NOVEMBER 2013 BAD FAITH CASES: SUPERIOR COURT AFFIRMS BAD FAITH FINDING BASED ON ADJUSTER’S FAILURE TO PERFORM INDEPENDENT EVALUATION ON UIM CLAIM; PERMITS EXPERT TESTIMONY ON CLAIMS HANDLING; UPHOLDS PUNITIVE DAMAGE AWARD; AND DOES NOT PERMIT EXPERT FEES, INVESTIGATIVE FEES, ARBITRATION FEES AND TRIAL PREPARATION EXPENSES WITHIN THE TERM “COURT COSTS” (Pennsylvania Superior Court)

Plaintiff brought suit against his insurer for bad faith handling of his UIM claim after he was awarded $4M at arbitration despite the insurer’s refusal to settle for more than its $1,000 reserve. Plaintiff won at the trial level on his bad faith claim, and the insurer appealed to the Superior Court. The Superior Court affirmed on most issues, in a divided 2-1 panel decision with a vigorous dissent.

The insurer presented six questions on appeal, including a question as to whether the trial court erred as a matter of law in concluding plaintiff had proven by clear and convincing evidence the insurer acted in bad faith in its handling of the underinsured claim. The insurer argued the trial court should have granted its post-verdict motion for judgment notwithstanding the verdict or a new trial.

The Superior Court, however, concluded the trial court did not abuse its discretion in finding the insurer had breached its good faith duty. The trial court based its decision on the adjuster’s affidavit, as well as plaintiff’s expert’s testimony.

Much of the majority’s opinion is focused on setting and never changing a loss reserve, and failures to follow the carrier’s manual in evaluating the loss reserve. As found in the majority opinion, in her affidavit, the original adjuster admitted she conducted no individual assessment of the future earnings loss before setting a $1,000 reserve on the claim, despite plaintiff submitting evidence that his loss far exceeded the $300,000 policy limit. Plaintiff’s expert testified this was an unreasonable practice, particularly given the $4M arbitration award so far exceeded the policy limits.

The insurer argued it is not required to pay out claims without the opportunity to fully investigate the same. However, the court found that the investigation was unduly delayed and or carried out in connection with defending an arbitration rather than making an evaluation of the claim, and distinguished the case law on which the carrier relied.

As to the evaluation, the majority characterized the carrier’s position as being that the insured’s expert’s number was speculative, and could be rejected on that basis alone. The found that such an argument would justify rejection of any UIM claim on the basis of an inherent uncertainty in estimating damages, and would take away any responsibility for a carrier’s doing its own analysis and evaluation. This could not fulfill an insurer’s duty of good faith and fair dealing.

The insurer also appealed the trial court’s finding that its delay in investigating and processing the claim constituted bad faith, however, the appellate court found the trial court’s determinations to be factual in nature and therefore subject to the trial court’s determination of credibility, and did not disturb the findings.

Of note were the majority’s looking to standards in the Unfair Insurance Practices Act governing the time for investigation and reporting. The court recognized that length of time alone cannot create a per se bad faith case, but time in the context of other conduct is to be considered.

It is further noteworthy that the trial and appellate court placed great reliance on plaintiff’s expert in reaching the bad faith decision concerning the claims handling process.

Next, the insurer argued the trial court erred in awarding punitive damages in the case because the insurer did not act with malice or dishonest purpose. Pennsylvania law, however, requires no showing beyond establishing bad faith conduct under the statute to permit an award of punitive damages.

Therefore, despite the insurer’s secondary argument, that the award was too high, the court found no error in awarding the damages or any constitutional impropriety in the amount of the award. As the punitive damages award was 5-6 times the compensatory damages award, and over $1.2 Million by itself, the court’s lengthiest analysis is on the punitive damages award; looking at its own prior decision in Hollock, and the U.S. Supreme Court case law focusing around State Farm v. Campbell.

Finally, the insurer argued the trial court improperly included expert witness fees, arbitration fees, investigation fees, and other trial preparation expenses and fees in its award of court costs under the statute. The appellate court found in the insurer’s favor on this issue, as court costs is commonly defined, and supported by Pennsylvania case law, as only including ‘docket costs.’

Date of Decision: November 1, 2013

Grossi v. Travelers Personal Ins. Co., Civil Action Nos. 769 WDA 2012, 828 WDA 2012, 2013 Pa. Super. LEXIS 3144 (Pa. Super. Ct. Nov. 1, 2013) (Mundy, J.).