Archive for the 'PA – Declaratory Judgment' Category

POLICY VOIDED FOR MATERIAL MISREPRESENTATIONS; INSURED VIOLATED INSURANCE FRAUD ACT; COMMON LAW FRAUD NOT ACTIONABLE ABSENT RELIANCE (Philadelphia Federal)

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The insured admittedly altered vendor invoices that inflated the replacement value of damaged items in this first party property damage claim, and submitted those false invoices to the insurer in making its claim for property damage losses.

The insurer brought a declaratory judgment action arguing there was no coverage due because of these misrepresentations, along with claims for “violations of Pennsylvania’s Insurance Fraud Act, common law fraud, and reverse bad faith.” The insured brought a statutory bad faith counterclaim, which the court earlier dismissed.

The parties cross-moved for summary judgment, and the insured asked Eastern District Judge Robreno to vacate his dismissal of its bad faith counterclaim.  Judge Robreno granted summary judgment to the insurer for declaratory relief and violation of the Insurance Fraud Act (IFA), and refused to vacate his dismissal of the bad faith counterclaim.

Fraud and concealment as a basis to void the policy and preclude recovery

The declaratory judgment count focused on the argument that the insured violated the Concealment, Misrepresentation or Fraud Condition in the policy.

Judge Robreno observed that:

  1.  “[T]o void an insurance policy under Pennsylvania law, an insurer must prove the following factors by clear and convincing evidence: “(1) the insured made a false representation; (2) the insured knew the representation was false when it was made or the insured made the representation in bad faith; and (3) the representation was material to the risk being insured.”

  2. “The clear and convincing evidence standard requires evidence that is ‘so clear, direct, weighty, and convincing as to enable the [trier of fact] to come to a clear conviction, without hesitancy, of the truth of the precise facts [in] issue.’”

  3. “Pennsylvania courts have long ruled that a violation of the fraud and concealment provision of an insurance policy … serves as a complete bar to the insured’s recovery under the policy.”

There was no question that the insured knowingly made misrepresentations to the insurer through the altered invoices.  The issue was whether these misrepresentations were material.

Misrepresentations are material “if a reasonable insurance company, in determining its course of action, would attach importance to the facts misrepresented.” Judge Robreno found the misrepresentations material. The false invoices were provided in direct response to the insurer’s requesting proof of the valuations the insured’s adjusters submitted. He accepted the insurer’s argument that the insured was aware the insurer “would use the invoices to determine and verify the amount of loss.”

Thus, Judge Robreno voided the policy, and found no coverage due.

Court grants insurer summary judgment under the Insurance Fraud Act

The insurer also sought relief under Pennsylvania’s Insurance Fraud Act, 18 Pa. Stat. and Cons. Stat. Ann § 4117(g). There are three elements to an IFA claim: “1) presenting false, incomplete, or misleading statements to [the insurer]; 2) that were material to the claim; and 3) which were knowingly made with an intent to defraud.” The courts are split on whether the burden of proof is clear and convincing evidence or preponderance of the evidence.

The court had just ruled, however, under the clear and convincing evidence standard, that the insured made material misrepresentations that voided the policy for fraud.  Thus, the only issue in obtaining civil relief under the IFA was whether the insurer court prove the insured’s actions were taken with an intent to defraud.  Judge Robreno adduced examples from the record demonstrating the insured’s conduct was intentional and knowing.  Thus, he granted the insurer summary judgment on this count as well.

Common law fraud not established without showing justifiable reliance

Unlike the other two fraud based counts, common law fraud requires proof of justifiable reliance on the misrepresentations.  The insurer did not provide evidence of record to meet that element, and summary judgment was denied.  Judge Robreno noted, that the insurer “could, of course, pursue this claim at a trial. However, it does not appear that [it] would be entitled to compensatory damages beyond the litigation and investigation costs it may seek to recover as a result of prevailing on [the Insurance Fraud Act claim], nor does it appear that punitive damages would be appropriate in this case.”

Finally, Judge Robreno denied the insured’s motion to vacate the order dismissing its bad faith claims against the insured.  Further, in light of its success on the first two counts, the reverse bad faith claim was dismissed without prejudice in light of the insurer’s position that it had no reason to proceed with that claim.

Date of Decision:  April 12, 2021

State Auto Property & Casualty Insurance Co. v. Sigismondi Foreign Car Specialists, Inc., U.S. District Court Eastern District of Pennsylvania No. CV 19-5578, 2021 WL 1343116 (E.D. Pa. Apr. 12, 2021) (Robreno, J.)

INSURER HAD STANDING AS ASSIGNEE TO BRING BAD FAITH CLAIM AGAINST ADDITIONAL INSURANCE PROVIDER; BAD FAITH CLAIM ADEQUATELY STATED FOR FAILURE TO PROVIDE FIRST LEVEL OF COVERAGE AND A DEFENSE UNDER ADDITIONAL INSURED ENDORSEMENT (Philadelphia Federal)

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This case involves a dispute between a defendant’s own insurer and another carrier obligated to provide coverage to defendant as an additional insured.  The issues involved which insurer has the primary coverage/defense obligations, and which was excess.

There were several tenders to the additional insurance provider to assume the defense, which were either ignored or denied.  The defendant’s insurer brought a declaratory judgment action seeking to have the additional insurance provider assume the defense, and to reimburse the defendant’s insurer for attorney’s fees and costs, as well as for the attorney’s fees and costs associated with bringing the declaratory judgment action.

It is also clear from the court’s opinion that a statutory bad faith claim under 42 Pa.C.S. § 8371 was at issue.

There was a motion to dismiss all claims.

There was a duty to defend the additional insured

Among other things, Eastern District Judge Robreno found the underlying complaint adequately alleged facts invoking the additional insurance provider’s duty of defend, when compared to the additional insured endorsement language.  Thus, the additional insurance provider was in error in failing to accept the tenders and assume the defense.

There was standing to bring a statutory bad faith claim as an assignee

The additional insurance provider challenged plaintiff’s standing to bring a section 8371 bad faith claim because it was not the named insured.  Judge Robreno disagreed, citing the Third Circuit’s 2015 Wolfe decision making clear that assignees can bring statutory bad faith claims.

[Note: Earlier in Wolfe, the Third Circuit certified to Pennsylvania’s Supreme Court the fundamental issue of whether bad faith claims can ever be assigned. In the Supreme Court’s own Wolfe decision, assignments were recognized as permissible, but only within limited parameters.  A summary of that case can be found here. The assignment in the present case falls within those acceptable parameters.]

The assignee-insurer pleaded a plausible bad faith claim

Next, Judge Robreno rejected the insurer’s arguments that the complaint was devoid of facts setting out a plausible bad faith claim.

To the contrary, Judge Robreno found the following sufficient:

  1. The complaint alleged the additional insurance provider failed to acknowledge its primary duty to defend, without a reasonable basis, breaching the duty of good faith and fair dealing.

  2. The complaint specifically set out numerous instances where that insurer denied or ignored tender letters.

  3. “Accepting as true all of the allegations in the Complaint and all reasonable inferences that can be drawn therefrom, and based on this record, [the plaintiff] has sufficiently pled that based on the correspondence submitted to [the insurer], [the additional insurance provider] did not adequately investigate, respond, or explain their refusal to defend and potentially indemnify [the insured] in the underlying action.”

The motion to dismiss was denied.

Date of Decision:  March 10, 2021

Liberty Mutual Fire Insurance Co. v. Harleysville Worcester Insurance Co., U.S. District Court Eastern District of Pennsylvania No. CV 20-5093, 2021 WL 909625 (E.D. Pa. Mar. 10, 2021) (Robreno, J.)

SUPERIOR COURT AFFIRMS TRIAL COURT’S BAD FAITH VERDICT, AND ITS REFUSAL TO AWARD PUNITIVE DAMAGES (Superior Court of Pennsylvania) (Non-precedential)

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After a non-jury trial, the Blair County Court of Common Pleas found the insurer violated the bad faith statute, and awarded statutory damages in the form of attorneys’ fees and super-interest. It declined, however, to award punitive damages under the statute.  The insurer appealed the bad faith verdict, and the insured appealed the decision not to award punitive damages.  The Superior Court rejected both appeals and affirmed the lower court.

Facts

This is another UIM bad faith case.

The accident occurred in 2000, and the driver’s carrier agreed with the insured that the other driver was 100% liable, and paid its full $100,000 UIM limits to the insured.  The tortfeasor’s carrier paid $50,000.

Over two years later, the insured sought UIM coverage from her mother’s carrier, the defendant insurer in this action. The defendant was affiliated with the driver’s own insurer, and had access to its investigation files.  Its UIM limit was $600,000. It valued the claim at $200,000 and offered $50,000 to settle the claim ($150,000 already having been paid by the tortfeasor’s carrier and the first UIM insurer).

The insured rejected the offer, and initiated a bad faith action in 2003, which it held in abeyance while the UIM case was pending. The insurer paid the undisputed $50,000.

Later in 2003, the insured received a PTSD diagnosis and send additional medical records to the insurer.  The insurer received the medical records, but denied having received them. The defendant insurer took the position that the diagnosis was unrelated to the 2000 accident, and its $200,000 remain unchanged, having failed to receive any medical records (which it in fact had received, however). It then initiated the UIM arbitration process in 2004.

The defendant carrier informed its arbitration defense counsel the other driver was 100% at fault.  Months later the carrier’s counsel said he had spoken to the other driver, based on that interview the accident could have been the insured’s fault, and the arbitrator might rule for the carrier on the UIM claim.  The attorney’s opinion was based solely on the other driver’s rendition of the facts, and not any expert report or investigation other than interviewing the other driver.  The carrier itself did not obtain a reconstruction expert report on the accident.

The carrier, however, was sufficiently persuaded. It took the position in late 2004 that the insured might have comparative negligence up to 50%, but not more. By early 2005, however, the carrier took the position that the accident was 100% the insured’s fault.

The carrier delayed the arbitration by filing a declaratory judgment action seeking to limit the range of damages the arbitrator could award. This case was dismissed on preliminary objections. The carrier further delayed the arbitration by seeking evidence of the insured’s post-accident motor vehicle record, fall-downs, alcoholism and depression.

Eight years later, in 2013, the case finally went to arbitration, i.e., over 13 years after the accident and 8-9 years after the UIM arbitration process began. The arbitrator valued the insured’s injuries at $599,000, and awarded her $399,000. The arbitrator found no comparative negligence. [This was the same position the carrier had taken before late 2004.]

Arguments at trial

The bad faith case went to a non-jury trial in 2018, with a claim handler and the insurer’s UIM arbitration counsel as the sole witnesses.

The insured argued the carrier acted in bad faith when changing its position on the drivers’ comparative negligence, based solely on defense counsel’s interview of the other driver. The insured asserted that the carrier should have known the other driver was not credible, and should not have relied on his rendition of the facts to change its position because the other driver contradicted his own earlier statements to the investigators as to the accident’s cause. In response, the carrier appears to have asserted an advice of counsel defense.

The insured also argued bad faith in the carrier’s blanket refusal to consider subsequent psychological treatments, failure to conduct a full investigation by interviewing the investigating police officer before the UIM arbitration, failing to hire an accident reconstruction expert, and prolonging the proceedings for years in order to selectively reevaluate the claim after it learned the insured had various substance abuse issues, and a history of fall-downs, after the date of the underlying accident.

The trial court’s verdict

The trial court “found [the insurer] had acted recklessly and without a reasonable basis in continually valuing [the] claim at $200,000.” Further, the insurer “had improperly failed to reevaluate the claim to consider [the insured’s] psychological damages.” It was significant to the court that the insurer refused to consider the psychological claims based on the insured’s failure to transmit PTSD related documents, but “admitted at trial that it had received the medical records.”

The court also ruled against the carrier based on its changing positions as to the insured’s responsibility, rejecting the advice of counsel defense because the other driver’s 2004 rendition of the facts to defense counsel should not have been deemed credible based on that driver’s initial statements after the accident.

For nearly four years, after its own investigation and earlier interviewing the other driver, the insurer took the position that the insured bore no responsibility for the accident. The defendant insurer only began altering its liability position after defense counsel interviewed the underlying tortfeasor, who had changed his story.  Then, over a period of months, the insurer went from no comparative negligence, to maybe 50% comparative negligence at most, to a 100% negligence on the insured, solely based on the other driver’s interview with defense counsel.

The trial court observed the arbitrator ruled the other driver was not credible. Further, “[t]he trial court stated that although the arbitrator’s decision did not bind it, it recognized that the arbitrator was a ‘neutral, detached fact-finder’ and had not found [the insured] comparatively negligent at all.” The arbitrator also found substantial injuries. Thus, the “change of position on liability ‘represents a significant failure by [the insurer] in their ongoing responsibility to investigate and reconsider [its] position during [its] entire management of the claim.’”

The trial court further found the refusal to go above its $200,000 valuation for over a decade “was done with a purpose motivated by self-interest.” For example, the carrier failed to consider the psychological medical records admittedly in its possession.  It also failed to carry out a proper investigation and follow-up by not contacting the investigating police officer until the arbitration hearing, or hiring a reconstruction expert. Finally, the trial court found the carrier prolonged the proceedings in filing the declaratory judgment action based on the insured’s substance abuse and fall-downs after the 2000 accident.

Damages

The trial court awarded $24,650 in attorneys’ fees for the bad faith litigation, $125,000 in attorneys’ fees in connection with the UIM claim, and $125,000 in interest. It refused to award punitive damages.

Bad faith legal standards where insurer delays in paying benefits due

The Superior Court observed the following legal principles in rendering its verdict:

  1. “Ultimately, ‘[w]hen an insured obtains a bad faith verdict in a bench trial, appellate courts should only reverse in the most egregious of cases when the trial court has committed reversible error.’”

  2. “’The analysis of an insurance bad faith claim ‘is dependent on the conduct of the insurer, not its insured.’”

  3. Because ‘bad faith’ in this context stems from the duty of good faith and fair dealing implied in every insurance contract, the plaintiff need not prove the insurer acted with self-interest or ill-will.”

  4. “In order to prevail under the bad faith statute, 42 Pa.C.S.A. § 8371, ‘the plaintiff must present clear and convincing evidence (1) that the insurer did not have a reasonable basis for denying benefits under the policy and (2) that the insurer knew of or recklessly disregarded its lack of a reasonable basis.’”

  5. “An action for bad faith is not restricted to the outright denial of a claim, but rather encompasses ‘all instances of bad faith conduct by an insurer.’”

[Note: The Court cited the Superior Court’s decision Rancosky v. Washington National Insurance Co., and not the Supreme Court’s Rancosky decision, to support this point.  As discussed many times on this Blog, there is a real issue as to whether section 8371 encompasses claims that do not involve the denial of a benefit actually due, i.e., is there any cognizable statutory bad faith cause of action when the insurer does not actually owe the insured any duty to pay first party benefits, or to defend or indemnify third party claims.  See, e.g., this post.]

  1. The Superior court then added examples of bad faith, where a claim was not outright denied: “This includes a lack of good faith investigation, as well as ‘evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of a power to specify terms, and interference with or failure to cooperate in the other party’s performance.’”

[Note: In this case, there is no dispute that some benefit was due from the insurer, just a dispute of how much was due and when.  In effect, the insured is arguing that there was a decade plus delay in paying a benefit actually due; and the court’s bad faith verdict is made in light of the insurer actually owing a benefit substantially greater than what the insurer offered to pay.]

  1. “An insurer must make a timely investigation in response to the claim, and not just for arbitration.”

  2. “Indeed, an insurer must reevaluate a claim when presented with new information.”

  3. “An insurer’s mere negligence does not constitute bad faith, and an insurer may make a low estimate of an insured’s claim, so long as it has a reasonable basis.”

  4. “[A]n insurer has committed bad faith where it ‘acted in a dilatory manner, and forced the insured into arbitration by presenting an arbitrary ‘low-ball’ offer which bore no reasonable relationship to the insured’s reasonable medical expenses,’ particularly where the ‘low-ball’ offer proved to be significantly lower than the arbitration award.”

Facts supporting the bad faith verdict

The Superior Court held the following facts supported the trial court’s finding of bad faith:

The insurer never changed its claim valuation over a ten year period from the claim’s submission through a UIM arbitration, “despite mounting evidence that [the insured’s] damages surpassed [that] $200,000 [valuation].” The trial court properly rejected the insurer’s argument that there was no valuation change over time because the insurer went from taking the position that the insured had no responsibility for her own injury, to being partially responsible, and finally to being deemed wholly at fault for her own injury.  The Superior Court agreed that the evidence did not show the valuation claim ever hinged on the insured’s alleged comparative negligence.

Rather, the record demonstrated that as the insurer’s “position on liability evolved, its valuation of the claim did not change. Rather, it put a $200,000 value on [the] claim from the outset, failed to consider evidence of her psychological damages, refused to modify the valuation, and now cites subsequent developments to justify its failure to adjust the valuation in light of the information it disregarded. That it may not have failed to consider the evidence and adjust the valuation purposefully or because of ill will does not undermine the trial court’s conclusion, as [the insured] did not need to prove such states of mind.”

Other factors collectively favoring bad faith were the insurer did not change its comparative liability position until preparing for the UIM arbitration; the insurer did not interview the police officer on the scene; and that the insurer “was unable hire a reconstruction expert for arbitration because too much time had passed is further indicative that it did not make adequate inquiry into the accident in a timely manner.”

The facts did not require the trial court to award punitive damages

The Superior Court ruled: “Although the [trial] court found [the insurer] acted in bad faith, and awarded attorneys’ fees and interest accordingly, we cannot say that it abused its discretion in not awarding punitive damages. The evidence was not such that we conclude that the court’s decision was manifestly unreasonable or the result of partiality, prejudice, bias, or ill will.”

The Superior Court made the point that section 8371 does not compel the Courts of Common Pleas to award punitive damages simply because there is a bad faith verdict.  Rather, punitive damages remain within the trial judge’s discretion.  Ill-will, reckless indifference, or some other sign of malign action might provide evidence in proving statutory bad faith, but this level of intent is not a required element of a statutory bad faith claim.
Thus, just an insured can make out a bad faith claim without having to prove the level of evil intent or outrageous conduct that forms the basis for punitive damages, a finding of bad faith does not automatically encompass conduct that would mandate a finding of punitive damages.   Here, the trial judge did not find the carrier’s intent was so outrageous that punitive damages were warranted, even though the court found the carrier knew or recklessly disregarded the fact that it was unreasonably denying the insured benefits due her.

No error in limiting discovery of “post-denial” conduct

Finally, the insurer appealed the trial court’s granting a protective order as to certain requests for admissions concerning “post-denial” conduct, covering a time period beginning with the April 2004 initiation of the UIM arbitration process.  The trial court found this conduct irrelevant to the insurer’s bad faith in denying the claim. The Superior Court affirmed, finding no abuse of discretion.

The insurer had the burden to show how it was prejudiced by the trial court’s excluding this evidence, but it never “specified what evidence it sought under the admissions requests that it did not receive, and how that alleged evidence would have affected its case.”

Date of Decision:  February 4, 2021

Sartain v. USAA, Superior Court of Pennsylvania No. 4 WDA 2020, 2021 WL 401954 (Pa. Super. Ct. Feb. 4, 2021) (Bender, McLaughlin, Musmanno, JJ.) (Non-precedential)

POTPOURRI OF ISSUES ADDRESSED IN RESPONSE TO 11 COUNT COMPLAINT: (1) REMAND (2) GIST OF THE ACTION/ECONOMIC LOSS (3) UIPA; (4) DUTY OF GOOD FAITH AND FAIR DEALING; (5) UNFAIR TRADE PRACTICES AND CONSUMER PROTECTION LAW (6) DECLARATORY JUDGMENT ACTIONS BY BREACH OF CONTRACT PLAINTIFFS AND (7) ADEQUATELY PLEADING BAD FAITH (Philadelphia Federal)

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In this Opinion, Eastern District Judge Tucker addresses a wide range of fundamental legal issues in the context of ruling on a motion to dismiss the insured’s 11 count complaint. The complaint includes not only breach of contract and bad faith claims, but tort claims, UIPA claims, declaratory judgment claims, and injunctive relief claims, all arising out of the alleged failure to pay on an insurance claim. The court also addresses a motion to remand after removal.

We do not address all of the issues Judge Tucker discusses, but highlight a few of the key principles adduced in her opinion. Her full opinion can be found here.

  1. Motion to remand denied.  (i) In determining the jurisdictional minimum amount-in-controversy, the court may consider the possibility of punitive damages under the bad faith statute. (ii) Diversity of citizenship can be established by showing the defendant is not a citizen of plaintiff’s state, just as well as by affirmatively showing the state(s) in which defendant is a citizen.

  2. The gist of the action doctrine and/or the economic loss doctrine will typically bar tort claims based on violations of an insurance contract.

  3. Violating the Unfair Insurance Practices Act (UIPA) (i) does not create a private right of action, and (ii) some courts hold it may not be used to establish violation of statutory bad faith.

As the court states: “Plaintiff’s claim is also barred to the extent that it relies on an alleged violation of the Pennsylvania Unfair Insurance Practices Act (‘UIPA’) because the UIPA does not permit private recovery for a violation of its provisions. Plaintiff advances a claim for damages based, in part, on a theory that [the insurer] was negligent having breached duties imposed upon it by the UIPA, 40 Pa Const. Stat. Ann. § 1171.1, et seq. ‘Courts within the Third Circuit and the Commonwealth of Pennsylvania continue to recognize [, however,] that the UIPA does not provide plaintiffs with a private cause of action.’ Tippett, 2015 U.S. Dist. LEXIS 37513, 2015 WL 1345442 at *2 (quoting Weinberg v. Nationwide Cas. and Ins. Co., 949 F. Supp. 2d 588, 598 (E.D. Pa. 2013)) (internal quotation marks omitted). Indeed, in Tippett, the district court not only rejected a plaintiff’s attempt to state a separate claim under the UIPA, but also rejected the plaintiff’s arguments that proof of a UIPA violation might otherwise provide support for the plaintiff’s independent bad faith claim. Id. Plaintiff’s claim under the UIPA in this case is similarly barred.”

  1. Breach of the common law duty of good faith and fair dealing is subsumed in the breach of contract claim.

  2. The Unfair Trade Practices and Consumer Protection Law applies to the sale of insurance policies, not claims handling.

As the court states: “While Plaintiff rightly notes that the ‘UTPCPL creates a private right of action in persons upon whom unfair methods of competition and/or unfair or deceptive acts or practices are employed and who, as a result, sustain an ascertainable loss,’ … Plaintiff fails to note that ‘the UTPCPL applies to the sale of an insurance policy [but] does not apply to the handling of insurance claims.’” Thus, as the alleged “wrongful conduct under the UTPCPL relate[s] solely to [the insurer’s] actions after the execution of the homeowner’s insurance policy,” the UTPCPL claim was dismissed.

  1. Declaratory judgment count not permitted in light of breach of contract claim.

The court states: “Federal courts routinely dismiss actions seeking declaratory judgment that, if entered, would be duplicative of a judgment on an underlying breach of contract claim.” Judge Tucker cites case law for the propositions that “granting a defendant’s motion to dismiss a plaintiff’s independent cause of action for declaratory judgment because the claim for declaratory judgment was duplicative of an underlying breach of contract claim,” and “dismissing a plaintiff’s duplicative claim for declaratory judgment in the face of an underlying breach of insurance contract claim and observing that ‘pursuant to discretionary declaratory judgment authority, district courts have dismissed declaratory judgment claims at the motion to dismiss stage when they duplicate breach of contract claims within the same action.’”

  1. The insured pleads a plausible bad faith claim.

Judge Tucker highlighted the following allegations in ruling that the bad faith claim could proceed:

i the insurer “attempted to close her insurance claim despite never having sent an adjuster or inspector to evaluate the damage to the Property.”;

ii the insurer “engaged in intentional ‘telephone tag’ to delay and deny Plaintiff coverage under the homeowner’s insurance policy.”;

iii. the insurer never “scheduled an inspection of the Property or otherwise [took] any action to deny or grant coverage under the homeowner’s insurance policy.”

Thus, at the end of the day, after reviewing all of the claims and motion to remand, the insured was allowed to proceed on the breach of contract and bad faith claims.

Date of Decision: August 13, 2019

Neri v. State Farm Fire & Cas. Co., U. S. District Court Eastern District of Pennsylvania CIVIL ACTION NO. 19-0355, 2019 U.S. Dist. LEXIS 136820 (E.D. Pa. Aug. 13, 2019) (Tucker, J.)

AN INSURER DOES NOT ACT IN BAD FAITH WHEN IT DOES NOT BREACH A DUTY TO DEFEND OR INDEMNIFY, EVEN WHEN DENIAL IS BASED ON LATE NOTICE (Western District)

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This case involves two bases for coverage denials: (1) late notice resulting in prejudice, and (2) first party claims are not covered under a commercial general liability policy.

The bad faith plaintiff is a general contractor. It was named as an additional insured on a subcontractor’s policy with the defendant insurer.

There was an explosion resulting in personal injury to a third party, and first party property damage to the contractor. The contractor was named as a defendant in the personal injury action, and claimed over against other parties, including the named insured subcontractor. The contractor also brought a property damage suit against others, including the subcontractor, for its own property damages.

Nearly 3½ years into the personal injury suit, the parties mediated a settlement. The contractor did not request a defense or indemnity from the insurer in the personal injury action until the day that suit settled. For the first time, during that mediation, the additional insured contractor orally requested a defense and indemnification from the defendant insurer.

A representative of the contractor’s own primary insurer was present at the mediation as well as a representative of the defendant insurer. However, the defendant insurer’s representative had only come to the mediation to represent the subcontractor’s interests, not the contractor’s interests.

There is no bad faith when the claim is plainly outside the scope of coverage.

The court readily found no coverage due for the contractor’s own property damage claims. The contractor was seeking coverage as an additional insured under the subcontractor’s CGL policy. CGL policies only apply to property damage claims raised by others against an insured, not to the insured’s own property damages.

An “insurer does not act in bad faith when the insurer does not breach its duty to defend or indemnify.” The property damage claim “was plainly outside the scope of coverage”. Thus, as there was no duty to defend or indemnify there could be no bad faith, and summary judgment was granted on both the first party property damage coverage and bad faith claims.

There could be no bad faith where late notice and prejudice also resulted in a coverage denial.

After extensive analysis, Judge Hornak concluded that there was no coverage due in the personal injury action because of the contractor’s late notice, and the actual prejudice resulting from the late notice. He granted the insurer’s summary judgment motion on any duty to defend or indemnify. The insurer lost the opportunity to retain counsel and pay a fee structure significantly less expensive than what was charged by the contractor’s counsel; lost “the opportunity to take control of the matter at an early stage and resolve it prior to the accumulation of those expenses”; lost the opportunity to advance potential defenses; and “was indisputably prejudiced by its inability to control [the] defense, or the costs incurred in furtherance of it, until the end of the underlying litigation—when [the contractor] expected payment for all of the expenses that they had accumulated up to that point along with what it ‘fronted’ for settlement.”

Absent that late notice and prejudice, there is no question the insurer had a duty to defend the personal injury claim against the contractor. Still, as no coverage was due because of the late notice and prejudice, there could be no bad faith under the same principles used in rejecting the bad faith claim on property damage, i.e., no coverage due = no bad faith.

However, the court went on to analyze the personal injury bad faith claim, assuming arguendo what would have happened if it allowed the issue of prejudice to go to the jury instead of granting summary judgment. Judge Hornak concluded that even under those circumstances, he would have rejected the bad faith claim. There was simply no basis in the record to show the insurer’s refusal to step in at the mediation, or its ongoing refusal to pay the contractor, was frivolous or unfounded.

The following facts were undisputed, and showed the insurer acted reasonably in believing it was prejudiced by late notice and would not have to provide any defense or indemnity payments. It did not choose counsel; the contractor had amassed years of legal fees and expenses over which the insurer had no control; the insurer “was not provided an accounting of the defense costs for which it would potentially have to indemnify” the contractor; the insurer “did not participate in early investigation or settlement discussions”; and the insurer “had no reason, until the moment that the oral demand was made, to believe that [the contractor] desired a defense or expected indemnification”.

The court also found it nonsensical to conclude the insurer could have made a decision in the midst of the mediation to provide indemnification and pay a settlement, or even could have stopped the mediation at which it was protecting the named insured’s interests. This was highlighted by the fact that the case had been going on for years, and the contractor had never before asked for defense or indemnification. Moreover, at that moment in time there remained legitimate coverage issues reasonably justifying a refusal to pay on demand.

Finally, the insurer’s ongoing refusal to pay for the subcontractor’s legal fees and settlement payment also had a reasonable foundation, and could not be deemed frivolous or unfounded. Thus, summary judgment on bad faith was granted even assuming it would not have been granted on the coverage claim.

Date of Decision: March 1, 2019

NVR, Inc. v. Motorists Mutual Insurance Co., U. S. District Court Western District of Pennsylvania No. 2:16-cv-00722, 2019 U.S. Dist. LEXIS 32802, 2019 WL 989393 (W.D. Pa. Mar. 1, 2019) (Hornak, J.)

DECEMBER 2018 BAD FAITH CASES: BAD FAITH CLAIMS STATED BASED ON UNREASONABLE INTERPRETATION OF POLICY EXCLUSIONS, AND PURSUIT OF DECLARATORY JUDGMENT PROCESS BEFORE ULTIMATELY SETTLING (Western District)

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The underlying suit involved negligence claims concerning a sexual assault by the insured’s father against others. The insurer defended under a reservation of rights, and brought a federal declaratory judgment action against the insured. The insured brought a declaratory judgment action in state court, and successfully had the federal claim dismissed on procedural grounds.

The insurer counterclaimed for declaratory judgment in state court, and filed a motion for judgment on the pleadings, which was denied. The insurer appealed to the Superior Court of Pennsylvania, and the appeal was quashed as interlocutory. The underlying action subsequently settled, and the declaratory judgment action was dismissed as moot.

The insured sued for common law contractual bad faith and statutory bad faith, and the insurer’s motion for judgment on the pleadings was denied.

The insured argued the reservation of rights letters were “manipulative”, that the insurer delayed settling the underlying action to improve its negotiating position, and that the insured suffered emotional distress and the expenses of having to bring and defend the declaratory judgment actions. The insured alleged the coverage positions were reckless or unwarranted, the appeal was unwarranted, and claim handling concerning coverage was unreasonable, inadequate, and was in conflict with the insured’s interests.

CONTRACTUAL BAD FAITH

The court first addressed the contractual bad faith claims. It observed that issuing reservation of rights letters is accepted practice, and that courts encourage the use of declaratory judgment actions.

However, bad faith allegations may be sufficient, even if policy limits are ultimately paid, where delaying resolution prejudiced the insured, and the insured pleads the insurer: (i) failed to conduct a complete and thorough factual or legal investigation; (ii) refused to enter good faith settlement negotiations; (iii) conducted “surface” settlement negotiations with no intent to settle; (iv) rejected settlement demands without counterproposals; or (v) pursued declaratory judgment actions with no reasonable basis, for an unreasonable time period.

In this case, the insured’s complaint put the investigation’s thoroughness at issue. Likewise, the exclusions the insurer relied upon, and propriety of settling the underlying case only after two years of actively pursuing the declaratory judgment action, were “unsettled questions of fact” on the bad faith claim. The court concluded: “Viewing the evidence in the light most favorable to [plaintiff], a reasonable jury could find that [the insurer’s] actions, in the aggregate, constituted a bad faith breach of its contractual duties … and could lead that jury to return a verdict in [plaintiff’s] favor.”

STATUTORY BAD FAITH

The court observed that statutory bad faith is not measured by whether an insurer ultimately fulfills its obligations. If payment is due and ultimately made, bad faith during the claim handling process in delaying that payment may be actionable. This is similar to a contractual bad faith claim where the court looks at the manner in which an insurer discharges its duties to the insured when payment is due, but that payment is delayed.

As the court was obliged to take the pleadings in the light most favorable to the insured in deciding a judgment on the pleadings, the complaint was sufficient. On the facts pleaded, a reasonable jury could conclude the alleged failures in investigation and claims handling were motivated by self-interest, despite the insurer’s ultimately settling the underlying case.

Date of Decision: November 27, 2018

Higginbotham v. Liberty Ins. Corp., U.S. District Court Western District of Pennsylvania Civil Action No. 18-747, 2018 U.S. Dist. LEXIS 199836, 2018 WL 6179024 (W.D. Pa. Nov. 27, 2018) (Mitchell, M.J.)

MAY 2017 BAD FAITH CASES: COURT DISCUSSES STAY AND SEVERANCE OF BAD FAITH CLAIMS, IN CONTEXT OF SETTING STANDARD FOR DISCOVERY OF EXTRINSIC EVIDENCE ON COVERAGE/CONTRACT CLAIMS (Middle District)

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This exhaustive opinion on discovery of extrinsic evidence sets forth a working standard for determining permissible discovery in declaratory judgment insurance coverage contract actions. After a detailed overview of pertinent case law and the 2015 rule amendments focusing on proportionality, the court held that “litigants who wish to discover extrinsic evidence in a contract interpretation case must (1) point to specific language in the agreement itself that is genuinely ambiguous or that extrinsic evidence is likely to render genuinely ambiguous; and (2) show that the requested extrinsic evidence is also likely to resolve the ambiguity without imposing unreasonable expense.”

In this case, the discovery sought did not fall within those aims and a motion to compel was denied.

To provide context by contrast, the court included an analysis of discovery in bad faith cases within its overall discussion. In instances where a plaintiff seeks underwriting files and claims manuals, the presence of a bad faith claim makes their “discoverability more likely, yet it by no means guarantees it.” In that context, “[t]he issue in a bad faith case is whether the insurer acted recklessly or with ill will towards the plaintiff in a particular case, not whether the defendants’ business practices were generally reasonable.”

By contrast, under Pennsylvania law, declaratory judgment actions for coverage are contract-based claims controlled by the express language in the contract, and the language of such integrated contracts will “often will suffice to dictate the proper outcome without reference to any external sources.”

To provide further contrast, the court looked at district court case law in the Third Circuit on stays, and severance of bad faith claims from coverage actions, where courts bifurcated the two claims and the different discovery related to them. These cases observe the differences between discovery and proof in bad faith cases and coverage cases, and that the coverage/contract claims can require less discovery in reaching resolution. [The court in this case had previously dismissed plaintiff’s bad faith claim].

Date of Decision: May 12, 2017

Westfield Insurance Company v. Icon Legacy Custom Modular Homes, No. 15-539, 2017 U.S. Dist. LEXIS 72624 (M.D. Pa. May 12, 2017) (Brann, J.)

 

FEBRUARY 2017 BAD FAITH CASES: COURT WOULD NOT REMAND DECLARATORY JUDGMENT ACTION WHERE JOINED WITH BAD FAITH CLAIM; BAD FAITH CLAIM ADEQUATELY PLEADED TO SURVIVE MOTION TO DISMISS (Western District)

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The district court refused to remand a declaratory judgment coverage action, principally because there was also a bad faith claim in the case. The court did look at some of the other Reifer factors before rendering its conclusion.

Having maintained jurisdiction, the court refused to dismiss the bad faith claim at the pleading stage. The insured had pleaded that a disclaimer letter prospectively denying a duty to defend was sent five months before any suit was filed. Further, this letter lacked an explanation of the carrier’s reasoning, and a later letter had the same failings in explaining the carrier’s position. The insured also alleged that the insurer failed to respond to the insured’s correspondence in another instance, and the insurer only conducted a cursory investigation into the claim. The insured further alleged that the insurer failed to provide a defense after the insured provided additional information and trial was approaching.

The court noted that the duty to defend is broader than the duty to indemnify, and it was not comfortable deciding the merits of potential coverage issues on a motion to dismiss, on the facts as pleaded. Rather, the court was persuaded that discovery was appropriate and the record should be further developed. The insurer could raise its defense later in the case, via summary judgment.

Date of Decision: January 30, 2017

Chester v. Utica First Ins. Co., No. 16-1671, 2017 U.S. Dist. LEXIS 12096 (W.D. Pa. Jan. 30, 2017) (Barry Fischer, J.)

 

NOVEMBER 2016 BAD FAITH CASES: NO BAD FAITH FOR FILING DECLARATORY JUDGMENT ACTION; AND WHERE RECORD SHOWS GENUINE INVESTIGATION AND NOT PUTATIVE PREDISPOSITION TOWARD DENIAL (Third Circuit, Pennsylvania) (Not precedential)

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This non-precedential Third Circuit opinion affirmed the trial court’s opinion granting summary judgment to the insurer on a statutory bad faith claim. (We will not repeat the facts, but instead link to our previous summary of the trial court opinion).

In reciting the elements of bad faith, among other things, the appellate panel stated that because the carrier “ultimately paid the full policy limit, Appellants’ bad faith claim is based on the company’s investigation of [the] claim.” The court cited the Superior Court’s decision Rancosky v. Wash. National Ins. Co., for the proposition that “Bad faith conduct includes lack of good faith investigation into the facts.” The court does not address the issue of whether poor claims handling alone, without the denial of a benefit, can be bad faith. The trial court had noted that a long enough delay in handling the claim can be treated as the equivalent of a denial of a benefit, but the Third Circuit did not address this nuance.

In Rancosky, Pennsylvania’s Supreme Court defined the elements of what constitutes a statutory bad faith claim, which do not require proof of motive of self-interest or ill will.)

In addressing the merits, the appellate court first looked at plaintiff’s assertions that there was a “predisposition toward denial” and that the insurer “focused upon exclusion and accepted no facts contrary to its initial conclusion” (theories that harken bank to the 2003 Luzerne County Corch decision). However, the Third Circuit agreed that “the claims file showed that [the insurer] evaluated [the]claim, consulted with legal counsel, and tried to determine” the key issue of employment status.

Moreover, the insurer did not deny the claim, but filed a declaratory judgment action to determine this key issue and how it affected coverage. The insurer’s ultimately paying the policy’s liability limit demonstrated its willingness to consider new evidence and adjust its position. The court added that: “In any event, [the insurer] had the right to investigate [the]claim and determine whether it was covered under the policy, regardless of whether [the insurer] initially sought to exclude the claim. Citing its own prior precedent: “[A]n insurer does not act in bad faith by investigating and litigating legitimate issues of coverage.”

The appellate court agreed that there was no bad faith under Pennsylvania law in filing a declaratory judgment action to seek a coverage determination, to resolve legal ambiguities after it had investigated the facts of the claim. The court observed that the insurer had consulted with in-house counsel before the decision to file the declaratory judgment action, showing that the insurer was still considering the insured’s claim.

The court affirmed the grant of summary judgment on the bad faith claim.

Date of decision: October 4, 2016

Bodnar v. Nationwide Mut. Ins. Co., No. 15-3485, 2016 U.S. App. LEXIS 17903 (3d Cir. Oct. 4, 2016) (Hardiman, McKee, Rendell, JJ.)

 

JULY 2016 BAD FAITH CASES: COURT RETAINED JURISDICTION OVER INSURER’S DECLARATORY JUDGMENT ACTION, REFUSING TO ABSTAIN UNDER SUMMY/REIFER (Western District)

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In Westport Insurance Corp. v. Hippo, the insured defendant was subject to a professional malpractice action in state court. The insurer brought a declaratory judgment action in federal court, seeking a ruling of no duty to defend or indemnify the state court action. The insured then brought its own declaratory judgment and bad faith action against the insurer in state court. The insured further asked the federal court to decline jurisdiction over the insurer’s declaratory judgment action. The court applied the 8 part Reifer test and decided to exercise jurisdiction over the insurer’s declaratory judgment action.  [Note: Reifer had seemed to indicate additional factors, beyond the Third Circuit’s seminal Summy decision, favoring the exercise of jurisdiction over declaratory judgment actions, though it was a matter clearly to be weighed carefully on either side].

Other 2016 post-Reifer decisions show most district courts declining jurisdiction over insurance declaratory judgment actions, at least in opinions available on Lexis. See, e.g., Kline v. Travelers Personal Security Ins. Co. (Middle District), Rachel II, Inc. v. State National Ins. Co. (Eastern District), Liberty Insurance Corp. v. Higgenbotham, No. 2:16-cv-38 (Western District March 24, 2016), Firemen’s Insurance Co. v. B. R. Kreider & Son, Inc. (Eastern District), Steadfast Insurance Co. v. Environmental Barrier Co. (Western District), Easterday v. Federated Mutual Ins. Co. (Eastern District), State Farm Mutual Automobile Ins. Co. v. Biddle (Western District).

In one other Western District case, the court did retain jurisdiction, Rafferty v. Metropolitan Life Ins. Co.

Date of Decision: April 28, 2016

Westport Ins. Corp. v. Hippo, 2016 U.S. Dist. LEXIS 56573 (W.D. Pa. April 28, 2016) (Gibson, J.)