Archive for the 'PA – No coverage due, bad faith still possible' Category

BAD FAITH CLAIM PROCEEDS EVEN AFTER CONTRACT CLAIM DISMISSED FOR UNTIMELY FILING (Western District)

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The insurer denied auto theft coverage based on an exclusion.  The insured sued for breach of contract and bad faith, and also alleged breach of a fiduciary duty. The carrier moved to dismiss the breach of contract and bad faith claims, and to strike the fiduciary duty language.

The court dismissed the breach of contract claim for failing to bring action within the time period required under the policy.

The court, however, allowed the insured’s bad faith claim to proceed.  The bad faith claim was based on an unreasonable investigation theory.  The court stated:

“On the existing record at this early stage of the litigation, [the insured] states a plausible claim for coverage and, while he will have to prove his bad faith claim by ‘clear and convincing evidence,’ … the allegations in the Complaint that [the insurer] failed to investigate his claim and knowingly set the date of loss outside the policy period “may … show bad faith.’ … Because [the] well-pleaded assertions of unreasonable claims processing and investigation adequately state a plausible bad faith claim under Section 8371, dismissal is not warranted and the Motion to Dismiss Count II of the Complaint is denied.”

The court did strike the allegation that the carrier’s breach of fiduciary duty constituted bad faith, observing:

In Keefe v. Prudential Prop. & Cas. Ins. Co., 203 F.3d 218, 227–28 (3d Cir. 2000), the United States Court of Appeals for the Third Circuit held that an insurer’s fiduciary obligations to an insured are limited to claims handling and resolution of third-party claims against an insured. “Under Pennsylvania law, a fiduciary duty higher than the duty of good faith and fair dealing does not arise out of an insurance contract until an insurer asserts a stated right under the policy to handle all claims asserted against the insured.” … Keefe has been applied to the cancellation of a life insurance policy and to policyholders’ uninsured and underinsured motorist claims where, like the present claim, the insurer has not asserted a right to resolve third-party claims against the insured. … Accordingly, given [the insured’s] failure to respond to the Motion to Strike, and the weight of precedential authority limiting an insurer’s fiduciary obligations to the resolution of third-party claims against an insured, the Motion to Strike is granted.

Date of Decision:  May 11, 2021

Peltz v. State Farm Mutual Automobile Insurance Company, U.S. District Court Western District of Pennsylvania No. 21-0005, 2021 WL 1893125 (W.D. Pa. May 11, 2021) (Kelly, M.J.)

BANKRUPTCY COURT PERMITS BAD FAITH CLAIM TO PROCEED, EVEN AFTER BREACH OF CONTRACT CLAIM DISMISSED (Philadelphia Bankruptcy Court)

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This is a rare bad faith case raised before a Bankruptcy Court in the context of an adversary proceeding.

The bankrupt/insureds brought a first party property damage claim against an excess insurer.  It is not fully clear from the record if the insureds were parties to the excess insurance agreement, which appears to be designed to protect a mortgage holder.  In any event, the court held there was nothing in the record that could establish excess coverage was triggered.  Thus, the court granted summary judgment on the breach of contract claim, finding no excess coverage possibly due that could have invoked the insurance contract’s coverage obligations.

The absence of any benefits being due, however, did not stop the court from analyzing the bad faith claim, and ultimately allowing that claim to proceed.

As discussed many times in this blog, there is a serious issue about whether a statutory bad faith claim can proceed if the insurer has not denied any benefit under an insurance policy, i.e., payment of a first party claim or defense and indemnification under a liability insurance policy. This limitation appears to be the required by the Pennsylvania Supreme Court’s 2007 decision in Toy v. Metropolitan Life.  An article addressing this issue can be found here.  See also this January 2020 post, this March 2021 post, and this January 2021 post questioning whether the non-precedential Third Circuit decision in Gallatin Fuels failed to consider Toy in reaching the conclusion that it was possible to pursue a bad faith claim when no policy was even in effect at the time of the loss.

In the present adversary proceeding, the court chiefly relied on Gallatin Fuels for the proposition that statutory bad faith claims can be pursued even where no benefits are due because there is no enforceable insurance contract, solely based on claims of poor investigation practices and possible misrepresentations during the investigation.

The court also relied on Pennsylvania’s Unfair Insurance Practices Act and Unfair Claim Settlement Practices regulations in finding a potential basis for bad faith. In particular, the court cites, 31 Pa. Code § 146.6 (providing “that every insurer shall complete investigation of a claim within thirty days after notification of the claim unless it cannot reasonably be completed in that time. It further provides that if the investigation cannot be completed within that timeframe, every forty-five days thereafter, the insurer shall provide the claimant with a reasonable explanation for the delay and state when a decision on the claim may be expected.”)

Courts approach violations of the UIPA and UCSP regulations differently, ranging from a complete prohibition on considering their violation in proving statutory bad faith cases, to using those violations as evidence of bad faith.  Our May 2, 2019 post summarizes different approaches courts take in considering UIPA and Unfair Claim Settlement Practices regulations.

Most recently on this Blog, we summarized Western District Magistrate Judge Dodge’s December 2020 Kleinz v. Unitrin opinion. Magistrate Judge Dodge found that since the seminal Terletsky opinion in 1994, “federal courts have uniformly rejected plaintiffs’ attempt to rely on UIPA violations to support bad faith claims.” She found that contrary to the insured’s arguments that some federal cases hold otherwise, “for the past 26 years, case law in federal courts on this issue has been consistent.”  Magistrate Judge Dodge cites, among other cases, the Third Circuit’s opinion in Leach, Judge Gibson’s 2019 Horvath opinion, Judge Fisher’s 2014 Kelman decision (while sitting by designation in the Western District), Judge Kosik’s 2007 Oehlmann decision, and Judge Conti’s 2007 Loos opinion.

Some other recent opinions look unfavorably toward using UIPA and UCSP violations to make the statutory bad faith case. See, e.g., Judge Quiñones Alejandro’s December 2020 White Opinion, and Judge Wolson’s April 2020 Live Face decision. In his March 2020 Clapps decision, Judge Darnell Jones notes that while there is no private right of action under the UIPA or UCSP regulations, there might be some circumstances where their violation might be the premise for a bad faith case.

All that being said, the bad faith claim was allowed to proceed in this case, in light of claim handling conduct that clearly troubled the court.

Date of Decision:  April 15, 2021

In Re Lena D. Lewis, Debtor, Lewis v. U.S. Bank National Association, U.S. Bankruptcy Court for the Eastern District of Pennsylvania No. AP 18-00240-AMC, 2021 WL 1424721 (Bankr. E.D. Pa. Apr. 15, 2021) (Chan, J.)

NO BAD FAITH WHERE (1) NO COVERAGE DUE, (2) ALLEGED BAD FAITH COMMUNICATIONS WITH CLIENT WERE EITHER IMMATERIAL OR ACCURATE, AND (3) ANY OMISSIONS IN THOSE COMMUNICATIONS ONLY AMOUNTED TO NEGLIGENCE AT MOST, NOT BAD FAITH (Western District)

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The insured brings this breach of contract and bad faith case based on the insurer’s denying virtually all of her water damage claim, and its allegedly improper claim handling in communications to the insured.  Western District Magistrate Judge Dodge grants the insurer’s motion to dismiss, but with leave to file an amended complaint.

First, the court dismissed the breach of contract claim.  Magistrate Judge Dodge found there was no coverage for the claims pleaded because the damages specifically alleged, when compared to the clear policy language, were not insured losses. There was, however, enough ambiguity in the plaintiff’s allegation that she suffered “resulting damages”, to allow the insured to amend if she could identify any other forms of damages that might be covered under the policy.

As to the bad faith claim, Magistrate Judge Dodge first observed that her contract ruling explained how the coverage denial was proper.  Further, “[t]he bad faith claim does not refer to any circumstances other than [plaintiff’s] contention that [the insurer] failed to communicate all of the policy language to her in one of its letters.” This was of no moment. The policy exclusion language omitted in the letter was irrelevant because the insurer did not rely on the omitted exclusion in denying coverage.

The insured alleged that the insurer also omitted a distinct important policy provision in correspondence to the insured. This was belied, however, by the correspondence itself. The purportedly omitted provision actually was included in the letter. Moreover, even if the omission occurred, this amounted at most to negligence, mistake, or poor judgment, none of which makes out an actionable bad faith claim.

Thus, the motion to dismiss the bad faith claim was granted, but without prejudice.

Date of Decision:  March 19, 2021

Blanton v. State Farm Fire & Casualty Co., U.S. District Court Western District of Pennsylvania Civil Action No. 20-1534, 2021 WL 1060661 (W.D. Pa. Mar. 19, 2021) (Dodge, M.J.)

Our thanks to the insurer’s counsel, Mark A. Martini, of Robb Leonard Mulvihill LLP, for bringing this case to our attention.

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.)

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

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

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

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

BAD FAITH CLAIM CAN PROCEED

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

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

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

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

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

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

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

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

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

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

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

MOTION TO BIFURCATE OR SEVER DENIED

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

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

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

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

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

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

Judicial Economy Favors a Single Action

As to judicial economy:

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

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

Date of Decision: September 11, 2020

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

ARE THERE MANY KINDS OF STATUTORY BAD FAITH, EVEN WHEN NO COVERAGE IS DUE ? (Western District)

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This statutory bad faith opinion issued out of the Western District of Pennsylvania yesterday.

The court finds no coverage based on a one-year suit limitation provision and/or a policy exclusion. Thus, plaintiffs have no bad faith claim based on denial of coverage, as no coverage is due, and that claim is dismissed with prejudice.

The court expressly finds, however, that there are other forms of statutory bad faith cognizable under 42 Pa.C.S. § 8371, beyond coverage denials.  It identifies a commonly recognized exception that if the contract claim fails for a technical reason, like exceeding a limitation period, the bad faith claim can still proceed.  The court goes beyond this kind of technical exception to recognize further that poor claims handling may be actionable independently, e.g., knowing or recklessly inadequate investigation, even when no benefit is due under the policy.

On this distinct bad faith investigation claim, plaintiffs only plead (1) conclusory allegations, along with (2) a single fact that cannot constitute bad faith standing alone. Thus, the court dismisses the bad faith investigation claim, but without prejudice. Plaintiffs have leave to file an amended complaint on their investigation bad faith claim, even though no coverage is due under the policy.

[Note: As those following this blog know, we have addressed the scope of cognizable claims under section 8371, and raised the question as to whether cognizable claims under section 8371 are limited to cases where first party benefits due have been denied, or where a defense and/or indemnification due have been refused on third party claims.  Our analysis always begins with the 2007 Supreme Court decision in Toy v. Metropolitan Life Insurance Company.  See, e.g., this post, and this article. The present opinion relies, in part, on the Third Circuit’s unpublished decision in Gallatin Fuels. As discussed in the linked article, Gallatin Fuels does not address Toy. We are also attaching a portion of a brief recently filed in a Philadelphia federal court, from attorney Lee Applebaum, as part of a motion that has now become moot.]

Date of Decision:  August 26, 2020

Palek v. State Farm Fire and Casualty Co., U.S. District Court Western District of Pennsylvania No. 20-170 (W.D. Pa. Aug. 26, 2020) (Flowers Conti, J.)

Our thanks to Attorney Daniel Cummins of the excellent Tort Talk Blog for bringing this case to our attention.

INSURED FAILS TO ADEQUATELY PLEAD BAD FAITH; CAN CONDIO BE USED TO DEFINE THE SCOPE OF THE BAD FAITH STATUTE AFTER TOY (Philadelphia Federal)

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The insured failed to plead a plausible bad faith claim in this first party property loss case.

We will address two things about this case.  First, the details in the court’s decision granting the motion to dismiss.  Second, the court’s finding that statutory bad faith can consist of more than the denial of first party benefits or the denial of a defense and indemnification in third party claims.

Failure to Plead a Plausible Bad Faith Claim

As discussed many times by the federal district courts addressing bad faith claims, conclusory allegations simply carry no weight in adequately pleading a bad faith claim. Courts will parse the complaint to determine what non-conclusory facts have actually been pleaded, what allegations are merely conclusory boilerplate and can be disregarded, and whether facts left standing after that process can support a plausible bad faith claim.

In this case, the facts pleaded only included the location of covered property, that a peril covered under the policy caused direct physical loss and damage to the property, that prompt and timely notice of loss was given to the carrier, and that the insured fully complied with all necessary policy terms and conditions.

The complaint went on to aver generically 13 forms of bad faith behavior, with no factual detail (listed below). The court readily found these allegations conclusory.

The court gave particular attention to a few of these conclusory allegations. For example, the complaint alleges the carrier “’misrepresent[ed] pertinent facts or policy provisions relating to coverages at issue’ and ‘sen[t] correspondence falsely representing’ that Plaintiff was not entitled to benefits under the Policy….” However, the complaint failed “to explain what those misrepresentations may have been.”

Plaintiff also averred that the insurer “’fail[ed] to fairly negotiate the amount of [Plaintiff’s] loss” … but provides no details describing what was unfair about the negotiations.”  Judge Padova added that “[t]he Complaint’s remaining bad faith allegations merely assert that [the insurer] was not prompt, thorough, fair, or reasonable in how it handled or denied the claim, but does not provide any facts explaining how [it] was not prompt, thorough, fair, or reasonable.”

The Complaint was dismissed with leave to amend.

Can Courts Rely on the Superior Court’s 2006 Condio Decision to Determine the Scope of the Bad Faith Statute after the 2007 Supreme Court Decision in Toy v. Metropolitan Life

Though not ultimately relevant to the court’s decision, the opinion states that:

“‘[S]ection 8371 is not restricted to an insurer’s bad faith in denying a claim. An action for bad faith may [also] extend to the insurer’s investigative practices.’” Greene v. United Servs. Auto. Ass’n, 936 A.2d 1178, 1187 (Pa. Super. Ct. 2007) (alterations in original) (quoting Condio, 899 A.2d at 1142). Indeed, the term bad faith “‘encompasses a wide variety of objectionable conduct’” including “‘lack of good faith investigation into facts, and failure to communicate with the claimant.’” Id. at 1188 (quoting Condio, 899 A.2d at 1142).

The Superior Court decided Condio in 2006.

In the 2007 Supreme Court Toy v. Metropolitan Life decision, Chief Justice Cappy, writing for the majority, observed that at the time of the Bad Faith Statute’s 1990 enactment, “the term ‘bad faith’ concerned the duty of good faith and fair dealing in the parties’ contract and the manner by which an insurer discharged its obligations of defense and indemnification in the third-party claim context or its obligation to pay for a loss in the first-party claim context.” “In other words, the term captured those actions an insurer took when called upon to perform its contractual obligations of defense and indemnification or payment of a loss that failed to satisfy the duty of good faith and fair dealing implied in the parties’ insurance contract.”

Justice Eakin, writing in concurrence, found this reading too narrow. In their competing opinions, Justices Cappy and Eakin specifically debate the meaning and application of Condio in statutory bad faith actions. Justice Eakin cites Condio, among other Pennsylvania Superior Court cases, to argue the majority’s interpretation of the bad faith statute is too narrow.

In response, Chief Justice Cappy does not reject the Condio opinion, but states that Condio is addressing a different aspect of “bad faith” than what the court had to decide that day.

Justice Cappy finds there are two aspects to “bad faith” in the context of section 8371.  “As we observe in footnotes 17 and 18, we do not consider what actions amount to bad faith [conduct], what actions of an insurer may be admitted as proof of its bad faith, whether an insurer’s violations of the UIPA are relevant to proving a bad faith claim or whether the standard of conduct the Superior Court has applied to assess an insurer’s performance of contractual obligations in bad faith cases is the correct one.”  Rather, “[i]n this area, the term ‘bad faith’ refers not only to [1] the claim an insured brings against his insurer under the bad faith statute, but also, [2] to the conduct an insured asserts his insurer exhibited and establishes that it is liable. These matters although related, are nonetheless, separate and distinct. We write to the former.  The concurrence appears to write to the latter.”

Justice Cappy specifically describes the issue in Condio, and other Superior Court cases cited by Justice Eakin, as “whether the evidence offered at trial by the insured as to the insurer’s behavior was sufficient to prove the bad faith claim and/or admissible in a § 8371 action.” Thus, it appears, Condio does not address the scope of what claims are cognizable under the Bad Faith Statute in the first instance, but addresses the adequacy of evidence in proving bad faith.

In light of (1) this distinction raised by the Toy Majority between the two uses of the term “bad faith”, (2) in direct response to Justice Eakin’s argument that statutory bad faith claims should broadly encompass the kind of behavior identified in Condio, and that such claims not be limited to “the manner by which an insurer discharged its obligations of defense and indemnification in the third-party claim context or its obligation to pay for a loss in the first-party claim context,” then (3) it is questionable that Condio, and other pre-Toy Superior Court cases, can expand the category of cognizable claims under the Bad Faith Statute to include conduct beyond “the manner by which an insurer discharged its obligations of defense and indemnification in the third-party claim context or its obligation to pay for a loss in the first-party claim context….”

See this article for a more detailed discussion.

Date of Decision: August 4, 2020

HARRIS v. ALLSTATE VEHICLE AND PROPERTY INSURANCE COMPANY, U.S. District Court Eastern District of Pennsylvania No. CV 20-1285, 2020 WL 4470402 (E.D. Pa. Aug. 4, 2020) (Padova, J.)

Conclusory allegations in the Complaint

  1. by sending correspondence falsely representing that Plaintiff’s loss [was not] caused by a peril insured against under the Policy [and that Plaintiff] was not entitled to benefits due and owing under the Policy;

  2. in failing to complete a prompt and thorough investigation of Plaintiff’s claim before representing that such claim is not covered under the Policy;

  3. in failing to pay Plaintiff’s covered loss in a prompt and timely manner;

  4. in failing to objectively and fairly evaluate Plaintiff’s claim;

  5. in conducting an unfair and unreasonable investigation of Plaintiff’s claim;

  6. in asserting Policy defenses without a reasonable basis in fact;

  7. in flatly misrepresenting pertinent facts or policy provisions relating to coverages at issue and placing unduly restrictive interpretations on the Policy and/or claim forms;

  8. in failing to keep Plaintiff or [her] representatives fairly and adequately advised as to the status of the claim;

  9. in unreasonably valuing the loss and failing to fairly negotiate the amount of the loss with Plaintiff or [her] representatives;

  10. in failing to promptly provide a reasonable factual explanation of the basis for the denial of Plaintiff’s claim;

  11. in unreasonably withholding policy benefits;

  12. in acting unreasonably and unfairly in response to Plaintiff’s claim;

m. in unnecessarily and unreasonably compelling Plaintiff to institute this lawsuit to obtain policy benefits for a covered loss, that Defendant should have paid promptly and without the necessity of litigation.

COURTS SPLIT ON WHETHER STATUTORY BAD FAITH EXISTS WHERE NO BENEFITS ARE DUE UNDER AN INSURANCE POLICY (Philadelphia Federal and Lackawanna County Common Pleas)

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Anyone following this blog has been made aware, ad naseum, that courts are divided on whether statutory bad faith can exist where no benefit is denied.  In this context, denial of a benefit includes a bad faith delay in providing a benefit owed. Thus, the issue is not whether a belated payment or defense can constitute bad faith.  Rather, the issue is whether a statutory bad faith claim is cognizable if an insurer owes no duty to indemnify in a first party case, or to defend or indemnify against a third party claim.

We have pointed out that the 2007 Pennsylvania Supreme Court decision in Toy v. Metropolitan Life strongly appears to have answered this question: There is no statutory bad faith possible if no benefit is denied.  Thus, if no benefit is due, it would appear section 8371 is not the remedy for poor claims handling practices, standing alone.

Last week, Eastern District Judge McHugh ruled in a case that no coverage was due under the policy at issue.  After so ruling, he then addressed the bad faith claim in one sentence.  “Because I have concluded that [the insurer] acted in accordance with the terms of the policy, it cannot be deemed to have acted in bad faith.”  Hemphill v. Landmark Insurance Company. Another example of this principle is found in Judge DuBois’ 2019 Buck decision, which specifically cites Toy.

One day earlier, Lackawanna County Common Pleas Judge Nealon concluded that statutory bad faith did not require denial of a benefit. In fact, a carrier could win summary judgment that no coverage was due under an insurance policy, but still be subject to a statutory bad faith claim.  Farber v. Erie Insurance Exchange.

Judge Nealon states that the success of a statutory bad faith claim does not depend on the success of the underlying contract claim. Citing a 1999 Superior Court opinion, he adds that “because ‘[a] bad faith action under Section 8371 is neither related to nor dependent on the underlying contract claim against the insurer,’ [the insured] is ‘not required to await a judicial determination of the coverage issue’ before pursuing a bad faith claim….”

There are numerous cases out of Pennsylvania’s Superior Court and Federal Courts finding there is a subset of statutory bad faith claims that do not require the denial of a benefit.  Despite Toy’s importance on this issue, these cases typically do not cite Toy. Of course, some of the cases were decided before Toy, but many are not.   Rather, these post-Toy cases cite case authority that ultimately relies on pre-Toy precedent.

The Farber opinion cites Superior Court case law relying on authority from the 1990s, as well as Middle District Judge Rambo’s 2019 Ferguson opinion.  In Ferguson, Judge Rambo addressed the issue head on, and concluded that there are cognizable statutory bad faith claims that do not require denial of a benefit. Unfortunately, Ferguson does not consider the Toy opinion in reaching this conclusion.

Here are links to our various posts on the subject over the last two years: May 4, 2020, April 16, 2020, March 25, 2020, February 24, 2020, January 28, 2020, December 9, 2019, November 21, 2019, August 19, 2019, January 30, 2019, and October 31, 2018.

Dates of Decision: July 8, 2020 and July 9, 2020

Farber v. Erie Insurance Exchange, Court of Common Pleas of Lackawanna County, No. 19 CV 2302 (July 8, 2020) (Nealon, J.)

Hemphill v. Landmark Insurance Company, U.S. District Court Eastern District of Pennsylvania CIVIL ACTION No. 19-5260, 2020 U.S. Dist. LEXIS 120447 (E.D. Pa. July 9, 2020) (McHugh, J.)

Our thanks to attorney Daniel Cummins of the excellent and valued Tort Talk Blog for bringing the Farber case to our attention.

BAD FAITH CLAIM CAN PROCEED EVEN THOUGHT CONTRACT CLAIM DISMISSED AS UNTIMELY; ADJUSTOR AND INVESTIGATOR NOT SUBJECT TO BAD FAITH STATUTE (Philadelphia Federal)

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This case involved breach of contract and bad faith claims against the insurer based on its decision not to cover the alleged theft of jewelry. The insurer engaged an investigation firm to look into the theft. The individual investigator assigned to the claim raised questions about either the ownership of the jewelry, or whether it was actually stolen in a burglary.

The insurer was granted judgment on the pleadings as to the breach of insurance contract claim. The policy had a one-year limitations period for brining suit, and the insured failed to file her action within one year.

Even though there was no coverage due because of the contractual limitations period, however, the court denied summary judgment on the bad faith claim. The insurer argued that the insured’s “deposition testimony shows that she cannot meet her burden of establishing bad faith.” The court found this argument premature.

The case had been removed to federal court and immediately placed in the arbitration track. There were no formal discovery requests from any party. The court found that the “litigation that has ensued does not preclude full and fair discovery on fact-driven claims that remain on the bad-faith count.” Thus, summary judgment was premature, and the motion was dismissed without prejudice. Judge Rufe added a requirement that the parties had to report jointly regarding to the court on what discovery was being pursued, if any, heading into the arbitration.

[Note: The insurer apparently did not attempt to argue that if the contract claim was dismissed, then the bad faith claim necessarily failed. There is some case law holding if the contract claim is dismissed on the basis of a contractual limitations period, the bad faith claim can still proceed. See, e.g., Doylestown Electrical Supply Co. v. Maryland Casualty Ins. Co., 942 F. Supp. 1018 (E.D. Pa. 1996) and March v. Paradise Mutual Ins. Co., 646 A.2d 1254 (Pa. Super. 1994), appeal denied, 540 Pa. 613, 656 A.2d 118 (1995).]

Finally, the insured attempted to amend the complaint to add claims against the insurer’s claim adjustor, the company it hired to investigate the claim and the individual investigator. The court found these claims meritless and would not allow amendment.

An individual adjustor working for an insurer is not an insurer. Thus, the individual adjustor was not subject to (i) a breach of contract claim because he was not a party to the contract; or (ii) the bad faith claim because Pennsylvania’s bad faith statute only applies to insurers. The same reasoning applied to the investigators.

Date of Decision: April 30, 2020

Holden v. Homesite Insurance Co., U.S. District Court Eastern District of Pennsylvania CIVIL ACTION NO. 19-2167, 2020 U.S. Dist. LEXIS 75904 (E.D. Pa. April 30, 2020) (Rufe, J.)