NOVEMBER 2016 BAD FAITH CASES: FOR CHOICE OF LAW PURPOSES IN BAD FAITH CASE, PLACE OF LOSS IS INSURED’S BUSINESS LOCATION; INSURER’S TREATING SIMILAR CLAIMS DIFFERENTLY IS NOT A PER SE BASIS TO SHOW BAD FAITH (Middle District)
The insured failed to allege a plausible bad faith claim in this case.
The insurer had defended the insured under a reservation of rights in two state actions. The insurer brought suit for declaratory relief in Pennsylvania on those two claims, seeking a ruling that it had no duty to defend or indemnify. It denied coverage in a third state (Vermont) action, apparently without any agreement to defend under a reservation of rights, and amended its Pennsylvania declaratory judgment action to cover this third case as well. The insured brought a counterclaim for bad faith for this last denial of coverage, focusing on the different treatment between the third action and the first two actions.
The Court first had to address a choice of law analysis. Although the states’ bad faith laws at issue were likely not in conflict, the court carried out the analysis to be thorough. The Court found that a key element was where the insurance benefit was denied, in cases where an insured is claiming breach of contract and bad faith. The denial is located at the insured’s place of business, since this is where the economic impact of the denial occurs. In this case, that was Pennsylvania. Further, there were other factors favoring application of Pennsylvania law.
The Court then addressed the insurer’s motion to dismiss the bad faith claim. The following allegations failed to set out a plausible claim under Pennsylvania bad faith law:
The insurer does not have a good faith basis for its denial of a defense to [the insured] in the Vermont Action.
The insurer agreed to defend the New York and Massachusetts Actions based on similar allegations as those contained in the Vermont Action and has at all times continued to defend the New York and Massachusetts Actions.
The insurer’s decision to deny a defense to [the insured] in the Vermont Action while agreeing to defend the New York and Massachusetts Actions is arbitrary, capricious and/or frivolous.
The Vermont Plaintiff’s claim for property damage and/or bodily injury falls within the Policy’s coverage and the products completed operations coverage and [the insured] is entitled to a defense for the claims asserted by the Vermont Plaintiff.
The insurer’s denial of coverage for the Vermont Plaintiff’s claim was made in bad faith.
The insured is entitled to recover damages for the insurer’s bad faith handling of the Vermont claim regardless of the law that applies.
The Court found that, even where claims are similar, denying some claims and covering others is not per se bad faith. The court gave the example that there could be 5 similar claims, none of which the insurer believed in good faith merited coverage. However, it might offer coverage for a subset of those cases “based upon a calculated business judgment, risk avoidance, litigation forecasts, etc.” Thus, “’similarity’ among claims is a poor predictor of bad faith denials in cases where either the claims’ alleged similarity or the claims’ coverage under the policy is not clearly established.”
The Court went on to observe that the insured “points out that coverage of the prior two claims to which [insured] compares the instant action was actually made under a reservation of rights. I consider it a poor use of judicial resources to create judicial rules that make it costlier for insurers to offer initial coverage under a reservation of rights letter. Were Defendant’s argument accepted, insurers would be less willing to offer coverage while a claim was initially being investigated for fear that one coverage decision might be viewed as an admission as to that claim or a comparable one in related litigation. Similar policy justifications underlie determinations by the Federal Rules of Evidence mandating that subsequent remedial measures and offers to pay initial medical or hospitalization costs be deemed irrelevant in associated legal proceedings.”
Finally, the Court found that “most damning for Defendant’s bad faith counterclaim, [the insurer] has provided the Court a copy of its coverage denial letter. Plaintiff has accurately characterized its declination letter as ‘detailed.’ The ten-page, single-spaced letter sets forth, from Plaintiff’s perspective, the applicable choice-of-law analysis, the pertinent policy definitions, the facts surrounding the claim, the justifications that it provides for why those facts do not trigger coverage, and various legal decisions that it suggests support its denial of the claim.”
The Court referenced the fairly debatable standard from other jurisdictions, in observing this was not a basis for bad faith. It looked at Pennsylvania case law on the existence of the insurer’s “reasonable basis” to deny a claim, to the same effect. As stated, it found that the insured had not met the Twombly/Iqbal pleading standards.
Unlike many dismissals for failure to plead a plausible action, however, this bad faith claim was dismissed with prejudice, the Court finding that amendment would be futile.