COURT BIFURCATES AND STAYS DISCOVERY ON BAD FAITH WHERE THAT CLAIM CENTERS ON COVERAGE DENIAL RATHER THAN CLAIM HANDLING (Philadelphia Federal)
The insured denied coverage in this UIM case, and the insured sued for breach of contract and bad faith. The case centered on whether the household exclusion barred coverage. The insurer took the position the household exclusion applied and the insured disputed the insurer’s interpretation of Gallagher v. GEICO in taking that position. [Note: This 2019 Pennsylvania Supreme Court case held the household exclusion was void as a matter of law. The breadth of Gallagher’s application to other factual contexts is hotly debated in courts across Pennsylvania.]
The insurer successfully moved to bifurcate and stay discovery on the bad faith claim.
The court distinguished between bad faith actions based on claim handling failures and those based on coverage denials. In this case, most of the bad faith allegations went to coverage, not claim handling. The court observed that “[t]hese allegations will become moot if it is determined that the Household Vehicle Exclusion applies and [the insurer] was not required to provide coverage to [the insured] under the Policy.”
Magistrate Judge Rice cited Magistrate Judge Carlson’s recent Dunleavy decision for the proposition “if an insurer properly denies coverage in accordance with the policy, then it could not have acted in bad faith by denying coverage,” and Judge Wolson’s decision in Live Face on Web, LLC for the principle that once the court concludes there is no contractual obligations to pay benefits under an insurance policy, the refusal to provide coverage “cannot have been unreasonable”.
In the same way, “if it is determined that the Household Vehicle Exclusion did not apply and [the insurer] breached the Policy by failing to provide coverage, the trier of fact on the bad faith claims can focus solely on [the insurer’s] motivations and intent in denying coverage. Thus, trying the breach of contract count first will narrow the issues to be decided in the bad faith count and result in efficiency and judicial economy.”
Magistrate Judge Rice also observed that the breach of contract claim centers on coverage and an exclusion that “will depend primarily on the terms of the policy, Pennsylvania law, causation, and … damages.” By contrast, “the bad faith claim concerns ‘more elusive concepts’ such as [the insurer’s] evaluation and investigation of the claim, motive, and response to [the insured]. … This evidence is irrelevant to the breach of contract count.” He observed that “’information concerning how an insurer investigated and evaluated a claim is simply immaterial to the issue of whether coverage is required under the policy.’”
In addition, “[b]ecause bad faith involves allegations of unreasonable and reckless behavior and requires a higher burden of proof, it also could confuse the jury and cause prejudice to [the insurer].”