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Sheila Rankin, the insured, was involved in a motor vehicle accident in September, 2007, in which she injured her left heel. At the time of the accident, she was insured by State Farm and her policy included uninsured motorist (UIM) coverage. However, instead of initially attempting to recover against her policy with State Farm, Plaintiff settled directly with the tortfeasor for $87,500. State Farm allowed this and waived its right to pursue a subrogation action against the tortfeasor. Then, nearly three years after the accident, Plaintiff decided to pursue an uninsured motorist claim with State Farm.

Plaintiff submitted a UIM claim of $200,000 to cover her medical expenses. State Farm denied, reasoning that plaintiff’s injuries did not warrant that type of settlement. It should also be remembered, though, that State Farm had waived subrogation. And even putting that waiver to the side, the tortfeasor’s prior settlement with Rankin would likely have precluded State Farm from bringing another claim against it arising from the same set of facts. In other words, if State Farm had honored Plaintiff’s claim, it likely would have had no recourse in recouping any of the settlement. This might serve as an alternate explanation (aside from the validity and extent of plaintiff’s injuries) as to why State Farm denied Plaintiff’s claim. It might also explain why the court ultimately found this denial of coverage to be about more than a mere dispute over a claim’s valuation and as such refused to dismiss plaintiff’s bad faith claims.

Plaintiff initially brought suit against State Farm in the court of common pleas for Indiana County, PA, alleging breach of the insurance contract and bad faith for failing to objectively evaluate her UIM claim. Plaintiff also alleged that State Farm owed her a fiduciary duty in the UIM context. State Farm removed to the Western District on diversity grounds, where it argued that it could not be held liable for bad faith based upon a valuation dispute. State Farm also moved to strike the fiduciary duty allegations from the bad faith claim and similarly moved to strike Plaintiff’s request for attorney’s fees and punitive damages.

The court granted defendant State Farm’s motion to strike the plaintiff’s requests for punitive damages and attorneys’ fees but denied State Farm’s motions to strike and dismiss in all other respects.

The court eschewed State Farm’s arguments that Pennsylvania’s bad faith statute did not extend to uninsured motorist claims. In fact, it found that the bad faith statute applies to UIM claims in much the same way as it applies to other insurance benefit claims in that the insurer’s duty to the insured continues to be one of good faith and fair dealing. And, while the court did recognize that there are aspects of UIM claims which make them unique—like the fact that they may contain elements of both first and third party claims and may pit the insured and insurer as adversaries—it was adamant that the insurance company’s duty of good faith persists throughout changing dynamics in its relationship with the insured. That being said, the court made certain to mention that this duty does not require an insurer to sacrifice its own interests by blindly paying each and every claim submitted by an insured in order to avoid a bad faith lawsuit. What is required is that the insurer evaluates the value of each claim in good faith. In other words, an insurer cannot evaluate a claim, gauge the extent of the insured’s injury and then make an intentionally low offer. Along these lines, numerous cases have recognized that when insurance companies make initial low ball offers and then increase their offers with no intervening new information, it is likely that they have acted in bad faith.

Here, State Farm made an initial offer of settlement of $40k and then just 19 days later, without any new information, raised the settlement offer to $100k. However, because it was unclear as to whether State Farm evaluated the claim before making a settlement offer, it cannot be determined whether it intentionally “low-balled” the insured. Thus, more information would be needed in order for the court to rule that State Farm acted in bad faith.

Finally, in terms of State Farm’s motion to strike the allegations of a fiduciary relationship, the court noted that an insurer can be the fiduciary of an insured within the context of a UIM claim, suggesting that the insurer’s duty to act in good faith is actually based upon the existence of this fiduciary relationship.

Date of Decision: April 27, 2011

Rankin v. State Farm Mut. Auto. Ins. Co., Civil Action No. 11-331, United States District Court for the Western District of Pennsylvania, 2011 U.S. Dist. LEXIS 55305, (April 27, 2011) (Mitchell, U.S.M.J.)

This Report and Recommendation was adopted as the Opinion of the United States District Court for the Western District of Pennsylvania by Order of the Honorable Nora Barry Fischer on May 24, 2011.