JULY 2018 BAD FAITH CASES: (1) DENIAL FOR LATE NOTICE, WITHOUT A SHOWING OF PREJUDICE, CAN BE THE BASIS FOR BAD FAITH; (2) NO BAD FAITH WHERE NO COVERAGE DUE (Western District)

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Today we discuss two opinions issued by Western District Judge Hornak on July 17th and 18th.

The key issue in the FAPD bad faith case was the carrier’s coverage denial based on late notice. The insured argued that the insurer had to show prejudice before denial, but the insurer argued that prejudice was only relevant to coverage, not bad faith. Judge Hornak of the Western District disagreed, and found that a coverage denial based on late notice that did not create prejudice could be a basis to assert that the denial was unreasonable, meeting the first element of a statutory bad faith claim.

The complaint further stated a plausible claim that this denial was knowing or reckless. A key factor was the alleged failure to adequately investigate the loss before denying the claim. Thus, the court refused to dismiss the bad faith claim.

As background before wrestling with the late notice/prejudice issue, the court included the statement that “the insured must ultimately show that the insurer breached its duty of good faith through some motive of self-interest or ill will.” The Supreme Court has made clear that while showing self-interest or ill-will may provide evidence to support a bad faith claim, these are not required elements of a bad faith claim.

The court also gave a list of some conduct that could constitute bad faith: “an unreasonable delay in handling claims; a frivolous or unfounded refusal to pay; a failure to communicate with the insured; acting in a dilatory manner . . . . A bad faith claim may also arise when an insurance company conducts an inadequate investigation.” As noted many times on this blog, there is a real question whether conduct that does not deny or delay a benefit can be bad faith standing alone.

This is consistent with Judge Hornak’s opinion issued the following day in Campbell, stating: In light of the dismissal of the Breach of Contract claim, the Bad Faith claim cannot survive. Frog, Switch & Mfg. Co. v. Travelers Ins. Co., 193 F.3d 742, 751 n.9 (3d Cir. 1999) (“[W]here there was no duty to defend, there was good cause to refuse to defend against a suit.”).
Dates of Decision: July 17, 2018 and July 18, 2018

FAPD, LLC v. Auto-Owners Insurance Co., No. 2:18-cv-00428, 2018 U.S. Dist. LEXIS 118776 (W.D. Pa. July 17, 2018) (Hornak, J.)

Campbell v. State Farm Fire & Cas. Co., 2:18-cv-00292, 2018 U.S. Dist. LEXIS 119973 (W.D. Pa. July 18, 2018) (Hornak, J.)

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