MAY 2015 BAD FAITH CASES: CONTRACTUAL AND STATUTORY BAD FAITH MAY BE SUPPORTED BY EVIDENCE THAT AN INSURER MADE A MISREPRESENTATION OR FAILED TO COMMUNICATE WITH INSURED DURING A MEDIATION, IF THAT ACTION OR INACTION CAUSED THE INSURED TO MAKE A PERSONAL CONTRIBUTION TO A SETTLEMENT WITHIN POLICY LIMITS; THOUGH THE INVITATION TO CONTRIBUTE ITSELF WAS NOT ACTIONABLE IN THIS CASE (Western District)

In McMahon v. Medical Protective Company, the court decided cross-motions for summary judgment in a case where the insured offered to contribute some of her own money to settle a claim that could lead to a verdict in excess of policy limits if brought to trial.  The insured alleged both contractual bad faith and statutory bad faith.  The court went through a lengthy analysis on the nature of contractual bad faith before reaching a mixed ruling.

A third party filed a dental malpractice lawsuit against the insured (plaintiff in the bad faith case), and her insurance company tendered a defense. In addition to counsel appointed by the insurer, the insured engaged her own personal counsel, who demanded that the case be settled within the policy limits.

The insurer originally believed the claim to be winnable at trial, but later changed it strategy in favor of settlement. Nine days before the scheduled trial date, the parties participated in a mediation with the underlying claimant, following the change in the insurer’s defense strategy to settle the case, rather than defend through trial. The insured was present at the mediation session along with her personal counsel, as well as the insurer’s claims manager, and defense counsel. The negotiations moved slowly because of the large gap between demands and offers, and the insured ultimately agreed to contribute from her own personal funds to facilitate a settlement. The insurer refused to reimburse her.

After the insurer refused to reimburse the insured for her personal contribution, the insured brought claims against her insurer for breach of contract, breach of the implied duty of good faith and fair dealing under that contract, and statutory bad faith. The insured argued that the carrier “acted in bad faith [during the mediation] by not informing her about its internal settlement limits and by inviting her to contribute personally to the settlement.”

The two bases for the breach of contract claim were that (1) the insurer failed to comply with the terms of the insurance policy, and (2) the insurer breached the implied duty of good faith and fair dealing. The insured alleged that the insurer breached the insurance contract by failing to pay the entire settlement amount. In finding for the insurer, the court looked at the plain language of the policy, which read “[t]he Insured shall not contract any expense nor make any … settlement of a claim hereunder, except at the Insured[‘]s own cost and responsibility, without the written authorization of [Insurer].” The court agreed with the insurer that the $50,000 paid by the insured was voluntary, and rejected the insured’s argument that the language did not apply to settlements jointly contracted by the insured and insurer.

On the contractual bad faith claim, sometimes referred to as Cowden bad faith based on the seminal Pennsylvania Supreme Court case, the court observed a lack of clarity on applicable law. The court looked at the Eastern District’s 2007 Dewalt decision, questioning Terletsky’s application to contractual bad faith claims, i.e., that in providing statutory bad faith an insured must (1) prove the insurer’s position was unreasonable and (2) prove at least reckless disregard of that unreasonable position. Rather, Dewalt found that Cowden bad faith could be based upon “an insurer’s negligence or unreasonableness in handling the potential settlement of claims against its insured, and does not require proof of recklessness or purposefulness.” Dewalt did, however, still require prove by clear and convincing evidence for contractual bad faith; the same standard as statutory bad faith.

The court then observed that Cowden bad faith is typically for a failure to settle that results in an excess verdict.  However, the court was not willing to limit contractual bad faith to that scenario only.  It cited to the 2013 Bodnar decision for other examples of contractual bad faith, that went beyond a mere delay in settling and/or paying policy limits on the eve of trial: “failure to conduct a complete and thorough investigation of the facts giving rise to the claim, or the law supporting it, the refusal to enter into good faith settlement negotiations or the conduct of “surface” negotiations undertaken with no genuine intent to find a basis for settlement, the rejection without counterproposal of all offers made by the third party for settlement, the filing and pursuit of actions for declaratory judgment without a reasonable evidentiary basis for doing so, if persisted in for an unreasonable period of time, will state a cause of action for breach of contract and for bad faith even if ultimately, after the insured has been prejudiced by the insurer’s conduct delaying resolution of the claim against it, the insurer pays the policy limits prior to the entry of a verdict.”

The court then examined the insured’s arguments that the insurer acted in contractual bad faith during the mediation session by failing to disclose its full settlement authority to the insured at several points during the mediation, and by inviting the insured to contribute to the settlement. The court observed that under the Pennsylvania Supreme Court’s Birth Center decision “[w]here the insurance company takes control of the decision to settle or litigate actions brought by third parties, the insurance company owes its policyholder a fiduciary duty, among other things, to engage in good faith settlement negotiations.”

However, “the duty of good faith owed by an insurer to its insured does not require the same level of selflessness as an agent-principal fiduciary relationship. Birth Center, when understood in this light, does not require disclosure of “all relevant information” such as its internal settlement authority or negotiation strategy.”  Thus, the court found no absolute fiduciary duty to reveal the insurer’s settlement authority and strategy, consistent with the principle that an insurer cannot place its interests over the insureds, but need not subordinate its interest to the insured either.

The court then identified significant exceptions to this seemingly limited fiduciary duty. “Although there is no requirement that an insurer disclose the upper limit of what it is willing to pay, the insurer may not make misrepresentations about that information to the insured.”  It took this reasoning from a prior case addressing a first party claim, but found the logic applicable to third party claims as well.  The court then added that an insurer’s failure to communicate with an insured can also be evidence that the insurer placed its interests above those of the insureds.

In sum, the court stated: “The court predicts, therefore, that under Pennsylvania law, a bad faith claim may be supported by evidence that an insurer made a misrepresentation to the insured or failed to communicate with the insured, if the misrepresentation or failure to communicate caused the insured to make a personal contribution to a settlement within policy limits.”

On the specific facts at issue, the court found it was a close call with respect to the disclosure issue, and reasoned that a factual dispute existed with regards to whether the insurer acted in bad faith by not revealing to the insured the full settlement authority, even after the insured offered to contribute her own money.  In denying summary judgment to the insurer, the court stated: “A reasonable jury could find that [the insured] acted negligently, given its duty to afford [the insured’s] interests the same consideration as its own, because: (1) [the insurer’s representative] told [the insured’s personal counsel] that [the insurer] would not offer more than $1.3 million, even after the mediation; (2) [the insurer’s representative] did not tell [the insurer’s claims manager] that [the insurer] would consider offering more than $1.5 million after the mediation, if necessary to settle the claim; (3) [the claims manager] told [the insured] and [her personal counsel] that $1.5 million was the limit of his authority; and (4) when [the insured] placed her own money on the table, neither [of the insurer’s personnel] told her that [the insurer] would offer more, if necessary, to settle the case.”  On this basis, “[a] reasonable jury could conclude that these actions or inactions caused [the insured] to contribute her own money to the settlement.”

As to the second basis for contractual bad faith, the court did grant summary judgment to the insurer. The insured alleged that one of the appointed defense attorneys suggested that she contribute her own funds to settle. The court determined that “an insurer’s invitation to contribute to a settlement does not, as a matter of law, constitute bad faith” and moreover, the attorney was not acting as an agent of the insurer. Thus, the only issues remaining for trial on contractual bad faith were whether the insurer “made a misrepresentation or omitted to provide material information and whether that conduct or failure constitutes contractual or statutory bad faith.”

Finally, the court addressed the statutory bad faith claim under 42 Pa.C.S. § 8371.  The insured made the same argument that the insurer “acted in bad faith by not informing her about its internal settlement limits and by inviting her to contribute personally to the settlement.” The court readily granted summary judgment on the invitation to contribute claim, since it had already granted summary judgment on the lower negligence standard on the same issue.

It then stated: “With respect to the alleged misrepresentation about whether [the insurer] was willing to offer more to settle, it is even a closer call whether a reasonable jury could find that this rises to the level of recklessness.” However, based on the details of the negotiations and the settlement numbers discussed between the insurer’s representatives with the insured and her personal counsel, the court found that a reasonable jury might find the insurer’s actions and inactions “to be at least reckless”.

Date of Decision: March 20, 2015

McMahon v. Med. Protective Co., CIVIL ACTION NO. 13-991, 2015 U.S. Dist. LEXIS 35131 (W.D. Pa. Mar. 20, 2015) (Conti, C.J.)