Archive for the 'PA – Law unsettled' Category

COVERAGE DUE, BUT NO BAD FAITH WHERE (1) REASONABLE INVESTIGATION AND (2) REASONABLY DEBATABLE BASIS TO DECLINE COVERAGE (Philadelphia Federal)

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The case centered on a dispute over whether the plaintiff had an insurable interest in its tenant’s property improvements.  The carrier denied coverage for damage to those improvements, asserting the policy did not cover tenant improvements.  The insured sued for breach of contract and bad faith.

The court found the policy did provide coverage, and ruled for the insured on its breach of contract claim.

On bad faith, the insured alleged the insurer both failed to investigate and that it unreasonably denied coverage.  Magistrate Judge Rice disagreed, finding the insured “lacks clear and convincing evidence that [the insurer] investigated and handled the claim in bad faith or denied coverage without a reasonable basis.”

First, a seven-month delay in the claim handling process was reasonable in light of the insurer’s very detailed and active investigation into the claim.

Second, even though the insurer incorrectly denied coverage, “[b]ecause Pennsylvania courts have held that insurable interest is generally decided by the jury … and there was testimony … contradicting [the insured’] expectation of benefit from the improvements, [the insurer] had sufficient reasonable basis to support its coverage decision.” The court’s own “analysis demonstrates … the existence of an insurable interest as a matter of law is a close question subject to reasonable debate.”

Date of Decision:  June 11, 2021

Greentree Properties Corp. v. Aspen Specialty Ins. Co., U.S. District Court Eastern District of Pennsylvania No. CV 20-4646, 2021 WL 2400727 (E.D. Pa. June 11, 2021) (Rice, M.J.)

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

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

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

No bad faith for not paying sum demanded.

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

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

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

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

No bad faith delay

Third, the insureds could not establish bad faith delay.

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

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

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

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

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

Date of Decision: May 17, 2021

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

NO BAD FAITH WHERE NO COVERAGE DUE; NO BAD FAITH WHERE LAW IS UNSETTLED ON SCOPE OF COVERAGE; KVAERNER INTERPRETATION OF OCCURRENCE CAN APPLY TO PROPERTY DAMAGE OUTSIDE THE SCOPE OF THE CONSTRUCTION CONTRACT (Middle District)

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There can be no bad faith where no coverage is due, or where coverage is a close question based on unsettled law.

Court Applies Kvaerner to ALL Reasonably Foreseeable Damages Resulting from Faulty Workmanship

Middle District Judge Brann addressed an expanding body of case law in Pennsylvania’s Superior Court that would appear to require coverage for damages flowing from faulty workmanship, even if the faulty workmanship itself is not covered.  He rejected, however, the Superior Court’s interpretation of what constitutes a covered occurrence under the Pennsylvania Supreme Court’s 2006 Kvaerner decision.

[We have previously posted on Kvaerner in the context of coverage and otherwise, with two case summaries in 2019, here and here, this 2018 case summary, this 2014 summary, in 2013 on the Superior Court’s Indalex decision in relation to Kvaerner, and in this 2009 summary.]

Judge Brann relied on Third Circuit precedent emphasizing that all reasonably foreseeable damages resulting from faulty workmanship do not constitute an occurrence, whether that is damage to the product being constructed or damages to property beyond the scope of the construction contract resulting from that faulty workmanship.

Thus, e.g., in Judge Brann’s and the Third Circuit’s perspective, if a contractor improperly installs a roof, the roof leaks, and other parts of the building or personal property are damaged, there is no occurrence for this other damage to third party property, even though it is beyond the contracted work itself, if that other damage is reasonably foreseeable.  By contrast, the new Superior Court cases would find this third party damage outside the scope of the actual construction work to be a covered occurrence, even if reasonably foreseeable.

Judge Brann observes, “Despite the caselaw that has emerged from the Superior Court, the [District] Court notes that it is not bound by these decisions. As the Third Circuit has explained, although courts should ‘give due deference to the decisions of intermediate state courts…[s]tate appellate decisions…are not controlling.’ Thus, ‘while [courts] may not ignore the decision of an intermediate appellate court, [they] are free to reach a contrary result if, by analyzing other persuasive data, [they] predict that the State Supreme Court would hold otherwise.’”

In the present case, Judge Brann held no coverage due to replace a roof that had been improperly constructed. Further, there was no coverage due to areas of the roof damaged that were outside the scope of the contracted roof work, which also had to be replaced as a result of the faulty construction, as these third party property damages were reasonably foreseeable. Thus, he granted judgment on the pleadings in favor of the insurer as to coverage.

No Bad Faith Where no Coverage Due

On the insured’s bad faith claim, Judge Brann likewise granted judgment on the pleadings. First, he observed that the insurer properly denied benefits. Thus, he found there could be no bad faith because the insurer “certainly had ‘a reasonable basis for denying benefits under the policy,’ meaning that [the insured] cannot demonstrate bad faith.”

Judge Brann then added, “even if this Court were incorrect in its decision that [the insurer] owes no duty to indemnify [the insured], the duty to indemnify is, at the very least, debatable, in light of the differing conclusions reached by the Superior Court and the Third Circuit. Given that the caselaw in this area does not establish a clear duty … to indemnify …, it cannot be said that [the insurer] had no reasonable basis to deny benefits.”

Date of Decision:  January 26, 2021

Berkley Specialty Insurance Company v. Masterforce Construction Corp., U.S. District Court Middle District of Pennsylvania No. 4:19-CV-01162, 2021 WL 254002 (M.D. Pa. Jan. 26, 2021) (Brann, J.)

NO COVID-19 BUSINESS LOSS COVERAGE DUE; NO BAD FAITH FOR DENIAL OF COVERAGE OR FAILURE TO INVESTIGATE (Philadelphia Federal)

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These two Covid-19 coverage cases ended in summary judgments against the insureds on their breach of contract and statutory bad faith claims.  Eastern District Judge Kenney decided both cases last Thursday (1/14/2021).

Case 1: Clear Hearing Solutions v. Continental Casualty

Covid-19 Business Coverage Issues

In Clear Hearing Solutions, the insured had two all-risk policies.  Plaintiffs were Pennsylvania entities, but they had hearing service stores closed in Maryland and North Carolina due to government shutdowns.  The insureds alleged they were entitled to “Business Income coverage, Extra Expense Coverage, Extended Business Income coverage, and Civil Authority coverage,” but the carrier denied coverage.

Judge Kenney observed that direct physical loss of property or damage to property were essential to all these coverages.  He followed the principles that “[t]he criteria for physical loss caused by a source unnoticeable to the naked eye is thus whether the functionality of the…property was nearly eliminated or destroyed, or whether the[ ] property was made useless or uninhabitable by that source.” (internal quotation marks omitted) The mere presence of the contaminating source material, however, “or the general threat of future damage from that presence, lacks the distinct and demonstrable character necessary for first-party insurance coverage.”

Judge Kenney states:

The Court agrees with and adopts the conclusion reached by another Court in this district. In 4431, Inc. et al v. Cincinnati Ins. Cos., the Court concluded that, “under Pennsylvania law, for Plaintiffs to assert an economic loss resulting from their inability to operate their premises as intended within the coverage of the Policy’s ‘physical loss’ provision, the loss and the bar to operation from which it results must bear a causal relationship to some physical condition of the premises.” No. 5:20-cv-04396, 2020 WL 7075318, at *11 (E.D. Pa. Dec. 3, 2020) (emphasis in original). There must also be an “element correlating to [the] extent of operational utility – i.e., a premises must be uninhabitable and unusable, or nearly as such.” Id; see also Brian Handel D.M.D. v. Allstate Ins. Co., No. 20-3198, 2020 WL 6545893 (E.D. Pa. Nov. 6, 2020) (finding Port Authority and Hardinger preclude a finding of “direct physical loss of or damage to” property where it remained inhabitable and usable, albeit in limited ways). In sum, while structural damage is not required to show “direct physical loss of” property, the source that destroys the property’s utility must have something to do with the physical condition of the premises.

The Clear Hearing insureds conceded there was no Covid-19 on the premises, and their losses resulted from government directed business closures.  “Because Clear Hearing expressly denies the existence of anything affecting the physical condition of its premises, its losses are a mere loss of use untethered to the physical condition of the property itself. Reading ‘direct physical loss of or damage to property’ to contemplate mere loss of use is not a reasonable interpretation because it renders two other Policy provisions superfluous or nonsensical.”

Judge Kenney then goes into a more detailed analysis as to why there is no covered physical damage or property loss from Covid-19, which are discussed in the opinion at length.

He further observes that simply because the policy lacks a virus exclusion, this does not create coverage by implication. “But ‘[a] loss which does not properly fall within the coverage clause cannot be regarded as covered thereby merely because it is not within any of the specific exceptions….’ And it is at least plausible that the physical manifestation of some type of virus could cause covered losses. That situation is just not present here.”

Judge Kenney also finds that the Maryland and North Carolina “government orders cannot constitute a covered cause of loss under either the Business Income and Extra Expense coverages or the Civil Authority Coverage provisions.”  Further, there was no genuine factual issue “as to whether the government orders were issued due to physical loss of or damage to nearby property,” and the insured could not show access to the premises was prohibited entirely for all purposes by these government orders.

Bad Faith Issues

[Note: We have observed numerous times over the years there is a strong argument that cognizable statutory bad faith claims in Pennsylvania require that the insured must have be denied an actual benefit, i.e., a payment of first party damages due or a refusal to defend and indemnify against third party claims due.  Thus, as repeated on this blog ad naseum, there is a genuine issue as to whether an independent statutory bad faith claim for poor investigation practices is cognizable when no coverage is otherwise due under a policy. For example, see this post from January 2020, this post from August 2020, and this post from earlier in August 2020.]

The Clear Hearing opinion states that statutory bad faith is an independent cause of action from a breach of contract action. If the statutory bad faith claim, however, “is premised solely on the denial of coverage, the claim must necessarily fail if a court finds that no coverage exists.” Judge Kenney adds, “[o]n the other hand, ‘if bad faith is asserted as to conduct beyond a denial of coverage, the bad faith claim is actionable as to that conduct regardless of whether the contract claim survives.’” Further, “[t]hat distinction has been accepted when, for example, an insured claims the insurer investigated his claim in bad faith in addition to a bad-faith denial of coverage.”

[Note: The legal support for these propositions goes back, in part, to the Third Circuit’s unpublished 2007 Gallatin Fuels decision, in which the court found bad faith was still possible even though there was not even a policy in effect at the time of the incident.  Here is a link to an article addressing the logic in Gallatin Fuels, and the effect the Pennsylvania 2007 Supreme Court decision in Toy v. Metropolitan Life should have had on Gallatin Fuels reasoning and authority, had the Gallatin Fuels Court looked to Toy, which was decided earlier in 2007.]

The bulk of Clear Hearing’s bad faith claims were based on coverage denials, and these claims were readily dismissed because no coverage was ever due. Judge Kenney then goes on to address the claim handling based bad faith arguments, accepting the possibility that statutory bad faith might still exist even when no coverage is due and no benefit has actually been denied.

Clear Hearing argued that there was bad faith based on the claim handling because Continental immediately denied the claim and did not conduct any investigation, while further failing to address or acknowledge the insureds’ interpretation of the policy language on direct physical loss.  Rather, Continental relied “on case law providing a restrictive interpretation of the term direct physical loss to deny its claim as part of a policy to limit the company’s losses during the pandemic.” (internal quotation marks omitted).

Judge Kenney rejected this argument:

To the extent that these allegations may be construed to extend beyond bad faith in the denial itself to bad faith in the investigatory process or process of denial, Clear Hearing has not met its burden. In the context of a claim for coverage based solely on government closure orders, and on Civil Authority orders where nearby property has not suffered direct physical loss of or damage to property and access to plaintiff’s property has not been prohibited, there is nothing to investigate: coverage does not exist on the face of that claim. Therefore, Clear Hearing has not shown bad faith in Continental’s lack of investigation or by denying Clear Hearing’s claim “in light of the current context of mass denials of COVID-19 related business interruption claims.” Discovery on this issue would not change that conclusion. Nor does Continental’s purported reliance on caselaw that this Court concludes correctly interprets “direct physical loss of or damage to” with respect to Clear Hearing’s claims indicate bad faith. Accordingly, Clear Hearing has not shown its entitlement to damages on its bad faith claim or an existence of a dispute of material fact as to Continental’s bad faith.

Case 2: Ultimate Hearing Solutions v. Twin City Fire Insurance

Plaintiffs were Pennsylvania entities with businesses located in Maryland, Delaware, Pennsylvania, and Virginia, which were subject to government closure orders due to Covid-19.  They likewise had all-risk policies, but with a different insurer than the Clear Hearing plaintiffs.  The Ultimate Hearing plaintiffs were represented by the same counsel as in the Clear Hearing case. These plaintiffs brought similar breach of contract and bad faith claims.

On the coverage, Judge Kenney applied the same reasoning found in Clear Hearing to conclude there was no covered direct physical loss or damage to property.

There were two differences, however, between the Ultimate Hearing and Clear Hearing all-risk policies. The Ultimate Healing policies included (1) limited coverage for fungi, wet rot, dry rot, bacteria, and viruses; and (2) a virus exclusion.

In rejecting limited virus coverage, Judge Kenney stated, “the Limited Virus Coverage clearly states that the Policy only covers ‘Direct physical loss or direct physical damage to Covered Property caused by … virus.’ Plaintiffs did not allege that the coronavirus was present at any of their insured properties. They also have not shown, as discussed above, physical loss or damage to their properties.”

Judge Kenney further rejected the argument that the limited virus coverage was illusory, because “Plaintiffs fail to acknowledge that this Limited Virus Coverage provision also applies to fungi, wet rot, dry rot, and bacteria, not just viruses. While it may be difficult to think of a hypothetical situation where a virus causes physical damage to a property, it is not difficult to imagine that wet rot, dry rot or fungi can cause damage that would satisfy the ‘direct physical loss or direct physical damage’ requirement. Further, while it may be difficult to imagine, Defendants did in fact identify a case where insured property was damaged due to a virus caused by a Covered Cause of Loss.”

Judge Kenney also found the virus exclusion precluded coverage.

The bad faith arguments were similar to those made in Clear Hearing, but without reference to the insurer’s improperly relying on caselaw to deny coverage. Rather, the argument was phrased as a refusal to consider the insureds reasonable interpretation of the policy language concerning direct physical loss.

Judge Kenney rejected the bad faith claim handling argument, stating as in Clear Hearing:

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 Plaintiffs’ property has not been entirely prohibited, there is nothing to investigate: coverage does not exist on the face of that claim. Therefore, Ultimate Hearing Solutions has not shown bad faith in Twin City’s lack of investigation or by denying Ultimate Hearing Solutions’ claim “in light of the current context of mass denials of COVID-19 related business interruption claims.” Discovery on this issue would not change that conclusion. Accordingly, Ultimate Hearing Solutions has not shown its entitlement to damages on its bad faith claim or an existence of a dispute of material fact as to Twin City’s bad faith.

Date of Decision:  January 14, 2021

Clear Hearing Solutions, LLC v. Continental Casualty Co., U.S. District Court Eastern District of Pennsylvania No. 20-3454, 2021 WL 131283 (E.D. Pa. Jan. 14, 2021) (Kenney, J.)

Ultimate Hearing Solutions II, LLC v. Twin City Fire Insurance Company, U.S. District Court Eastern District of Pennsylvania No. 20-2401, 2021 WL 131556 (E.D. Pa. Jan. 14, 2021) (Kenney, J.)

INSURER CAN GO BEYOND FOUR CORNERS OF COMPLAINT TO DETERMINE IF A PERSON IS AN INSURED IN THE FIRST INSTANCE, WHEN DEFENDING BAD FAITH CASE (Third Circuit, Pennsylvania Law)

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The Third Circuit addressed the central issue of whether the defendant was an insured, and how to analyze that factual issue in ruling on coverage and bad faith claims.

The named insured went with his girlfriend to a picnic, where they met up with the mother of the named insured’s child.  The girlfriend was also a named insured, but the mother was a stranger to the insurance contract. The mother decided to move the named insureds’ car, and struck plaintiff while driving the car. The injured plaintiff sued the two named insureds and the mother.

The carrier covered the named insureds, but took the position that the mother was not a permissive user and therefore was not an insured under the policy. The mother stipulated to a judgment and assigned her bad faith and breach of contract claims to the injured plaintiff, who sued the carrier.

The trial court granted summary judgment to the insurer, and the Third Circuit affirmed.

The Four Corners Rule does not Apply to Determining if a Party is an Insured for Duty to Defend Purposes

The Third Circuit first addressed the issue of whether the four corners rule encompasses determinations of whether a party is an insured in the first instance.

The issue has never been addressed by Pennsylvania’s Supreme Court.

The insurer argued it could not be bad faith to take the position the mother was not an insured, even if the complaint indicated otherwise, because the law on the issue is unsettled.  The carrier asserted it could use extrinsic evidence to show the mother was not an insured, and denied coverage on that basis. The Third Circuit agreed that “because Pennsylvania courts have not ruled on this issue, [the insurer] did not act in bad faith after it ‘reasonably determined that [mother] was not an insured under the Policy.’”

On the merits of coverage itself, the court concluded “that, when the insurer determines a claim is outside the scope of the insurance policy before a suit is filed, it has no duty to defend because it has effectively ‘confine[d] the claim to a recovery that the policy [does] not cover.’” Here, the insurer investigated the claim, and determined the mother was not an insured because she was not a permissive user.  “After that determination, the four corners rule no longer applied. [The insurer] did not have a duty to defend, and its actions do not show bad faith.”

Bad Faith Investigation

The court then went on to examine whether a bad faith claim could be stated solely on the basis that the insurer’s investigation was conducted in bad faith.  As repeated on this blog ad naseum, there is a genuine issue as to whether there is an independent bad faith claim for poor investigation practices when no coverage is otherwise due. For example see this post from January 2020, this post from August 2020, and this post from earlier in August 2020. A close examination in this case, however, shows the lack of investigation bad faith claim is actually intertwined with the coverage issue. Thus, this is not a case where a party is trying to prove bad faith even though no coverage is due.

Treating investigation based bad faith as a separate cause of action, rather than merely evidence of bad faith, the court observed “[g]ood faith in this context requires that an insurance determination be ‘made diligently and accurately, pursuant to a good faith investigation into the facts’ that is ‘sufficiently thorough to provide [the insurer] with a reasonable foundation for its actions.’” The mother argued the record showed she had “implied permission” to use the car, and the carrier acted in bad faith by unreasonably failing to recognize she had implied permission. The court disagreed, finding no adequate evidence to defeat summary judgment on the issue.

No Common Law Bad Faith Claim

“Finally, although the standard for common law bad faith diverges from statutory bad faith … the common law action for bad faith is a contract claim. Thus, because [the mother] was not an insured, she was not party to the contract, and she had no common law contract claim to assign….”

Date of Decision: December 8, 2020

Myers v. Geico Cas. Co., U. S. Court of Appeals for the Third Circuit No. 19-1108, 2020 WL 7230600 (3d Cir. Dec. 8, 2020) (Fisher, Restrepo, Roth, JJ.)

NO BAD FAITH: (1) NO BENEFIT DUE; (2) NO ESTOPPEL UNDER THE UIPA OR UCSP REGULATIONS; (3) AN OVERSIGHT CAUSING DELAY IS NOT BAD FAITH (Philadelphia Federal)

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The court described this as the case of the missing email. The insurance policy at issue covered various cars. The insured emailed its broker to add another vehicle to the policy. The broker claims it never got the email, and thus never asked the insurer to issue an endorsement adding the new car to the policy. As things sometimes go in life, the new car was involved in a collision, damaging another vehicle as well as its own new car.

The insured reported the claim. However, the insured identified its vehicle as one of existing cars listed in the policy, rather than the new unlisted vehicle. The insurer accepted coverage, and even paid damages to the other driver. The insurer later reversed itself on coverage once its appraiser determined the insured’s vehicle was not the car identified in the claim form, and was not covered under the policy.

The police report did list the correct vehicle. The insurer had the police report at the time it initially provided coverage, and only reversed itself when its appraiser realized that the damaged car was not the car on the claim form and was not listed in the policy.

The insured sued for breach of contract and bad faith, among other claims against the insurer as well as the broker. The insurer moved for summary judgment, which the court granted.

There is no breach of contract, or estoppel under the UIPA or UCSP regulations

First, there was no breach of contract, as the vehicle at issue never became part of the policy. The insured argued, however, that the insured was estopped from denying coverage under the Unfair Insurance Practices Act (UIPA) and the Unfair Claims Settlement Practices (UCSP) regulations governing “Standards for prompt, fair and equitable settlements applicable to insurers”. The insured relied on 31 Pa. Code § 146.7(a)(1), which states that, “Within 15 working days after receipt by the insurer of properly executed proofs of loss, the first-party claimant shall be advised of the acceptance or denial of the claim by the insurer.”

Judge Wolson rejected the statutory/regulatory argument for three reasons:

  1. There is no private right of action under the UIPA and UCSP regulations, and only Pennsylvania’s Insurance Commissioner can enforce the UIPA and UCSP regulations.

  2. The policy itself did not incorporate the UIPA or UCSP obligations or impose those obligations on the insurer. “Absent the incorporation of these obligations into the Policy, their potential violation does not breach the Policy.”

  3. The doctrines of waiver or estoppel cannot “create an insurance contract where none existed.”

THERE IS NO BAD FAITH

  1. The broker is not an insurer subject to the bad faith statute

First, the court recognized that there was no sustainable statutory bad faith action against the broker because it was not an insurer.

  1. There is no bad faith where no benefit is denied

Next, as to the insurer, “To prevail on a bad faith claim, a plaintiff must present clear and convincing evidence that, among other things, an insurer ‘did not have a reasonable basis for denying benefits under the policy’ or that an insurer committed a ‘frivolous or unfounded refusal to pay proceeds of a policy.’” Because the insurer had no contractual obligation to pay its refusal could not have been unreasonable, and the claim failed.

  1. The UIPA and UCSP regulations do no prevent changing a coverage decision based on new information

The court rejected another argument based on the UIPA and UCSP regulations cited above. The insured argued the failure to pay was unreasonable once the insurer accepted coverage. The court found, however, the UCSP regulations did not “prevent an insurer from changing a coverage determination based on new information.”

More importantly to the court, the insured adduced no case law adding such a gloss to section 146.7, i.e. a mandate that once coverage was accepted it could never be denied under any circumstances. Thus, it was reasonable for the insurer to interpret that regulation to permit an insurer to revise a coverage decision based on new information.

  1. A Delay based on an Oversight is not the Basis for Bad Faith

Finally, any delay in revising its coverage determination was likewise not bad faith. Citing the 2007 DeWalt decision, the court observed that an “insurer’s actions in allegedly delaying investigation did not constitute bad faith under Pennsylvania law [when] there was no evidence that such delay was deliberate or knowing, or was unreasonable.”

While the carrier “probably could have been more diligent” in determining which vehicle was involved in the collision by looking at the police report earlier, “an insurer ‘need not show that the process used to reach its conclusion was flawless or that its investigatory methods eliminated possibilities at odds with its conclusion.’” There was nothing in the record to establish the insurer “acted with reckless disregard of its obligations or otherwise fell so short that it acted in bad faith.”

Date of Decision: April 1, 2020

Live Face on Web, LLC v. Merchants Insurance Group, U.S. District Court Eastern District of Pennsylvania Case No. 2:19-cv-00528-JDW, 2020 U.S. Dist. LEXIS 56852 (E.D. Pa. April 1, 2020) (Wolson, J.)

Our thanks to attorney Daniel Cummins of the excellent Tort Talk Blog for bringing this case to our attention.  We also note the Tort Talk Blog’s three recent posts on post-Koken motions to sever and stay bad faith claims in the Western District, York County, and Lancaster County.

(1) NO BAD FAITH WHERE COVERAGE LAW UNCERTAIN (2) BAD FAITH POSSIBLE FOR DELAY AND DENIAL OF ALLEGEDLY UNADDRESSED CLAIM (Philadelphia Federal)

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This case involved a highly disputed factual issue on coverage, with no clear guidance in the case law. The court denied summary judgment on the insured’s breach of contract claim, and rendered a split decision on the two bad faith claims.

The Close Coverage Call

Coverage existed if a roof was damaged by wind, allowing water to enter a building. The issue was whether a tarp could be considered part of a roof. The insurer denied coverage on the basis the tarp at issue was a temporary stopgap when blown off during a windstorm. The insured argued the tarp was sufficiently stable and integrated to be part of a roof system when it was blown off.

The court looked at local and national case law on when a tarp might be part of a more permanent structure, and thus part of a roof. The court found the issue highly fact-driven under this case law, and inappropriate for summary judgment. A jury had to decide the issue after hearing the disputed evidence and expert opinions.

The Bad Faith Claims

On the bad faith claims, the court stated that both denial of a benefit and/or improper investigative practices could constitute bad faith.

[As we have written on this Blog ad naseum, the idea that statutory bad faith covers anything other than benefit denials arguably runs contrary to Pennsylvania Supreme Court case law. In the 2007 Toy v. Metropolitan Life decision, Pennsylvania’s Supreme Court strongly appears to state that only denial of a benefit creates a cognizable statutory bad faith action, whereas matters like poor claims handling would be evidence of bad faith. See this article.

A few months later, the Supreme Court seems to confirm this conclusion. In Ash v. Continental Insurance Company, citing Toy, the Supreme Court states, “The bad faith insurance statute, on the other hand, is concerned with ‘the duty of good faith and fair dealing in the parties’ contract and the manner by which an insurer discharge[s] its obligation of defense and indemnification in the third party claim context or its obligation to pay for a loss in the first party claim context.’” (Emphasis added)

While it appears highly likely Pennsylvania’s Supreme Court made clear 13 years ago that section 8371 is limited to claims for denying benefits, numerous subsequent opinions conclude that there can be other bases for statutory bad faith. These cases typically do not address Toy or Ash in reaching this conclusion.]

In the present case, the insured allegedly made two separate claims, 19 days apart. The first had to do with wind damage to roof shingles, and the second addressed the issue concerning the tarp and interior water damage.

Bad Faith Possible for Undue Delay

On the first claim, the insured alleged it gave proper notice of loss, and the insurer failed to respond at all to the claim. The insurer alleged it had no notice, but in any event took the position that its denial letter addressed both the roof shingle and tarp claims.

The court found that there was an issue of whether the insurer had constructive notice of the first claim, even without formal notice. The adjuster was made fully aware of the event, but it is unclear if the insurer thought of this as a distinct event or just part of the continuum in a single claim. It was also unclear whether the denial letter actually addressed the shingle damage as such.

Thus, bad faith had to go to the jury. “If a jury were to conclude that Defendant was aware that Plaintiff had made a claim for the April damage, but ignored it, that could be seen as an objectively unreasonable, frivolous, intentional refusal to pay (or to otherwise resolve the claim in a timely fashion).”

[While there are certainly claims handling issues here regarding delay and responsiveness to an insured, this claim ultimately includes the denial of a benefit. Thus, the issue of whether there can be statutory bad faith without the denial of a benefit is not actually before the court.]

No Bad Faith where Governing Law is Uncertain

As to the second claim, the insurer won summary judgment. This gets back to the dispute over whether the tarp constitutes a roof. “An insurer who makes a reasonable legal conclusion based on an uncertain area of the law has not acted in bad faith.” Thus, “[w]ith no binding guidance from the Pennsylvania Supreme Court or the Third Circuit, and numerous fact-intensive cases on the subject, Defendant reasonably interpreted the membrane, and not the tarp, to be the roof. Even if that call is ultimately found to have been incorrect, Defendant did not act in bad faith by denying the claim.”

Date of Decision: March 18, 2020

Harrisburg v. Axis Surplus Ins. Co., U.S. District Court Eastern District of Pennsylvania CIVIL ACTION NO. 19-1213, 2020 U.S. Dist. LEXIS 48115 (E.D. Pa. Mar. 18, 2020) (Beetlestone, J.)

AUGUST 2017 BAD FAITH CASES: BASIS FOR DENYING CLAIM RELEVANT TO BOTH BAD FAITH AND BREACH OF CONTRACT CLAIMS, SUPPORTING COURT’S CERTIFYING CASE FOR IMMEDIATE APPEAL (Philadelphia Commerce Court)

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In a lengthy opinion, the court ruled against the insurer on how to interpret the meaning of “actual cash value” under the policy. The issue was sufficiently significant that the Commerce Court certified its decision as a final appealable order to the Superior Court.

The case also involved a bad faith claim, which came into play when determining whether to certify the appeal. The interpretation of pertinent policy language was intertwined with the issue of whether the insurer had a reasonable basis to deny benefits and/or recklessly disregarded the potential lack of a reasonable basis to deny benefits. The “statutory bad faith analysis is quite clearly related to whether plaintiff is entitled to damages on its breach of contract claim.”

Later, the court stated that “immediate appellate review promotes judicial economy because appellate analysis will provide instruction, one way or the other, on open trial level issues relating to both class certification and bad faith. Pre-trial review in the event of affirmance is expected to be extensive and should be provided only after the threshold legal question is settled.”

Date of Decision: July 21, 2017

Kurach v. Truck Insurance Exchange, July Term 2015, No. 339, 2017 Phila. Ct. Com. Pl. LEXIS 228 (C.C.P. Phila. July 21, 2017) (Djerassi, J.) (Commerce Court)

APRIL 2017 BAD FAITH CASES: (1) INSURER INTERPRETS POLICY CORRECTLY, SO NO BAD FAITH; (2) NO BAD FAITH WHERE INSURER AGREED TO DEFEND ONLY COVERED CLAIMS, BECAUSE OF NOVEL ARGUMENT THAT USUAL RULE DID NOT APPLY TO TITLE INSURANCE (Philadelphia Federal)

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This dispute arises out of a Title Insurance Company’s initial refusal to defend its insured against a third party claim. The plaintiff in the underlying action proceeded pro se, and filed three different complaints before obtaining counsel. Based on the confusing and unclear language in the complaints, the insurer denied coverage.

It was not until a fourth Complaint was filed that the insurer provided a defense under a reservation of rights. Notably, however, the insurer only agreed to defend the covered claims, and refused to provide a defense for the uncovered claims. The insurer’s position went against well-established Pennsylvania case law requiring insurers to defend against both covered and uncovered claims until all potentially covered claims had been dismissed or resolved.

The insured brought suit alleging that the insurer acted in bad faith by delaying its defense, and by refusing to defend against all claims as required under Pennsylvania law. In determining that there was no bad faith, the Court reviewed the policy and held that the insurer correctly determined that its duty to defend was not triggered until the filing of the fourth Complaint. Because the insurer’s refusal to defend was based on a correct interpretation of the policy, its denial of benefits was not unreasonable, and the plaintiff was unable to satisfy the first element of bad faith.

With regard to insurer’s refusal to defend all claims, the court observed that the general rule that if any claim is covered, then under Pennsylvania law, the insurer must defend all claims, i.e., both covered and uncovered claims. The title insurer argued, however, “that title insurance policies should be construed differently, to extend the duty to defend only to those claims within the contours of the policy.” The title insurer relied upon case law from other jurisdictions and the title policy language; and the insured relied upon Pennsylvania public policy as set forth in case law. The court determined that it should rely upon Pennsylvania precedent, and rejected the title insurer’s argument.

As to bad faith, however, the court held that the insurer’s position was not taken in bad faith for two reasons. First, although unsupported by any Pennsylvania case law, this title insurance exception was an issue of first impression and had apparently never been presented before a Pennsylvania court. Second, the insurer’s position was supported by case law from other jurisdictions that had carved out similar exceptions for Title Insurance Companies.

Date of Decision: March 27, 2017

Lupu v. Loan City, LLC, No. 12-4556, 2017 U.S. Dist. LEXIS 45135 (E.D. Pa. Mar. 27, 2017) (Rufe, J.)

MARCH 2017 BAD FAITH CASES: SPLIT IN RELEVANT CASE LAW IS NOT AN ABSOLUTE DEFENSE TO A BAD FAITH INTERPRETATION OF POLICY LANGUAGE CLAIM, AS REASONABLENESS REMAINS THE MEASURE (Philadelphia Federal)

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The interesting part of this case involved the court’s subtle distinction when lack of clarity in the relevant case law on how to interpret the insurance policy language at issue provides a bad faith defense. The specific issue was application of an intentional act exclusion to a violent assault fact pattern, where the insured claimed he was too drunk to know what he was doing.

The insurer argued “that an insurer does not act in bad faith if it relies on a reasonable interpretation of unsettled case law,” and cited at least three opinions supporting its position that the exclusion applied to the fact pattern at issue. The court described this argument as “incomplete”.

The court stated: “Supporting authority, though highly relevant, does not automatically defeat a bad faith claim. This was made clear by J.H. France Refractories Co. v. Allstate Insurance Co., 534 Pa. 29, 626 A.2d 502 (1993). There, the Pennsylvania Supreme Court found that [the insurer] had not acted in bad faith in denying coverage where it had relied on an ‘excessive pluralism and disparity . . . in the decisions of the many courts which ha[d] entertained similar litigation.’ …. But the Court did not hold that the mere existence of disparate decisions precluded bad faith—instead, it took care to note both that it did ‘not regard the issues presented in this case as simple ones’ and that each of the varying approaches other courts had taken ‘seem[ed] reasonable from some point of view.’ …. Indeed, bad faith claims are highly ‘fact specific,’ … and their touchstone—‘reasonableness’—only ‘has meaning in the context of each case[.]’”

After observing this subtle distinction in how to analyze the effect of disparate case law on bad faith claims, the court still ruled in the insurer’s favor, finding its position reasonable. Thus, there was no bad faith.

Date of Decision: March 13, 2017

Allstate Ins. Co. v. Lagreca, No. 13-6039, 2017 U.S. Dist. LEXIS 35197 (E.D. Pa. Mar. 13, 2017) (McHugh, J.)