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As discussed at length in our prior blog posting the Court previously had held that that under Pennsylvania law, a contractually based bad faith claim may be supported by evidence that an insurer made a misrepresentation to the insured or failed to communicate with the insured, if the misrepresentation or failure to communicate caused the insured to make a personal contribution to a settlement within policy limits.

Upon close analysis, the court found it was a close call with respect to the disclosure issue. It concluded, however, that a factual dispute existed as to whether the insurer acted in bad faith by not revealing to the insured the full settlement authority, even after the insured offered to contribute her own money, and denied summary judgment on the contractual bad faith claim.

As to statutory bad faith, the court allowed the claim to go forward because a jury could find the insurer’s conduct reckless, under Terletsky, “based on the details of the negotiations and the settlement numbers discussed between the insurer’s representatives with the insured and her personal counsel.”

This instant decision involved the insurer’s motion for reconsideration and request for an interlocutory appeal on the refusal to dismiss all bad faith claims. The Court did dismiss the breach of contract claim. The insurer asserted that the Court clearly erred by “overlooking” parts of the insured’s testimony and failing to apply the Terletsky standard to contractual insurance bad faith claims.

The deposition argument was based upon a putative lack of reliance.  The insurer argued that the insured’s deposition testimony showed the insured was not aware that the insurer’s employee told the insured’s counsel that the insurer would not offer more than $1.3 million, and thus the insured could not have relied on this alleged misrepresentation.

The Court considered the testimony, and reasoned that the testimony did not support the definite and firm opinion that the Court had made a mistake. Viewed in the light most favorable to the insured, the statement made by the insurer’s employee that the insurer would not offer more than $1.3 million was untrue, “but it was likely not material from the standpoint of a fraudulent misrepresentation because [the insurer] later offered $1.5 million.”

However, the conversation between the insurer’s employee and the insurer’s attorney was relevant because “the jury could infer from it and [the insurer’s employee’s] true statement that $1.5 million was the limit of his authority that ‘[the insured] was misled into believing that $1.5 million was the absolute limit of what [the insurer] was willing to offer.’”

The insurer correctly pointed out that a person “cannot rely upon what [she] does not know or be misled by something of which [she] is not informed.” However, the Court found that the insured’s attorney was informed and did rely on the statement made by the insurer’s employee, at least until the insurer raised its offer. Thus, this untrue statement informed the advice given to the insured by her attorney and may be considered by the jury as evidence of bad faith; and the insured’s testimony did not demonstrate a clear error by the Court that would serve as a basis for reconsideration of summary judgment.

The insurer next argued that the Court committed clear error by failing to apply the Terletsky recklessness standard to the contractual bad faith claim, which the Court had carefully reviewed in its original decision, concluding that the lower standard of proving liability set forth in DeWalt v. Ohio Casualty Insurance Co., 513 F.Supp. 2d 287 (E.D. Pa. 2007), applied to the insured’s contractual bad faith claim, as discussed in this Blog.

The insurer argued that it was error to apply DeWalt because DeWalt involved “excess verdicts resulting from an insurer’s failure to settle a case and there was no excess verdict in this case.” However, in the Third Circuit’s most recent Wolfe decision, the appellate court stated that it knew of no decision in which an excess verdict was necessary in order to bring a contractual bad faith claim, and in fact cited the summary judgment decision in the earlier McMahon opinion “as an example of a decision predicting that an excess verdict is not required for a third party bad faith claim under Pennsylvania common law.”

The Court acknowledged that other Pennsylvania courts have repeatedly held that “an insurer’s unreasonable refusal to settle a claim can subject an insurer to bad faith liability,” and reasoned that it carefully considered its prediction that the DeWalt standard applied to the contractual bad faith claim here. Thus, the Court found that its decision was not clearly erroneous and denied the insurer’s motion for reconsideration on this issue as well.

Finally, the insurer made an argument for certification of an order for interlocutory appeal, and cited three issues that it claimed satisfied the requirements: “(1) whether denial of summary judgment was appropriate in light of [the insured’s] testimony that allegedly conflicts with [the insured’s attorney’s] testimony about what [the insurer’s employee] told him; (2) whether denial of summary judgment was appropriate given [the insurer’s] alleged reasonable basis for not disclosing to [the insured] its settlement strategy, its urging [the insured] not to make a personal contribution, and other factual reasons; and (3) whether the application of a negligence standard to the contractual bad faith claim was appropriate.”

The Court reasoned that the first two issues were not appropriate for interlocutory appeal because they did not involve a controlling question of law. However, the Court acknowledged that “[w]hether a negligence standard applies to the contractual bad faith claim is a controlling question of law.” Nevertheless, the Court reasoned that an immediate appeal of this issue would not “materially advance the ultimate termination of the litigation” and would likely increase unnecessary costs and waste judicial resources.

Thus, a trial would still be necessary to resolve the statutory bad faith claim even if the negligence standard was erroneous. The Court found that discovery had been completed and it would be most efficient to proceed to trial without an interlocutory appeal. Consequently, the insurer “did not meet its burden of showing that certification of the summary judgment order for interlocutory appeal is an appropriate exceptional circumstance.”

Date of Decision: August 3, 2015

McMahon v. Medical Protective Co., No. 2:13-cv-00991, 2015 U.S. Dist. LEXIS 101179 (W.D. Pa. August 3, 2015) (Conti, J.)