Monthly Archive for April, 2007

APRIL 2007 BAD FAITH CASES
NO BAD FAITH UNDER STANDARDS FOR STATUTORY BAD FAITH CLAIM OR CONTRACT-BASED BAD FAITH CLAIM (Philadelphia Federal)

Published on April 24, 2007 in PA - Claims Handling Procedures. Closed

    

In DeWalt v. The Ohio Casualty Insurance Company, the defendant’s insured was the driver of a car involved in a one-car accident that seriously injured three passengers, including the plaintiff.  Over a year after the accident, defendant tendered its policy limits to plaintiff.  Plaintiff rejected the limits and proceeded to trial against the insured and won a verdict in excess of $4,000,000.  The insured settled with plaintiff and assigned him any claims she had against defendant.  Plaintiff then brought a contract action for bad faith as well as a statutory action for bad faith to recover the unpaid amount of his verdict.  Defendant moved for summary judgment.

In granting Defendant’s motion, the court first held that the standard for liability in a statutory bad faith claim differs from the standard in a contract-based bad faith claim.  In a statutory claim, the two part standard articulated in Terletsky v. Prudential Property & Cas. Ins. Co., 437 Pa. Super. 108 (Pa. Super. Ct. 1994) applies and requires plaintiff show that the insurer lacked a reasonable basis for denying coverage and the insurer knew or recklessly disregarded its lack of reasonable basis.  In contract based bad faith claims, however, the court held that the Terletksy standard does not apply and used the standard articulated in Cowden v. Aetna, 389 Pa. 459 (Pa. 1957), which requires the insurer to accord its insured the same faithful consideration it givens its own interest.

The court then applied these standards and held that the defendant’s conduct did not satisfy the standard for either a statutory or a contract-based bad faith claim.  In so holding, the court found that it was reasonable for the defendant to wait until it had received the medical records of all injured passengers before offering the plaintiff the policy limits.  The court held that the defendant was not required to act in bad faith with respect to the claims of the other two passengers in order to avoid being accused of bad faith with respect to the plaintiff.  In addition, the court held that the delay in obtaining the medical records of the other passengers was caused by the passengers, not the defendant, and defendant therefore did not act in bad faith in delaying payment of defendant’s claim.  Finally, the court held that defendant’s failure to communicate the status of the investigation and claims to it’s insured did not constitute bad faith because the lack of communication did not cause the excess verdict.   

Date of Decision:  April 10, 2007

DeWalt v. The Ohio Casualty Insurance Company, United States District Court for the Eastern District of Pennsylvania, 2:05cv740, 2007 U.S. Dist. LEXIS 26901 (E.D. Pa. April 10, 2007)(McLaughlin, J.)

 

 
    

APRIL 2007 BAD FAITH CASES
STANDARD OF LIABILITY IN STATUTORY BAD FAITH CLAIM DIFFERS FROM STANDARD FOR CONTRACT-BASED BAD FAITH CLAIM (Philadelphia Federal)

Published on April 24, 2007 in PA - General Bad Faith and Litigation Issues. Closed

In DeWalt v. The Ohio Casualty Insurance Company, 513 F. Supp. 2d 287 (E.D. Pa. April 10, 2007), the insured (Guffey) was the driver of a car involved in a one-car accident that seriously injured three passengers, including DeWalt, who subsequently brought a claim against Guffey. The carrier had informed DeWalt’s counsel earlier of the amount of coverage, but that there was a policy limits problem because of the number of claimants. One of the three claimants took an excessively long time to respond to the carrier with his claims. Nearly a year after the accident, the carrier informed counsel for the three claimants that the carrier would pay the limits, but the three needed to agree on a distribution. (The limits were $25,000 per person and $50,000 accident, far less than what the three were demanding).

After this, DeWalt filed suit. The carrier eventually settled with the two other claimants for $12,500 each and offered DeWalt the remaining $25,000 three months later. DeWalt rejected the limits offer, and proceeded to trial against Guffey, winning a verdict in excess of $4,000,000. Guffey settled with DeWalt and assigned him any claims she had against her carrier. DeWalt then brought this contract action for bad faith as well as a statutory action for bad faith to recover the unpaid amount of his verdict. Defendant moved for summary judgment.

In granting the carrier’s motion, the court first held that the standard for liability in a statutory bad faith claim differs from the standard in a contract-based bad faith claim. In a statutory claim, the two part standard articulated in Terletsky v. Prudential Property & Cas. Ins. Co. (discussed below) applied, requiring that a plaintiff show the insurer lacked a reasonable basis for denying coverage and the insurer knew or recklessly disregarded its lack of reasonable basis.

In contract based bad faith claims, however, the court held that the Terletksy standard does not apply, and used the standard articulated in Cowden. This requires that the insurer refusing to settle accord its insured the same faithful consideration it gives its own interest in determining whether to settle a case; that there is a bona fide belief that there is a good possibility of winning the case; that the “chance of a finding of non-liability must be real and substantial and the decision to litigate must be made honestly.” Thus, the insurer’s sincere belief in its position is insufficient to defeat a contractual bad faith claim when failing to settle.

Moreover, rather than requiring knowing or reckless conduct, this court found that, following the Third Circuit’s decision in Haugh v. Allstate Ins. Co., 322 F.3d 227 (3d Cir. 2003), “a contract claim for bad faith requires evidence that an insurer acted negligently or unreasonably in handling the potential settlement of claims against its insured.”

The district court, however, applied the clear and convincing evidence standard to both types of bad faith. See also McPeek v. Travelers Casualty and Surety Company of America, No. 2:06-cv-114, 2007 U.S. Dist. LEXIS 46628 (W.D. Pa. June 27, 2007) (a case involving the carrier’s refusal to advance defense expenses based upon it interpretation of a policy exclusion, applying DeWalt’s differing standards, and refusing summary judgment for either party).

The court then applied these standards and held that the defendant’s conduct did not satisfy the standard for either a statutory or a contract-based bad faith claim. First, before finding for the carrier, the court ruled that an actual refusal to settle was not a necessary predicate for a bad faith claim, in rejecting the carrier’s argument that there could be no liability because it made an offer to settle at policy limits. In then holding for the carrier, the court found that it was reasonable for the carrier to wait until it had received the medical records and claims of all injured passengers before offering DeWalt the policy limits. In addition, the court held that the delay in obtaining the medical records of the other passengers was caused by the passengers, not the carrier, and it therefore did not act in bad faith in delaying payment of defendant’s claim. Finally, the court held that defendant’s failure to communicate the status of the investigation and claims to its insured did not constitute bad faith because the lack of communication did not cause the excess verdict.

Date of Decision: April 10, 2007
DeWalt v. The Ohio Casualty Insurance Company, United States District Court for the Eastern District of Pennsylvania, 2:05cv740, 2007 U.S. Dist. LEXIS 26901, 513 F. Supp. 2d 287 (E.D. Pa. April 10, 2007)(McLaughlin, J.)

 

 

APRIL 2007 BAD FAITH CASES
NO COMMON LAW CLAIMS FOR BAD FAITH IN FIRST PARTY INSURANCE ACTIONS; FIRST PARTY CLAIMS NOT GOVERNED BY BIRTH CENTER V. ST. PAUL (Philadelphia Federal)

Published on April 23, 2007 in PA - General Bad Faith and Litigation Issues. Closed

    

This Opinion has been reversed.  See July 2007 Archive on this site

 

In Kakule v. Progressive Casualty Insurance Company, the insured was involved in a motor vehicle accident with another vehicle.  The other vehicle did not stop and was never identified.  The insured sustained injuries to his upper body and was diagnosed with reflex sympathetic dystrophy.  The insured’s policy with defendant insurer provided up to $100,000 in uninsured motorist coverage.  The insured filed a claim demanding the maximum amount of benefits under the policy, but the insurer only offered $18,000 in satisfaction of the claim.  The insured chose not to accept the offer and an arbitration panel awarded the insured $500,000.  The insurer then paid the insured the policy limits and the insured filed an action alleging that the insurer breached its contractual duties under the insurance policy, violated Pennsylvania’s Bad Faith Statute and violated Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (“UTPCPL”).  The insurer filed a motion to dismiss the insured’s breach of contract and UTPCPL allegations.

The court granted the insurer’s motion and held that the insured cannot bring a common law contract claim for breach of the duty of good faith and fair dealing.  Although the Pennsylvania Supreme Court had previously declined to create a common law cause of action in bad faith in D’Ambrosio v. Pa. Nat. Mut. Cas. Ins. Co., 494 Pa. 501 (Pa. 1981), the insured argued that the case of Birth Center v. St. Paul Co., Inc. 567 Pa. 386 (Pa. 2001) changed the court’s position to now allow such causes of action.  The Eastern District disagreed with the insured’s argument and held that the Birth Center decision does not create a common law cause of action in bad faith for first party insurance coverage issues.  The court relied on the distinction that Birth Center dealt with third party insurance whereas D’Ambrosio as well as the case at bar involved first party insurance benefits.  The court made clear that common law bad faith claims in first party coverage situations are not cognizable as the Pennsylvania Bad Faith Statute provides the insured’s remedy. 

In addition, the court dismissed the insured’s claim under the UTPCPL as the facts alleged in the insured’s complaint showed proof of nonfeasance, not malfeasance.  Only malfeasances, the improper performance of a contractual obligation, raises a cause of action under the UTPCPL.

Date of Decision:  April 10, 2007

Kakule v. Progressive Casualty Insurance Company, United States District Court for the Eastern District of Pennsylvania, 2:06cv4995, 2007 U.S. Dist. LEXIS 26678 (E.D. Pa. April 10, 2007)(Kelly, J.)

 
            

APRIL 2007 BAD FAITH CASES -- CLAIM FOR BAD FAITH PROPERLY DISMISSED WHERE INSURED MADE CLAIM FOR LIFE INSURANCE BENEFITS FOR DECEASED EX-WIFE (Third Circuit)

Published on April 13, 2007 in PA - Coverage Issues. Closed

    

In Early v. United States Life Insurance Company in the City of New York, the insured asserted breach of contract, bad faith denial of benefits and state statutory claims after the insurer denied his claim for benefits under a life insurance policy that he had purchased through his employer for his deceased ex-wife.  The District Court dismissed the insured’s claim and the insured appealed.  In an unpublished opinion, the Third Circuit Court of Appeals affirmed the District Court’s dismissal because the insured’s policy specifically stated that only lawful spouses of employees are eligible for coverage.  Since the insured and his wife divorced prior to her death, there was no coverage.  In addition, the court also speculated that the insured’s claim would ordinarily fall within the scope of ERISA preemption.  However, neither party addressed whether the insured’s claims were preempted by ERISA.  The Court held that the insured’s claims would fail as a matter of law under Pennsylvania law as well as under ERISA’s civil enforcement provision, since the terms of the policy were clear and unambiguous.  

Date of Decision:  March 22, 2007

Early v. The United States Life Insurance Company in the City of New York, United States Court of Appeals for the Third Circuit, CV-05-4696, 2007 U.S. App. LEXIS 6870 (3d. Cir. March 22, 2007)(Sloviter, Ambro and Brody, JJ.)
    

APRIL 2007 BAD FAITH CASES
CLAIM FOR BREACH OF CONTRACT STEMMING FROM BAD FAITH HANDLING OF INSURANCE CLAIM IS VIABLE (Western District)

Published on April 12, 2007 in PA - General Bad Faith and Litigation Issues. Closed

In McCrory v. State Farm Mutual Automobile Insurance Co., the insured plaintiff suffered injuries in a motor vehicle accident and received $200,000 in payments under insurance policies held by both drivers involved in the accident. The insured plaintiff also sought the $100,000 policy limits of her own insurance through the defendant insurer, who refused to make payments. An arbitration panel awarded the insured plaintiff the full $100,000 under the policy. The defendant insurer paid the arbitration award and the insured plaintiff then filed an action for breach of an insurance contract as well as a violation of Pennsylvania’s bad faith statute. The insurer defendant filed a motion to dismiss plaintiff’s breach of contract count as well as a paragraph of the complaint referring to a breach of a fiduciary duty. The insurer defendant argued that the breach of contract claim was foreclosed because defendant eventually paid the uninsured motorist benefits and that the insured plaintiff was not entitled to attorneys fees, costs and interests as such damages are not available under the insurance contract. In addition, the insurer defendant argued that allegations regarding breach of fiduciary duty must be dismissed
The court denied the insurer defendant’s motion to dismiss the bad faith aspects of the claims, holding that breach of contract actions stemming from bad faith handling of insurance claims are viable, even when combined with a claim under Pennsylvania’s bad faith statute. The court looked to The Birth Center v. The St. Paul Companies, Inc., which recognized both types of bad faith claims. In addition, the insured Plaintiff might be entitled to compensatory damages for her bad faith claims. Finally, the court refused to dismiss the insured plaintiff’s allegation as to defendant insurer’s fiduciary duty, since the phrase fiduciary duty was merely used to describe the relationship between the insured and the insurer. Therefore, the insured defendant’s motion was denied.
Date of Decision: March 21, 2007
McCrory v. State Farm Mutual Automobile Insurance Company, United State District Court for the Western District of Pennsylvania, CV-07-0039, 2007 U.S. Dist. LEXIS 20981 (W.D. Pa. Mar. 21, 2007)(Lancaster, J.)

APRIL 2007 BAD FAITH CASES
INSURER’S ACTIONS TO CLARIFY SCOPE OF COVERAGE IN RESPONSE TO QUESTIONABLE CLAIM INSUFFICIENT TO PROVE BAD FAITH (Western District)

Published on April 11, 2007 in PA - Claims Handling Procedures. Closed

    

In Employers Mutual Casualty Company v. Loos, a pedestrian was struck as she was crossing a roadway by a third party driver.  The pedestrian died as a result.  The pedestrian’s father possessed an automobile insurance policy (the “policy”).  The policy provided, in pertinent part: “Who Is An Insured  If the Named Insured is designated in the Declarations as: 1.  An individual, then the following are “insureds”:  a.  The Named Insured and any “family members.”  2. A partnership . . . then the following are insureds”: a. Anyone “occupying” a covered “motor vehicle” or temporary substitute for a covered “motor vehicle.”  The covered “motor vehicle” must be out of service because of its breakdown, repair, servicing, “loss” or destruction. b. Anyone for damages he or she is entitled to recover because of “bodily injury” sustained by another insured.”

The policy Declarations designated the insured as a partnership.  However, under a separate heading of “NAMED INSURED,” the partnerships name was listed, as well as the father’s name.  The plaintiff insurer denied coverage under the policy on the ground that the daughter was not an “insured”; the insurer took the position that only the partnership, and not the father, was a named insured.  The father responded by sending a letter informing the insurer that he personally owned one of the vehicles insured under the policy, and that the vehicle had been used for purely personal travel.  However, at his deposition, he admitted that the vehicle had been used to plow the business when it snowed and also to pick up parts for the business, an automobile repair shop.  Six months after the accident, an underwriter sent the insurance agent for the partnership correspondence stating that she would be taking the father and another individual off the policy and leaving only the partnership as a named insured.  The underwriter also informed that the vehicle that the father claimed was owned by him personally would be deleted.  The underwriter responded that he felt that deleting the vehicle and cancelling the policy sent a message to the insured that they did not want exposure for the daughter’s death, which would in turn validate coverage for the death.  However, the plaintiff insurer still chose to cancel the policy as to the individuals.  The plaintiff insurer filed a declaratory judgment action, and the parents filed a counterclaim asserting bad faith denial of insurance benefits pursuant to 42 Pa. Cons. Stat. Ann. § 8371. 

The plaintiff insurer filed a motion for summary judgment on the declaratory judgment direct claim and the bad faith counterclaim.  The defendant parents and estate filed a cross-motion for summary judgment on the declaratory judgment claim only.  As to the declaratory judgment action, the court found that ambiguity existed and therefore the defendants were entitled to coverage.  As to the defendants’ bad faith counterclaim, the court noted that “an insurer’s denial of a claim does not constitute bad faith if it is based on a reasonable legal position in an unsettled area of the law.”  While the defendants contended that the plaintiff insurer had no reasonable basis for denying underinsured motorist benefits under the policy, the court disagreed, even though it had ultimately ruled against the insurer on coverage because of ambiguity.  The defendants also argued that the correspondence between the insurer and the agent evidenced bad faith.  However, the court stated that the proposed deletion or cancellation could arguably be viewed as a change in the terms of the policy or a clarification as to what those terms had always been.  The court stated that to prove a violation of the bad faith statute, “defendants must do more than show that plaintiff acted to clarify its perceived limits to the scope of coverage after being presented with a seemingly questionable UIM claim.”  The court therefore granted the insurer summary judgment on the bad faith counterclaim.

One of the court’s key findings was that the plaintiff does not have to prove ill-will or self-interest as elements of a bad faith claim, in addition to objectively unreasonable behavior and conscious or reckless disregard thereof.  Rather, the presence or absence of ill-will or self-interest goes to the issue of whether, if there is objective unreasonableness, the insurer’s consciously chose to act that way or recklessly disregarded that it was doing so.

Date of Decision:  February 28, 2007

Employers Mutual Casualty Company v. Loos, 476 F.Supp.2d 478 (W.D. Pa. 2007)(W.D. Pa. Feb. 28, 2007) (Conti, J.)
        

APRIL 2007 BAD FAITH CASES - NO BAD FAITH IN DENYING LONG TERM DISABILITY BENEFITS WHERE INVESTIGATION INCLUDED INDEPENDENT EXAMINATION AND REVIEW (Philadelphia Federal)

Published on April 10, 2007 in PA - Claims Handling Procedures. Closed

    

In Wedemeyer v. The United States Life Insurance Company in the City of New York, the plaintiff insured was a principal for a school for students with serious problems with discipline, weapons violations, drugs, or assault.  The plaintiff was involved in a rear-impact car accident.  She was covered under a disability insurance policy that included long term disability benefits.  After the accident, she did not return to work, did not seek alternative employment as a principal or in any other capacity, and did not request that her employer make any accommodations for any disabilities.  At the time of the accident, the plaintiff was enrolled in and at the end of a doctoral program, taking her last classroom course before writing her dissertation.  Approximately one and one-half years after the accident, she also enrolled in a Masters of Business Administration (“MBA”) program, and drove 25 miles each way to attend.  Approximately two years after the accident, while she still claimed total disability, she traveled to China, Singapore and Thailand as part of a three credit course which was not required for hr MBA program.  She never informed the insurer of her enrollment in the MBA program or her overseas travel.

Eight months later, the insurer sent the plaintiff a letter reminding her that proof of continued disability is required for benefits, and requested information as to her current medical status, as well as information about any classes she had taken over the past two tears.  The letter specifically requested that the plaintiff provide a response to the following question: “[H]ow are you able to attend classes and fulfill all the requirements involved with attending school, but still feel unable to work?  How do these requirements differ from the activities of your job?”  The plaintiff responded that her doctoral program permitted her to work at her own pace and communicate by phone, mail, and e-mail, whereas her job required 50-60 hour stressful weeks overseeing a school for disruptive youths and a commute of 38 miles each way for five to six days per week.  At no point did the plaintiff disclose that she was also pursuing an MBA, or that it required her to appear in person and commute.  The insurer ordered additional medical record reviews by physicians, and two outside independent medical examinations of the plaintiff.  After giving plaintiff’s treating physician a chance to respond, the insurer notified the plaintiff that it was terminating her benefits.  The plaintiff elected to appeal, and the insurer assigned the matter to an appeals analyst with no previous involvement in the matter.  The insurer also commissioned independent file reviews from two additional doctors, and gave the plaintiff’s treating physicians an opportunity to respond.  One of the plaintiff’s physicians chose not to respond.  The other relied on a report written approximately two years earlier that did not opine on any restrictions on the plaintiff’s ability to work.  The insurer upheld the revocation of benefits.

The plaintiff filed a suit alleging, in part, that the revocation of benefits constituted bad faith.  The plaintiff accused the insurer of having “a mindset of denial” throughout the investigation of her claim.  She claimed that the insurer’s medical record reviews were defective and that its doctors were biased.  The court noted the many medical file reviews and medical reports that were conducted and drafted in the course of the investigation, including two reviews by independent consultants.  The court also noted that the plaintiff underwent two independent medical examinations by independent doctors.  Finally, the court noted that the plaintiff’s own physicians declined to supplement the record.  The court found that this was more than enough to show that the insurer conducted a thorough investigation and had a reasonable basis for terminating the benefits.  Moreover, as to the plaintiff’s claim that a certain employee doctor failed to consider evidence regarding the nature of her doctoral program, and that the employee doctor was biased, the court noted that the doctor was only one of many reviewers and was not the ultimate decision maker on the claim.  While the plaintiff argued that the particular employee doctor had the “real authority” to deny her claim, and that the claims analyst who purportedly had final decision making authority had a “relatively modest educational and training background” in comparison to the doctor, the court found the plaintiff’s argument unpersuasive.  “Absent specific facts suggesting that employees’ ages or years of job experience affected their decision-making abilities, such factors are irrelevant.”  The court found that the plaintiff offered no such specific facts, but rather “only crude innuendo.”  Therefore, the court granted summary  judgment for the insurer on the bad faith claim.

Date of Decision:  March 6, 2007

Wedemeyer v. The United States Life Insurance Company in the City of New York, et al., United States District Court for the Eastern District of Pennsylvania, No. 05-6263, 2007 U.S. Dist. LEXIS 15742 (E.D. Pa. March 6, 2007) (Dalzell, J.),  

 
        

APRIL 2007 BAD FAITH CASES
AMOUNT IN CONTROVERSY CANNOT BE CREATED FOR FEDERAL JURISCTION BY INSURED’S REFUSAL TO SIGN INSURER’S FORM OF STIPULATION WHERE INSURED DECLARED CLAIM LESS THAN $75,000

Published on April 9, 2007 in PA - Procedural Issues. Closed

    

In Jenkins v. Texas International Life Insurance, the plaintiff insured brought a claim against the defendant insurer pursuant to the Pennsylvania Bad Faith Insurance statute, 42 Pa. Cons. Stat. Ann. § 8371.  The case was removed from the Court of Common Pleas of Allegheny County to the U. S. District Court for the Western District of Pennsylvania.  The sole basis for federal jurisdiction was diversity of citizenship.  Subsequently, the plaintiff filed a motion to dismiss for lack of subject matter jurisdiction.  In support of the motion, the plaintiff filed a Declaration stating that the amount in controversy can not reasonably be expected to meet or exceed the jurisdictional amount of $75,000, even with attorney fees under the bad faith statute.  The court granted the dismissal.

Because it was not satisfied with the plaintiff’s representations in the motion and supporting Declaration, the defendant insurer prepared a “stipulation” that it requested plaintiff sign.  The plaintiff refused.  Thereafter, the defendant moved before the federal court, arguing that the plaintiff’s refusal to sign the stipulation created federal jurisdiction.  The court disagreed.  “Regardless of counsel for defendant’s attempts to create federal jurisdiction, plaintiff’s refusal to sign defendant’s form of stipulation does not create federal jurisdiction.”  The court noted that by filing the Declaration with the court, the plaintiff limited her recovery to less than $75,000, and the defendant insurer could use the Declaration to prevent plaintiff from seeking a greater amount in state court.

Date of Decision:  February 28, 2007

Jenkins v. Texas International Life Insurance, United States District Court for the Western District of Pennsylvania, No. 07-CV-0156, 2007 U.S. Dist. LEXIS 14238 (W.D. Pa. Feb. 28, 2007) (Schwab, J.)

APRIL 2007 BAD FAITH CASES
NO BAD FAITH IN DELAYING COVERAGE WHILE INVESTIGATING CLAIM; AND DISPUTE AS TO INSURED’S POTENTIAL MISREPRESENTATION IN APPLICATION NOT MATERIAL TO BAD FAITH CLAIM

Published on April 8, 2007 in PA - Claims Handling Procedures. Closed

    

In Estakhrian v. Continental General Insurance Company, the insured plaintiff submitted an online application for health insurance.  Thereafter, a representative of the insurer conducted a telephone interview to verify the information in the application.  The insured plaintiff failed to inform the insurer that she had underwent in the previous months three mammograms and a biopsy of her breasts, all of which were inconclusive.  Seven months later, the plaintiff insured was diagnosed with breast cancer and ultimately underwent a double mastectomy and major reconstructive surgery.  The plaintiff contended that she was never informed of the purpose of the biopsy or that the calcifications in her breasts were abnormal.

The insurer wrote to the plaintiff’s insurance agent to inquire whether the plaintiff had disclosed additional information to him that was not included in the insurance application, and the agent responded in writing that he recalled “no medical history not disclosed on the app[lication].”  The insurer informed the plaintiff that she had the option of signing a coverage rider excluding payment for breast conditions or discontinuing the policy and receiving a refund of net premiums. The insurer also gave the plaintiff additional time for her doctor to submit additional information for their coverage investigation.  The plaintiff’s doctor prepared a letter stating that the plaintiff’s breast cysts necessitating the bilateral mastectomy were not related to the abnormalities discovered in her previous mammograms and biopsy.  Thereafter, the insurer once again contacted the agent regarding the insurance application.  This time, in the insurer’s opinion, the tone of the agent’s response seemed to change, and he could not definitively state if all medical history disclosed to him was included in the application.  At this point, after approximately one year had passed since the plaintiff had first submitted her claim, the insurer extended coverage.

The plaintiff brought a bad faith suit against the insurer.  The plaintiff alleged that the insurer’s conduct during the application process constituted bad faith in that the online application “failed to contain a question . . . specifically geared to breasts” and that the insurer “failed to ask specific questions regarding breasts or mammograms” in the telephone interview.  The court, on the insurer’s motion for summary judgment, ruled that nothing in the record came close to showing bad faith during the application process.  “There is no legal support for plaintiff’s suggestion that the failure of defendant to inquire about any particular health condition arises to any showing, let alone a showing by clear and convincing evidence, of bad faith.”

The plaintiff also alleged bad faith in the processing of her claim, including (1) that the insurer failed to keep written notes regarding plaintiff’s claim; (2) that the letter sent by the insurer requesting a rider did not specifically inform the plaintiff of her right to appeal, but rather the right to appeal was communicated one month after the letter; and (3) that the underwriter did not obtain additional information from the plaintiff’s doctors before issuing his coverage opinion.  While the court noted that the insurer certainly could have done things differently in its claims processing, that the processing could have been improved does not mean that unimproved actions arose to bad faith.  “The crux of a bad faith claim is that the insurer lacked a reasonable basis for its action and it acted knowingly and recklessly in disregard of that lack of a reasonable basis.”  The court noted that while a dispute of fact existed as to whether the plaintiff fraudulently misrepresented material information such that the insurer would have been entitled to rescind the policy, such a dispute was not material to the bad faith claim.  Rather, the bad faith claim can be resolved as long as the insurer can demonstrate that it had a reasonable basis for its actions.  Therefore, the court granted summary judgment to the insurer.

Date of Decision:  December 18, 2006

Estakhrian, et al v. Continental General Insurance Company, et al., United States District Court for the Eastern District of Pennsylvania, No. 2:06-CV-00218, 2006 U.S. Dist. LEXIS 95607 (E.D. Pa. Dec. 18, 2006) (Davis, J.)