Archive for the 'PA - Reserves' Category
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The insured brought an uninsured motorist bad faith claim against an insurer refusing to pay policy limits. In discovery, the insurer had produced a privilege log claiming attorney client privilege and work product protection; and further asserting reserves are not discoverable.
The court first observed the breadth of the attorney client privilege under Pennsylvania law. The insured argued that it could obtain attorney client communications that occurred before the insured filed the bad faith action. The court appeared to accept the notion that somehow attorney client communications could be discoverable if not related to the defense of the case, but were only related to mere business purposes; but concluded that there was no evidence to show the communications concerned anything other than defending against the insured’s claims.
As to the work product doctrine, which went to the internal communications of the insurer’s representatives other than attorneys, the court readily protected such communications after the date the insured’s counsel threatened litigation, presuming that “all inter-office communications in this file after that date were prepared in anticipation of litigation and are, thus, properly excluded from discovery except in the redacted form [the insurer] has proposed.”
In doing so, the court was not necessarily ruling that an express threat of litigation was required to create “anticipation of litigation”; but the parties here had offered no details about prior events that would have revealed an earlier date to anticipate litigation.
However, as to the communications described in the privilege log predating the express threat of litigation, where the insurer court not “reasonably be seen as having anticipated litigation”, the court found these communications were “prepared in the ordinary course of business, and, consequently, are not subject to work product protection.”
The court did refuse to allow discovery of these materials “to the extent that any of these documents contain explicit discussion of an attorney’s advice or direction,” recognizing these discussions would be redacted. This would imply that the attorney client privilege is broader that what the court appeared to earlier suggest, i.e., that even a communication with an attorney during a time period when this was in the ordinary course of business is still protected.
Finally, while recognizing a split in the district courts, the court ruled that discovery of reserve information in bad faith cases in permissible.
Date of Decision: August 21, 2015
Cicon v. State Farm Mut. Auto. Ins. Co., Case No. 3:14-CV-2187, 2015 U.S. Dist. LEXIS 111104 (M.D. Pa. August 21, 2015) (Conaboy, J.)
Morris v. USAA Casualty Insurance Company involved discovery disputes in a UIM breach of contract and bad faith case. The court denied a motion to quash the deposition of the insurer’s designated representative on the basis that the deposition notice was vague and overbroad; but did quash the deposition of the insurer’s former president and CEO.
The court (1) granted a motion to limit discovery of information from other cases; (2) denied a motion to quash “with respect to information regarding the SI Unit or Low Impact Unit as it relates to this case”; and (3) denied a motion for protective order on reserve information. The court noted the split in authority on discovery of reserves, but agreed with the line of cases, including cases from the Middle District, ruling in favor of discovery.
Date of Decision: August 18, 2015
Morris v. USAA Cas. Ins. Co., CIVIL ACTION NO. 3:12-CV-1664, 2015 U.S. Dist. LEXIS 108966 (M.D. Pa. August 18, 2015) (Kosik, J.)
In Clemens v. New York Central Mutual Fire Insurance Company, the court addressed numerous motions in limine, in a supplemental underinsured motorist action. The motions directly addressing the bad faith claim are summarized below.
Reserves
The court rejected the insurer’s argument that evidence of reserves be barred from evidence. The court cited case law going both ways on the subject: (1) “that the relationship between the amount an insurance company reserves for a claim and the amount it ultimately offers to resolve that claim is so tenuous as to make the size of the reserve irrelevant for purposes of determining a bad faith claim” vs. (2) “that the amount set aside in reserve necessarily reflects a company’s assessment of the potential worth of the claim and, to the extent the reserve is dissimilar from the amount offered in settlement, is germane to an analysis of whether the company acted in bad faith in pretrial settlement negotiations”.
The court adopted the second position accepting the evidence, but expressly made clear that the insurer would not be precluded “from producing testimony explaining the difference between its reserve and its settlement offer in this case.”
Time Period of Bad Faith Claim
The insurer took the position that the time period in which to consider the bad faith claim began when the insured’s attorney advised the carrier that the tortfeasor’s carrier had agreed to pay its policy limits; and ended the date suit was filed. The insured took the position that the relevant time frame should begin on the date that their counsel advised the insurer of a potential underinsured motorist claim, and never ended because the misconduct of an insurer, even after suit is filed, may constitute bad faith.
The court found that bad faith may not be predicated on the insurers “actions or lack of action before being notified of a claim”, and in this case counsel’s allusion to a potential claim did not trigger any duty. Further, while case law does allow “for the introduction of evidence of an insurer’s bad faith even during the pendency of a lawsuit …. such evidence of bad faith cannot be provided simply by an insurer’s action of mounting an aggressive legal defense.” The court ruled that resolution of the underinsured motorist claim ended any bad faith cause of action after that date, and no evidence of the insurer’s alleged bad faith occurring after that date would be permitted.
The cutoff date, i.e., the date the underinsured motorist claim was resolved, was June 20, 2014. The insured’s suit was removed to federal court in September of 2013. Thus, the time period in which bad faith conduct could be considered encompassed part of the time period during the pendency of the bad faith litigation itself.
Other Cases
The court granted the motion in limine barring evidence of other insureds’ claims against the carrier. The court found in particular that the U.S. Supreme Court had ruled that evidence of what happened to other insureds, not parties to the case at hand, could not be used to enhance punitive damages for the party actually in the case.
Expert Testimony on Bad Faith Claim Regarding Industry Standards & Claims Handling
The court observed its own broad discretion on evidentiary matters, and the Federal Rules favoring the admission of evidence to assist the trier of fact. It concluded that the insured’s expert testimony could be helpful to the jurors in their inquiry as to whether the insurer acted in bad faith. Thus, the court allowed the insured’s expert to testify regarding industry standards and claims handling practices.
Date of Decision: June 15, 2015
Clemens v. New York Cent. Mut. Fire Ins. Co., Case No. 3:13-CV-2447, 2015 U.S. Dist. LEXIS 77180 (M.D. Pa. June 15, 2015) (Conaboy, J.)
This is the fourth opinion in this matter. Here are links to the first three (1, 2, and 3).
In Sharp v. Travelers Personal Security Insurance Co., although no bad faith claim was filed, the court used comparisons to discovery in insurance bad faith cases repeatedly throughout this detailed opinion.
On the issue of reserves, the court cited numerous opinions, pro and con, on the proposition that “insurance reserves are discoverable in bad faith litigation against insurers, where liability for the underlying claim has already been established, since such information may be relevant to the issue of whether the insurer acted in bad faith in failing to settle or pay the original claim.” However, “[n]o Pennsylvania court has permitted discovery of insurance reserves in litigation not involving a bad faith liability claim against an insurer.”
On claims manuals, policy manuals, and training materials, the insurer argued that training and policy manuals have only been deemed discoverable in bad faith actions. The court stated: “It is beyond cavil that an insurer’s claims practice manual setting forth its procedures and guidelines for handling claims is relevant evidence in a bad faith action against an insurer.”
On the issue of claim representative personnel files, in general, there is a heightened standard of review for relevance. Further, “[p]roduction of personnel files has only been deemed appropriate in bad faith litigation where earlier discovery conducted by the parties has established a sufficient nexus between the personnel file and the bad faith claim.”
And even in bad faith cases, the requests are often denied. “Those courts have rejected such discovery on the ground that the insureds may obtain the information sought through less invasive and burdensome means by deposing the claims representatives in question and their supervisors.”
On the issue of other litigation or administrative complaints involving medical expense benefit claims, “[s]everal federal district courts have denied discovery requests for ‘similar claims evidence,’ even in bad faith litigation, and have reasoned that evidence of other lawsuits or claims is irrelevant since they presumably involve different facts and circumstances.” “Some of those courts have also concluded that production of information concerning other bad faith suits or complaints would be unduly burdensome and cost prohibitive.”
“The only state appellate authority addressing the discoverability of ‘similar claims evidence’ allowed such discovery, provided that it was restricted to the same type of claims at issue in the pending litigation.” “More recent federal rulings have likewise determined that ‘other litigation’ evidence could lead to the discovery of admissible evidence … and may uncover relevant ‘pattern and practice’ proof, so long as the discovery is confined ‘to those practices employed in handling plaintiff’s claim….’” “Such discovery may also unearth earlier depositions or statements by … claims personnel that may be pertinent to the issues in this case.”
Date of Decision: March 7, 2014
Sharp v. Travelers Personal Security Insurance Co., NO. 12 CV 6483, COMMON PLEAS COURT OF LACKAWANNA COUNTY, PENNSYLVANIA, 2014 Pa. Dist. & Cnty. Dec. LEXIS 282 (C.C.P. Lackawanna March 7, 2014) (Nealon, J.)
In Lane v. State Farm Mutual Automobile Insurance Company, the court provided a detailed discussion of the work product doctrine, in the context of a UM-bad faith claim against the insurer. The court addressed three sets of materials on the insured’s motion to compel:
(1) whether the mental impressions of insurers employees recorded after the filing of the Complaint constitute protected work product;
(2) whether the reserve history for plaintiff’s claim and the procedures for setting reserves are irrelevant, confidential and privileged; and
(3) whether portions of the insurer’s “Auto Injury Evaluation” containing the mental impressions of defense counsel are protected by attorney-client privilege and attorney work product doctrine.
WORK PRODUCT AND ATTORNEY CLIENT PRIVILEGE
The court first addressed the work product issues, under Federal Rule of Civil Procedure 26(b)(3), and questions of attorney client privilege.
Redactions and Attorney Client Privilege
The court rejected plaintiff’s efforts to have the judge review redacted documents in camera. Contrary to plaintiff’s assertions, the insurer’s privilege log adequately described the nature of the information being redacted, so that it could be addressed on the discovery motion.
Moreover, the vast majority of redactions were on billing invoices for legal services or correspondence between the insurer and privately-retained or in-house counsel, which the court concluded “very clearly involve classic cases of attorney-client privilege.”
The court was vehement in its response to plaintiff’s arguments that the insurer’s counsel may not have been forthcoming in claiming the redacted materials were what was purported: “But the hypothetical possibility that representations made by a duly licensed attorney and officer of this court could be found to be utter fabrications is insufficient to carry Plaintiff’s burden in overcoming the privilege. Nor does this Court believe it is appropriate to order the Defendant to submit these redacted materials for in camera inspection simply because the Plaintiff does not trust counsel’s representations. In the absence of any evidence that the statements made before this Court are fraudulent, we shall accept them as true.”
Claims File and Privilege Logs
As to the claims file, the insured sought production of items recorded after the complaint was filed, which the insurer redacted as containing protected mental impressions of its employees, mental impressions of defense counsel or other attorney client privileged information or attorney work product. The insurer’s privilege log also included items created before suit was filed against the insurer, on the same bases.
A party claiming that documents were created in anticipation of litigation and are thus protected, may carry its initial burden by submitting a properly documented privilege log. Such a privilege log “should identify each document and the individuals who were parties to the communications, providing sufficient detail to permit a judgment as to whether the document is at least potentially protected from disclosure.” (internal quotations omitted). In this case, the privilege log was “just barely sufficient to meet Defendant’s initial burden that a privilege potentially applies[, because] [t]he Log identifies the documents, states that they were created by [the insurer’s] employees (albeit without naming those employees), and states that these documents were created as to Plaintiff’s claim file after the date on which a civil Complaint on this very matter was filed. While these representations do not contain detailed factual support, they are enough to carry the burden of proof that the documents were work product created in anticipation of (then-ongoing) litigation.”
Bad Faith Claims Alone Do Not Pierce Privilege
The insured argued it was still entitled to the discovery because post complaint mental impressions are necessarily relevant to the bad faith case. This argument was based on the theory that the “insurer had a continuing duty to investigate the insured’s [UM] claim even after suit was filed.” The court rejected this argument for a number of reasons: (1) the insured did not provide any plausible justifications as to how the post-Complaint mental impressions could actually be relevant to the facts of his specific bad faith claim, as opposed to asserted an abstract proposition; (2) “the mere fact that Plaintiff has asserted a bad faith claim does not by itself overturn the work-product privilege” (no advice of counsel defense had been asserted); and (3) independently, the insured never addressed how he could not obtain the substantial equivalent by other means without undue hardship, as required under Rule 26(b)(3). Moreover, this plaintiff did have the opportunity to take bad faith discovery, which would include deposing claims adjusters.
Pre-Complaint Materials
This involved attorney client communications and attorney work product, and the court was not going to pierce these privileges under the circumstances. The insured argued that the attorney materials can be discovered when they are placed at issue, but the court found they were not placed in issue, i.e., no advice of counsel defense was being asserted. Further, “the mere fact that attorney-client communications may relate to the lawsuit does not expose them to discovery. Quite the contrary: it is in exactly these situations where attorney-client privilege is most properly invoked.”
Reserves
The insurer redacted reserve amounts, and refused to produce manuals and procedures for setting reserves. The court observed that: “Pennsylvania law requires casualty insurance companies to ‘maintain a claim reserve for incurred but unpaid claims and an active life reserve which shall place a sound value on its liabilities and be not less than the reserve according to appropriate standards set forth in regulations issued by the Insurance Commissioner.’”
The insured argued reserve information was relevant regarding the value of the claim and how it was being processed. However, the court found that “[t]he mere fact that Plaintiff’s Complaint alleges a bad faith refusal to pay his policy proceeds does not by itself indicate relevance, because the reserve history and procedures do not ipso facto have any necessary connection to the alleged bad faith.” The court did not reject the notion that reserve information could be discoverable upon a showing of good cause, but this was a case specific matter; and here, the plaintiff provided “no explanation for how the reserve history is relevant or reasonably calculated to lead to the discovery of admissible evidence in connection with the issues presently before” the court.
Date of Decision: May 18, 2015
Lane v. State Farm Mut. Auto. Ins. Co., 3:14-CV-O1045, 2015 U.S. Dist. LEXIS 64679 (M.D. Pa. May 18, 2015) (Mariani, J.)
The court issued prior opinions on the statute of limitations, expert testimony and the admissibility of evidence. The court found no reason to reconsider the statute of limitations argument, and then addressed plaintiff’s claims of trial errors, chiefly concerning new evidentiary issues.
The insured focused on the court’s precluding evidence, but failed to show prejudice. Moreover, wide latitude was given in permitting plaintiff’s evidence, and the court’s rulings on the evidence were within a trial judge’s discretion. The insured alleged that he was barred from introducing evidence on Market Conduct Examinations and the Regulatory Settlement Agreements and amendments thereto, but this was not the case.
The court had allowed “testimony about these adverse regulatory actions regarding defendant, when they pertained to issues directly affecting the plaintiff, and/or were not already subsumed within [the insurer’s] own standards for reviewing disability claims.” But the court “ruled that admitting evidence as to the origin of these regulatory materials was not relevant to plaintiff’s claim and would have been unduly prejudicial to the defendants….” It did not exclude, however, “reference to these regulatory standards in total….”
Further, the insured “was given significant and wide latitude in introducing both factual testimony and expert testimony supporting his claims, with adequate reference to the regulatory proceedings….”
The court found that the “jury had a full picture of the plaintiff’s claims and the reasons for [the insurer]’s conduct.” There was evidence that both sides causing delays in claims handling; and that the insured received benefits due for a significant period of time. The jury had these facts, and resolved in favor of the defendant; the court observing that the facts are taken in the light most favorable to the verdict winner when moving to set aside the verdict.
Finally, the insured attempted to argue trial error in connection with allowing the defense’s expert testimony. The court observed that “plaintiff was given wide latitude to cross examine [the expert] about his qualifications before he was allowed to testify as an expert,” meeting Daubert’s requirements.
Date of Decision: August 7, 2014
Leporace v. N.Y. Life & Annuity Corp., CIVIL ACTION NO. 11-2000, 2014 U.S. Dist. LEXIS 108804 (E.D. Pa. August 7, 2014) (Baylson, J.)
In Borgia v. State Farm Mutual Automobile Insurance Co., the court addressed discovery disputes in the context of UIM breach of contract and bad faith claims, based on refusal to pay the $750,000 policy limits and alleged unreasonable delays in claim processing. The insured had sustained serious physical and cognitive injuries, and was unable to care for his wife who suffered from multiple sclerosis.
The insurer had produced a redacted claims file, and withheld other documents based upon the attorney-client privilege and the work product doctrine. Some material was also redacted or withheld on the basis of relevance. The insured sought to compel the carrier to produce a subset of the material referenced in its privilege log.
Prior to making its ruling, the court reviewed the disputed documents in camera. The insured ultimately did not challenge the assertion of the attorney-client privilege over communications between outside counsel and claims personnel, including redactions of such material; nor the redaction or withholding of information on unrelated matters on the basis of relevance.
Well prior to suit, the parties exchanged communications and demands after the accident, and the point came where the insureds demanded policy limits, and stated that in the absence of an expeditious resolution they would proceed to litigation. The carrier responded that it needed more time to evaluate medical records. Two months later, the carrier retained a law firm.
That counsel began to play the lead role in discussing settlement with the insured’s counsel in short order. The same firm eventually represented the insurer after suit was filed five months later.
Prior to suit, the insurer requested statements under oath (“SUOs”), which were taken 2-3 months after the carrier retained counsel. Shortly before taking the SUOs, the insurer offered $300,000 to settle, and then $350,000 after the SUOs. The insureds rejected the offers, and the insurer thereafter requested an independent medical examination of the injured insured.
A complaint was eventually filed for breach of contract, bad faith, and loss of consortium. After removal, a motion to dismiss the bad faith claim was denied.
The documents sought included: (1) entries in electronic claims logs regarding the assessment of liability for the accident and available coverage, valuation of the claim, settlement authority, reserve amounts, and updates made to various categories of information; (2) evaluations of the claim prepared by claims personnel in two different months prior to suit; (3) emails among claims personnel regarding settlement authority; and (4) an asset report for the driver of the other car involved in the accident.
The insurer invoked the work product doctrine as to all of these documents, most of which reflected the mental impressions of the company’s claims personnel regarding the claim.
The work product doctrine protects certain material prepared in anticipation of litigation, but not those prepared in the ordinary course of business. The court observed that: “As numerous courts have recognized, ‘[a]n insurance company cannot reasonably argue that the entirety of its claims files are accumulated in anticipation of litigation when it has a duty to investigate, evaluate[,] and make a decision with respect to claims made on it by its insureds.’”
On the other hand, this did not mean “that the work product doctrine is wholly inapplicable to insurers’ claims files,” or that the “’mere claim of bad faith is enough to shatter the work-produce privilege.’” “Rather, ‘[a]t some point in its investigation, . . . an insurance company’s activity shifts from mere claims evaluation to an anticipation of litigation.’”
Thus, the first step is to determine when the insurer reasonably anticipated litigation, which includes both an objective and subjective component. Courts initially focus on the state of mind of the party preparing, or ordering preparation, of the document, and that person’s anticipation of litigation must be objectively reasonable for the work product protection to apply. “A party’s anticipation of litigation is objectively reasonable if ‘there existed an identifiable specific claim or impending litigation when the materials were prepared.’”
The court concluded that the insurer reasonably anticipated litigation by the time it hired counsel to handle the claim, in light of the policy limit demand, the threat of litigation, and its own knowledge that it was not prepared to pay policy limits. The fact that the insureds had hired their own counsel earlier, who made demands, were not facts, standing alone, that objectively created anticipation of litigation. The fact that the insurer did not hire counsel for months after the initial demands supported that conclusion.
Thus, all document prepared prior to the date of counsel’s retention had to be produced, unredacted. This included reserve information. The court recognized that district courts in the Third Circuit are divided over whether reserve information is discoverable.
However, it followed the district courts which conclude that “the establishment of reserves would serve little, if any, purpose unless the reserves ‘have some relationship to the insurer’s estimation of the insured’s potential liability, and the amount set aside for reserves is therefore germane to any analysis [the defendant-insurer] made of the claim’s value and is relevant to the determination of whether the defendant-insurer acted in bad faith in processing the claim.”
The court looked to Judge Rambo’s recent Shaffer opinion on this point; though in finding reserve information relevant, the court expressed “no opinion regarding the admissibility of such information as that issue is not before the Court at this time.”
The court next addressed whether documents created after hiring counsel still lacked work product protection because they would have been created in the ordinary course of business in any event. The court stated, again citing Shaffer: “This argument has some force since … an insurance company ‘has a duty to investigate, evaluate[,] and make a decision with respect to claims made on it by its insureds.’”
Again, however, the court also recognized that at some point there is a shift from claims evaluation to defending against objectively anticipated prospective litigation, citing Judge Rambo’s recent Keefer decision. After an in camera review, and for the reasons given as to when the insurer first reasonably anticipated litigation, the court found that activity “shifted from mere claims evaluation to defending against the prospect of litigation on an objectively reasonable basis” when it retained outside counsel.
Lastly, the court addressed plaintiff’s substantial need argument under Rule 26(b), for overcoming the work product doctrine, even if applicable, i.e., where a party “shows that it has substantial need for the materials to prepare its case and cannot, without undue hardship, obtain their substantial equivalent by other means.”
The court then reiterated that “a mere allegation of bad faith is insufficient to overcome the work product privilege,” and then stated the insureds failed to make the showing necessary to obtain disclosure of work-product-protected materials, particularly where they could depose the claims personnel as a viable means of obtaining at least some of the information they wanted. The insureds motion was, however, denied without prejudice.
The court noted that there had been no true address of whether any of this included opinion work product, which would be entitle to the highest level of protection.
Date of Decision: September 3, 2014
Borgia v. State Farm Mut. Auto. Ins. Co., CIVIL ACTION No. 14-3149, 2014 U.S. Dist. LEXIS 123180, (E.D. Pa. September 3, 2014) (Sanchez, J.)
Mineo v. Geico involved a UIM claim. The insured was a Vietnam War Veteran who had suffered significant combat injuries during the War. Years later he was in a motor vehicle accident and suffered a shoulder injury. After the accident, there was some record that he suffered a further shoulder injury.
The insurer offered a settlement sum that the insured rejected. The insured contended that the adjuster incorrectly placed too much emphasis on the post-accident injury in devaluing the extent of his injury from the accident.
In addressing the insurer’s motion for summary judgment on the bad faith claim, the court stated that in evaluating the insured’s bad faith claim it could consider insurer’s because bad faith can include a lack of good faith investigation into facts, and failure to communicate with the claimant.
The court stated that an “insurance company … is not required to show the process by which it reached its conclusion was flawless or that the investigatory methods it employed eliminated possibilities at odds with its conclusion.” However, it “must conduct a meaningful investigation, which may include an in-person interview, examination under oath, medical authorizations, and/or independent medical examinations.”
The adjuster relied on only one physical therapy record to justify her position that the injury was caused or aggravated by the post-accident fall. This was based on her review of the medical records, and her conclusion that no IME was needed. The court observed she was not a doctor, knew that the insured disputed the record, and the insured’s physical therapist had explained that there was a significant left shoulder dysfunction prior to the post-accident fall.
The court cited to the insurer’s claims manual which “admonishes its adjusters to avoid drawing conclusions based on assumption or speculation,” and which “underscores the importance of completeness….” The manual warned: “If the denial is unsound, the result may be a complaint or a lawsuit, either of which could have been avoided. Because some cases turn on very fine points, reports must be complete and accurate.”
The manual also included “a Sequence of Investigation, which ‘applies to the majority of cases,’ and sets forth that adjusters should: ‘Determine whether independent medical examinations are necessary, and if so, see your supervisor and then arrange for them. Determine whether medical peer review should be secured. If so, see your supervisor.’” The adjuster did neither, and the carrier only had an IME pursued post-litigation.
The court next addressed the issue of whether the insurer failed to meet its own standards of using a “90-Day Control” which is used to calculated and set reserves and to revisit these matters at 6, 12, and 18 months. Under the insured’s manual “Supervisors and managers review each summary and give direction, comments and instructions…. Each Summary and supervisor/manager review must be completed by the end of the month in which the 90th day falls.”
The court questioned whether this was created or produced to the insured.
In addressing stalled negotiations and the languishing nature of the process, the court stated that the insurer could have conducted an in-person interview, done an examination under oath, sought medical authorizations and/or an IME. The IME eventually conducted appeared to favor the insured’s version of events; and the court cited case law for the proposition that a failure to conduct an IME could be the basis for a bad faith claim.
In this regard, the court was “mindful” of the Unfair Insurance Practices Act.
The summary judgment motion was denied.
Date of Decision: July 15, 2014
Mineo v. Geico, Civil Action No. 12-1547, 2014 U.S. Dist. LEXIS 95686 (W.D. Pa. July 15, 2014) (Fischer, J.)
In Leporace v. New York Life & Annuity Corp. the court addressed various motions in limine on a bad faith claim against a disability insurer.
On the first issue, both parties attempted to disqualify the other’s experts. Plaintiff’s expert was qualified on most issues, but was not permitted to testify on the strengths of medical opinions or medical care. Furthers, she was not permitted to testify on reserves. The Court concluded that introducing evidence on reserves would be contrary to the concepts behind competitive and confidential reserve practices of insurance companies, and should not be permitted in a bad faith case on a disability insurance claim.
As to the insurer’s expert, the court allowed expert testimony on the basis of the expert’s conclusions regarding the carrier’s claims manual that the insurer met its obligations; however, it found this expert’s reliance on Pennsylvania statutory and regulatory positions, the NAIC Market Regulation Handbook and various on-line websites “doubtfully relevant, if at all….”
The court would not allow a volume of evidence on the carrier’s practices, prior to the date that the court found the claim at issue started; however, the court did allow limited evidence under Federal Rule of Evidence 404(b) on the specific issue of the carrier identifying the insured as a “malingerer” during a five year period prior to the current claim.
Next, citing Birth Center and the recent Peruggia decision, the court did permit plaintiff to see damages for emotional distress under a common law contract claim for breach of the duty of good faith.
Finally, the court would not allow expert testimony, or recovery, on the insured’s claims for “litigation stress”. The court analyzed this issue closely, and gave two reasons that the insured could not seek recovery for the stress of the bad faith lawsuit itself. First, it cited a body of cases from various jurisdictions rejecting “litigation stress” because there is no question that filing a lawsuit is the plaintiff’s decision, and imposing additional damages on the defendant for defending against the plaintiff’s claims would impair the defendant’s right to defend itself. Second, once a lawsuit is instituted, the party becomes subject to the contentions of an opposing party and the rulings of a court, and the stress may be from the insurer’s counsel conduct of the case or even the court’s ruling, and not the insurer itself.
Date of Decision: May 7, 2014
Leporace v. N.Y. Life & Annuity Corp., CIVIL ACTION NO. 11-2000, 2014 U.S. Dist. LEXIS 62911 (E.D.Pa. May 7, 2014) (Baylson, J.)
In Mirarchi v. Seneca Specialty Insurance Company, the Third Circuit affirmed the District Court’s judgment in the carrier’s favor on a fire loss claim.
The policy at issue had a $600,000 limit, directing that valuation on claims be done according to the property’s actual cash value (ACV). The policy defined ACV as the amount it would cost to repair or replace the property at the time of loss or damage, with material of like kind and quality, subject to a deduction for deterioration, depreciation and obsolescence.
Further, per the policy, the carrier would not pay on any claim until it received a formal proof of loss from the insured. If a disagreement arose as to the value the property value or amount of loss, either party could seek an appraisal. A fire occurred, prompt notice was given, and each party retained experts.
The insurer estimated the ACV at approximately $332,000 and the insured’s expert came in at approximately $692,000. The insurer still paid the first $100,000 on the claim after the insured submitted a partial proof of loss. After receiving a proof of loss based on the $692,000 figure, the insurer paid the balance of the undisputed part of the claim, i.e., the difference between $100,000 and its experts ACV number ($332,000).
The experts continued amicable discussions thereafter on the difference until the insured told his expert that he would not accept anything less than $500,000.
The parties mutually agreed to enter the appraisal process, and each side hired an independent appraiser. The insurer’s appraiser estimated the ACV at $449,550, more than $100,000 higher than the insurer’s original estimate. The dispute was submitted to an umpire, who concluded that the ACV was $618,338.07. The insurer then paid the balance remaining on the $600,000 policy limit.
The insured brought a bad faith claim on the basis of delayed payment. As stated, the District Court granted the insurer summary judgment. The first issues on appeal were challenges to the trial court’s discovery rulings.
First, the trial court found reserves not discoverable because they were irrelevant to the claims. This was a significant issue to the insured, because the carrier had set it reserves at the policy limit, $600,000, well above the initial valuation. The trial court explained that a loss reserve is the insurer’s own estimate of the amount which the insurer could be required to pay on a given claim.
The lower court did recognize that reserve information is sometimes relevant in bad faith cases, but it concluded that the loss reserve figures in this particular case did not represent an evaluation of coverage based upon a thorough factual and legal consideration.
The Appellate Court found that the insured failed on appeal to show that the loss reserve figures were related to the carrier’s considered estimate of the ACV such that they would be relevant to his bad faith claim. Thus, the lower court did not err in its legal analysis of the relevance of loss reserve estimates generally in bad faith cases, and did not abuse its discretion in excluding the evidence in this case based on its lack of relevance to the bad faith claim.
In a footnote, the Third Circuit likewise upheld the lower court’s decision not to permit discovery of communications between the insurer and its reinsurer for the same reasons that it affirmed on the loss reserve issue, i.e., these communication were not evidence of the insurer’s considered evaluation of the value of the insured’s claim.
The Third Circuit also found no abuse of discretion in the trial court’s refusal to extend discovery, compel additional discovery responses or reconsider earlier rulings after the insured retained new counsel.
Turning to the merits, because the insurer ultimately paid the full policy limit, the bad faith claim was based on delay, which required the insured to show that (1) the delay was attributable to the insurer, (2) the insurer had no reasonable basis for causing the delay, and (3) the insurer knew or recklessly disregarded the lack of a reasonable basis for the delay.
The cornerstone of the insured’s argument was the insurer’s second appraiser came in at a significantly higher number than the first expert; and that the insurer acted in bad faith by standing by its adjuster’s initial estimate of ACV pending resolution by the umpire, failing to make an additional partial payment, and failing to make a higher settlement offer.
As to the partial payment issued, an insurer has no duty to advance partial payments, particularly where the claim is disputed. Further, the undisputed evidence showed that the insurer relied on a genuine and considered estimate of ACV by its first expert.
That subsequent estimates assigned a higher value to the claim did not constitute clear and convincing evidence that the insurer acted in bad faith either in arriving at its initial estimate or by standing by that estimate until the appraisal process concluded. The Third Circuit stated: “That is, after all, what the appraisal process is for—settling disputes about the value of a claim.”
The insured failed to show by clear and convincing evidence that the insurer acted unreasonably in the manner it paid the claim, and that no reasonable juror could conclude otherwise. The insured’s breach-of-contract claim, based on a breach of the duty of good faith, failed for the same reasons as his statutory bad faith claim.
Lastly, the court noted that the insured’s used of mathematical calculations regarding the first estimate, the property’s purchase price, and the balance of the insured’s mortgage lacked sufficient explanation to make a persuasive argument for a conspiracy between the insurer and its experts.
Date of Decision: April 29, 2014
Mirarchi v. Seneca Specialty Ins. Co., No. 13-2129 , UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT, 2014 U.S. App. LEXIS 8015 (3d Cir. April 29, 2014) (Ambro, J.)
