Monthly Archive for June, 2021

“SPARSE” FACTUAL ALLEGATIONS ENOUGH TO “NUDGE” CLAIM “ACROSS THE LINE FROM CONCEIVABLE TO PLAUSIBLE” (Middle District)

For the second time in a week, Middle District Judge Mariani denied an insurer’s motion to dismiss a bad faith claim.  Judge Mariani’s June 3, 2021 decision in Signature Building Systems v. Motorist Mutual is summarized here.

This is a breach of contract and bad faith underinsured motorist action.  The complaint alleged the following.

The insured suffered significant injuries requiring ongoing treatment.  The tortfeasor had $15,000 in coverage, but the insured’s UIM limit on her own policy was $250,000.  The insured pursued underinsured motorist coverage against her carrier.

The insured “fully complied with all terms, conditions, and duties imposed upon her by her Auto Policy.” She “’continually’ provided medical records and reports to Defendant, ‘outlining her injuries, special damages, medical expenses, as well as evidencing her physical pain and suffering’ and has cooperated with Defendant ‘in every way throughout the life of her claims.’”

The insured made the following bad faith allegations:

  1. Failing to properly investigate [the] claim upon notification of same;

  2. Refusing to pay [the] claims without conducting a reasonable investigation based upon all available information;

  3. Failing to promptly and objectively evaluate [the] claims;

  4. Unreasonably delaying the objective and fair evaluation of [the] claim;

  5. Causing unreasonably [sic] delay in all aspects of the handling of [the] claim;

  6. Dilatory and abusive claims handling;

  7. Conducting an unfair, unreasonable and dilatory investigation of [the] claims;

  8. Failing to act in good faith to effectuate prompt, fair, and equitable settlement of [the] claim;

  9. Ignoring competent and overwhelming medical evidence substantiating [the insured’s] injuries and resulting disability;

  10. Ignoring competent and overwhelming medical evidence that injuries the [insured] sustained in the subject motor vehicle have not resolved.

The carrier moved to dismiss the bad faith claim, arguing the foregoing was mere boilerplate that did not meet federal plausible pleading standards.  Judge Mariani disagreed.

First he has no problem in finding the complaint sets out an underinsured motorist coverage claim, and the insured fully complied with the policy and her duties in cooperating with the insurer by “continually” providing medical records that laid out the details of her injuries.

Next, Judge Mariani finds the complaint alleges that despite the insured’s compliance, “Defendant failed to properly investigate her claim, refused to pay her but did not conduct a reasonable investigation, and failed to promptly and objectively evaluate her claim but instead delayed evaluating her claim. Plaintiff further alleges that Defendant’s investigation of her claim was ‘unfair, unreasonable and dilatory’ and that Defendant ignored the medical evidence substantiating her injuries and resulting disability.”

This was enough to state a plausible claim. Although the complaint was “sparse with respect to the bad faith claim, the Complaint contains sufficient well-pleaded factual allegations to ‘nudge[ ]’ Plaintiffs’ claim ‘across the line from conceivable to plausible….” [Note: Judge Mariani quotes this same language in his March 2021 Chuplis decision, summarized here.]

For anyone pleading a bad faith claim, or seeking to dismiss such a claim, it is worthwhile to compare this opinion with Judge Pratter’s Brown opinion, summarized yesterday, or the myriad other cases finding the pleading either lacked, or reached, plausibility.

Date of Decision:  June 10, 2021

Dougherty v. American States Insurance Company, U.S. District Court Middle District of Pennsylvania No. 3:20-CV-2166, 2021 WL 2383229 (M.D. Pa. June 10, 2021) (Mariani, J.)

NO BAD FAITH BASED ON DELAY OR “LOW-BALL” OFFER; POLICY LIMIT IS NOT THE DE FACTO VALUE OF A CLAIM (Philadelphia Federal)

Eastern District Judge Pratter provides a clear discussion on allegations of delay and valuation that do not make out a bad faith claim.

This underinsured motorist coverage breach of contract and bad faith case focused on a dispute over whether the insured was entitled to stacked benefits.  The insured had waived stacking, but asserted that the insurer’s failure to send new waiver forms when she added additional vehicles negated that waiver.  She pleaded serious personal injuries, and that the insurer only offered $4,500 on the claim.

First, Judge Pratter found the insured failed to plead a plausible claim for bad faith delay.  “Although this complaint alleges the accident took place in January 2020, it does not allege when [the insured] noticed her intent to seek UIM coverage or when [the insurer] transmitted its offer. So, the complaint fails to plead the length of the alleged delay, let alone whether it was unreasonable.”

There were no allegations the insured made a timely demand or that the insurer failed to investigate or conducted an unreasonable investigation. At best, the insured’s argument was that the insured offered $4,500, and when compared to her alleged injuries, this was facially unreasonable.  Judge Pratter did not accept this argument, observing that “the pleadings must provide sufficient allegations from which the Court can plausibly infer that [the insurer] knew or recklessly disregarded a lack of a reasonable basis to deny benefits.”

The complaint revealed “a “’normal dispute between an insured and insurer over the value of a UIM claim’ which is itself predicated on a dispute over [the insured’s] entitlement to stacked coverage limits.” Judge Pratter describes the coverage disagreement as a “live dispute that motivates both the declaratory judgment and breach of contract claims. An insurer’s refusal to pay the policy limit when it disputes that the insured is entitled to any such coverage at all is not evidence of unreasonable conduct that would support a bad faith claim.”

Finally, on bad faith, Judge Patter states that a “low-ball” offer by itself is not necessarily bad faith.  “The complaint contains no allegations that [the insured] submitted documentation of the extent of her injuries to support her position such that she is entitled to the policy limit. A policy limit is just that—the ultimate maximum that an insured could theoretically recover. It is not the de facto value of a claim.”

Judge Pratter did give leave to amend the bad faith claim, but only if the insured could plead within the parameters set out in the Court’s opinion.

Date of Decision:  June 7, 2021

Brown v. LM General Insurance Company, U.S. District Court Eastern District of Pennsylvania No. CV 21-2134, 2021 WL 2333626 (E.D. Pa. June 7, 2021) (Pratter, J.)

BAD FAITH CLAIM WITHSTANDS MOTION TO DISMISS AFTER BREACH OF CONTRACT CLAIM HELD VIABLE (Middle District)

This case involves coverage claims for water damage during a construction project.  The insurer refused coverage, and the insured sued for breach of contract and bad faith.  The insurer unsuccessfully moved to dismiss both claims.

First, the court found there was an issue of fact concerning the coverage denials.  Thus, the court refused to dismiss the breach of contract claim.

As to the bad faith claim, plaintiff alleged two specific instances of the insurer improperly rejecting the claims, and that the insurer “failed to conduct a proper analysis to support its denial.” Additionally, the insureds alleged there was an “inadequate process in reviewing their claim, including over fifty alleged points of bad-faith conduct, evinc[ing] a clear effort to ‘unreasonably and unfairly den[y] and/or delay[ ] payment of benefits’ to Plaintiffs that the Defendant ‘knew, or should have known, … should have been paid.’”

The insurer’s argument relied upon the position that there must be a predicate breach of contract, and the breach of contract claim should fail.  However, as set forth above, the court already found the insureds pleaded a viable breach of contract claim, “and Plaintiffs subsequently alleged facts sufficient to state a bad faith claim….” Thus, Judge Mariani denied the motion to dismiss the bad faith claim as well as the contract claim.

Date of Decision:  June 3, 2021

Signature Building Systems of Pennsylvania, LLC v. Motorist Mutual Insurance Co., U.S. District Court Middle District of Pennsylvania No. 3:20-CV-2348, 2021 WL 2269980 (M.D. Pa. June 3, 2021) (Mariani, J.)

POLICY RESCINDED FOR MATERIAL MISREPRESENTATION; NO BAD FAITH WHERE COVERAGE FAIRLY DEBATABLE (New Jersey Federal)

The carrier sought to void a life insurance policy on the basis of material misrepresentation. The beneficiary brought counterclaims for breach of contract and bad faith, among others.

The court rescinds based on material misrepresentation in the application

The material misrepresentation argument was based on the insured claiming $180,000 in annual income for the family business, when its annual income was actually less than $2,000.

“Under New Jersey law, an insurer may rescind a policy for equitable fraud when false statements were made in the application which ‘materially affected either the acceptance of the risk or the hazard assumed by the insurer.’ N.J.S.A. § 17B:24-3(d). Equitable fraud does not require scienter for objective questions; the only inquiry is whether the misrepresentation is material. A misrepresentation is material if it ‘naturally and reasonably influenced the judgment of the underwriter in making the contract at all, or in estimating the degree or character of the risk, or in fixing the rate of premium.’”

“In reviewing alleged misrepresentations on life insurance applications, courts distinguish between objective and subjective questions.” Objective questions are based on the applicant’s actual knowledge. “If the question is objective, even an innocent misrepresentation warrants rescission.”

“In contrast, subjective questions inquire into the applicant’s state of mind. They are concerned with more ambiguous issues, such as what is the state of the applicant’s health.” (Internal quotation marks omitted). Courts show greater leniency on the subjective question inquiry, and “consider whether the answer accurately reflects the applicant’s state of mind even if otherwise inaccurate.” “Therefore, if a question is subjective, then the insurer must additionally establish the insured knew the answer was false.”

In this case, the question involved annual income, which constitutes an objective question. While the insurer’s agent did ask for an estimate, and the insured could not provide a fixed number, this did provide an excuse for the insured’s material misrepresentation to the carrier’s agent. She could have estimated annual income at $0-2,000, rather than the $200-1000 per day estimate provided to the insurer’s agent.

Thus, the court entered summary judgment rescinding the policy.

No bad faith where coverage position is fairly debatable

The court dismissed the beneficiary’s various counterclaims. As to the bad faith claim, the insured had to prove “the absence of a reasonable basis for denying benefits of the policy and the insurer’s ‘knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.’” A “fairly debatable” claim defeats bad faith allegations. “Here, the Court has already determined the policy was void, which itself establishes the coverage was debatable.” The facts further showed that the insured was not insurable under the carrier’s underwriting guidelines.

Date of Decision: June 3, 2021

Allstate Assurance Company v. Tawil, U.S. District Court District of New Jersey No. CV 18-8843, 2021 WL 2253544 (D.N.J. June 3, 2021) (Arleo, J.)

 

BAD FAITH CLAIM PREMATURE IN LIGHT OF ONGOING APPRAISAL PROCESS; UTPCPL DOES NOT APPLY TO CLAIM HANDLING (Philadelphia Federal)

This case involves a first party fire loss to the insured’s home.  The insured’s public adjuster estimated damages at over $300,000. The insurer’s adjuster issued a number of reports that consecutively lowered the damage estimate. The final report was less than a ¼ of the plaintiff’s estimate. These differences resulted in the carrier invoking the appraisal process, which was pending at the time this suit was filed.

The insured sued the insurer for breach of contract, bad faith, fraud, conspiracy to commit fraud and violation of the Unfair Trade Practices and Consumer Protection Law (UTPCPL).  The last three claims also were made against the carrier’s independent adjuster.

The court dismissed the breach of contract claim because the matter was subject to the ongoing appraisal process.  Judge Padova observed that while there is some right of appeal from the completed appraisal process, the scope of appeal is limited.  Dismissal was without prejudice to pursue those limited appellate rights after the appraisal process ended.  Judge Padova rejected the insured’s argument that this was actually a coverage dispute, rather than a valuation dispute.

Next, Judge Padova stayed the bad faith claim as premature. Because the appraisal process was ongoing, the carrier had never actually denied the claim.  Judge Padova did appear to recognize, however, the insured had pleaded a potential bad faith claim. This was based on allegations concerning the insurer’s involvement in the various decreasing loss estimates, which it allegedly knew were incorrect.

The fraud and UTPCPL claims failed to allege justifiable reliance, and were dismissed.

In addition, as to the UTPCPL claims, Judge Padova states:

Moreover, we note that recent Pennsylvania caselaw has stated that “[t]he UTPCPL applies to consumer transactions, which are statutorily defined[, and] the handling of an insurance claim does not meet the statutory definition.” … Under this authority, “[t]he UTPCPL applies to the sale of an insurance policy, it does not apply to the handling of insurance claims,” and the bad faith statute, 42 Pa. Cons. Stat. § 8371, “provides the exclusive statutory remedy applicable to claims handling.” … Accordingly, for this reason as well, we conclude that Plaintiff’s UTPCPL claim, which is grounded on deceptive conduct in the handling of her insurance claim, cannot state a claim upon which relief can be granted.

Date of Decision:  June 1, 2021

Bussie v. American Security Insurance Company, U.S. District Court Eastern District of Pennsylvania No. CV 20-3519, 2021 WL 2206282 (E.D. Pa. June 1, 2021) (Padova, J.)

OUR 1800TH POST: (1) RESERVES DISCOVERABLE; (2) COMMUNICATIONS RETAINING COUNSEL NOT DISCOVERABLE; (3) ISO CLAIM HISTORY REPORT DISCOVERABLE; (4) ASSET REPORT ON TORTFEASOR NOT DISCOVERABLE; (5) CLAIM EVALUATION REPORT ONLY HAS LIMITED WORK PRODUCT PROTECTION; (6) INTERNAL NOTES FULLY PROTECTED ON ATTORNEY COMMUNICATIONS, BUT LIMITED WORK PRODUCT PROTECTION; (7) DEPOSITIONS MAY INQUIRE INTO AREAS WITH ONLY LIMITED WORK PRODUCT PROTECTION (Philadelphia Federal)

It has been nearly 15 years since our first bad faith blog post, summarizing an opinion by the late Judge Albert Sheppard.  Today’s summary is our 1,800th post

This Eastern District opinion addresses discovery issues in a UIM bad faith case, including document production and issues arising out of plaintiff seeking to depose the insurer’s claim adjuster and corporate designee.  Magistrate Judge Perkin had already addressed numerous discovery issues in this case in an earlier opinion, summarized here, and now addresses the remaining issues after conducting an in camera review of certain documents on the insurer’s privilege log.

Reserves discoverable in bad faith valuation dispute

Magistrate Judge Perkin observed, “District Courts within the Third Circuit are split on the question of whether reserves are discoverable in bad faith cases.”  He relied on Middle District Magistrate Judge Carlson’s Barnard decision, summarized here, holding that in bad faith cases, reserves are discoverable if the bad faith claim is based on a valuation dispute, rather than outright coverage denial.  As the present case involved a valuation dispute, reserves were discoverable.

Magistrate Judge Perkin further rejected the argument that the reserves were protected work product.  Applying the Federal Rules of Civil Procedure, he found that the insurer did “not argue that its reserves were prepared in anticipation of litigation or other than in the normal course of business.”

Internal emails regarding receipt of this lawsuit and assignment to legal counsel not discoverable

The insurer “withheld internal emails regarding receipt of the lawsuit and assignment to its legal counsel. Defendant’s privilege log indicates that these documents were withheld on the grounds that the information is ‘work product, mental impression, confidential, and post litigation.’ After in camera review, this Court finds that the documents have been appropriately withheld. These documents, dated after the lawsuit was filed, are protected by both attorney-client privilege and the work-product doctrine as the communications were made with the purpose of seeking legal advice and discuss litigation strategy.”

ISO claim search report discoverable

“[T]he ISO Claims Search Database is a nationwide database utilized by insurance companies to track claims history and detect fraud. Defendant withheld the report on Plaintiff’s claims history on the basis that it is not relevant.” The court found the information “relevant to Plaintiff’s bad faith claim to the extent that it is a factor Defendant considered in evaluating Plaintiff’s Underinsured Motorist Claim.”

Asset report for consent to settle/waiver of UIM subrogation purposes not discoverable

Defendant withheld the asset search of the tortfeasor in the underlying motor vehicle accident action, on the basis of irrelevance and confidentiality. The court agreed it was irrelevant to the bad faith claim at issue

Insurer’s evaluation report for plaintiff’s UIM claim: no attorney-client privilege protection and limited work product protection

The insurer withheld its evaluation report on the UIM claim based on “work product, mental impression, attorney-client, confidential, and post litigation.” Magistrate Judge Perkin found “these documents consist of not only the final evaluation of Plaintiff’s claim prepared by claims personnel … but also a detailed history of all updates made by claims adjusters to the report beginning on … the date Plaintiff settled with the tortfeasor.”

First, the court found these documents were not subject to the attorney-client privilege. “[T]he privilege bars discovery of confidential communications made between attorneys and clients for the purpose of obtaining or providing legal assistance to the client. …  The privilege does not apply to the ‘disclosure of the underlying facts by those who communicated with the attorney.’” “The evaluation report contains no communications between Defendant and its counsel. Rather, the report contains a series of notations regarding the claim by the claims adjuster….”

Next, Magistrate Judge Perkin dove deep into an analysis of the work product doctrine, addressing the difficult question of when the normal duty to investigate a claim turned into a period where the insurer reasonably anticipated litigation.

Thus, to determine the work-product doctrine’s applicability:

  1. A court must “first establish when Defendant reasonably anticipated litigation.”

  2. “The party asserting work product protection must demonstrate that it subjectively anticipated litigation, and that the anticipation was objectively reasonable.”

  3. “While the court must initially focus on the state of mind of the party preparing, or ordering preparation, of the document, that person’s anticipation of litigation must be objectively reasonable for the work product protection to apply.”

  4. “A party’s anticipation of litigation is objectively reasonable if ‘there existed an identifiable specific claim or impending litigation when the materials were prepared.’”

Magistrate Judge Perkin looked for guidance in Judge Sanchez’s 2014 Borgia opinion, summarized here, and Judge Leeson’s 2016 Wagner decision, summarized here.

In the present case, plaintiff’s counsel first demanded policy limits on January 12, 2018, and the insurer engaged counsel to investigate and evaluate the claim on April 19, 2018.  After being retained, the insurer’s counsel conducted a statement under oath, subpoenaed medical records and assisted in obtaining an IME.

“On July 20, 2018, after the Statement Under Oath was completed, Plaintiff’s counsel again made a demand for policy limits, though she made no threat or mention of litigation. Reviewing the e-mails between counsel, it appears that, from July 20, 2018 through February 27, 2019, the communications involved only requests for authorization of medical records and scheduling of the independent medical examination. On August 26, 2019, the independent medical examination occurred. Shortly after, on September 3, 2019, Plaintiff filed this lawsuit.”

Counsel’s communications indicated plaintiff sought full UIM limits but never threatened litigation. Further, “the communications between counsel from July 20, 2018 through February 7, 2019 concerned continued requests for medical records and authorizations to fully assess Plaintiff’s claim.”

Further, this was not a case where insurer’s claim valuation and the policy limit demand were so far apart that a reasonable insurer would believe litigation could arise, until the August 26, 2019 IME. Magistrate Judge Perkin found it was only at the time the IME concluded in August 2019 that it was “likely that Defendant had determined Plaintiff’s demand for payment in the amount of the policy limit exceeded its expected offer for settlement.” Thus, he held the insurer reasonably anticipated litigation no later than the date the IME concluded, and ordered production of unredacted claim handling entries on the evaluation reports prior to that date.

Internal file notes reflecting communications with counsel protected, but those based on work product are only partially protected

The insurer redacted all information in its internal file notes concerning communications with legal counsel, UIM strategy and evaluation, and claim handling on the basis of “work product, attorney-client, confidential, mental impression, not relevant, and post litigation.” The redactions “appear to be an account of all updates made on the handling of Plaintiff’s claim by the claims adjuster….” Based on the earlier work product analysis, “any entries made prior to August 26, 2019 redacted on the basis of the work-product doctrine are discoverable and must be produced.”

This included the adjuster’s summary of the insured’s statement under oath.

“Any redactions made due to the attorney-client privilege are appropriately redacted, and need not be produced, as they are summaries of communications between the claims adjuster, in-house counsel, and outside counsel.”

Scope of permissible subjects for inquiry at deposition of corporate designee and adjuster

As stated above, plaintiff could not direct questions to either deponent about attorney-client communications.  Plaintiff could ask about underlying facts, even if those facts were also communicated to counsel for counsel’s consideration in evaluating the matter, regarding what facts were considered in not offering policy limits.

As to work product, per the above reasoning, “Plaintiff’s counsel must limit any questions under this matter for examination to the time period before August 26, 2019.”

Date of Decision:  May 27, 2021

Sanchez v. State Farm Mutual Auto Insurance Company, U.S. District Court Eastern District of Pennsylvania No. CV 19-4016, 2021 WL 2156367 (E.D. Pa. May 27, 2021) (Perkin, M.J.)

NO BAD FAITH FOR: (1) VALUATION DISPUTE (2) DELAY (3) DECISION MADE BASED ON UNCERTAIN LAW (Middle District)

Middle District Judge Conner dismissed this UIM bad faith claim on three grounds.

First, the complaint relied upon conclusory averments, and lacked sufficient factual allegations to set forth a plausible bad faith claim.

No bad faith for not paying sum demanded.

Second, the carrier’s decision not to meet the insureds demand did not constitute bad faith. The complaint merely averred that the insureds issued a demand letter, the carrier’s claim handler reviewed the letter and a PIP medical file, and did not offer fair value. The insureds did not plead their demand amount, but only that the insurer refused to pay their demand.

Judge Conner observed that valuation disputes alone cannot create bad faith, citing Judge Caputo’s 2019 Moran decision, summarized here. Judge Conner further relies upon the Third Circuit’s oft-cited 2012 Smith decision, summarized here, for the proposition that “an insurer does not act in bad faith ‘merely because [it] makes a low but reasonable estimate of an insured’s damages….’”

Judge Conner also makes clear that “insurers need not blindly accede to an insured’s demand when the value of the insured’s potential recovery is in dispute.” Supporting this proposition, Judge Conner again cites Smith and his own Castillo v. Progressive, and Yohn v. Nationwide decisions. Applying these principles in the present case, the carrier’s refusal to accede to the insureds’ payment demand alone is not bad faith.

Judge Conner further found the insureds failed to explain how the declination constituted bad faith. The insureds “do not allege: whether or when [the insurer] actually extended an offer; what that offer was; when and whether plaintiffs reviewed, rejected, or countered [the] offer; or why that offer was unreasonable under the circumstances.” “Plaintiffs’ disagreement with an offer made by [an insurer] or its decision not to extend an offer, without more, does not establish a plausible claim.”

No bad faith delay

Third, the insureds could not establish bad faith delay.

An insured alleging bad faith delay must establish that “the delay is attributable to the defendant, that the defendant had no reasonable basis for the actions it undertook which resulted in the delay, and that the defendant knew or recklessly disregarded the fact that it had no reasonable basis to deny payment.”  Judge Conner relies on Eastern District Judge Kelly’s 2011 Thomer v. Allstate decision for this principle.

Judge Conner was “mindful that the process for resolving an insurance claim can be ‘slow and frustrating,’ … but a long claims-processing period does not constitute bad faith by itself….” “Furthermore, delay caused by a reasonable investigation or mere negligence in causing a delay does not amount to bad faith.”

Judge Conner observed that even long delays do not constitute bad faith where an investigation was necessary, citing Thomer (42 months) and Williams v. Hartford (15 months).  In the present case, the UIM claim was submitted only 9 months before suit was filed and a formal demand was only made 5 months before suit was filed.  Moreover, Judge Conner found the insureds themselves concede liability was not clear, and that more investigation was needed to determine the value of their claim. Further, the pleadings suggest “that the parties were engaged in a deliberative process—during which they both reviewed relevant documents, retained counsel, and participated in a negotiation process—shortly before this action was filed.” Some delay was also attributable to the insureds.

Finally, the insureds asserted it was bad faith to review the injured insured’s PIP file without his permission, as this violated “some rule of law.”   Judge Conner disagreed, stating, “an insurer’s reasonable legal conclusion in an uncertain area of law does not constitute bad faith. … Neither party has pointed the court to cases discussing whether or not an insurer’s unauthorized review of an insured’s PIP file is unlawful. Based on the court’s review, it appears that insureds can request to review PIP files, but it is unclear whether permission is required. … Given the apparent dearth of case law on this matter, we cannot conclude at this juncture that [the insurer’s] decision to review [the insured’s] PIP file was per se unreasonable or sufficient to state a plausible claim of bad faith.”

While doubting the pleading deficiencies could be cured, Judge Conner did give leave to file an amended bad faith claim.

Date of Decision: May 17, 2021

Green v. State Farm Mutual Automobile Insurance Company, U.S. District Court Middle District of Pennsylvania No. 3:20-CV-1534, 2021 WL 1964608 (M.D. Pa. May 17, 2021) (Conner, J.)