Archive for the 'PA – Underwriting' Category

FAILURE TO PROVIDE UNDERWRITING FILE CANNOT CONSTITUTE BAD FAITH ABSENT MORE SPECIFIC FACTS SUPPORTING IT WAS WITHHELD IN BAD FAITH (Philadelphia Federal)

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Judge Baylson had previously dismissed in this matter, summarized here, but allowed the insured leave to amend.  The insured filed an amended complaint, and the carrier moved again to dismiss the bad faith claim.

The carrier had taken the position that there was no stacking available to the insured. Before suit, the insured asked the carrier for its underwriting file to confirm there were no UIM stacking benefits.  The insurer refused to produce that file absent a court order.

The insured argued his bad faith claims were not premised on UIM coverage disputes, “but rather upon Defendant’s misrepresentation of that coverage and refusal to disclose the underwriting agreement.” The insured alleged the carrier refused to produce the underwriting file “because it contained information that would demonstrate Defendant falsely represented the coverage amount.” This alleged “concealment and misrepresentation by the Defendant constitute[d] an act of bad faith.” Judge Baylson disagreed and dismissed the bad faith claim with prejudice.

A bad faith claim requires plaintiff showing by clear and convincing evidence that a benefit denial was unreasonable, and that the insurer knew it was unreasonable or recklessly disregarded that fact. A bad faith claim cannot meet the plausible pleading standard, however, by simply pleading the insurer denied a coverage request. Rather, an insured-plaintiff must plead “factual specifics as to the ‘who, what, where, when, and how’ of the denial,” to make a cases for reckless indifference.

Judge Baylson found the insured plaintiff here alleged “no factual content indicating that Defendant (1) lacked a reasonable basis to deny coverage or (2) that Defendant knew or recklessly disregarded the lack of reasonable basis. Rather, Plaintiff essentially asks the Court to infer—without providing any supporting facts—that Defendant’s sole motivation in withholding the underwriting file was to deceive Plaintiff.”

In Judge Baylson’s first decision, he had “addressed reasons other than bad faith that might explain why Defendant refused to provide the underwriting document.” Specifically, he observes that “underwriting files often contain an insurer’s evaluation of the risks along with other confidential business information, to be in line with a wide swath of rational and competitive business strategy.” (Internal quotation marks omitted.) The amended complaint fails to allege “any facts that plausibly suggest Defendant had no reasonable basis to deny Plaintiff stacked coverage, nor that Defendant knew or disregarded the lack of any such basis.”

Date of Decision: December 30, 2020

Dietz v. Liberty Mutual Insurance Company, U.S. District Court Eastern District of Pennsylvania No. 20-1239, 2020 WL 7769933 (E.D. Pa. Dec. 30, 2020) (Baylson, J.)

BAD FAITH CLAIM CAN PROCEED WHERE THE POLICY TERMS WERE IN DISPUTE, AND NO PARTY COULD PRODUCE THE ORIGINAL POLICY (Western District)

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This case involves a missing disability insurance policy.

The insured claimed he never received the original policy in 1990.  By the time of his disability claim 25 years later, the insurer likewise did not have an original, and could only produce “substitute” or “replica” policies.  The insured did have various application forms, which the court considered in ruling on the instant summary judgment motion.

Without going into painstaking detail here, the insured claimed he had a lifetime disability policy, and the carrier claimed the insured was only entitled to two years of payments after his disability.  The insured sued for breach of contract, tort, bad faith and violation of the Unfair Trade Practices and Consumer Protection Law (UTPCPL). The insurer moved for summary judgment on all counts.

The court first rejected the insurer’s breach of contract motion. While the substitute and/or replica policies could support the insurer’s position that it had paid all that was due, the insurer still had to prove that these policies accurately reflected the actual policy.  Thus, the insured’s testimony concerning the lifetime coverage he requested and was told he received vs. the insurer’s testimony that the substitute and/or replica policies were identical to the original policy all had to be decided by the trier of fact. Therefore, summary judgment on the contract action was denied. The court also considered the insured’s reasonable expectations under Tonkovic and Rempel to be open issues of fact.

As to the bad faith claim, the court first set out the pertinent legal principles and reiterated that the insured did not have to prove self-dealing or ill-will under Rancosky.  The court then denied the summary judgment motion on bad faith.

The insured raised numerous facts supporting bad faith.

  1. The insured alleged the carrier’s adjuster sarcastically commented that the insured claim conveniently fell just within the policy’s expiration limit.

  2. When asked for a copy of the policy, the insurer’s response was inconsistent. It first sent a “substitute policy” and then a “replica policy”. Both policies had missing pages and both were different than the policy he believed he had actually purchased.

  3. The insured contended the carrier’s “practice of not maintaining original copies of policies is further evidence of bad faith toward its insureds because this practice shifts the burden to the insureds to produce the terms of the policies.”

  4. The carrier “never informed [the insured] of the relevant limitations of the Policy, even when it offered the opportunity to purchase a new policy when he approached age 65.”

On the other hand, the carrier argued it had a reasonable basis to deny coverage, precluding bad faith.  The court responded that “while this may ultimately be proven, the Court cannot determine on a motion for summary judgment whether [the insurer] had a reasonable basis for its denial. Moreover, as [the insured] observes, [the insurer’s] behavior during the claim process constitutes evidence in support of his claim that it acted in bad faith.”

The court likewise denied summary judgment on the UTPCPL claim. The insured was successful in framing the argument as a case of deceptive conduct in issuing the policy, and not merely a failure to pay (which is not actionable under the UTPCPL).

The insured “indicated that representations were made by [the insurer’s] agent that he was purchasing a disability policy that provided ‘lifetime benefits up to age 65,’ that he justifiably relied on these representations and that he suffered damages because [the insurer] later took the position that the Policy did not provide this benefit because he did not become disabled until after he reached age 60. He has presented sufficient evidence to support a claim under the UTPCPL that must be weighed by the trier of fact.”

Summary judgment on the remaining claims was likewise denied.

Date of Decision: November 30, 2020

Falcon v. The Northwestern Mutual Life Insurance Company, U.S. District Court Western District of Pennsylvania No. CV 19-404, 2020 WL 7027482, (W.D. Pa. Nov. 30, 2020) (Dodge, M.J.)

NO BAD FAITH FOR FAILURE TO LEARN ABOUT OTHER INSURANCE COVERAGE NOT DISCLOSED BY THE INSURED, OR IN ACTIVE CLAIM HANDLING THAT ONLY RESULTED IN A VALUATION DISPUTE (Western District)

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The injured plaintiff had UIM insurance stacked for four vehicles. With stacking, this UIM coverage amounted to $60,000. The insured agreed to settle his claim for $50,000.

After that settlement, the plaintiff brought to the carrier’s attention that his stepson also had an auto policy with the same carrier. Plaintiff took the position that he was an insured under the stepson’s policy as they resided in the same household. If true, this would considerably increase potential UIM coverage from $60,000 to $160,000.

The stepson’s policy, however, listed a different home address. The stepfather told this carrier this was not accurate and an investigation into the stepson’s address ensued.  The carrier ultimately agreed to the additional $100,000 in available UIM coverage, but did not find a factual basis to increase the $50,000 paid to settle the case.

The Insurer’s Claim Handling Concerning Valuation

The court accepted the carrier’s factual recitations from the record. The insured twice agreed with the carrier on the claim’s value, only later to change course and increase his demand.  Instead of arguing over these reversals, the carrier “re-opened, re-evaluated and continued to negotiate with Plaintiff in a prompt and reasonable manner.” Moreover, the carrier did so “despite [the plaintiff’s] repeated refusal for over a year to participate in an SUO [statement under oath], and resistance to providing authorizations for the release of medical records, both of which are investigative tools to which [the insurer] is contractually entitled.”

The court also agreed the insured only gave the carrier “unreasonably small windows of time to respond to his demands, and refused to grant any extensions. … Nevertheless, [the insurer] continued to work with Plaintiff and to explain to him what [the insurer] needed, why [the insurer] needed it, and the basis for [its] determinations regarding his claim.”

The insurer obtained an independent medical examination, years after the injury, from which it concluded there was no basis to increase the settlement sum.  This evaluation was done at a time when the insured repeatedly said he was going in for additional surgery, and this was a basis to increase the claim’s value. As of the time the record was created in the case, however, this surgery had not taken place.

Judge Cercone stated the insurer “reasonably valued Plaintiffs UIM claim … and reasonably took the position that, if Plaintiff did in fact undergo surgery, the claim could be again be re-evaluated at that time.”

Alleged Failure to Determine the Stepson’s Address

The bad faith claim focused on the insurer’s alleged failure to disclose the insured was also covered under the stepson’s policy, as well as his own policy. This in turn boiled down to where the stepson actually resided at the time of the accident at issue, and what information the insurer had about the stepson’s residence in underwriting the stepson’s auto policy.

The record shows the stepson used his biological’s father’s home address in applying for insurance, not his stepfather’s address. Further, there was nothing on the face of the stepson’s underwriting file to indicate the stepson resided with plaintiff and not his biological father. After considerable investigation, the insurer did agree plaintiff was an insured under the stepson’s policy, thus accepting that the stepson in fact resided with plaintiff and not his biological father.  As stated above, however, the insurer refused to increase its settlement sum pending any actual additional surgery and an evaluation thereof.

Bad Faith Analysis

The insured sued for breach of contract and bad faith. The bad faith claim was based on the notion that it was the carrier, not the stepfather, that had a duty to disclose the additional $100,000 in coverage under the stepson’s policy. Thus, the plaintiff alleged the carrier misled the stepfather-insured into thinking there was only $60,000 in coverage, and this created a basis for a statutory bad faith recovery.

The insurer successfully moved for summary judgment on this bad faith claim.

Judge Cercone found “[t]he matter presented to defendant and this court falls far short on the showing needed to permit the finder of fact to arrive at a finding of bad faith.” The stepfather did nothing more than insinuate the carrier: (1) should have been more astute in determining the stepson’s actual address, (2) questioned the stepson on his address, (3) discovered inconsistencies in his address, which (4) “would have and should have detected that [stepson] lived with plaintiffs,” and then (5) would have necessarily resulted in the carrier realizing that the stepson’s policy should have been added to the stepfather’s applicable policy limits.

The court rejected this speculative narrative as falling far short of the kind of reckless or intentional misconduct needed to prove bad faith. The putative failure to uncover the extra $100,000 in coverage was at most negligent, and “an insurer’s mere negligence or bad judgment is not bad faith.”

Moreover, the court clearly did not believe there was even negligence in this case. Judge Cercone described plaintiff’s effort to convert the stepson’s underwriting history “into an unfounded and unreasonable basis for failing to detect [stepson’s] actual residence [as] nothing more than an attempt to insinuate an evidentiary basis for a finding of bad faith.” The plaintiff failed to identify any procedure the carrier failed to follow in concluding the stepson’s address to be with his biological father, which was the address submitted by the stepson and his biological father when originally obtaining the policy, and the address used on the policy.

The court described the case as actually boiling down to a valuation dispute.

As described above, the insurer’s claims handling was reasonable. It considered multiple demands to reevaluate the claim, even after settlement. It also agreed to the additional $100,000 in coverage limits “without meaningful delay once [stepson’s] actual address … was made known … and it verified…”

Judge Cercone states, “[a]gainst this backdrop it is rank speculation to infer that the [insurer’s] principals involved here engaged in a course of conduct with the intent to promote [the insurer’s] financial interest over its fiduciary obligations to plaintiffs, or that they recklessly pursued a course of conduct that had the ability to do so. As noted above, plaintiffs’ attempts to establish the lack of good faith fall woefully short of the mark and are insufficient.” Nothing was identified in the insurer’s claim handling that “even remotely raises a specter of self-dealing.”

Judge Cercone found “no evidence whatsoever that defendant did not investigate, valuate and negotiate with plaintiffs in good faith or stopped doing so during the adjustment process.”

In summing up, Judge Cercone states:

In short, plaintiffs have failed to advance sufficient evidence to permit a finding in their favor on a bad faith insurance practices claim. Plaintiffs’ evidence pertaining to defendant’s failure to uncover [stepson’s] policy during a search for household policy holders in conjunction with [plaintiff’s] UIM claim cannot bear the weight plaintiffs seek to have it shoulder. [The insurer] straightforwardly requested plaintiffs to identify the automobiles owed by any family member residing in their household. They did not identify or even allude to [stepson] and his motor vehicle when so requested. The evidence reflecting the address used in issuing [stepson’s] policy has every appearance of being consistent with honoring the representations and billing requests of its insureds and does not in any event supply clear and convincing evidence that defendant engaged in self-dealing or other similar measures in order to thwart its good faith obligations in adjusting and negotiating [plaintiff’s] UIM claim.”

Date of Decision: November 30, 2020

Bogats v. State Farm Mutual Automobile Insurance Company, U.S. District Court Western District of Pennsylvania No. 2:18CV708, 2020 WL 7027480 (W.D. Pa. Nov. 30, 2020) (Cercone, J.)

SIMPLY DENYING CLAIM OR REFUSING TO PRODUCE UNDERWRITING FILE NOT BAD FAITH; UIPA VIOLATIONS MUST BE A REGULAR BUSINESS PRACTICE TO BE CONSIDERED AS EVIDENCE (Philadelphia Federal)

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This UIM bad faith opinion includes instructive points on factual allegations that only create possible, but not plausible, claims and on the use of alleged Unfair Insurance Practices Act (UIPA) violations as evidence. The opinion also includes the more common observations admonishing against conclusory pleading.

The bad faith claims in this case concern alleged misrepresentations of UIM coverage in connection with stacking, a refusal to provide the underwriting file, and a claim that the insurer forced the insured to file suit just to obtain documents. The court dismissed the bad faith claims, but with leave to amend.

ADEQUATE PLEADING STANDARDS

As with many other cases issuing out of the Eastern District this year, the court made clear that conclusory allegations are given no regard in supporting a bad faith pleading. Like many of those courts, Judge Baylson cited the Third Circuit’s Smith opinion on this point, as well as his own opinions in Eley and Robbins.

There were three factual allegations that went beyond mere conclusory pleading, though still not adequate to state a claim because they only made bad faith possible, not plausible.

Refusal to Pay Not Enough

  1. “Defendant denied Plaintiff’s claim for UIM stacking of benefits for five vehicles….” As to this allegation, Judge Baylson found that “a plaintiff cannot base a bad faith claim on the defendant’s refusal to pay. A disagreement over the amount of a UIM claim is not unusual, and the existence of such disagreement cannot by itself state a viable bad faith claim.” He relied on Johnson v. Progressive Ins. Co., for the proposition that “[t]he underlying facts involve nothing more than a normal dispute between an insured and insurer over the value of an UIM claim. The scenario under consideration occurs routinely in the processing of an insurance claim.”

Refusal to Turn Over Underwriting File

  1. “Defendant refused to provide the underwriting file upon request….” Judge Baylson found the insurer’s alleged “refusal to provide the underwriting document is comparable to the allegation of parallel conduct in Twombly, which ‘gets the complaint close to stating a claim, but without some further factual enhancement it stops short of the line between possibility and plausibility of entitlement to relief.’” He added that “[i]n insurance coverage disputes, underwriting files often contain an insurer’s evaluation of the risks presented on an insurance application, along with other confidential business information. Although a showing of Defendant’s refusal to disclose the underwriting file may be consistent with bad faith, it is also as much in line with ‘a wide swath of rational and competitive business strategy.’”

Don’t Make the Court Speculate that an Alleged Fact Might Possibly be Bad Faith

       3. “Defendant required Plaintiff to file a lawsuit in order to obtain the documents that will confirm the coverage.” Although not addressed separately, this allegation fell under the general concept the court will not infer bad faith because a possibility of bad faith exists. Rather, the factual allegations must stand by themselves as a plausible basis for a bad faith claim. Plausibility means the court does not have to speculate on what the allegation might imply.

UIPA Violations Must Show the Actions at Issue Occurred on a Regular Basis as a General Business Practice

The insured argued that he should be allowed to use UIPA violations as evidence of bad faith. The carrier countered that UIPA violations might only be evidence of bad faith “when the actions in question were a general business practice,” and the insured did not make any allegations to this effect. Judge Baylson found the complaint was devoid of specific factual allegations concerning putative UIPA violations.

Judge Baylson stated that “31 Pa. Code § 146.1 (1978) provides that such violations ‘will be deemed to constitute unfair claims settlement practices’ if they occur with “a frequency that indicates a general business practice.’” Judge Baylson relied on his 2017 Jack decision, to support his conclusion that the insured “pleaded no factual allegations showing that Defendant’s actions occur on a regular basis that constitutes a general business practice.”

Date of Decision: June 22, 2020

Dietz v. Liberty Mutual Insurance Co., U.S. District Court Eastern District of Pennsylvania No. 2:20-cv-1239-MMB, 2020 U.S. Dist. LEXIS 108559 (E.D. Pa. June 22, 2020) (Baylson, J.)

BAD FAITH PLAINTIFF ALLEGED FACTS SUFFICIENT TO WITHSTAND MOTION TO DISMISS IN THIS MORTGAGE INSURANCE CASE (Philadelphia Federal)

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This case involved mortgage insurance. The insured alleged breach of contract, conversion, unjust enrichment, and bad faith. The insurer moved to dismiss on a number of grounds. The court refused to dismiss the bad faith count.

Plaintiff alleged bad faith on the basis that the insurer “denied, rescinded, and curtailed coverage for valid claims and refused to reimburse [the insured] for premium overpayments.” The court found the Complaint “replete with allegations arguing that [the insurer] lacked a reasonable basis for its coverage decisions.” Moreover, the insured alleged the insurer “knew and understood that if it wrongfully rescinded, denied and/or curtailed claims that third parties would seek to have [the insured] repurchase these loans.” Thus, both elements of a bad faith claim were satisfied.

The court found the following factual allegations, among others, sufficient to make out a plausible claim under Rule 8 and Twombly/Iqbal: Curtailing benefits through implementing post-hoc servicing guidelines and standards; misinterpreting policy language to deny claims improperly based on lateness and missing documents; rescinding claims based on “post-hoc re-underwriting” loans it had previously agreed to insure; and refusing to return premium overpayments. Further, the plaintiff actually listed over 5,000 specific loans at issue in its complaint.

These allegations could not be treated as conclusory, and the motion to dismiss the bad faith claim was denied.

Date of Decision: March 22, 2019

Nationstar Mortgage LLC v. Radian Guaranty, Inc., U. S. District Court Eastern District of Pennsylvania CIVIL ACTION NO. 18-03798, 2019 U.S. Dist. LEXIS 48164, 2019 WL 1318541 (E.D. Pa. Mar. 22, 2019) (Pappert, J.)

AUGUST 2018 BAD FAITH CASES: POLICY VOIDED BY JURY ON BASIS OF FRAUDULENT APPLICATION, AND DAMAGES AWARDED TO INSURER (Pennsylvania Superior Court) (Non-precendential)

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The insured sued based on a denial of benefits for a vandalism loss. During the course of pre-suit examinations under oath, the insurer concluded that the policy was obtained by fraud. Thus, in addition to denying the claim, the insurer counterclaimed for common law fraud, breach of contract, statutory insurance fraud and reverse bad faith, based on a false insurance application. The jury ruled for the insurer and voided the policy.

The court awarded damages of over $285,000 to the insurer for claims paid and claim expenses incurred under the now voided policy, subject to a reduction for the return of premiums paid. Post-trial motions were denied, and the verdict was affirmed on appeal.

In upholding the verdict, the Superior Court recognized that fraud required the highest standard of proof known in a civil setting. The jury did not err, however, in finding the standard met. The appellate court found “the record is replete with evidence that [the insured], through an agent, knowingly provided … false, misleading and incomplete information in his insurance application statement.”

The court stated the insured had misrepresented his loss history, failed to disclose a foreclosure complaint, failed to disclose tax judgments against him and failed to reveal “he incurred a federal conviction in the Eastern District of Pennsylvania for filing false corporate tax returns.”

The court also rejected arguments concerning the trial court’s evidentiary rulings. There was no error in allowing evidence relating to a prior conviction for underpaying corporate taxes, and previous tax liens. Nor was there error in allowing testimony from an underwriter to describe underwriting practices during the relevant time period.

Date of Decision: August 15, 2018

Smith v. United States Liability Insurance Company, Superior Court of Pennsylvania, No. 1287 EDA 2017, 2018 Pa. Super. Unpub. LEXIS 2968 (Pa. Super. Ct. Aug. 15, 2018) (Lazarus, Panella, Strassburger, JJ.) (Not precendential)

 

MARCH 2017 BAD FAITH CASES: INSUREDS ALLOWED DISCOVERY OF UNDWRITING MANUAL AND FILES, BUT NOT PERSONNEL FILES (Western District)

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This case involves cross actions for declaratory judgments on a lawyer’s professional liability policy, and bad faith claims by the attorneys against the carrier. The attorneys moved to compel production of the insurer’s underwriting manual and the underwriting files, as well as the personnel files of three employees identified as having worked on the coverage file.

There was no clear case law on production of underwriting files, though the 2011 Consugar case decided by Judge Munley in the Middle District had some relevance. Thus, as with most discovery issues, the court looked at the particulars of the case before it.

The court found that production of the underwriting materials was proper. Although the insured did not bring any underwriting claims, the court observed that in supporting their bad faith claim, the attorneys argued that there were premium increases imposed by the insurer relating to commencement of the underlying litigation. Thus, “[g]iven the bad faith claim and the related allegations, the underwriting materials may well be relevant.” [Note: The opinion does not indicate whether the bad faith claims are under section 8371, common law contractual bad faith, or both. Thus, the question as to whether a premium increase can constitute the actionable denial of a benefit under a statutory bad faith claim is not clear.]

The insureds were not successful in obtaining the personnel files. They argued they were entitled to the information in the personnel files to gain knowledge about “the insurer’s corporate policy, standards, and procedures … relating to [the insurer’s] state of mind and relationship with its employees, and information regarding the relationship between the corporate policies and the training of the claims employees”

“Because there is a strong public policy against disclosure of personnel information, such requests are subject to a heightened relevancy standard.” Again, there was no clear case law, and the court stated it must look at the particular facts of the case. Relevant factors in the discovery of personnel files include “whether there is another way for the requesting party to obtain the information sought … whether there is other evidence suggesting the personnel files are likely to include relevant information … how broad the request is … and how closely the personnel files relate to the requesting party’s claims.”

The balance weighed against production. Although the “request is relatively narrow in that it asks for only the files of the employees who worked on its claim and has agreed to a number of redactions, the other factors do not meet the heightened relevancy requirement.” “The reasons supplied … for wanting the personnel files such as whether the claims employees had some incentive to deny its claim and the nature of the relationship between the company and its employees could likely be obtained through the depositions of those employees.” “Likewise, [the insured] has not presented any other evidence to support the[] theory that the personnel files are likely to include information relevant to their claims.” Thus, the insureds could not meet the heightened standards in obtaining personnel files.

Date of Decision: March 7, 2017

Westport Ins. Corp. v. Hippo Fleming & Pertile Law Offices, NO. 15-251, 2017 U.S. Dist. LEXIS 31659 (W.D. Pa. Mar. 7, 2017) (Gibson, J.)

 

SEPTEMBER 2014 BAD FAITH CASES: INSURER’S ARGUMENTS THAT BAD FAITH STATUTE DID NOT ENCOMPASS POLICY SOLICITATION CONDUCT OR POST-CLAIMS UNDERWRITING WERE INAPPOSITE WHERE INSURED ALLEGED THAT INSURER USED ALLEGEDLY FRAUDULENT APPLICATION FORMS AS A BASIS TO DENY COVERAGE (Western District)

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In Fields v. Gerber Life Insurance Company, the case involved an out-of-state insurer licensed to sell endowment life insurance policies, marketed as college savings plans, through the internet and telephone.  Plaintiff obtained a policy for her seriously infirm infant grandson.  She was forthcoming on the telephone about the child’s condition, but was allegedly not asked to put anything in writing, which would have been electronically under the circumstances.

The insurer issued a $50,000 life insurance policy for the baby, attaching unsigned and unverified application forms prepared by and/or on behalf of the insurer.  The grandmother alleged that she never agreed in writing to the answers placed on the medical questionnaire which had been completed by the insurer’s representative after the follow-up telephone call.

Unfortunately, the child died.  The grandmother notified the insurer, and completed all forms required by the insurer to obtain the death benefits due under the policy. Upon receiving notice, the insurer obtained the child’s medical records and began to investigate whether the grandmother made a material misrepresentation in the application process. She allegedly cooperated fully at all times in this process.  The carrier denied coverage and canceled the life insurance policy allegedly “based upon information contained on the application forms attached to the policy, knowing that the forms were bogus and should never have been used in denying payment for the loss.”

The grandmother brought various claims, including a bad faith claim.  The insurer sought to dismiss the claim.  It alleged that plaintiff was seeking relief for improper solicitation and/or post-claims practices, neither of which is encompassed within the bad faith statute under controlling Pennsylvania Supreme Court and Third Circuit precedent; the former on the basis that there could have been no denial of benefits prior to there being a policy in place and the statute was not aimed at deceptive or fraudulent solicitations, and the later because an insurer can investigate a questionable claim.

The court concluded, however, that the grandmother’s claim was not premised solely on the theory that the insurer engaged in improper solicitation or post-claim underwriting practices. By way of one example, she averred that the insurer attached improper and illegal documentation to the insurance policy, and used that documentation to deny coverage. Thus, the bad faith claim could not be dismissed.

Date of Decision:  September 2, 2014

Fields v. Gerber Life Ins. Co., 2:14-cv-727, 2014 U.S. Dist. LEXIS 121671 (W.D. Pa. September 2, 2014) (McVerry, J.)

MAY 2014 BAD FAITH CASES: COURT DENIES MOTION TO DISMISS BAD FAITH CLAIM AGAINST HEALTH INSURER WHERE POLICY WAS RESCINDED ON BASIS OF ANSWER TO QUESTION IN APPLICATION THAT WAS NOT CLEARLY MATERIAL TO THE DISEASE FOR WHICH THE INSURED WAS BEING TREATED, AND DISCOVERY INTO BASIS FOR RESCISSION WAS NEEDED; UTPCPL CLAIM DISMISSED UNDER ECONOMIC LOSS DOCTRINE (Middle District)

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In Muckelman v. Companion Life Insurance Company, the insured brought claims against his health insurer. The insured was treated for cancer during the policy period, and alleged that he had requested that the insurer give authorization for additional specialized treatments beyond what he was undergoing. After months of review, without any prior notice to the insured, the carrier rescinded the policy and returned the premium.

The rescission was based upon a failure to provide information in the insurance application, as to the results of a medical test from some years earlier. On the record, there did not appear to be a dispute that this alleged failure to disclose these results was either fraudulent, intentional, or material. The carrier refused to pay the outstanding costs for the treatments taken, as well as for the additional treatments. The insured brought bad faith, breach of contract, and UTPCPL claims.

On the bad faith claim, the court made general statements of the law in beginning its analysis. It stated, among other things, that section 8371 bad faith concerns the duty of good faith and fair dealing in the parties’ contract and the manner in which an insurer discharged its obligation to pay for a loss in the first party claim context.

While bad faith may be found in circumstances other than an insurer’s refusal to pay, a reasonable basis is all that is required to defeat a claim of bad faith. Per Pennsylvania’s Superior Court, since the statute is not limited to an insurer’s bad faith in denying a claim, a plaintiff may also successfully assert an action for an insurer’s bad faith in investigating a claim.

Examples include a failure to conduct a sufficiently thorough investigation to yield a reasonable foundation for the insurer’s action based upon available information; and failure to communicate with the claimant. The court also stated that delay is a relevant factor in determining whether bad faith has occurred. Neither negligence nor bad judgment, however, constitutes bad faith. Rather, to support a finding of bad faith, the insurer’s conduct must be such as to import a dishonest purpose, and the plaintiff must show that the insurer breached its duty of good faith through some motive of self-interest or ill will.

In his complaint, the insured alleged that (1) the insurer delayed payment, resulting in economic harm; (2) the insurer denied the use and benefit of monies to which the insured was entitled; (3) the carrier’s interest was misplaced; (4) the insurer engaged in post-claim underwriting; and (5) the insurer decided to rescind the policy without a reasonable basis, and in violation of the Patient Protection and Affordable Care Act. The court found a plausible claim pleaded under Twombly/Iqbal.

The complaint, viewed in the light most favorable to the plaintiffs, contained allegations of potentially unacceptable delays in denying rights under the policy and paying benefits under the policy. The insured alleged that for a period of 10 months, the insurer was allegedly aware of the insurance claims submitted by the plaintiffs; but rather than providing a prompt response, the insurer allegedly misled the plaintiffs into believing that their claims would be covered under the insurance policy.

Moreover, the length of the delay was suspect given the insurer’s ultimate reason for denying coverage for the cancer treatments and rescinding the policy; a reason apparently unconnected to the insured’s condition for which he sought insurance coverage, and a reason that should have and could have been easily established once the insurance application was first submitted.

Additionally, prior to rescinding the policy, the insurer did not notify the insured that his claim would be denied. Further, the insurer never informed the insured that his response to application question at issue was material. Similarly, it was not clear that the insured’s answer was in fact material, fraudulent, or intentional. In relation to the one question at issue on the application, there was evidence of only a single doctor visit that occurred five years before applying for insurance coverage.

At the pleading stage, finding that this was a material misrepresentation or that the insurer engaged in a sufficiently thorough investigation “would be putting the cart before the horse and have the potential effect of chilling litigation in this area of the law.” The court stated that: “Health insurance companies would effectively be permitted to simply comb through insurance applications to later find reasons for denying coverage knowing full-well that the insured, despite a well-pleaded complaint, would not be permitted to look behind the curtain to see the wizard.” Thus, the case called for discovery on the insurer’s claims handling, and the motion to dismiss was denied.

The Magistrate Judge then found the UTPCPL claim barred by the economic loss doctrine, following Judge Rambo’s decision in Sarsfield v. Citimortgage, Inc., 707 F.Supp.2d 546 (M.D. Pa. 2010).

Date of Decision: January 15, 2014 Report and Recommendation, adopted March 12, 2014

Muckelman v. Companion Life Ins. Co., CIVIL NO. 4:13-CV-00663 , 2014 U.S. Dist. LEXIS 32868, (M.D. Pa. January 15, 2014) (Schwab, M.J.) (Report and Recommendation),

adopted, 2014 U.S. Dist. LEXIS 31960 (M.D. Pa. Mar. 12, 2014) (Brann, J.)

JUNE 2013 BAD FAITH CASES: COMPLAINT WAS LEGALLY SUFFICIENT TO SURVIVE MOTION TO DISMISS FOR DENIAL OF COVERAGE FOR CLAIMS ARISING FROM DEFAULTED MORTGAGE LOANS VIEWED AS POST-CLAIM UNDERWRITING; AND USE OF 5 EXEMPLARY INCIDENTS OUT OF NEARLY 250 DISTINCT EVENTS LEGALLY SUFFICIENT (Western District)

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The court considered whether pleadings alleging bad faith conduct in the handling of claims arising from the mortgage crisis were legally sufficient. Plaintiff is a bank that provided home mortgage loans to individual consumers. These loans were insured by defendant (“the carrier”) through “flow” policies, intended to insure against the risk a borrower will default on a particular, individual loan, even if that loan is sold in the secondary market. The loans were also insured through a “pool” policy, which provides coverage to a group of loans, and is intended to protect the lender against the risk of exposure to investors in the event of adverse economic conditions or increased borrower defaults.

Plaintiff claimed to have paid all premiums and complied or substantially complied with all of its duties under the policies, entitling it to coverage for 248 defaulted loans. Therefore, the carrier’s rescission and/or cancellation of the policies constituted a breach of contract and bad faith conduct. In its complaint, plaintiff used five loans which were denied coverage as “example loans” to demonstrate the breach of contract and bad faith conduct of the carrier.

Plaintiff sought declaratory judgment as to how the policies should be interpreted and applied to the various disputed loans; money damages for breach of contract; and compensatory and punitive damages for bad faith pursuant to Pennsylvania and Ohio law.

The carrier filed a motion to dismiss pursuant to Rule 12(b)(6), alleging plaintiff misrepresented material information, making the cancellation or rescission of its policies appropriate. The carrier also argued each loan should be considered separately, and that broad declaratory relief would be inappropriate. Furthermore, the complaint only made conclusory statements as to the 243 loans not used as “example loans” in the complaint. The carrier also argued the loans were governed by Minnesota and Indiana law pursuant to the choice of law provision in the insurance contracts, preventing a claim of bad faith.

The Third Circuit instructs district courts to apply a three step test in assessing the legal sufficiency of a complaint.

First, the court must “take notes of the elements a plaintiff must plead to state a claim.”

Second, the court should identify allegations that are not entitled to the assumption of truth because they are not more than conclusions.

Finally, where there are well-pleaded factual allegations, a court should consider the veracity of the allegations and “whether they plausibly give rise to an entitlement for relief.” In performing the final step, the court must determine whether a complaint does more than just allege an entitlement to relief, requiring the court “to draw on its judicial experience and common sense.”

The Court found the complaint complied with the Federal Rules of Civil Procedure, and that interpretation of the rights and duties of the parties under an insurance contract is an appropriate scenario for declaratory relief to be provided. The court declined to dismiss any counts of the complaint, believing the declaratory relief issues would be better resolved on a more developed record.

Furthermore, the bad faith claim was properly pled as it provided a “short and plain statement” as required by Fed. R. Civ. P. 8, and gave the carrier fair notice of the conduct which plaintiff alleged was in bad faith. Furthermore, to dismiss those claims based on the choice of law provision defense before those defenses were fully developed would be premature.

Date of Decision: May 23, 2013

PNC Bank, N.A. v. Republic Mortg. Ins. Co., Civil Case No. 2:12-cv-1470, 2013 U.S. Dist. LEXIS 72872 (May 23, 2013 W.D. Pa.) (McVerry, J.).