FEBRUARY 2010 BAD FAITH CASES
NO BAD FAITH WHERE NO BENEFIT DENIED OR BECAUSE INSURER SOUGHT GENERAL RELEASE OF ALL CLAIMS, INCLUDING RELEASE OF BAD FAITH CLAIMS(Western District)

In Johnson v. State Farm Life Insurance Company, the plaintiff filed suit individually and as Administratrix of the estate of Terry Johnson, plaintiff’s husband, for various claims stemming from the purchase of a life insurance policy issued to Mr. Johnson. On October 11, 1989, the insurer issued a $10,000.00 whole life policy to Mr. Johnson, in which plaintiff was listed as the beneficiary.

On February 10, 2007, Mr. Johnson allegedly went to an agent of the insurer, to cancel the policy because he did not want plaintiff to receive the proceeds. The agent initially talked Mr. Johnson into keeping the policy and changing the beneficiary, but a few days later, Mr. Johnson returned to reinstate plaintiff as the beneficiary, and then returned again to cancel the policy.

The agent, who had known Mr. Johnson for many years and was aware that he was using drugs, suggested that he buy the policy because he did not want to see Mr. Johnson lose coverage. On February 19, 2007, the agent purchased the policy for $100.00. Mr. Johnson passed away five days later in prison – Mr. Johnson had turned himself in for violating plaintiff’s restraining order.

Plaintiff sued for common law bad faith and violations of Pennsylvania’s bad faith statute. Plaintiff argued that her bad faith claim was based on: (1) the way the insurer handled her claim before the agent purchased the policy and (2) the fact that the insurer conditioned the policy proceeds on her release of all claims against it. The insurer argued that plaintiff’s claims should be dismissed because she failed to state a claim for any of her causes of action.

The court held that plaintiff was unable to establish bad faith and dismissed the claims. In dismissing plaintiff’s common law bad faith claim, the court held that Pennsylvania does not recognize a common law cause of action for bad faith in insurance cases.

The court held that because plaintiff did not file her insurance claim until after the agent purchased the policy, it precluded a finding that her bad faith claim revolved around how her claim was handled. Further, the court held that there was no statutory bad faith because plaintiff was paid the entire proceeds of the policy plus interest.

The court concluded that “benefits were not denied under the Policy or compromised in any way; rather, it appears that [plaintiff] received everything to which she was entitled.”

In addressing whether seeking a release of the bad faith claims itself could constitute bad faith, the court stated:

“Moreover, it is unclear to the Court how conditioning the payment of the full proceeds on her release of any claims against State Farm constitutes bad faith where the value of the claim was established by the face of the Policy and was tendered in full. As argued by State Farm, “[a]n insurance company need not submerge its interests to that of a beneficiary,” and is entitled to insulate itself from potential litigation.” (citations omitted)

Date of Decision: January 14, 2010 (Report and Recommendation)

Johnson v. State Farm Life Ins. Co., Civil Action No. 09-207, United States District Court for the Western District of Pennsylvania, 2010 U.S. Dist. LEXIS 10727, 695 F. Supp. 2d 201 (W.D. Pa. Jan. 14, 2010) (Reynolds, U.S.M.J.).

This Report and Recommendation of the Magistrate Judge was adopted by the District Court in Johnson v. State Farm Life Ins. Co., Civil Action No. 09-207, United States District Court for the Western District of Pennsylvania, 2010 U.S. Dist. LEXIS 10473, 695 F. Supp. 2d 201 (W.D. Pa. Feb. 8, 2010) (McVerry, J.).