SEPTEMBER 2014 BAD FAITH CASES: NO BAD FAITH UNDER PENNSYLVANIA LAW WHERE INSURED FAILED TO DISCLOSE FACTS TO DISABILITY INSURER; NO BREACH OF FIDUCIARY DUTY UNDER NEW JERSEY LAW FOR SAME REASON (Philadelphia Federal)

In Hayes v. American International Group, a case involving a disability insurance claim, the Magistrate Judge concluded in her Report and Recommendation that there could be no statutory bad faith under Pennsylvania law where the carrier paid total disability benefits for over four years until it learned that the insured had been working over the entire period.

Further, a subsequent investigation of the insured, his work-related activities and his earned income, as well as his failure to provide relevant financial information, led to the insurer’s decision to terminate benefits.

The insured did not present sufficient evidence to support that the insurer lacked a reasonable basis for denying total or residual disability benefits, or that the insurer disregarded a lack of a reasonable basis for doing so.

The insured also brought a claim for breach of fiduciary duty. The court observed that there was a difference in Pennsylvania and New Jersey law, with Pennsylvania law recognizing only a very limited fiduciary duty in insurers, and New Jersey law recognizing a broader fiduciary duty from insurers to insureds in the processing of first party claims.

The court did a conflict of laws analysis, setting out, however, that both parties to the insurance contract owe a fiduciary duty to the other under New Jersey law. In light of that, New Jersey law was not contrary to Pennsylvania’s governmental interests, the conflict was false, and New Jersey law applied.

For the reasons set out above, there could be no breach of fiduciary duty. The insured had repeatedly and consistently reported his lack of income and inability to perform anything but sedentary activities to the insurer. Thus, the court stated that “it cannot be said that [the insurer] exercised bad faith in discontinuing benefits when confronted by evidence that Plaintiff was earning more from his private practice than he was earning before he allegedly became disabled.”

Date of Decision: July 29, 2014

Hayes v. Am. Int’l Group, CIVIL ACTION NO. 09-2874, 2014 U.S. Dist. LEXIS 103564 (E.D.Pa. July 29, 2014) (Hey, U.S.M.J.) (Report and Recommendation)

Adopted by District Court on September 11, 2014.