Monthly Archive for August, 2021

NO BAD FAITH POSSIBLE WHERE NO DEFENSE OR COVERAGE OBLIGATION OWED (Philadelphia Federal)

The insurer refused to defend and indemnify a personal injury claim against its additional insured under a commercial general liability policy.  The insured and its own insurer brought declaratory judgment, breach of contract, statutory bad faith, and common law contractual/equitable bad faith claims.  The insured’s own carrier alleged its policy should have been excess to the additional insured carrier’s policy.

The additional insured CGL carrier moved to dismiss, on the basis that coverage was excluded, per an employer’s liability exclusion.

First, Philadelphia Federal Judge Padova held the additional insured carrier had no duty to defend or indemnify in light of the employer’s liability exclusion.

[There is a very interesting discussion of whether the employer’s liability exclusion could apply if there was no additional insured coverage due, based on an argument that the underlying plaintiffs’ injuries did not arise out of the named insured’s conduct.  Judge Padova delved into the concept that this analysis was two-fold: (1) Was the party an additional insured, and then (2) Was there coverage for that additional insured. He found that the party was an additional insured, and any as yet undetermined absence of coverage because the additional insured’s liability did not arise from the named insured’s conduct, was a second level inquiry. Thus, because the party was an additional insured, the employer’s liability exclusion was in effect, and coverage for injury to its employees was excluded as to all insureds.]

On the statutory bad faith claim, Judge Padova first reiterated the employer’s liability exclusion foreclosed coverage. Based upon that predicate fact, he was “thus unable to conclude either that [the insurer] lacked a reasonable basis for denying the claim or that [the insurer’s] refusal to provide coverage was ‘frivolous or unfounded.’”

He cited Judge Savage’s 2012 Neshaminy Constructors, Inc. v. Fed. Ins. Co. opinion, summarized here, for the proposition: “Because there is no coverage under the contract for [the] claim, there can be no bad faith….” Judge Padova adds, “in the absence of coverage, [the insurer] cannot have acted in bad faith insofar as it failed to investigate the uncovered claims.”

Judge Padova also quotes Judge Dalzell’s 2007 Wedemeyer v. U.S. Life Ins. Co., decision, summarized here:  “If a reasonable basis exists for an insurer’s decision, even if the insurer did not rely on that reason, there cannot be bad faith.”

Finally, Judge Padova dismissed the other insurer’s bad faith claim, which purportedly arose out of its rights of equitable subrogation as an excess carrier against a primary carrier.  The insured’s own carrier argued its policy should have been excess to the defendant’s CGL policy, and the additional insured CGL carrier breached a duty of good faith to the excess carrier to save the excess carrier from providing a defense or paying claims the additional insured CGL carrier should have paid as primary insurer.

Judge Padova states

[T]he Third Circuit has held “that Pennsylvania recognizes no direct duty of good faith between a primary and an excess carrier.” … Rather, “‘an excess insurer who has discharged an insured’s liability stands in the shoes of the insured and as subrogee may maintain an action for breach of the primary carrier’s duty to act in good faith.’” … Thus, “[u]nder equitable subrogation the rights of the excess carrier may not rise above those of the insured.” … Because we have concluded that [the additional insured carrier] owed no duty to defend or indemnify [the insured] and [the excess carrier’s] rights may not rise above those of [its insured], which as we have previously concluded was not owed a defense or indemnity, we conclude that [the primary carrier] did not owe [the excess carrier] a duty to shield it from exposure as an excess carrier.

Date of Decision:  August 16, 2021

Westminster American Insurance Company v. Security National Insurance Company, U.S. District Court Eastern District of Pennsylvania No. CV 20-2195, 2021 WL 3630464 (E.D. Pa. Aug. 16, 2021) (Padova, J.)

MERE EXISTENCE OF CONTINUING INVESTIGATION AND NEGOTIATION RATHER THAN AN ARBITRARY AND IMMEDIATE DENIAL IMPLIES REASONABLENESS ON THE PART OF THE INSURER (Philadelphia Federal)

The insureds brought breach of contract and bad faith claims in connection with water damage to their home.  Eastern District Judge Tucker granted the insurer summary judgment on the bad faith claim.  She states

When Plaintiffs’ home was damaged by an overflowing toilet, [the insurer] inspected the loss and made payments on the dwelling damage and personal items it determined to be related to the loss. Later, when Plaintiffs submitted other estimates, [the insurer] reviewed those estimates to determine if payment was warranted, and that the scope of those estimates was in line with its own damage observations. When there were concerns on scope and pricing, [the insurer] asked for re-inspections and negotiated with Plaintiffs. Plaintiffs argue that the denial of payment is unreasonable because under a “replacement cost policy” like theirs, Defendant is to make payment on an actual cash value basis until the repairs are made, after which depreciation is payable to the policy holders. But Plaintiffs fail to present sufficient evidence of unreasonableness in their claim processing. While claim negotiations were ongoing at the time suit was initiated, and reimbursement or denial of depreciation costs may have eventually taken place, the mere existence of continuing investigation and negotiation rather than an arbitrary and immediate denial implies reasonableness on the part of Defendant.

Date of Decision:  August 13, 2021

Davis v. Safeco Insurance Company of Illinois, U.S. District Court Eastern District of Pennsylvania No. CV 19-3871, 2021 WL 3603037 (E.D. Pa. Aug. 13, 2021) (Tucker, J.)

 

NO COVERAGE DUE FOR COVID-19 LOSSES IN LIGHT OF VIRUS EXCLUSIONS, AND THUS NO BAD FAITH POSSIBLE (New Jersey Federal - two cases)

Today’s post addresses two recent cases where New Jersey federal judges held Covid-19 business loss claims barred by insurance policy virus exclusions.

Case 1 (Judge Hillman)

In this Covid-19 business closure case, the insured claimed coverage was due for business interruption, and under the policy’s civil authority coverage provision.  The carrier denied coverage based upon a virus exclusion.  The insured brought breach of contract and bad faith claims, which the insurer successfully moved to dismiss.

First, after an extensive analysis and review of developing case law, the court found the Covid-19 business loss barred by the policy’s virus exclusion.

As to bad faith, the court observed that under New Jersey law, causes of action for bad faith can include a denial of insurance coverage, or conduct that goes beyond coverage denial.  In coverage denial cases, the insured has to prove the lack of a reasonable basis to deny benefits, and a knowing or reckless disregard of the unreasonableness of the carrier’s denial.

Such claims cannot survive if they are fairly debatable; nor can there be a cognizable “bad faith claim for denial of coverage if the insurer was correct as a matter of law in denying coverage.” [Interestingly here, the court cites Third Circuit case law supporting this principle where the courts were addressing Pennsylvania’s bad faith statute, and not New Jersey’s common law insurance bad faith law.  The court also cited this “Pennsylvania” case law on bad faith reaching beyond coverage denial claims.]

New Jersey Federal Judge Hillman dismissed the bad faith claim with prejudice, stating

In the context of a claim for coverage based solely on the Closure Orders where there are no claims that the insured property or nearby property has been physically damaged and access to Plaintiff’s property has not been entirely prohibited, there is nothing to investigate: coverage does not exist on the face of that claim. Therefore, Plaintiff has not shown bad faith in Defendant’s lack of investigation or by denying Plaintiff’s claim. Discovery on this issue would not change that conclusion. As detailed above, the Court has already concluded Defendant was correct as a matter of law in denying Plaintiff coverage. Accordingly, the Court will dismiss with prejudice Plaintiff’s bad faith claim.  …. “Because the Court has found that [the insurer] was not obligated to provide coverage under the terms of the Policy, the bad faith claim similarly fails.”

Judge Hillman looked to Judge Kugler’s 2020 Shore Options opinion, summarized here, to support this conclusion.

Date of Decision:  August 9, 2021

Z Business Prototypes LLC v. Twin City Fire Insurance Company, U.S. District Court District of New Jersey No. CV 20-10075, 2021 WL 3486897 (D.N.J. Aug. 9, 2021) (Hillman, J.)

Case 2 (Chief Judge Wolfson)

After a lengthy analysis, Chief Judge Wolfson ruled that New Jersey’s principles governing insurance policy interpretation required application of a virus exclusion to bar coverage for a group of restauranteurs asserting Covid-19 business loss claims.  She then entered a judgment on the pleadings for the insurer on plaintiffs’ bad faith claim.

We quote the Chief Judge’s bad faith reasoning in full:

In Pickett v. Lloyd’s, 131 N.J. 457, 481 (1993), the New Jersey Supreme Court enumerated two situations under which an insurance company can be held to have acted in bad faith in the context of a first party claim: (1) “denial of benefits” and (2) “processing delay.” The Court reasoned that, like all contracts, an insurance contract contained a covenant of good faith and fair dealing in its performance and enforcement. …

Thus, the Court concluded that the insured should have a remedy when the insurer breaches its fiduciary duty to its insured by acting in bad faith. Id. To prove bad faith, “a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant’s knowledge or reckless disregard or the lack of a reasonable basis for denying the claim.” “While the knowledge of the lack of a reasonable basis may be inferred and imputed to an insurance company where there is reckless indifference to facts or to proofs submitted by the insured, neither negligence nor mistake is sufficient to show bad faith.” …. Rather, it must be demonstrated that the insurer’s conduct is unreasonable and the insurer knows that the conduct is unreasonable, or that it recklessly disregards the fact that the conduct is unreasonable. ….

In the present matter, Plaintiffs assert a claim that Defendant acted with bad faith when it denied benefits set forth in Plaintiffs’ contract with Defendant. … However, as previously discussed, Plaintiffs’ losses are barred by the Virus Exclusion. Consequently, because no coverage exists for Plaintiffs’ claims, the bad faith claim fails.

Date of Decision:  August 12, 2021

JRJ Hospitality, Inc. v. Twin City Fire Insurance Company, U.S. District Court District of New Jersey No. 320CV13095FLWDEA, 2021 WL 3561356 (D.N.J. Aug. 12, 2021) (Wolfson, J.)

[Yesterday’s post summarized a separate August 9, 2021 New Jersey Federal Court opinion, addressing the same bad faith coverage issues, though outside the Covid-19 context, likewise concluding that if no coverage is due, bad faith is not possible.]

NO BAD FAITH WHERE COVERAGE AND CLAIM HANDLING CONDUCT WERE “FAIRLY DEBATABLE”; CFA INAPPLICABLE TO COVERAGE CLAIMS (New Jersey Federal)

This case involves a fire damage claim to plaintiffs’ home.  This was the seventh fire in plaintiffs’ home.  The carrier denied coverage based on various theories, such as fraud in the application and during the investigation process, failure to cooperate, and alleged arson against plaintiffs.  Plaintiffs sued for breach of contract, violation of New Jersey’s Consumer Fraud Act (CFA) and bad faith.  The carrier moved for summary judgment on all claims.

Philadelphia Federal Judge Joel Slomsky was sitting by designation in this New Jersey Federal Action.  He denied summary judgment on the breach of contract claim, as disputes of fact remained for the jury on the above-referenced issues concerning the fire and insurance application; but he granted summary judgment on the CFA and bad faith claims.

Consumer Fraud Act Inapplicable

The CFA claim failed as a matter of law. Judge Slomsky observed, “New Jersey courts have consistently held that the Consumer Fraud Act does not apply to initial coverage.”  Here, the “case involves an initial coverage dispute based on Defendant’s denial of Plaintiffs’ fire loss claim. … Moreover, the record is devoid of any evidence of fraud by Defendant.”

Conduct in Coverage Denial and Claim Handling Fairly Debatable

New Jersey recognizes actionable insurance bad faith for both claim handling and coverage denial.  Coverage denial requires predicate proof that the claim denial was unreasonable.  Plaintiffs bad faith claims based on coverage denial and claim handling were fairly debatable as to their reasonableness, and thus bad faith could not exist.

Judge Slomsky observed, “if determining whether the insurer lacked a reasonable basis for denying a claim is ‘fairly debatable,’ then the insured cannot prevail on a bad faith claim. … In other words, if an insured cannot succeed on their substantive claim at summary judgment, then they cannot succeed on a bad faith claim premised on an insurer’s denial of coverage.”

The same “fairly debatable” standard applies to delays in claim handling.  “The insured must show that there was ‘no valid reason to delay and the insurance company knew or recklessly disregarded the fact that no valid reasons supported the delay.’ … But if the insured cannot succeed on summary judgment for its substantive claim, then it cannot prevail on a bad faith claim based on delay.”

Judge Slomsky already held that the breach of contract/coverage denial claim could not be decided on summary judgment because there were factual disputes.  “As a result, Plaintiffs “cannot establish as a matter of law a right to summary judgment” on their substantive claim, and ‘cannot succeed on [their] claim for bad faith[.]’”

Date of Decision:  August 9, 2021

Bui v. Mid-Century Insurance Company, U.S. District Court District of New Jersey No. CV 19-20053, 2021 WL 3486896 (D.N.J. Aug. 9, 2021) (Slomsky, J.)

WITHOUT A COVERAGE OBLIGATION, IT IS IMPOSSIBLE TO SHOW THAT INSURER LACKED A REASONABLE BASIS FOR DENYING COVERAGE (Philadelphia Federal)

The insured brought breach of contract and bad faith first party property damage claims.  These claims were based upon faulty workmanship, the consequences flowing from that faulty workmanship, and failed efforts at repairs.

Eastern District Judge McHugh granted summary judgment on coverage, based upon a faulty workmanship exclusion.  He then granted summary judgment on the bad faith claim, stating

To succeed on a bad faith claim, plaintiffs must show by clear and convincing evidence “that the defendant did not have a reasonable basis for denying benefits under the policy and that the defendant knew or recklessly disregarded its lack of reasonable basis for denying the claim.” … Here, the exclusion was properly invoked. “A reasonable basis is all that is required to defeat a claim of bad faith.” J.C. Penney Life Ins. Co., 393 F.3d at 367 (citing Horowitz v. Fed. Kemper Life Assurance Co., 57 F.3d 300, 307 (3d Cir. 1995)). See also Cresswell v. Pennsylvania Nat. Mut. Cas. Ins. Co., 820 A.2d 172, 179 (Pa. Super. Ct. 2003) (stating that where the court found that the insurer did not have a duty to provide coverage, “it is impossible” to show that the insurer lacked a reasonable basis for denying coverage).

Date of Decision:  August 4, 2021

Jones v. Allstate Property and Casualty Insurance Co., U.S. District Court Eastern District of Pennsylvania No. CV 20-3052, 2021 WL 3418876 (E.D. Pa. Aug. 4, 2021) (McHugh, J.)

 

ANOTHER INADEQUATELY PLEADED UIM BAD FAITH CLAIM IS DISMISSED WITHOUT PREJUDICE (Eastern District)

Another UIM bad faith case.  Another dismissal for failure to plead beyond conclusory allegations.  Another dismissal with leave to amend, if the insured can meet the Twombly/Iqbal plausible fact pleading standards.

Judge Baylson relied on his January 2021 Baxley decision, summarized here, in granting the insurer’s motion to dismiss the bad faith claim.  In Baxley, the insured failed to “provide any explanation regarding how the defendant had responded to her claim, or what facts, apart from the defendant’s failure to pay her claim, indicated bad faith.”

The same was true in this case: “Plaintiffs do not provide sufficient factual allegations on which the Court can reasonably infer Defendant’s ill will. …. The claims of bad faith as described in ¶¶ 26-32 of the Complaint are overly vague and do not contain any specific factual allegations that suggest bad faith. For example, Plaintiffs plead no specific factual allegations as to how Defendant forced Plaintiffs to file the instant action. Nor does the Complaint give any clarifying details as to what the alleged ‘false pretexts’ and ‘invasive tactics’ utilized by Defendant were. Indeed, Plaintiffs’ sole factual allegation in the Complaint regarding Defendant’s action is that Defendant denied Plaintiffs’ claim. Just as in Baxley, this does not suffice.”

[Note: The court, citing the 1994 Terletsky decision, states that “[f]or an insurer’s failure to pay a claim to be considered in bad faith, the plaintiff must allege an underlying element of self-interest or ill will.” In 2017, however, Pennsylvania’s Supreme Court made clear in Rancosky that “we hold that proof of an insurance company’s motive of self-interest or ill-will is not a prerequisite to prevailing in a bad faith claim under Section 8371…. While such evidence is probative of the second Terletsky prong, we hold that evidence of the insurer’s knowledge or recklessness as to its lack of a reasonable basis in denying policy benefits is sufficient.” A link to our Rancosky summary can be found here.]

Date of Decision:  July 28, 2021

O’Brien v. Liberty Mutual Insurance, U.S. District Court Eastern District of Pennsylvania, No. 21-CV-01234, 2021 WL 3203405 (E.D. Pa. July 28, 2021) (Baylson, J.)

INSURER’S COVERAGE DENIAL OBJECTIVELY REASONABLE AND THUS NO BAD FAITH IS POSSIBLE (Western District)

Western District Judge Hornak adopted Magistrate Judge Kelly’s Report and Recommendation to grant the insurer summary judgment, in this underinsured motorist coverage breach of contract and bad faith case.

First, the breach of contract claim hinged on whether the insurer’s underinsured motorist coverage rejection form comported with Pennsylvania’s Motor Vehicle Financial Responsibility Law (MVFRL).  The insured signed a form rejecting UIM coverage, but argued the form he signed did not meet the MVFRL’s requirements, and therefore should be deemed void.

The court rejected this argument, and found no UIM coverage due.  The court also found that the failure to include a proper renewal notice regarding the rejection of UIM coverage was a violation of the MVFRL. Renewal notice MVFRL violations, however, have long been held not to provide a private remedy in the courts.  Rather, any failure in the renewal form was solely for administrative review by the insurance department.

Thus, the insurer obtained summary judgment on the coverage claim.

In light of this ruling, the bad faith claim necessarily failed because there was an objectively reasonable basis to deny UIM coverage, since the insured himself had rejected UIM coverage.  While there were some flaws in the claim adjuster’s manner of denying coverage, the fact is that the adjuster reached the correct conclusion that no coverage was due; and the carrier consistently took that position throughout, including an independent analysis by coverage counsel after the adjuster’s initial denial that no coverage was due.

Dates of Decision:  July 12, 2021 (Report and Recommendation), August 2, 2021 (Order adopting Report and Recommendation)

Keeler v. Esurance Insurance Services, U.S. District Court Western District of Pennsylvania No. 20-271 (W.D.Pa. July 12, 2021) (Kelly, M.J.) (Report and Recommendation), adopted by Order of the District Court (Aug. 2, 2021) (Hornak, J.)

Our thanks to Attorney Daniel Cummins, author of the excellent TortTalk Blog, for bringing this case to our attention.

WESTERN DISTRICT JUDGE STICKMAN ISSUES TWO BAD FAITH OPINIONS: (1) DIFFERENCE IN VALUATION ALONE IS NOT BAD FAITH; (2) BAD FAITH CANNOT BE PURSUED AGAINST CARRIER’S CLAIM ADJUSTER (Western District)

On July 19th, Judge Stickman held in Stegena v. Nationwide, that simply pleading the insured’s injuries are worth significantly more than the carrier’s valuation of the same injuries cannot, by itself, constitute bad faith.  One week later, Judge Stickman opined in the Alexander v. Mid-Century, that an insured could not bring breach of contract or bad faith claims against a carrier’s claim adjuster.

Valuation dispute alone cannot constitute bad faith

In this undersinsured motorist breach of contract and bad faith case, the insured’s “argument in support of her statutory bad faith claim consists almost entirely of nothing more than a bare recitation of the materials and evidence submitted in support of her claim, together with monetary valuations included in the opinions of experts procured after the initiation of this litigation….”

Judge Stickman found the complaint alleged a claim handling history that did not make out a plausible bad faith claim, with the insured trying to meet her clear and convincing evidence burden by simply emphasizing the amount of damages her experts found due to compensate her damages, which the carrier would not pay. Judge Stickman states: “The problem with [the insured’s] argument is that, although she provides sizeable dollar amounts, which her experts claim represent prospective lost wages and medical expenses, her argument fails to address the present issues before the Court—why there was an absence of a reasonable basis, or how [the insurer] knew or recklessly disregarded that absence.”

He recognizes that “under the right circumstances, an unsupported low-ball offer may support a claim for insurance bad faith … [but] it remains [the insured’s] burden to scrutinize the relationship between [the insurer’s] considerations and determinations.” Here, the insured’s failure to “identify, with any specificity, factual deficiencies illustrating the unreasonableness of [the insurer’s] conduct, demonstrates that her claim is more properly characterized as an inappropriate, generalized grievance over the monetary valuation of her claim.” Moreover, the record showed the carrier’s “investigation and determinations, and, more specifically, the process that he used to evaluate and value the claim … cannot be characterized as anything other than reasonable, as that term applies in the bad faith context.”

Judge Stickman cites Judge Caputo’s 2019 Moran decision in support, summarized here, where the Middle District court collected cases on valuation discrepancies and bad faith.

Finally, in reciting case law detailing Pennsylvania’s statutory bad faith standards, we observe that Judge Stickman quoted the long-standing principle that “an insurance company is not required to demonstrate its investigation yielded the correct conclusion or even that its conclusion more likely than not was accurate. The insurance company also is not required to show the process by which it reached its conclusion was flawless or that the investigatory methods it employed eliminated possibilities at odds with its conclusion. Rather, an insurance company simply must show it conducted a review or investigation sufficiently thorough to yield a reasonable foundation for its action.”

Date of Decision:  July 19, 2021

Stegena v. Nationwide Property & Casualty Insurance Company, U.S. District Court Western District of Pennsylvania No. 2:20-CV-428, 2021 WL 3038800 (W.D. Pa. July 19, 2021) (Stickman, J.)

No viable breach of contract or bad faith claim against individual adjuster

The insured brought  breach of contract and bad faith claims against both his insurer and its claim adjuster.  The defendants moved to dismiss, arguing there was no viable claim against the adjuster, and that the adjuster was joined to improperly destroy diversity jurisdiction and prevent removal to federal court.

Judge Stickman found Pennsylvania case law made clear that neither a breach of insurance contract or insurance bad faith claim could be pursued against an individual claim adjuster working for the insured’s carrier.  He cites the 2017 Pennsylvania Superior Court decision in Brown v. Everett, summarized here, holding that “a statutory action for bad faith can only be brought against the insurer,” and not an adjuster.

Judge Stickman rejected the argument that the adjuster could be sued under the “participation theory,” finding that theory inapposite to the context of an insurance adjuster handling a claim for an insurance company.  Thus, he dismissed the claims against the adjuster with prejudice, which further resulted in jurisdiction over the remaining claims against the insurer being proper in federal court.

Date of Decision:  July 26, 2021

Alexander v. Mid-Century Insurance Company, No. 2:21-CV-392, U.S. District Court Western District of Pennsylvania 2021 WL 3173621 (W.D. Pa. July 26, 2021) (Stickman, J.)

NO BAD FAITH POSSIBLE WHERE NO COVERAGE DUE IN THIS COVID-19 CASE (New Jersey Federal)

New Jersey Federal Judge Wolfson denied plaintiff coverage in this Covid-19 business loss case.  Judge Wolfson found the policy’s virus exclusion unambiguously applied, denied the insured’s motion for summary judgment, and granted the carrier judgment on the pleadings.

[For those interested in the detailed reasoning behind this Covid-19 coverage decision, a copy of Judge Wolfson’s opinion can be found here.  We are only focusing on the bad faith claim.]

In a closing footnote, Judge Wolfson observed:

Neither party includes in its briefing any argument with respect to Plaintiff’s bad faith claim. Nevertheless, it is well-established that under New Jersey law, “a claimant must be able to establish a right to summary judgment, as a matter of law, for coverage before asserting a bad faith claim against an insurer for their refusal to pay a claim.” Mitra v. Principal Ins. Co., No. 15-1259, 2015 WL 4139015, at *3 (D.N.J. July 7, 2015) (citing Polizzi Meats v. Aetna Life & Cas. Co., 931 F. Supp. 328, 339 (D.N.J. 1996). In other words, where the plaintiff cannot “establish a right to summary judgment, the bad faith claim fails.” Id. Accordingly, because Plaintiff has not established a right to summary judgment on its coverage claim, its bad faith claim must also be dismissed.

Date of Decision:  July 29, 2021

Metuchen Center, Inc. v. Liberty Mutual Insurance Company, U.S. District Court District of New Jersey No. CV2012584FLWTJB, 2021 WL 3206827 (D.N.J. July 29, 2021) (Wolfson, C.J.)

ALLEGED “RED FLAGS” NOT ENOUGH TO DEFEAT BAD FAITH CLAIM; MOTION TO BIFURCATE DENIED (Philadelphia Federal)

Eastern District Judge Younge denied the insurer’s summary judgment motion on bad faith, and its motion to bifurcate the bad faith claim.

Plaintiff sought coverage based on auto theft and damage to the vehicle. The carrier investigated the claim, and took the vehicle into its custody during the investigation.  The carrier never paid on the claim.  Rather, it assigned the claim to its Special Investigation Unit (SIU) because of “red flags” it allegedly uncovered. The carrier argued these red flags supported its decision to further investigate the claim and then to deny coverage, making the process reasonable and thus beyond the scope of a bad faith claim.

Summary Judgment Denied on the Merits

Judge Younge gives a thorough exposition of bad faith law, and specifically the law concerning the reasonableness of investigations and red flags.  Despite the carrier’s arguments that its investigation, and denial based thereon, were reasonable, Judge Younge ruled that the carrier’s arguments were insufficient to get summary judgment under this case law.  The insured adduced “several holes” in the carrier’s investigation that could be indicia of an unreasonable investigation, despite the putative red flags.  Further, the record was lacking in evidence that the insured “had any motive to damage, destroy or fake the theft of her Vehicle.”

[Judge Younge cited legal principles from the April 2021 Fuentes case, summarized here, which cited the 2019 Merrone case, summarized here, where “red flags” were sufficient to make to carrier’s investigation reasonable.  For those litigating “red flag” cases, it will be useful to compare and contrast Judge Younge’s Bermudez opinion with these two cases.]

Motion to Bifurcate Denied

In denying the motion to bifurcate, Judge Younge found:

  1. The insurer “failed to establish the level of prejudice necessary to warrant bifurcation.”

  2. “[I]t would appear that the evidence related to Plaintiff’s breach of contract claim will overlap evidence presented in relationship to Plaintiff’s insurance bad faith claim.”  “For example, both claims will focus on whether Plaintiff was involved in the theft of her own Vehicle and/or whether Plaintiff made a material misrepresentation to her insurance company in connection with her claim.”

  3. “Defendant’s investigatory process, its interpretation of the evidence and impression of witnesses which would ordinarily be relevant to an insurance bad faith claim will be equally relevant to the breach of contract claim under the facts of this case. Defendant’s reason for refusing to provide coverage for the Vehicle will be at issue in the breach of contract claim.”

  4. “From the perspective of judicial economy, bifurcation of trial on separate claims could prove inefficient and inconvenient.”

  5. “Bifurcation could result in the unnecessary need to call the same witnesses twice to testify before the same jury on two separate occasions which would extend the amount of time necessary for the jury to resolve this litigation.”

Judge Younge did recognize the insurer had some legitimate concerns, and stated: “Based on overlapping evidence and the intertwined nature of the two claims, the prejudice that Defendant will suffer from trying these two claims together remains to be seen. However, to mitigate any potential concerns, the Court could provide curative instructions and/or implement a staged verdict sheet that would ask the jury to resolve the breach of contract claim prior to reaching the insurance bad faith claim. The varying burdens of proof for breach of contract and insurance bad faith could be explained to the jury and described on the verdict sheet. Potentially, evidence related to damages under insurance bad faith, and specifically punitive damages, could be presented to the jury after it resolves issues related to liability. These issues can be fairly addressed at a pretrial conference prior to jury selection.”

Date of Decision:  July 19, 2021

Bermudez v. Progressive Insurance Co., U.S. District Court Eastern District of Pennsylvania No. 19-CV-4085-JMY, 2021 WL 3033757 (E.D. Pa. July 19, 2021) (Younge, J.)