Monthly Archive for April, 2014

APRIL 2014 CASE ON DECLARATORY JUDGMENT ACTIONS: THIRD CIRCUIT PUTS SOME BRAKES ON DISTRICT COURTS’ ABSTAINING IN FEDERAL DECLARATORY JUDGMENT ACTIONS INVOLVING INSURANCE COVERAGE (Third Circuit)

Published on April 30, 2014 in NJ - Procedural Issues and PA - Procedural Issues. Closed

In Reifer v. Westport Insurance Corporation, the Third Circuit issued its most important decision on the exercise of federal jurisdiction in insurance declaratory actions since its 2000 decision in State Auto Ins. Co. v. Summy, 234 F.3d 131 (3d Cir. 2000).

For practical purposes, the most important statement in the new Opinion may be that: “While we sympathize with our district courts’ apparent frustration over the volume of such cases, we, like our sister circuit, ‘know of no authority for the proposition that an insurer is barred from invoking diversity jurisdiction to bring a declaratory judgment action against an insured on an issue of coverage.’” The Court painstakingly went over the law in other circuits, and detailed the factors that District Courts should consider in weighing the abstention issue. The lesson is clear that there is no bright line rule permitting abstention by which the District Courts can forego this weighing of factors; and there is clearly no rule that would allow for automatic abstention in the absence of a federal legal issue, independent of whether the state law is settled.

The Third Circuit upheld the District Court’s abstention order in this case, which had been issued sua sponte after a Magistrate Judge had provided a lengthy Report and Recommendation solely on substantive issues. A key focus was the presence of a potentially important, but undecided, issue of substantive state law; which should be decided by a state court rather than a federal court in the first instance. The Court’s Opinion thus indicates that the unsettled nature of the state law at issue is going to bode in favor of abstention; but that if the state law to be applied is settled, this can be as readily applied by a federal court as a state court. The Court made clear that the District Court’s decision was to be reviewed under an abuse of discretion standard, and any prior Third Circuit decisions requiring more stringent review had been overruled by the Supreme Court on this issue.

Date of Decision: April 29, 2014 (Issued as a Precedential Opinion)

Reifer v. Westport Insurance Corporation, No. 13-2880, 2014 U.S. App. LEXIS 8014 (3d Cir. April 29, 2014) (Van Antwerpen, J.)

APRIL 2014 BAD FAITH CASES: COURT ORDERS PRODUCTION OF RESERVE INFORMATION IN BAD FAITH CASE; DENIES PRODUCTION OF WORK PRODUCT PREPARED IN ANTICIPATION OF LITIGATION (Middle District)

Published on April 29, 2014 in PA - Claims Handling Procedures, PA - Discovery and Evidence and PA - Reserves. Closed

In Shaffer v. State Farm Mut. Auto. Ins. Co., Judge Rambo issued her second discovery opinion in the insurance bad faith context within three days. The Judge had ordered the insurer to submit unredacted versions of all redacted and partially redacted pages of the claims log to the court for an in camera review. The files provided to the insured by the carrier remained significantly redacted.

The dispute involved a UIM claim, where the insureds (with the carrier’s consent), settled their claims with the other driver and sought additional coverage on their own policy. $200,000 was available in coverage, and the insureds demanded $150,000, and had provided the carrier with medical records and other information regarding the claim. The carrier made no settlement offer. The insureds brought claims for breach of contract and bad faith, but the court denied a motion to dismiss the bad faith claim.

The court evaluated the redactions under the work product privilege. The court stated that an insurer’s claims file may be discoverable in a bad faith case like this one, as information in that file on the defendant’s actions related to the claim is relevant or could lead to potentially relevant information; however, it cited precedent applying the work product doctrine limiting that discovery as the work product privilege protects “the mental impressions, conclusions, opinions, or legal theories of an attorney or other representative of a party concerning the litigation.” The court observed that the work product doctrine is not applicable merely because the material was prepared by or for the agents of an insurer, and that an insurer’s attorney “may invoke work product protection in favor of documents prepared by it in anticipation of litigation….” However, Rule 26(b)(3) was “not intended to protect all insurance claim files from discovery.” Thus, “[a]n insurance company cannot reasonably argue that the entirety of its claims files are accumulated in anticipation of litigation when it has a duty to investigate, evaluate[,] and make a decision with respect to claims made on it by its insureds.”

The court was unable to determine the basis for much of the redaction, but noted that several portions were likely redacted because the pages contained information pertaining to reserves or the insurance adjusters’ impressions or conclusions.

As to reserves, the carrier had redacted all reserve information. The court observed that there is competing treatment of whether reserve information is discoverable in a bad faith lawsuit. Some courts have determined that information related to reserve values is not discoverable and that the procedure for setting reserves . . . is confidential information which a court should not order to be disclosed unless the relevance of the information is clear and disclosure is necessary. However, other courts have found that “reserves, of course, must have some relationship to the insurer’s estimation of the insured’s potential liability. Otherwise, the setting aside of reserves would serve little, if any purpose.” Thus, the amount set aside for reserves “is certainly germane to any analysis [the defendant-insurer] made of” the claim’s value and is relevant to the determination of whether the defendant-insurer acted in bad faith in processing the claim. The court concluded that because the insureds alleged that the carrier acted in bad faith during its investigation of their UIM claim, the amount set aside for reserves is relevant to the determination of whether it acted in bad faith in processing the claim, and therefore, the court ordered the disclosure of such information.

As to the insurance adjuster’s impressions, conclusions and opinions, the court first stated that mental impressions and opinions of a party and its agents are not generally protected by the work product doctrine unless they are prepared in anticipation of litigation. Thus, “work product prepared in the ordinary course of business is not immune from discovery.” As stated by Judge Rambo three days earlier in Keefer v. Erie Ins. Exchange, the gravamen of a claim of work product protection necessarily requires an assessment of when litigation was anticipated, which is a determination not subject to a bright-line rule. As recognized by the Third Circuit, “[p]rudent parties anticipate litigation and begin preparation prior to the time suit is formally commenced.” Thus, whether litigation was reasonably anticipated is a fact-dependent inquiry. Although the court lacked the necessary evidence to determine when the insurer reasonably anticipated litigation, the court had reviewed the claims file with this standard in mind, and concluded that certain portions of the record were prepared in anticipation of litigation and should be protected. The accompanying order reflects the court’s findings in this regard. Date of Decision: March 10, 2014

Shaffer v. State Farm Mut. Auto. Ins. Co., Civil Action No. 1:13-cv-01837, 2014 U.S. Dist. LEXIS 30436 (M.D. Pa. March 10, 2014) (Rambo, J.)

APRIL 2014 BAD FAITH CASES: INSURED STATED CLAIM FOR COMMON LAW CONTRACTUAL BAD FAITH UNDER BIRTH CENTER AND COWDEN FOR COMPENSATORY DAMAGES, INCLUDING POSSIBILITY OF RECOVERING DAMAGES FOR EMOTIONAL DISTRESS; AND THE COURT PERMITTED THE CASE TO PROCEED ON BAD FAITH THEORY THAT THE INSURER SOUGHT A GLOBAL SETTLEMENT OF UNDERLYING COVERAGE AND BAD FAITH CLAIMS, EVEN THOUGH COURT QUESTIONED THE STRENGTH OF THAT POSITION (Philadelphia Federal)

Published on April 27, 2014 in PA - General Bad Faith and Litigation Issues. Closed

In Perrugia v. American Home Assurance Company, the District Court revisited principles of common law contractual bad faith claims under Cowden and Birth Center, and found that under these principles, damages for emotional distress were recoverable even where the sum paid under the policy was no longer in dispute.

The insured worked for Verizon, and was seriously injured while driving in the course of his employment. The other driver had a $500,000 policy, and Verizon had a $2 million policy in first-party underinsurance coverage. The injured insured settled with the other driver’s carrier for $451,673; and Verizon’s insurer allegedly gave express consent to that agreement.

The injured party pursued Verizon’s carrier, and provided the insurer’s adjuster with medical records, reports from treating physicians, and a vocational expert’s report on lost earnings—said to be over $1.5 million. The insured alleged a dilatory response in the carrier’s adjustment of the claim, making its first settlement offer approximately two years after being provided with this data. That offer would have included a global release of any claims in connection with the insured’s claim for underinsured motorist benefits and, subsequent to the offer, the insurer’s attorney asked the plaintiff’s attorney if he intended to bring a statutory or common law bad faith claim related to the adjustment of the insurance claim.

The insured alleges that the insurer willfully failed to adjust the claim in a timely manner; inadequately supervised outside counsel; failed to make timely requests for necessary materials; failed to evaluate damages fairly and in good faith; failed to make reasonable, good faith settlement offers; failed to negotiate without demanding a global release of claims; and failed to communicate with the insured in good faith. One week before binding arbitration, the parties reached settlement in an amount of $1.65 million, allegedly to resolve the underinsured motorist claim only. The insured then brought suit claiming breach of contract and breach of the implied covenant of good faith and fair dealing and statutory bad faith. The carrier moved to dismiss.

First, the court rejected the notion that there was no common law claim for bad faith. Citing Birth Center and Cowden, it recognized that at least since Cowden was issued in 1957, insureds have possessed a ccommon law contract right permitting an insured to recover compensatory damages in bad faith actions. These principles revolve around a bad faith failure to settle that results in damages other than simply payment of the policy limits. Thus, the insurer’s payment of the amounts owed under the policy do not free it from other known or foreseeable damages it has caused its insured to incur.

The court further found that Pennsylvania Supreme Court case law specifically recognized the possibility that emotional distress damages may be recoverable on a contract where, for example, the breach is of such a kind that serious emotional disturbance was a particularly likely result. The court further found that there was no “physical impact requirement” needed to establish a claim for emotional distress damages in the common law bad faith breach of contract setting. Whether the insured could ultimately prove that the insurer should have foreseen that severe emotional distress was a likely result of its conduct remained open, but the insured had set out a plausible claim for relief. The court did note that, while the insured alleged that he suffered severe emotional distress as a result of delay in adjustment of his claims and that this was “foreseeable” to the insurer, the insured did not allege the insurer had actual knowledge of the emotional distress.

Next, the insurer sought to dismiss the breach of contract claim based on its alleged attempt to achieve a global settlement in its negotiations with the insured. The insurer asserted that it was not probative of bad faith to ask for a global settlement, and, in any event, the insured could not show damages from such a request. The insured contended the request was a delay-causing attempt to coerce him into releasing the bad faith claims at issue in the current litigation.

The court observed that there may be a valid cause of action where an insurer knows an insured is entitled to a policy limit but will only agree to make full payment if the insured agrees to a global release. In general, however, “it is not inappropriate for an insurance company to attempt to resolve all claims with one settlement, particularly when there is no indication of an attempt to mislead.” Under the circumstances, the court found it difficult to see how the claim based on the insurer’s request for global settlement could be successful. However, it then found that the insured had alleged a plausible bad faith claim on this point. The court expressly stated that it would allow the parties to develop a more specific factual record through discovery, and address the issue again at summary judgment or at trial.

Date of Decision: March 11, 2014

Peruggia v. Am. Home Assur. Co., 2:13-cv-6256-WY, 2014 U.S. Dist. LEXIS 33007 (E.D. Pa. March 11, 2014) (Yohn, J.)

APRIL 2014 BAD FAITH CASES: FEDERAL DISTRICT JUDGE PROVIDES DETAILED ANALYSIS ON PROPER SCOPE OF DISCOVERY IN UIM BAD FAITH CASE AS TO RESERVES, CLAIMS HANDLING DOCUMENTS AND PRACTICES, EVALUATING VALUE OF CLAIMS, RATIONALE FOR NON-PAYMENT, ADJUSTER’S MENTAL IMPRESSIONS, FILE REDACTION, AND DISCOVERABILITY OF OTHER BAD FAITH CLAIMS AGAINST THE SAME INSURER (Middle District)

Published on April 26, 2014 in PA - Discovery and Evidence, PA - Experts, PA - Reserves and PA-Manuals. Closed

In Keefer v. Erie Insurance Exchange, the court addressed the scope of discovery in a bad faith UIM context. The insurer had objected to producing discovery on the following:

 

1) The initial reserve value for Plaintiff’s claim and the amount in which it has changed, if at all; 2) Claims manuals and any documents used to process and/or investigate Plaintiff’s claims; 3) Any evaluations conducted regarding Plaintiff’s demands or Defendant’s offers; 4) Rationale as to why the claim had not been paid; 5) Impressions/conclusions and opinions of the adjuster(s) regarding the value and/or merit of the claim and/or defenses; 6) Complete un-redacted copy of the Claims file; 7) Names/Captions and location of all bad faith claims against the Defendant in the last five years; 8) Procedures followed or pursued to determine if a claim is to be paid; and 9) In what way Defendant deviated from its normal procedure in the investigation of Plaintiff’s claims.

 

In addition to these categories, the insured requested that the insurer’s neuropsychologist produce raw test data from his examination of injured sured. The court has reviewed the raw test data in camera.

 

1. Reserves

The insurer argued that reserves are not discoverable in a bad faith claim. The court observed that “there is competing treatment of whether reserve information is discoverable in a bad faith lawsuit.” Some courts find it not discoverable on the bases that it is confidential information which a court should not order to be disclosed unless the relevance of the information is clear and disclosure is necessary; while other courts have found that “reserves, of course, must have some relationship to the insurer’s estimation of the insured’s potential liability. Otherwise, the setting aside of reserves would serve little, if any purpose.” In the latter court’s opinions, the amount set aside for reserves “is certainly germane to any analysis [the defendant-insurer] made of” the claim’s value and is relevant to the determination of whether the defendant-insurer acted in bad faith in processing the claim. The present court agreed that the amount of reserve, if any, assigned to the insured’s UIM claim should be produced. The insured asserted claims that that the insurer acted in bad faith during its claim investigation, and thus a comparison between the reserve value of the claim and the insurer’s actions in processing the claim could shed light on the insurer’s liability under the bad faith statute. Thus, the reserve amount was deemed relevant or that it could potentially lead to relevant information.

The court also rejected the argument that the reserve information is protected from discovery by the work product doctrine. It could not agree that the reserve values were prepared outside the ordinary course of business. Under the work product doctrine, mental impressions and opinions of attorneys and their agents are protected from discovery when they are prepared in anticipation of litigation, as distinguished from materials prepared in the ordinary course of business.

2. Claims Manuals, Procedures Generally Followed, and Procedures Followed in Evaluating and Investigating Plaintiff’s UIM Claim

The insured sought information from the insurance adjuster or supervisor regarding the claims manuals used to process and/or investigate the insured’s claims, the procedures followed or pursued to determine whether a claim is to be paid, and whether the insurer exercised a normal procedure in investigating and evaluating the UIM claim. The insured argued this was relevant to the reasoning upon which the insured denied satisfying the UIM claim, and therefore relevant to the bad faith claim. The insurer argued that the posture of this case, which includes both bad faith and UIM causes of action, militates against disclosure as unduly prejudicial, even if the manuals would be relevant to the bad faith lawsuit. The court permitted the insured to inquire into the processes that the insurer used to investigate her claims. As to the relevance of Defendant’s policies for handling claims, inquiry into this area is reasonably calculated to lead to information relevant to the bad faith cause of action. Such material would allow the insured to compare the insurer’s standards for evaluating claims with the conduct of the insurer’s agents in the case at hand. Although the fact that the insurer’s agents departed from established standards or policies in handling this UIM claim may not alone establish bad faith, such information “is probative evidence” and could make it more likely that the insurer acted in bad faith in investigating the UIM claim. Given the liberal scope of federal discovery and the fact that such information may lead to the discovery of admissible evidence, the court overruled the insurer’s objections to this discovery.

 

3. Evaluations, Impressions, Conclusions, and Opinions Regarding the Value and Merit of Plaintiff’s Claims and Demands and Defendant’s OffersThe insurer opposed inquiries regarding its adjusters’ impressions, conclusions, and opinions regarding the value and merit of the claim and their evaluations of the insured’s demands and the insurer’s offers. The court observed that mental impressions and opinions of a party and its agents are not generally protected by the work product doctrine unless they are prepared in anticipation of litigation. Thus, “work product prepared in the ordinary course of business is not immune from discovery.” The gravamen of a claim of work product protection necessarily requires an assessment of when litigation was anticipated, which is a determination not subject to a bright-line rule, observing that: “Prudent parties anticipate litigation and begin preparation prior to the time suit is formally commenced.” Thus, whether litigation was reasonably anticipated is a fact-dependent inquiry, and the facts were not developed on this issue by the present parties. To determine the issue, it needed specific evidence demonstrating when litigation was reasonably anticipated. The court stated generally that the insured would be permitted to inquire into the adjuster’s opinions, mental impressions, and conclusions that he or she formed while investigating the UIM claim in the ordinary course of business and not formed with litigation reasonably anticipated. However, as there were insufficient facts to determine anticipation of litigation vs. ordinary course, the court did not rule on the objection at that point.

 

4. Rationale Underlying the Reason for Non-PaymentThe insurer objected to the inquiry regarding the adjuster’s or supervisor’s rationale of the reason Plaintiff’s UIM claim had not been paid. Given the liberal scope of federal discovery and the fact that the reason for non-payment may be probative of whether insurer acted in bad faith in the investigation of the UIM claim, the objection was overruled.

 

5. Un-redacted Claims FileThe parties disputed whether the insured was entitled to access of the insurer’s entire claims file created for the underlying UIM case. The insurer argued that certain documents within the claims file are subject to the attorney-client privilege or work product protection and need not be produced. The insurer did not dispute that at least some portion of the file may be discoverable in this action. The court stated that an insurer-defendant’s claims file may be discoverable in a bad faith case like this one, as information in that file on the defendant’s actions related to the claim is relevant or could lead to potentially relevant information; but also observing that prior case law held that while a plaintiff could discover claims file in bad faith case, it would apply the work product doctrine to limit the plaintiff’s attempt to discover the un-redacted UIM claim file and all documents associated with the file. The court denied discovery to the extent that the insured wanted the entire file without any redactions for attorney-client privilege. The insurer was required to produce the claims file, and the insured would be entitled to question the insurer’s agents on its contents. The insurer could assert privilege over portions of the case file and set forth the redacted portions in a privilege log, and the insured could challenge those assertions through an appropriate motion with the court. At present, the court could not make a decision on whether particular documents in the file were subject to privilege, as such an assessment would require a motion that describes the particular documents at issue and an in camera inspection. The insurer was ordered to produce the claims file subject to its assertions of privilege. The court also denied the insured’s request to the extent that she seeks the entire claims file without any redactions for documents falling under the work-product doctrine, noting that the work product privilege protects “the mental impressions, conclusions, opinions, or legal theories of an attorney or other representative of a party concerning the litigation.” The work product doctrine, however, is not applicable merely because the material was prepared by or for the agents of an insurer. An insurer’s attorney “may invoke work product protection in favor of documents prepared by it in anticipation of litigation, but Rule 26(b)(3) was “not intended to protect all insurance claim files from discovery.” Citing prior case law: “An insurance company cannot reasonably argue that the entirety of its claims files are accumulated in anticipation of litigation when it has a duty to investigate, evaluate[,] and make a decision with respect to claims made on it by its insureds.”

6. Unrelated Bad Faith Actions The insurer objected to the insured’s solicitation of information regarding unrelated bad faith claims against the insurer in the last five years. The court found that: “Past claims by other insureds are not relevant to the present bad faith action before the court.”

7. Raw Test Data The insurer objected to producing raw test data collected from the insured during a neuropsychological examination. The court reviewed the raw test data in camera. The insurer wanted a protective order, citing the need for confidentiality of the raw data gathered from the neuropsychological evaluation; based on the examining doctor’s statement regarding the need to protect the integrity of the examination methods and results. The court found the concerns legitimate; however, they did not warrant a protective order to prevent disclosure. The court observed that the party wishing to obtain a protective order has the burden of demonstrating that “good cause” exists for the order. Citing Third Circuit precedent, good cause is established on a showing that disclosure will work a clearly defined and serious injury to the party seeking closure. Such an injury must be shown with specificity, as broad allegations of harm, unsubstantiated by specific examples or articulated reasoning, do not support a good cause showing. Courts must use a balancing test, weighing the requesting party’s need for information against the injury that might result if uncontrolled disclosure is compelled. When the risk of harm to the owner of a trade secret or confidential information outweighs the need for discovery, disclosure through discovery cannot be compelled, but this is an infrequent result. If the materials should be disclosed, the issue is whether some limitation should be placed on the disclosure, which again depends on a judicial balancing of the harm to the party seeking protection (or third persons) and the importance of disclosure to the public. Courts have a great deal of flexibility in crafting the contents of protective orders to minimize the negative consequences of disclosure and serve the public interest simultaneously.

Most commonly, courts condition discovery of confidential documents by preventing the party obtaining the documents from sharing that document with others and by using that document for any purpose other than the present litigation. Courts are given the necessary flexibility to “justly and properly consider the factors of each case.” Applying these standards, the extent of the insured’s injuries was a central issue. The data sought form the insurer’s doctor pertained to the tests and results therefrom that were conducted to assess the extent of those injuries. Thus, liberal discovery policies dictated that the material was discoverable. However, the court ordered that the raw test data be produced following the execution of a confidentiality agreement designed to protect the confidential nature and trade secrets of the tests conducted by examining doctor.

Date of Decision: March 7, 2014

Keefer v. Erie Ins. Exch., Civil No. 1:13-CV-1938 , 2014 U.S. Dist. LEXIS 29282 (M.D. Pa. March 7, 2014 (Rambo, J.)

APRIL 2014 BAD FAITH CASES: THIRD CIRCUIT AFFIRMS APPLICATION OF EXCLUSIONS TO DAMAGES ARISING FROM FLUID RELEASE OF DECOMPOSING BODY (Third Circuit)

Published on April 25, 2014 in PA - Coverage Issues. Closed

In Certain Underwriters at Lloyd’s London Subscribing to Policy No. SMP3791 v. Creagh, the District Court found that certain policy exclusions precluded coverage for property damage arising out of fluid release from a decomposing body, which is detailed in this earlier blog entry. The Third Circuit affirmed on the grounds explained by the District Court in finding no coverage, and readily upheld dismissal of the bad faith counterclaim in a footnote.

Date of Decision: April 14, 2014

Certain Underwriters at Lloyds v. Creagh, No. 13-3541, 2014 U.S. App. LEXIS 6853 (3d Cir. April 11, 2014) (Hardiman, J.)

APRIL 2014 BAD FAITH CASES: PENNSYLVANIA SUPREME COURT TO CONSIDER ISSUE OF WHETHER BAD FAITH CLAIM CAN BE ASSIGNED

Published on April 25, 2014 in PA - General Bad Faith and Litigation Issues and PA - Procedural Issues. Closed

In Wolfe v. Allstate Property Casualty Ins. Co., Judge Jones of the Middle District held that statutory bad faith claims could be assigned. This runs contrary to rulings in the Eastern District, holding that such claims cannot be assigned; one of which decisions, Feingold v. Liberty Mutual Group, was upheld in a non-precedential opinion from the Third Circuit three weeks ago, in which the Panel commended Judge Bartle’s detailed reasoning in concluding that Pennsylvania law does not permit such assignments.

However, in the Third Circuit appeal of Judge Jones’ decision in Wolfe, that Panel petitioned the Supreme Court of Pennsylvania for certification of the following question of law: “Under Pennsylvania law, can an insured tortfeasor assign his or her bad faith claim against an insurer, under 42 Pa.C.S. § 8371, to an injured third party?” Yesterday, the Supreme Court granted the Petition, and will hear the matter in Allstate Property and Casualty Insurance Company v. Jared Wolfe, No. 39 MAP 2014. Our thanks again to the Tort Talk blog for bringing this latest development to our attention.

Date of Decision: April 24, 2014

Allstate Prop. & Cas. Ins. Co. v. Wolfe, No. 23 MM 2014, 2014 Pa. LEXIS 1044 (Pa. April 24, 2014) (Per Curiam), transferred as Case No. 39 MAP 2014.

On December 15, 2014, the Supreme Court ruled section 8371 claims are assignable.

 

 

APRIL 2014 BAD FAITH CASES: AFTER FINDING INSURER IMPROPERLY DENIED COVERAGE, COURT FOUND SUMMARY JUDGMENT MOTION ON BAD FAITH CLAIM PREMATURE, AS THE RECORD WAS INSUFFICIENT TO DETERMINE IF THE INSURER ACTED WITH KNOWLEDGE OR RECKLESS DISREGARD OF THE LACK OF A REASONABLE BASIS FOR DENYING THE INSUREDS’ CLAIM (New Jersey Federal)

Published on April 25, 2014 in NJ - Claims Handling Procedures and NJ - Coverage Issues. Closed

In Tripoldi v. Universal North American Ins. Co., the insureds had attempted to construct a water proofing system in their basement, the results of which ultimately damaged the structure of a basement wall in their home to the degree that it became uninhabitable. They made a claim and the insurer denied covered. The insured brought a breach of contract and bad faith suit. As to the latter, they asserted that there was no debatable reason why the loss should not have been covered under the policy, and that the denial was arbitrary, capricious, and in direct contravention of the insurer’s own engineering report, and the stated cause of loss in that report. The insureds also alleged that the carrier’s conduct was outrageous, and violated several provisions of the New Jersey Unfair Claims Settlement Practice Act and its accompanying regulations.

The coverage issue involved whether the structural damage to a wall that led to the home’s condemnation constituted a “collapse”. In the absence of any policy definition, under New Jersey law, the term collapse did not require an actual fall, but “any serious impairment of structural integrity that connotes imminent collapse threatening the preservation of the building as a structure or the health and safety of occupants and passers-by.” However, the policy at issue did define “collapse”, and the issue was whether the damage sustained to the basement wall constituted an abrupt falling down or caving in of any part of a building, which would not require the falling down of the entire building. All parties further had the understanding that the basement wall at issue never collapsed completely in. After a lengthy analysis, the court found that the circumstances met the policy definition of collapse, and summary judgment was granted to the insured on coverage.

Moving to the bad faith claim, the court stated that in the context of first-party insurance claims, the Supreme Court of New Jersey has held that “[t]o show a claim for bad faith, a plaintiff must show [1] the absence of a reasonable basis for denying benefits of the policy and [2] the defendant’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.” Establishing a bad faith claim requires that a “plaintiff must show two elements: (1) the insurer lacked a ‘fairly debatable’ reason for its failure to pay a claim, and (2) the insurer knew or recklessly disregarded the lack of a reasonable basis for denying the claim.”

In addition, a “plaintiff may also demonstrate an insurer’s bad faith when the insurer unreasonably delays the processing of a valid claim, and the insurer knows or recklessly disregards the fact that the delay is unreasonable. However, neither negligence nor mistake may constitute bad faith on behalf of an insurer. “Rather, it must be demonstrated that the insurer’s conduct is unreasonable and the insurer knows that the conduct is unreasonable, or that it recklessly disregards the fact that the conduct is unreasonable.” In other words, to show that an insurer has acted in bad faith, a plaintiff must demonstrate that no fairly debatable reason exists for denying or delaying the processing of a claim. “Under the ‘fairly debatable’ standard, a claimant must establish a right to summary judgment on the substantive claim in order to be entitled to assert a claim against the insurer for bad faith refusal to pay [or delay in processing].”

Both parties moved for summary judgment on the bad faith issue. The insureds asserted that the insurer conducted a grossly inadequate investigation into their loss, affirmatively misrepresented the findings of an expert report in its letter to the insureds denying coverage, added conditions to coverage that were not otherwise required under the policy, and affirmatively misrepresented that engineers were present at the site inspection. However, the court found that the insureds failed to provide the Court with sufficient evidence that the insurer acted with reckless indifference to the proofs the insureds had submitted.

Still, the court did not rule for the insurer. It found that the record and the documents submitted in support of both parties’ motions did not present sufficient evidence for the Court to make a determination on whether the insurer acted with knowledge or reckless disregard of the lack of a reasonable basis for denying the insureds’ claim. Procedurally, at that point in time, the insureds had not conducted any depositions of any of the insurer’s employees or any of the individuals involved in the investigation and evaluation of their claim. Thus, the summary judgment motion was premature.

Date of Decision: December 31, 2013

Tripoldi v. Universal North America Ins. Co ., U. S. Dist. Court, District of New Jersey, Civ. No. 12-1828 (D.N.J. Dec. 31, 2013) (Hillman, J.)

APRIL 2014 BAD FAITH CASES: NO BAD FAITH IN CLAIMS PROCESSING WHERE NO COVERAGE DUE AND COVERAGE WAS DISPUTED, AND WHERE FACTS DID NOT DEMOSTRATE THE KIND OF KNOWLEDGE OR RECKLESS DISREGARD TO ESTABLISH BAD FAITH (New Jersey Appellate Division)

Published on April 25, 2014 in NJ - Claims Handling Procedures. Closed

In Johnson v. Plasser American Corporation, an excess carrier paid in its $4,000,000 policy limits to settle a severe personal injury case involving the insured’s employee. There were issues concerning exclusions and whether the duty to defend was ever invoked based on exhaustion of the underlying policy’s limits. There was some alleged delay in response by the excess carrier to demands by the insured’s counsel. The actual issues before the court involved whether the carrier had to reimburse attorney’s fees under Rule 4:42-9(a)(6), and whether there was bad faith in claims handling.

The court found that the duty to defend was never invoked, and that coverage was excluded. Thus, no attorney’s fees were due as the insured did not prevail on the indemnity claim. As to the bad faith claim, the Appellate Division upheld the trial court’s dismissal of the insured’s bad faith and breach of the covenant of good faith and fair dealing claims.

The insured did not assert bad faith in settlement. The carrier contributed $4 million — its umbrella policy limit — toward settlement of the underlying action, thus (1) shielding the insured from a potential judgment exceeding its coverage; and (2) shielding itself from a possible Rova Farms bad faith claim that it exercised bad faith in refusing to settle.

Rather, the insured focused on the carrier’s delay in providing its position regarding the insured’s request for a defense and indemnification under the umbrella policy. “In short, it alleges bad faith processing of its claim.” The insured also alleged the delay forced it to retain coverage counsel to ascertain its rights to coverage, which the carrier opposed, resulting in putative damages consisting of the insured’s legal fees.

The court found explanations for the delay in the record, though it did not condone a failure to respond; but ultimately it was clear to the insured that the insurer contested coverage.

The Court observed that: “An insurer owes a duty of good faith in processing an insured’s claim. … However, the standard applies to inattention to an uncontested claim.” The Court refused to follow the minority of jurisdictions supporting a cause of action for harm to the insured by the handling of an uncovered claim, but rather approved the majority view that “a covered claim is a sine qua non to maintaining a claim-handling claim”. In this case, the coverage claim was contested, and contested successfully; thus, the insured’s coverage claim had no merit.

Further, the mere failure to issue a timely response to defense counsel’s letter is insufficient to establish bad faith, as simple negligence is not enough. Rather, “[w]hen a case involves a processing delay: [B]ad faith is established by showing that no valid reasons existed to delay processing the claim and the insurance company knew or recklessly disregarded the fact that no valid reasons supported the delay. In either case (denial or delay), liability may be imposed for consequential economic losses that are fairly within the contemplation of the insurance company.”
Date of Decision: February 26, 2014
Johnson v. Plasser Am. Corp., DOCKET NO. A-2116-12T1, 2014 N.J. Super. Unpub. LEXIS 372 (N.J. Super. App. Div. February 26, 2014) (Reisner and Ostrer, JJ.)

 

APRIL 2014 BAD FAITH CASES: FOLLOWING PRIOR PRECEDENT, LEBANON COUNTY JUDGE SEVERS BREACH OF CONTRACT AND BAD FAITH ACTIONS (Lebanon County)

Published on April 25, 2014 in PA - Procedural Issues. Closed

In Audrey’s Crafts and Home Decor, Inc. v. Pennsylvania National Insurance, Judge Charles of Lebanon County followed prior Court precedent in severing a bad faith claim from the breach of insurance contract action. Thanks to the excellent Tort Talk blog for identifying and summarizing this case, and providing a link to Judge Charles’ Opinion.

APRIL 2014 BAD FAITH CASES: AN INSURED BUSINESS STATED A BAD FAITH CAUSE OF ACTION AGAINST ITS E&O CARRIER WHERE ITS ALLEGED CONDUCT, WHETHER LEGAL OR NOT, INVOLVED PROFESSIONAL SERVICES; AND AN EXCLUSION RELIED UPON BY THE CARRIER TO DENY COVERAGE, EVEN IF APPLICABLE, DID NOT COVER ALL CLAIMS IN UNDERLYING ACTION AND COULD NOT BE A BASIS TO DENY COVERAGE FOR ALL CLAIMS (Western District)

Published on April 21, 2014 in PA - Coverage Issues. Closed

In Municipal Revenue Services v. Houston Casualty Company, plaintiffs were in the business of purchasing government tax liens. A law firm accused plaintiffs of scheming with other attorneys to improperly move those tax liens to others. The law firm sought equitable relief to enjoin those parties’ alleged on-going criminal, civil and fiduciary misconduct, and to protect its, and its clients’, confidential, proprietary, and trade secret information. The law firm also sought compensatory and punitive damages, attorneys’ fees and costs. The facts alleged in the underlying case were that the law firm represented public entities in the purchase of tax liens and worked throughout the year to prepare for tax lien sales closings. One of the entity’s officers and others allegedly contacted the taxing government entities and advised them of the need to pass new resolutions. This allegedly paved the way for replacing the original purchaser with a purchaser controlled by the officer, all as part of an alleged scheme to move business from the complaining law firm. The officer was also accused of having secretly stolen and transferred the files from the old law firm to a remote internet location where it could be accessed without permission.
The old law firm brought suit alleging six (6) counts, including Violations of Computer Fraud and Abuse Act, Violations of 18 Pa.C.S. 5741 (Wiretap Act), Violation of Pennsylvania Trade Secrets Act (All Defendants), Conversion, Tortious Interference with Present and Prospective Business Relationships; and Civil Conspiracy and Aiding and Abetting. That litigation concluded prior to the instant opinion being issued. The insurer in the instant matter refused to defend and indemnify under its Professional Errors and Omissions policy with the business entity (not the law firm). The entity and its officer brought a claim for breach of contract and bad faith.

The bases for denial were that the conduct alleged was not a “Wrongful Act” as defined in the policy, as there was allegedly no claim relating to “Professional Services”; and exclusion (exclusion “r”) where the claim was for misuse of confidential or proprietary information. The insurer moved to dismiss both the breach of contract and bad faith claims. The court denied the motion.

The court found the following factual assertions and reasonable legal inferences to be plausible, essentially on the basis that the business’ conduct, whether legal or illegal, involved professional services, whether or not rendered to the plaintiff in the underlying action:

That Plaintiffs possessed a valid and enforceable insurance policy, which covered “wrongful acts” committed by the insured; that the Policy covered “wrongful acts” in the course of “Professional Services”; that “Professional Services” may be construed to include those acts (or “wrongful acts”) that are committed in the course of business transactions (illegal or not) and include elements or actions that may be conducted in the course of “professional” work, thus, falling in the purview of “Professional Services”; that there were highly specific professional services rendered at the time the “wrongful acts” were committed; and that coverage of the policy is not excluded because Exclusion “r” of the Policy states the Policy will not apply when there is use or disclosure of confidential, proprietary or personally identifiable information in the wrongful act of claimant because other counts in the underlying claim did not include the acts specified in Exclusion “r”. These allegations constitute “enough facts to raise a reasonable expectation that discovery will reveal evidence of the necessary element[s].”
The Pennsylvania law covering the duty of an insurer to an insured is very clear and hinges on the language of the policy at issue. Plaintiff’s facts in this case are plausible and the legal conclusion would flow therefrom. A ruling in favor of a Motion to Dismiss is not appropriate where there is a plausible case where Plaintiffs maintain a legitimate cause of action with facts that support that cause of action and there is potential for success in the claim. We, therefore, find that Plaintiffs have adequately pleaded a claim for relief based on the allegations of Breach of Contract and Bad Faith.

Date of Decision: March 5, 2014

Mun. Revenue Serv. v. Houston Cas. Co., Civ. No. 1:13-cv-151 Erie, 2014 U.S. Dist. LEXIS 27762 (W.D. Pa. March 5, 2014) (Cohill, J.)