BAD FAITH CLAIM IS RIPE TO PROCEED; COURT REJECTS MOTION TO BIFURCATE OR SEVER (Philadelphia Federal)

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In this underinsured motorist bad faith case, Eastern District Judge DuBois denied both a motion to dismiss on ripeness grounds, and an alternative motion to server or bifurcate.

The complaint alleges the tortfeasor had $50,000 in coverage and the plaintiff/insured had $500,000 in UIM coverage. The tortfeasor agreed to settle at $47,000 and the UIM carrier consented. Plaintiffs alleged severe and permanent injuries and pursued a UIM claim.

Specifically, the insureds allege they complied with all policy terms and conditions; the insurer did not tender any UIM benefits or make any settlement offers; the insurer did not conduct any investigation into the claims; and the insurer played “cat and mouse” games by “continuously and systematically failing to communicate any offer of settlement or denial of benefits,” misleading plaintiffs as to potential settlement on at least nine occasions, and “purposefully ignoring [plaintiffs’] demand for underinsured motorist benefits.”

BAD FAITH CLAIM CAN PROCEED

First, Judge DuBois rejected the argument that the bad faith claim was not ripe until the breach of contract claim was actually decided. Among other things, the court stated: “Success on a statutory claim for bad faith does not necessarily depend on the success of the underlying breach of contract claim.” Relying on a 1996 Eastern District decision, the court quotes: “A claim for bad faith brought pursuant to § 8371 is a separate and distinct cause of action and is not contingent on the resolution of the underlying contract claim. A plaintiff may succeed on its bad faith claim even if it fails on the underlying breach of contract claim. Additionally, courts interpreting § 8371 have consistently entertained multi-count complaints containing both unresolved insurance contract disputes and bad faith claims.”

The court further relies on the unpublished Third Circuit decision, Gallatin Fuels, Inc. v. Westchester Fire Insurance Co., in reasoning that “’[a] finding that the insured did not ultimately have a duty to cover the plaintiff’s claim does not per se make the insured’s actions reasonable’ in hindsight.” Judge DuBois concludes: “Therefore, so long as the underlying contract claim is ripe, the bad faith claim is also ripe.”

After finding the claim ripe, the court finds plaintiffs can proceed on their bad faith claim. “Plaintiffs allege defendant acted in bad faith by failing to properly investigate their insurance claim, engage in settlement discussions, and communicate with them. This is ‘a separate and distinct’ cause of action from plaintiff’s claim that defendant breached the terms of the policy in failing to pay UIM benefits. … As such, a finding that defendant does not owe plaintiffs UIM benefits would not mandate a finding that defendant did not act in bad faith in handling the insurance claim.”

[Note: This opinion does not address the impact of the Pennsylvania Supreme Court’s decision in Toy v. Metropolitan Life Insurance Company in determining to what extend a statutory bad faith claim can proceed, if at all, when there is no duty to pay any benefits under the policy. Moreover, we have previously observed that Gallatin Fuels never addressed Toy. These issues have been discussed many times on the Blog, most recently here.

Of special note is Judge DuBois’ 2019 decision in Buck v. GEICO, which appears to emphasize, and confirm, the denial of a benefit as a predicate to statutory bad faith claims. Among other things, the Buck opinion looks to Toy as a leading authority, and not Gallatin Fuels. The Buck opinion includes language, in quotes below, stating:

“Even assuming that the bad faith denial of the benefits claimed by plaintiff was properly alleged in the Complaint, plaintiff’s argument fails because plaintiff does not allege the denial of any benefits within the meaning of the statute. ‘[B]ad faith’ as it concern[s] allegations made by an insured against his insurer ha[s] acquired a particular meaning in the law.’”

“Courts in Pennsylvania and the Third Circuit have consistently held that ‘[a] plaintiff bringing a claim under [§ 8371] must demonstrate that an insurer has acted in bad faith toward the insured through ‘any frivolous or unfounded refusal to pay proceeds of a policy.’”

The Buck plaintiff could not state a claim because “[n]one of the ‘benefits’ that defendant allegedly denied plaintiff concern the refusal to pay proceeds under an insurance policy. To the contrary, plaintiff concedes that he ‘does not allege bad faith for refusal to pay benefits.’”

Buck observes that cases have held “’section 8371 is not restricted to an insurer’s bad faith in denying a claim. An action for bad faith may also extend to the insurer’s investigative practices.’” This means, however, that bad faith claims “’need not be limited to the literal act of denying a claim.’”

Rather, “the essence of a bad faith claim must be the unreasonable and intentional (or reckless) denial of benefits.” “Thus, plaintiff must allege the denial of benefits to state a claim under § 8371.”]

In the present case, there seems to be no question that UIM coverage is provided, but only whether the plaintiff’s damages reach into the UIM coverage level or stop below $50,000. The insurer does not appear to challenge whether a plausible bad faith claim has been pleaded with adequate factual allegations, but only that the bad faith claim should not be allowed to proceed because it is not ripe. The court concludes that the UIM bad faith claim is ripe and can proceed.

MOTION TO BIFURCATE OR SEVER DENIED

The Procedures and Standards Governing Contract and Bad Faith Claims do not Favor Bifurcation or Severance.

Judge Dubois first rejected the argument that the claims should be severed or bifurcated because they will be governed by different procedures and standards. First, the carrier incorrectly argued that the contract and loss of consortium claims go to a jury while bad faith is decided by the judge. While true in Pennsylvania state court actions, bad faith claims can go to the jury in federal court cases. Next the court rejected the notion that the jury would be confused in applying the preponderance of the evidence standard to the contract claim and clear and convincing evidence standard to the bad faith claim. Judge Dubois also rejected the argument that the facts at issue on the two claims were entirely distinct.

“For example, one of plaintiffs’ assertions in the bad faith claim is that defendant failed to conduct an adequate investigation into plaintiffs’ injuries. This requires inquiry into two facts (1) the extent of plaintiffs’ injuries, and (2) the extent of defendant’s investigation into those injuries. The breach of contract claim also requires inquiry into the extent of plaintiffs’ injuries. A separate trial on the bad faith claim would require plaintiffs to present much of the same evidence to the second jury, ‘duplicating in many respects the presentation to the first jury.’ This would be expensive and time-consuming for all parties. Because of the factual overlap between the claims, it would be more convenient to have a single trial in this case. Accordingly, the convenience factor weighs against severance or bifurcation.”

There is no Prejudice Because the Work Product Doctrine Remains Functional.

As to prejudice, the insurer focused on protecting work product. Judge Dubois states: “On this factor, defendant contends that allowing discovery and trial for the claims to proceed simultaneously would prejudice defendant because discovery in the bad faith claim would require defendant to disclose the claim adjustor’s mental impressions, conclusions, and opinions as to the merits of the case, evidence that is not discoverable in the breach of contract case. … To the extent that the claim adjustor’s work product is protected, defendant’s argument is unconvincing.”

Judge Dubois joins the vast majority of opinions finding the attorney client privilege and work product doctrine do not fall by the wayside simply because an insured brings a bad faith claim: “The Federal Rules of Civil Procedure and longstanding judicial precedent protect work product from disclosure—protections that do not disappear merely because work product prepared in anticipation of litigation over one claim may also be relevant to a second claim. Allowing the claims to proceed simultaneously simply means [defendant] will be called upon to prove its entitlement to work product protection….”

Judicial Economy Favors a Single Action

As to judicial economy:

“Defendant’s argument as to this factor is that, should plaintiffs fail on their breach of contract claim, the bad faith claim will be moot. As explained above, that is an incorrect statement of the law. Plaintiffs’ bad faith claim is based, in part, on defendant’s failure to investigate plaintiff’s insurance claims and communicate with plaintiffs regarding their claims. ‘A finding that the [insurer] did not ultimately have a duty to cover the plaintiff’s claim does not per se make the [insurer’s] actions reasonable’ in hindsight. Gallatin Fuels, Inc., 244 F. App’x at 434-35. Whether defendant ultimately owes plaintiff benefits under the policy is distinct from whether defendant appropriately handled the claims.” [See Note above re Toy v. Metropolitan and Buck v. GEICO.]

“To the contrary, a single trial promotes judicial economy because it avoids duplication of effort by the parties across multiple trials. Although the contractual and bad faith claims present distinct legal issues, the underlying facts overlap. Therefore, “[b]ifurcation would essentially double the life of this action requiring a second discovery period, more dispositive motions, more pretrial motions, and a completely separate trial,” much of which would concern the same factual basis. … Accordingly, the judicial economy factor weighs against severance or bifurcation.”

Date of Decision: September 11, 2020

Dunleavy v. Encompass Home & Auto Insurance Company, U.S. District Court Eastern District of Pennsylvania No. CV 20-1030, 2020 WL 5501200 (E.D. Pa. Sept. 11, 2020) (DuBois, J.)

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