE INSURED, IS UNTENABLE” (Western District)

Western District Judge Horan previously dismissed breach of contract and bad faith claims in this case, with leave to amend.  A copy of our earlier summary can be found here.  The insured cured the defects in its contract claim, but once again failed to set out a plausible bad faith claim.  This time, however, Judge Horan dismissed the bad faith claim with prejudice, as any future attempt to amend would be futile.

The claim centered on a dispute over actual cash value losses for damaged equipment, and documents the insurer requested as part of an examination under oath (EUO). The insured failed to produce those documents, deeming them irrelevant, and the insurer would not proceed without those documents.

The complaint pleads that the carrier’s actual cash value calculation was fundamentally flawed, and that the carrier sought documents for the EUO that had nothing to do with coverage.

Judge Horan carefully reviewed the second amended complaint, finding plaintiff still failed to state a statutory bad faith claim for the same reasons set forth in her original March 4, 2021 opinion. Rather than overcoming the bad faith claim’s flaws, the new allegations in the second amended complaint “regarding Defendants’ pre-litigation investigation and document requests further buttress[ed] the Court’s prior decision.”

Judge Horan states:

“Defendants undertook an investigation upon the initial loss of the [damaged equipment] and made an offer. [The insured] rejected that offer and made its own claim of value for payment. … In response, Defendants continued the investigation by seeking documents and an examination under oath, as permitted by the Policy. Such conduct is not bad faith.”

Further, in once again rejecting the insured’s complaint over the document requests’ relevance, Judge Horan reiterates that “[e]xpecting an insurer to both investigate claims placed at issue by the insured and to do so only in a manner that is acceptable to the insured, is untenable.”

“Finally, as to the remaining allegations, they speak to a general disagreement over Defendants’ estimate of … damages. The Second Amended Complaint continues to support that an offer was made and that further effort at investigation was attempted by Defendants. These allegations of valuation and investigation disagreements do not support that Defendants engaged in bad faith.”

Date of Decision: April 30, 2021

Integral Scrap & Recycling, Inc. v. Conifer Holdings, Inc., U.S. District Court Western District of Pennsylvania No. 2:20-CV-00871-MJH, 2021 WL 1720713 (W.D. Pa. Apr. 30, 2021) (Horan, J.)

INSURER’S FAILURE TO FOLLOW UP ON ITS OWN INVESTIGATION IDENTIFYING AN ACTUAL LOSS, AND THEN REFUSING TO MAKE ANY PAYMENT, PLAUSIBLY ALLEGES BAD FAITH (Philadelphia Federal)

Eastern District Judge Padova permitted this first party property damage bad faith claim to proceed, finding the complaint’s allegations were not merely conclusory.

The insureds pleaded the following facts. They reported property damage to their insurer. The carrier hired a construction company to inspect the property, determine needed repairs, and calculate the loss.  The contractor found the property’s foundation and structure were damaged, but “did not calculate the amount of the loss because [the insurer] needed to first determine ‘the extent of the corrective work conducted at or related to [a] neighboring property.’”

The insurer allegedly never made that determination, however, and then refused to pay for the plaintiffs’ known damages. The insureds retained their own expert who valued repairs at over $211,000.

Judge Padova found these allegations went beyond the kind of conclusory pleadings rejected by other courts.

He recognized the principle that: “Implicit in section 8371 is the requirement that the insurer properly investigate claims prior to refusing to pay the proceeds of the policy to its insured.”

Here, the insurer allegedly “acted in bad faith by failing to investigate in good faith and disregarding its own expert’s determination that the structure and foundation of the property were damaged.” Specifically, the complaint alleged the insurer retained an expert to investigate the property damage and then disregarded that expert’s damage assessment, “failed to determine the extent of the corrective work conducted at the neighboring property, refused to investigate the loss to determine what it would cost to repair the foundation and building structure of Plaintiffs’ property, failed to ascertain the amount of the loss, and failed to pay Plaintiffs for the damage to the exterior, foundation, and building structure of their property.”

These factual allegations plausibly stated “a claim for bad faith stemming from [a] failure to properly investigate the damage to Plaintiffs’ property prior to denying coverage.”

Date of Decision:  April 22, 2021

Procoppio v. Foremost Insurance Co., U.S. District Court Eastern District of Pennsylvania No. CV 20-5184, 2021 WL 1581487 (E.D. Pa. Apr. 22, 2021) (Padova, J.)

NO BAD FAITH CLAIM STATED WHERE ONLY ALLEGATION IS THAT INSURER FAILED TO EXPLAIN ITS VALUATION IN OFFERING CLAIM PAYMENT BELOW POLICY LIMITS (Western District)

The insureds valued their UIM claim at $215,000, and settled with the tortfeasor’s insurer for $15,000.  They demanded $200,000 policy limits from the UIM carrier, and transmitted a police report and medical records in support of their demand.  The insurer offered $15,000 in response, and the insureds sued for breach of contract and bad faith.

The insurer successfully moved to dismiss the bad faith claim, but the insured was given leave to amend.

Western District Judge Horan found the insureds’ complaint failed to “provide any factual support regarding their bad faith claim, other than their allegations that [the] offer of $15,000 failed to cite any reasons for such offer. The [insureds] did not cite any other facts to support their allegation that [the insurer] acted in bad faith. These bare factual assertions, without more, do not state a plausible claim for which relief can be granted.”

Date of Decision: April 20, 2021

Long v. USAA Casualty Insurance Company, U.S. District Court Western District of Pennsylvania No. CV 20-2017, 2021 WL 1550094 (W.D. Pa. Apr. 20, 2021) (Horan, J.)