JUNE 2015 BAD FAITH CASES: WHERE INSURED’S BROKER WAS A NON-DIVERSE CO-DEFENDANT, AND AN ACTIONABLE BREACH OF CONTRACT CLAIM BASED ON ERRORS IN THE INSURANCE APPLICATION PROCESS WAS PLEADED AGAINST THE BROKER, THE CASE WAS REMANDED FOR LACK OF DIVERSITY JURISDICTION (Western District)

In Hines v. Mutual of Omaha Insurance Company, the Court remanded a bad faith claim after finding a no subject matter jurisdiction. In the underlying complaint, the insured claimed he honestly answered all of the questions on the insurance application, and that his agent/broker was involved in the process. The insured was denied coverage for an injury that caused him to be disabled. The insurer claimed it denied coverage because “based on medical records it had obtained, [the insurer] concluded that [the insured’s] application was not correct because” of specific misstatements in the insurance application regarding prior treatment and income.

The insured brought claims for breach of contract and insurance bad faith against the insurer and his own broker. The bad faith claim alleged that the insurer “breached an implied covenant of good faith and fair dealing by refusing to pay disability benefits without a reasonable basis for that refusal.” Diversity existed between the insured and the insurer, but not between the insured and the broker. Thus, if the broker stayed in the case as a defendant, diversity would be destroyed and the case remanded. The insurer argued that the broker had been fraudulently joined to destroy diversity.

The key was whether the insured’s complaint, “can possibly be read to allege a claim against [the agent].” The court recognized that the insured had no claim against his own broker for breach of the insurance agreement or bad faith in not issuing benefits on an insurance policy. However, the court went on to observe that agents/brokers have duties to their client-insureds, the breach of which duties can be pleaded as a breach of contract against the broker.

As pleaded, the complaint set forth a possible action against the broker based on the fact that “the policy is void or materially defective through the agent’s fault.” The Court reasoned that “because Pennsylvania recognizes a breach of contract action by an insured against an insurance agent or broker, this Court concludes that it is at least possible that a state court could find that [the insured’s] original Complaint states a cause of action against [the agent], the resident Defendant.” Thus, the broker was properly joined and the lack of complete diversity deprived the Court of subject matter jurisdiction.

Date of Decision: May 20, 2015

Hines v. Mut. of Omaha Ins. Co., Civil Action No. 2:15-cv-00245, 2015 U.S. Dist. LEXIS 65853 (W.D. Pa. May 20, 2015) (Hornak, J.)