MARCH 2016 BAD FAITH CASES: PHILADELPHIA COURT (1) APPLIES PENNSYLVANIA LAW TO STATUTORY BAD FAITH CLAIM AFTER CONDUCTING CHOICE OF LAW ANALYSIS; (2) FINDS GENUINE ISSUE OF MATERIAL FACT EXISTED AS TO WHETHER INSURER’S CLAIMS HANDLING OVER PAYMENTS OF DEFENSE COUNSEL FEES AMOUNTED TO BAD FAITH; (3) DISMISSES INSURED’S BREACH OF FIDUCIARY DUTY CLAIM AFTER FINDING IT WAS REDUNDANT OF BAD FAITH CLAIM (Philadelphia Commerce Court)
In IMS Health Inc. v. Zurich American Insurance Company, the insured brought action against its insurer. Suit previously had been filed in Philadelphia’s federal district court against the insured for tortious interference with contract and unfair competition under Pennsylvania common law. The insured tendered the defense, and the insurer agreed to defend the Philadelphia federal action under a reservation of rights.
After an attorney fee rate dispute between the insured and the insurer, the insurer filed a declaratory judgment action in the United States District Court for the District of Connecticut concerning coverage as well as rates payable to the insured’s two sets of attorneys. Shortly thereafter, the insured filed the instant action in the Philadelphia Commerce Court against the insurer, and both parties filed partial motions for summary judgment in the Commerce Court.
The Commerce Court first addressed the insured’s claim that application of a 10% discount by the insurer on already reduced rates predetermined by the insurer constitutes a breach of the duty to defend and is bad faith. As a question of fact existed as to whether the insurer applied the discount improperly, the court refused to grant summary judgment on this issue. Next, the court found that Connecticut law applied on the issue of whether the insurer could seek recoupment of attorney’s fees paid to defend the insured, a remedy not available under Pennsylvania law.
The court reached a different decision on the applicability of Pennsylvania law on bad faith, on the issue of bad faith in claims handling in the non-payment of defense costs for the Philadelphia federal action.
The insurer argued that Connecticut law should apply to the bad faith claim, while the insured argued that Pennsylvania law should apply. The court found that a true conflict existed, as Connecticut recognizes a common law bad faith claim based on breach of an implied covenant of good faith and fair dealing as well as two statutory claims, but does not recognize a tort of bad faith based on claims mishandling.
However, Pennsylvania provides for a private cause of action for bad faith insurance disputes under its bad faith statute, which can include a bad faith claim for claims handling. In this case, the claims handling at issue was the calculation and payment of attorneys’ fees to the insured’s defense counsel in the federal action.
After conducting a conflict of law analysis, the court found Pennsylvania had the greater interest in applying its bad faith statute to “curtail certain bad faith acts by insurers” by “formally imposing a duty of good faith on insurers based on the apparent determination that such a provision was necessary to deter bad faith.”
The court went on to deny summary judgment under Pennsylvania law, as genuine issues of material fact existed as to whether the insurer’s claims handling concerning the attorney’s fees amounted to bad faith.
Finally, the court granted the insurer’s motion for summary judgment on the breach of fiduciary duty claim filed by the insured, reasoning that Pennsylvania law “does not recognize a separate tort-law cause of action for breach of fiduciary duty against an insurer” aside from certain exceptions, and that Pennsylvania courts have dismissed claims for breach of fiduciary duty in the insurance context as “duplicative of statutory bad faith claims.”
Here, the insured’s claim for breach of fiduciary duty arose from the same allegations of misconduct concerning the claims handling as to attorneys’ fees. Accordingly, the breach of fiduciary duty claims was found to be redundant of the bad faith claim and dismissed.