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MARCH 2018 BAD FAITH CASES: THIRD CIRCUIT DID NOT HAVE TO REACH ISSUE OF WHAT LITIGATION CONDUCT COULD CONSTITUTE BAD FAITH, BECAUSE CONDUCT AT ISSUE WAS NOT BAD FAITH CONDUCT IN THE FIRST INSTANCE (Third Circuit, Pennsylvania law)

Published on March 19, 2018 in PA - Experts and PA - Litigation Conduct Claims. Closed
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The insured alleged bad faith based on the insurer’s introduction and reliance on allegedly biased expert testimony in this underinsured motorist case. The District Court had dismissed the claim, after an extensive analysis on when litigation conduct might constitute bad faith. The Third Circuit affirmed, but without addressing that issue.

The parties entered a high/low settlement agreement during the course of a jury trial, i.e., if the insured won he could get up to $300,000, but no less than $100,000 if he lost. The jury awarded $1.6 Million, but that sum was molded to $300,000. The agreement released all bad faith claims existing up to the date of the agreement, but did not release post-agreement bad faith claims.

The insurer relied upon two experts’ reports and testimony before the jury. The insured later brought a bad faith action based upon the insurer’s use of its expert reports and testimony during the trial process and after the date of the high/low agreement. He alleged that the insurer acted in bad faith by introducing and relying upon the biased testimony of its experts; by “failing to make an honest, intelligent settlement offer”; and by “seeking to have the bad faith claim dismissed with prejudice.”

The Third Circuit observed that bad faith is based upon the frivolous or unfounded refusal to pay proceeds under a policy, under a two criteria test: (1) that it was unreasonable to deny benefits; and (2) that the insurer knew or recklessly disregarded the absence of a reasonable basis to deny benefits. The big issue addressed at the District Court level was how to evaluate litigation conduct under the Bad Faith Statute. The Third Circuit found it did not have to reach that issue because the complaint’s allegations (including expert reports and depositions as exhibits) did “not identify any misconduct, much less bad faith” conduct.

It was alleged contradictions in the experts’ testimony that formed the basis of the bad faith claim. The Court found no inconsistencies in the first expert’s report and testimony, and found that the report was more limited in scope than the insured asserted. Similarly, the Court found no contradictions in the second expert’s report. Thus, “[b]ecause the statements made by [the medical experts] are not contradictory, [the insurer’s] introduction of and reliance on their testimony cannot rise to the level of bad faith, even under [insured’s] suggested legal standard.”

And again, after noting the absence of Pennsylvania Supreme Court precedent on when litigation conduct could be subject to the Bad Faith Statute — though it had been addressed to some degree in the Superior Court and the Third Circuit — the Court stated that it “need not reach this question because the facts alleged clearly do not amount to knowing presentation of biased expert testimony.”

Date of Decision: February 27, 2018

Homer v. Nationwide Mutual Insurance Co., U. S. Court of Appeals Third Circuit No. 16-3686, 2018 U.S. App. LEXIS 4859 (3d Cir. Feb. 27, 2018) (Fishman, Hardiman, Roth, JJ.)

MARCH 2017 BAD FAITH CASES: FINEMAN, KREKSTEIN & HARRIS OBTAINS SIGNIFICANT VICTORY FOR INSURER IN DEFEATING UIM BAD FAITH CLAIM AT TRIAL IN PHILADELPHIA’S COMMERCE COURT (Philadelphia Commerce Program)

Published on March 23, 2017 in PA - Claims Handling Procedures, PA - Discovery and Evidence, PA - Experts, PA - Punitive Damages, PA - Reserves and PA-Manuals. Closed
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In a bad faith case that actually went to trial, in Philadelphia’s Commerce Court, Fineman, Krekstein & Harris won a finding in favor of the insurer in a hard fought case, involving a myriad of bad faith issues. The court issued a 37 page Findings of Fact and Conclusions of Law, vindicating the positions argued and case presented for the insurer.

The insureds argued, among other things, that there were undue delays in claims handling, adjusters did not keep claims files in accordance with policy manuals, and reserves were improperly set. Among other things, the insurer focused its arguments on the timing of the insureds first making a demand for payment; reliance upon competent counsel in reaching decisions; and that the insureds’ original demand for the $1,000,000 policy limits was never lowered through the course of the UIM case.

In its conclusions, among other things, the court observed there is no heightened duty to insureds in the UIM context, and that even negligence or bad judgments do not equate to bad faith. The court made clear that delay is not bad faith per se, and that evaluating delay includes an analysis of the reasonableness of denying a claim. Moreover, even if unreasonable, to constitute bad faith the delay must be knowing or reckless. Bad faith is measured from the time demand is made.

The court also stated that undervaluing a claim is not bad faith if there is a reasonable basis for the valuation. Thus, a low but reasonable valuation is not bad faith. A settlement offer in the insurer’s low range of estimated value also is not bad faith. On the facts of this case, the court observed that the insurer never took the position that it would pay nothing on the claim, and as described below, made a number of offers.

The court found it was reasonable under the circumstances for the insurer to decline mediation two weeks before the arbitration was to take place. The insurer’s counsel testified that it was too late to mediate, and that there was no indication the insureds would lower their demand. The court observed that in evaluating bad faith, courts weigh the insureds’ decision not to negotiate down from a policy limit demand, even though the insured is not required to negotiate. The court found that settlement almost always requires a mutual give and take, which did not occur in this case.

The insurer was required to pay $600,000 under the UIM arbitration award. The court found, however, there was no evidence the insureds would have accepted $600,000 to settle the case prior to arbitration.

The court also took into consideration the actual difference between the ultimate UIM arbitration award, the insurer’s final offer, and the insured’s demand. In this case, the insured’s final offer was approximately $182,000 below the ultimate award, but the insureds’ policy limit demand was $400,000 greater than the award. The court found the insurer’s final settlement offer was reasonable, and that earlier offers for lesser sums were permissible interim offers. The court explained the reasonableness of each offer in its context.

Among other facts addressed in the court’s conclusion of law, the court gave weight to the fact that the insurer’s UIM defense counsel received a report from his own expert that counsel had not requested. Furthermore, defense counsel disagreed with the report’s conclusions. However, instead of withholding the report, counsel and the insurer’s representatives produced it to the insureds.

Moreover, the insurer used a high-end number from this same report in coming up with the basis for its final offer. The arbitration panel also used that number, rather than the insureds’ expert’s even higher number, in coming up with its arbitration award. The court stated that the insurer did not have to base its decision upon the insured’s expert rather than the insurer’s own expert.

The court found the insurer’s investigation was lengthier than it should have been, but did not constitute bad faith. The court found the insurer’s request for an independent medical examination was not evidence of bad faith. Nor was this a case of setting a reserve and never moving from that number during the course of the claim. The court found no discrepancy in the manner of setting reserves and the nature of the investigation that showed intent or recklessness in undervaluing the claim. As to the claims handling, even if unduly lengthy or negligent, this did not constitute bad faith.

The court further found that the carrier’s representatives sought UIM defense counsel’s advice in good faith, and that counsel was competent to give advice on defense and valuation of the claim. Although this was not a strict advice of counsel defense, since the insurer’s representatives ultimately made their own decisions, the thorough nature of counsel’s advice, when considered as a component of their decision making, supported the reasonableness of their claims handling decisions.

Date of Decision: March 21, 2017

Richman v. Liberty Insurance Underwriters, Sept. Term 2014, No. 1552, Court of Common Pleas of Philadelphia (C.C.P. Phila. Mar. 21, 2017) (McInerney, J.) (Commerce Program)

S. David Fineman and Christina L. Capobianco of Fineman, Krekstein & Harris were defense counsel.

JANUAY 2017 BAD FAITH CASES: INSURER’S LITIGATION CONDUCT CAN ONLY PROVIDE BASIS FOR BAD FAITH CLAIM WHERE CONDUCT IS EXTRAORDINARY OR EGREGIOUS – WHICH DID NOT OCCUR IN THIS CASE (Western District).

Published on January 17, 2017 in PA - Experts and PA - Litigation Conduct Claims. Closed
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The court predicted, and held, that evidence of litigation conduct is admissible as evidence of bad faith only “in the rare cases involving extraordinary facts.”

The insured was injured in a motor vehicle accident. There were underinsured policy limits of $500,000, which the insured demanded. The carrier rejected the policy limits demand, and the case went to trial. During trial, the parties signed a “Binding High-Low Settlement Agreement” that contained a provision dismissing all claims for bad faith occurring “prior to” the execution of the Agreement, but preserving all claims for bad faith occurring “after the date” of the Agreement’s execution.

On the same day the parties executed the Agreement, during trial, the insurer introduced videotaped testimony of two medical experts. During closing arguments, the insurer referenced their testimony. The jury returned a verdict in favor of the insured. The insurer filed a motion to mold the verdict to the “high” set forth in the Agreement, and further sought to dismiss the insured’s bad faith claim “as of” the date of the Agreement. The insured argued that, pursuant to the Agreement, only claims for bad faith occurring “prior to” the date of the Agreement should be dismissed. The trial court ruled for the insured.

The insured filed a separate lawsuit, alleging that the insurer acted in bad faith when it introduced the videotaped deposition of the medical experts, whom the insured felt was biased; referenced their testimony during closing; and filed the motion to mold the verdict with what the insured believed had inaccurate wording. The insurer filed a motion to dismiss the insured’s complaint.

In addressing the litigation conduct as bad faith issue, the Court found there was an: “ill-defined line… drawn between conduct which can be described as ‘defending the claim’ and that which suggests ‘that the conduct was intended to evade the insurer’s obligations under the insurance contract.’” The Court reviewed decisions from other jurisdictions that had “developed more comprehensive rules for dealing with bad faith claims premised on litigation conduct.” It found that the other jurisdictions employ four approaches.

In the first approach, there is a blanket prohibition on introducing evidence to show an insurer’s bad faith. In the second approach, an insured may introduce evidence of unreasonable settlement behavior, while introduction of litigation conduct, techniques and strategies is prohibited. In the third approach, an insured may introduce litigation strategies and techniques, “as long as the insurer knowingly encouraged, directed, participated in, relied upon, or ratified the alleged wrongful conduct.” In the fourth approach, utilized by most jurisdictions, evidence of litigation conduct is admissible evidence of bad faith in “rare cases involving extraordinary facts.”

The Court found that Pennsylvania’s Supreme Court has not adopted any of the four approaches. It predicted that the Supreme Court would adopt the fourth approach for three reasons: (1) The fourth approach “most effectively balances an insurer’s interest in defending itself and the ability of courts and rules of civil procedure to handle most litigation abuses with the relatively broad scope of § 8731.”; (2) Most of the other jurisdictions utilize the fourth approach; and (3) The fourth approach is the most consistent with the Pennsylvania case law that exists on the issue.

Applying this standard, the Court ruled that the insured’s allegations relating to the insurer’s medical experts were not rare, extraordinary, or egregious; and did not rise to the level of bad faith. Specifically, in regards to the first medical expert, the Court rejected the insured’s argument that the expert was biased, given the contradiction between the expert’s report and his deposition testimony. The insured’s allegations were merely conclusory. As to the second expert, the Court found that the insured was able to fully address his concerns through cross-examination, that the expert “always finds in favor of the party paying him”.

As to referencing the medical experts’ during closing argument, the Court held that if the insurer’s use of the expert testimony did not constitute bad faith, then referencing it during closing arguments similarly could not constitute bad faith. The Court stated that the insured did not suffer any prejudice. More importantly, the Court explained: “parsing an insurer’s closing argument after the fact through a bad faith action endangers an insurer’s ability to defend itself.” Furthermore, the Court stated that it would threaten the insurer’s attorney’s duty to competently and zealously represent a client.

Finally, with regard to the insured’s allegations based upon the insurer’s motion to mold the verdict, via putative improper wording, the Court held that the allegations did not rise to the level of bad faith. Specifically, the Court found that the insurer’s wording “seem[ed] reasonable given the somewhat ambiguous wording of the [A]greement itself.”

Ultimately, the Court granted the insurer’s motion to dismiss the insured’s complaint.

The case is currently on appeal with the U.S. Court of Appeals for the Third Circuit.

Date of Decision: August 26, 2016

Homer v. National Mutual Ins. Co., No. CV 15-1184, 2016 WL 4493689, 2016 U.S. Dist. LEXIS 114548 (W.D. Pa. Aug. 26, 2016) (Barry Fischer, J.)

The case was affirmed on appeal, however, the Third Circuit held it did not have to rule on what litigation conduct might be actionable under the Bad Faith Statute as none of the conduct at issue constituted bad faith under any standard.

MARCH 2016 BAD FAITH CASES: LENGTHY INVESTIGATION ALONE INSUFFICIENT TO MAKE OUT BAD FAITH CASE; LATER LARGE JURY VERDICT ALONE COULD NOT SHOW BAD FAITH; TRIAL COURT HAS BROAD DISCRETION IN REJECTING EXPERT’S LEGAL CONCLUSIONS ON BAD FAITH (Third Circuit)

Published on March 30, 2016 in PA - Claims Handling Procedures and PA - Experts. Closed
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In Shaffer v. State Farm Mutual Automobile Insurance Company, the Third Circuit upheld the trial court’s summary judgment decision in this underinsured motorist case, affirming that “no reasonable fact finder could conclude that there is “clear and convincing” evidence that the insurer acted in bad faith”.

In evaluating a bad faith claim the court observed that: “A claim for bad faith may be premised on an insurer’s bad faith in investigating a claim, such as by failing to conduct a good faith investigation into the facts or failing to communicate with the claimant. …. Although a delay between a demand for benefits and an insurer’s determination of whether to pay a claim is relevant, delay “does not, on its own, necessarily constitute bad faith.” …. Rather than focusing solely on delay, courts have looked “to the degree to which a defendant insurer knew that it had no basis to deny the claim[].” Thus, “’[i]f delay is attributable to the need to investigate further or even to simple negligence,’ bad faith has not been shown.”

The insureds focused on the alleged delay in investigating and evaluating their UIM claim. The court found that the insurer’s request to obtain the injured insured’s extensive medical file was not undertaken for the purpose of delaying the claim. Nor was there evidence that retaining a doctor to review the file was merely a pretext to effect a low payment the claim. Even if the claims handling process was flawed, no evidence was presented that the delays or the insurer’s objectives were anything other than an effort to evaluate the insured’s medical history and determine the claim’s value.

After summary judgment on bad faith had been entered below, the case went to trial and the insureds won a substantial jury verdict. The Third Circuit did not find this a basis to rewrite the lower court’s decision. The “jury’s later determination regarding the credibility of [the] medical review does not affect the reasonableness of [the insurer’s] earlier reliance on that review. Similarly, the fact that [the insurer’s] settlement offer was much lower than the amount the jury ultimately awarded would not necessarily affect the reasonableness of [the insurer’s] reliance on the review in making that offer.”

The court further ruled that the timing of the insurer’s opening the UIM file was not a basis for reversal; nor was the manner in which the carrier assessed medical expenses from the incident at issue vs. prior injuries.

Finally, the Third Circuit upheld the trial court’s decision to disregard the insured’s expert regarding the bad faith issue. A trial court “has considerable discretion to accept or reject an expert’s conclusions on the question of bad faith.” And in this case, the expert review provides a legal conclusion without adding any additional facts, and so provides no factual evidence to support a claim of bad faith.”

Date of Decision: March 10, 2016

Shaffer v. State Farm Mut. Auto. Ins. Co., No. 15-1196, 2016 U.S. App. LEXIS 4448 (3d Cir. March 10, 2016) (Jordan, McKie, Vanaskie, JJ.)

NOVEMBER 2015 BAD FAITH CASES: INSURANCE FRAUD CLAIMS BARRED BY STATUTE OF LIMITATIONS; LIMITS ON EXPERT TESTIMONY AS TO ULTIMATE ISSUE OF BAD FAITH (Philadelphia Federal)

Published on November 6, 2015 in PA - Experts and PA - Reverse Bad Faith. Closed
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In Schatzberg v. State Farm Mutual Automobile Insurance Company, the insurer brought a statutory insurance fraud claim against a medical provider, under 18 Pa.C.S. § 4117, among other fraud based claims. This claim has a two year statute of limitations. The court found that the insurer was on notice of the alleged fraudulent billing scheme well beyond the limitations periods applicable to the various claims; and the court rejected all tolling theories. Thus, summary judgment was granted against the insurer.

In an interesting alternative holding, the court found there could be no justifiable reliance on the alleged fraud after a certain period, because the insurer was aware of the fraud but kept making payments anyway.

In a second opinion the same day, granting the insurer partial summary judgment on the plaintiff’s defamation claims, the court made observations as to how experts could not testify on the ultimate legal issue of bad faith; and footnoted various statutory and regulatory provisions addressing the Pennsylvania Legislature’s concern with combating insurance fraud.

Dated of Decisions: October 7, 2015

Schatzberg v. State Farm Mut. Auto. Ins. Co., CIVIL ACTION NO. 10-2900, 2015 U.S. Dist. LEXIS 136722 (E.D. Pa. October 7, 2015) (QUIÑONES ALEJANDRO, J.)

Schatzberg v. State Farm Mut. Auto. Ins. Co., CIVIL ACTION NO. 10-2900, 2015 U.S. Dist. LEXIS 136730 (E.D. Pa. October 7, 2015) (QUIÑONES ALEJANDRO, J.)

 

JUNE 2015 BAD FAITH CASES: COURT (1) FINDS RESERVES CAN BE ADMITTED INTO EVIDENCE; (2) SETS THE TIME PERIOD TO CONSIDER EVIDENCE OF BAD FAITH FROM ACTUAL NOTICE OF THE CLAIM UNTIL THE CLAIM WAS RESOLVED; (3) FINDS EVIDENCE OF OTHER CASES NOT ADMISSIBLE; AND (4) FINDS EXPERT TESTIMONY ON CLAIMS HANDLING ADMISSIBLE ON BAD FAITH (Middle District)

Published on June 24, 2015 in PA - Discovery and Evidence, PA - Experts, PA - Litigation Conduct Claims and PA - Reserves. Closed
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In Clemens v. New York Central Mutual Fire Insurance Company, the court addressed numerous motions in limine, in a supplemental underinsured motorist action. The motions directly addressing the bad faith claim are summarized below.

Reserves

The court rejected the insurer’s argument that evidence of reserves be barred from evidence. The court cited case law going both ways on the subject: (1) “that the relationship between the amount an insurance company reserves for a claim and the amount it ultimately offers to resolve that claim is so tenuous as to make the size of the reserve irrelevant for purposes of determining a bad faith claim” vs. (2) “that the amount set aside in reserve necessarily reflects a company’s assessment of the potential worth of the claim and, to the extent the reserve is dissimilar from the amount offered in settlement, is germane to an analysis of whether the company acted in bad faith in pretrial settlement negotiations”. The court adopted the second position accepting the evidence, but expressly made clear that the insurer would not be precluded “from producing testimony explaining the difference between its reserve and its settlement offer in this case.”

Time Period of Bad Faith Claim

The insurer took the position that the time period in which to consider the bad faith claim began when the insured’s attorney advised the carrier that the tortfeasor’s carrier had agreed to pay its policy limits; and ended the date suit was filed. The insured took the position that the relevant time frame should begin on the date that their counsel advised the insurer of a potential underinsured motorist claim, and never ended because the misconduct of an insurer, even after suit is filed, may constitute bad faith.

The court found that bad faith may not be predicated on the insurers “actions or lack of action before being notified of a claim”, and in this case counsel’s allusion to a potential claim did not trigger any duty. Further, while case law does allow “for the introduction of evidence of an insurer’s bad faith even during the pendency of a lawsuit …. such evidence of bad faith cannot be provided simply by an insurer’s action of mounting an aggressive legal defense.” The court ruled that resolution of the underinsured motorist claim ended any bad faith cause of action after that date, and no evidence of the insurer’s alleged bad faith occurring after that date would be permitted.

The cutoff date, i.e., the date the underinsured motorist claim was resolved, was June 20, 2014. The insured’s suit was removed to federal court in September of 2013. Thus, the time period in which bad faith conduct could be considered encompassed part of the time period during the pendency of the bad faith litigation itself.

Other Cases

The court granted the motion in limine barring evidence of other insureds’ claims against the carrier. The court found in particular that the U.S. Supreme Court had ruled that evidence of what happened to other insureds, not parties to the case at hand, could not be used to enhance punitive damages for the party actually in the case.

Expert Testimony on Bad Faith Claim Regarding Industry Standards & Claims Handling

The court observed its own broad discretion on evidentiary matters, and the Federal Rules favoring the admission of evidence to assist the trier of fact. It concluded that the insured’s expert testimony could be helpful to the jurors in their inquiry as to whether the insurer acted in bad faith. Thus, the court allowed the insured’s expert to testify regarding industry standards and claims handling practices.

Date of Decision: June 15, 2015

Clemens v. New York Cent. Mut. Fire Ins. Co., Case No. 3:13-CV-2447, 2015 U.S. Dist. LEXIS 77180 (M.D. Pa. June 15, 2015) (Conaboy, J.)

This is the fourth opinion in this matter. Here are links to the first three (1, 2, and 3).

 

JUNE 2015 BAD FAITH CASES: UNDISCLOSED PUTATIVE CONFLICT WITH DOCTOR PERFORMING IME NOT BASIS FOR BAD FAITH; INSURER CAN RELY ON IME WHERE NO EVIDENCE PUT FORWARD THAT IT WAS FLAWED (Middle District)

Published on June 3, 2015 in PA - Discovery and Evidence and PA - Experts. Closed
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In Neal v. State Farm Mutual Automobile Insurance Company, the Court granted the insurer’s motion for summary judgment and held that the insurer did not act in bad faith after denying benefits to the insured based on an independent medical examination (“IME”) that showed the insured had reached “pre-injury” status. In the underlying action, the insured was injured when a vehicle rear-ended the car in which the insured was a passenger. The insurer’s claim representative requested an IME to be performed on the insured to address if “her ongoing complaints were accident related and whether she had reached pre-injury status from the accident.” The insurer contacted a vendor to arrange an IME by an orthopedic surgeon. After a surgeon was selected, the insurer requested an examination closer to her residence, so the vendor arranged for another doctor to perform the IME. Prior to going to the IME, the insured briefly discussed that doctor with her own current physician, and it turned out that the two doctors formerly had a practice together.

After performing the IME, the doctor observed that, among other things, he was “unable to detect any specific injury which occurred from the most recent motor vehicle accident,” and that the insured had reached full recovery from the car accident. Subsequently, the insurer denied all bills for treatment that the insured received after the IME.

The insured’s bad faith claim was premised on allegations that the insurer did not act reasonably in “refusing to reconsider its decision or schedule a new IME when presented with a potential conflict of interest” and “choosing to automatically follow the findings of the IME Report despite conflicting evidence regarding the nature and causation of Plaintiff’s injuries.”

In granting the insurer’s motion for summary judgment on the bad faith claim, the Court stated with regards to the potential conflict of interest, “there is no dispute that [the insurer] did not know about the prior association between the doctors at the time [the vendor] arranged for the IME to be performed….” The Court pointed out that even though the insured knew of the doctors’ prior association, she did not inform her insurer of any alleged conflict, nor did she believe that the doctor would be biased against her in performing the IME. Because the insured did not show clear and convincing evidence of any bad faith, the Court could find no material disputes of fact on this issue.

As for the claim that the insurer automatically followed the findings of the IME, the Court reasoned that “an insurer is entitled to rely on the findings of an IME … even in the fact of contrary medical opinions.” Further, the insured presented no evidence that the IME was flawed. In sum, the Court found that “the record evidence [was] insufficient to allow a reasonable fact-finder to find that Defendant exhibited bad faith in relying on [the allegedly conflicted doctor’s] IME.”

Date of Decision: May 12, 2015

Neal v. State Farm Mut. Auto. Ins. Co., 1:13-cv-02309, 2015 U.S. Dist. LEXIS 61770 (M.D. Pa. May 12, 2015) (Kane, J.)

 

JUNE 2015 BAD FAITH CASES: SUPERIOR COURT VACATES JUDGMENT ON BAD FAITH CLAIM AFTER CLOSE FACTUAL ANALYSIS; AND DIRECTS TRIAL COURT ON REMAND TO ALLOW EXPERT TESTIMONY CONCERNING ADJUSTER’S OBLIGATION TO CLARIFY LEGAL INTERPRETATION OF POLICY TERMS, BUT NOT TO CONSIDER INSURED’S POST-DENIAL CONDUCT (Superior Court)

Published on June 1, 2015 in PA - Claims Handling Procedures, PA - Discovery and Evidence, PA - Experts and PA-Manuals. Closed
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In Mohney v. American General Life Insurance Company, the Superior Court reversed the trial court, and remanded the insured’s statutory bad faith case against his disability insurer for a new trial. At the time of this decision, the case had been pending in some form for 20 years.

The insurer originally paid total disability benefits, based upon policy definitions of the insured’s “total disability”. The insurer’s adjuster later made the decision, on his own understanding, to terminate benefits on the basis that the insured’s doctor stated the insured could work in some limited capacity. However, the doctor’s statements upon which the adjuster based his decision were in fact equivocal and highly qualified as to whether the insured could perform alternative work in the future.

In an earlier trial on the breach of contract claim, the court found the insurer breached its contract. In a second trial, on bad faith, the trial court found there was no bad faith. While the insurer was incorrect in terminating benefits, it had not been unreasonable in its position or investigation, nor had it knowingly or recklessly disregarded that fact. The appellate court disagreed.

The Superior Court stated that “bad faith” encompasses a variety of possibilities including “a frivolous or unfounded refusal to pay the proceeds of a policy done with dishonest purpose, motivated by self-interest or ill will”, conduct “lack[ing a] good faith investigation into facts, and failure to communicate with the claimant”, “where the insurer intransigently refused to settle a claim that could have been settled within policy limits, where the insurer lacked a bona fide belief that it had a good possibility of winning at trial, thus resulting in a large damage award at trial”, and it “may also extend to the insurer’s investigative practices”. The appellate court recited the bad faith standards: proof must be by clear and convincing evidence, the insurer’s position must have been unreasonable, and the insurer must have knowingly or recklessly disregarded the unreasonable nature of its position. In a clarifying footnote, the court reiterated its rulings in Nordi (2010) and Greene (2007) that the insured is not required to prove a motive of self-interest in or ill will as a third element of statutory bad faith; rather, evidence of self-interest or ill will are probative of the second element, i.e., that the insurer knew or recklessly disregarded the unreasonableness of its position.

The Superior Court then firmly rejected the trial court’s factual conclusion that the insurer’s termination of benefits was reasonable; thus, the insured met the burden on the first prong of the bad faith test. The court went into an extremely detailed analysis of the factual record in reaching this conclusion.

As to the second prong, the appellate court likewise drilled down into facts going to the insurer’s state of mind. It approved a standard that the insurer “’was required to conduct an investigation sufficiently thorough to provide it with a reasonable foundation for its actions.’” The absence of a reasonable basis to deny coverage was the cornerstone of undermining the insurer on the knowing or reckless disregard standard. The appellate court found that the trial court largely ignored substantial evidence that the insurer’s investigation “was not sufficiently thorough to obtain the necessary information regarding [the insured’s] ability to work.” The appellate court also referenced evidence from the record that could establish knowing or recklessly culpable conduct by the insurer, in the nature of misrepresentations of fact in terminating the benefits, and conduct constituting a lack of honest or objective review.

Thus, the Superior Court rejected the trial court’s conclusion that there was no evidence supporting the second bad faith prong. However, it did not automatically then rule for the insured. Rather, it held that “while [the] misrepresentations are evidence of bad faith, they do not without more establish knowing or reckless misconduct as a matter of law by clear and convincing evidence on the record before us.” That issue could not be decided on appeal.

The insurer argued that the adjuster making the decisions on the claim at issue had broad discretion, within his experience, to evaluate the claim based on available medical records and his common sense. In the insurer’s training practices, the key policy term “total disability” was left to the adjuster’s common sense interpretation, based on his prior experience. While the adjuster could seek advice from an attorney, he did not do so “because he did not believe that any additional legal construction of the term ‘total disability’ was necessary. Instead, he applied a plain and common sense meaning to the certificates’ definition of ‘total disability.’”

The appellate court had already ruled that the adjuster’s interpretation was contrary to the policy language itself, as well as Pennsylvania appellate law.Thus, the court stated that “in the absence of a standard policy manual or other specific guidance, it was left solely to [the adjuster’s] ‘common sense’ and discretion to decide whether it was necessary to consult with legal counsel on the proper (legal) interpretation of the policy term at issue.” There was no evidence in the record of industry standards on training adjusters in legal interpretations of policy language, or providing adjusters guidance of when to seek guidance from staff attorneys.

Prior to trial, the insured did provide an expert report stating, among other things, that insurers and their professionals “be informed on the established law which they would be expected to apply in the course of handling claims, specifically including the law regarding the interpretation of policy provisions and definitions.” That expert’s trial deposition also stated that there was a “need for adjusters to be trained in the proper application of established case law on applicable policy terms.” However, the expert report and testimony were excluded at trial, on the basis that they “consisted of legal conclusions that were improper and inadmissible, the facts underlying [the] bad faith claim were ‘readily ascertainable by the Court without the aid of expert testimony,’ and [the expert’s] testimony would not assist in the resolution of [the] bad faith claim.”

The Superior Court found this was an abuse of discretion because: “The issue in question, involving the standards in the insurance industry for the training of claims adjusters in applying legal precedent when deciding insurance claims, is sufficiently complex to permit the introduction of expert testimony. The … Trial Court’s written decision does not reflect that it had any specific knowledge of the industry standards in this area. Instead, the … Trial Court merely accepted [the adjuster’s] testimony that there was no need to consult with staff attorneys in this case, and in the absence of expert testimony … [the insured] had no ability to offer contradictory evidence to rebut [the adjuster’s] testimony.”

Thus, the lower court’s ruling on bad faith was vacated, and the case remanded for a new trial.

On remand, the Superior Court instructed that the trial court was not to consider evidence of the insured’s post denial conduct, which it had earlier done. Further, the trial court had precluded the insurer’s expert report as a sanction, and the appellate court left it to the trial court as to whether it would revisit that sanction; but it did not vacate the sanction itself. Finally, the appellate court upheld the trial court’s decision not to allow an amended complaint to add bad faith allegations based upon litigation conduct, as being so untimely as to be prejudicial; but the appellate court did note that the insured never raised the more general argument that the insurer’s litigating this matter for 20 years, when there was no reasonable basis to do so, could conceivably be the basis for a bad faith claim.

Date of Decision: May 8, 2015

Mohney v. American General Life Insurance Company, No. 2030 WDA 2013, SUPERIOR COURT OF PENNSYLVANIA, 2015 Pa. Super. LEXIS 250 (Pa. Super. Ct. May 8, 2015) (Donahue, Allen, and Strassburger, JJ.)

MAY 2015 BAD FAITH CASES: NO BAD FAITH BASED ON INVESTIGATION AND EXPERIENCE OF INSURANCE TEAM, EVEN THOUGH EXPERT NOT USED IN INVESTIGATION, AND ORIGINAL REFERENCES IN DENIAL LETTER WERE TO GENERIC POLICY AND NOT INSURED’S SPECIFIC POLICY (Middle District)

Published on May 1, 2015 in PA - Claims Handling Procedures, PA - Coverage Issues and PA - Experts. Closed
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In Boulware v. Liberty Insurance Corp., the insurer denied a claim for a damaged deck, under a homeowners policy, on the basis of exclusions for faulty workmanship, wear and tear and/or rot. The insurer’s adjuster came to the scene and investigated, but did not bring an engineer. He determined the cause was poor work or rot, and looking to a generic version of the homeowners policy at issue, not the specific policy, when he drafted a denial letter. His supervisor, who had experience and training with such construction issues, also only referring to the generic policy, approved the denial letter.

The insured brought a bad faith claim, based in large part on the fact that the only on-site inspection was done by the adjuster, in under an hour; and that the insurer “did not retain any contractor experts or engineers to inspect her damage despite the fact that its adjusters and supervisors had authority to do so.” Rather, the insured argued that “during the entire claims process, [the insurer] failed to utilize a contractor expert or engineer to assist it to properly evaluate [the insured’s] claim and examine the cause of … loss, and that [it] should have retained such experts before it issued the two denial letters.” The insurer responded that based on the construction background of its personnel handling the claim, and the adjuster’s actual investigation, “it can hardly be said that their decisions were unreasonable or that they knew an expert or engineer was required to properly evaluate plaintiff’s claim yet recklessly disregarded this in denying her claim.” The court further focused on the adjuster’s detailed determinations at the actual inspection, where the adjuster concluded “that there was ‘improper, inadequate, defective workmanship or construction’ of the deck, and he stated that the method of attachment of the deck to plaintiff’s home was ‘with nails, instead of lag screws’ and that there ‘was no Z flashing present.’” He had also “concluded that there was defective construction of plaintiff’s deck since there was rot in the deck boards caused by the lack of Z flashing which allowed snow and water to rot out the boards over time.” The adjuster had “personally viewed the areas of rot and took photos of the areas, and his photos substantiated his findings regarding the use of nails and the deteriorating boards. … [and his] findings were entirely consistent with the opinions of the engineer expert defendant retained after this case was filed in court….”

Moreover, “the retention of an expert by the insurer after denying a claim is not bad faith and, that even if the insurer erred by not retaining an expert to examine the damage prior to the initial denial of a claim, this amounts to only negligence or poor judgment and not bad faith.” In any event, the court found that the denial was reasonable, even without first having retained an expert. That during litigation, the two experts differed on causation and thus cover, only created a dispute of fact over contract coverage, not bad faith.

The court found that the insurer “performed a reasonably detailed investigation of plaintiff’s claim notwithstanding the lack of an expert, and it supplied a reasonable basis to bolster its denial of her claim on two occasions.”

As to the adjusters’ not reviewing the insured’s specific policy, rather than a generic policy, this was not evidence of bad faith, as the adjuster “was well aware of the provisions in a standard … policy as well as the exclusions in the … standard policy when he inspected plaintiff’s property and drafted his first denial of coverage letter for plaintiff’s claim.” The adjuster had even discussed the nuances of the policy exclusions with the insured at the time of his inspection. The supervisor’s review using the same general knowledge supported the adjuster’s conclusion. Finally, when a third employee of the insurer, a team manager, got involved, “he had all of the documents regarding [the] claim, including the original denial letter, the notes, the photographs, the log notes, all correspondence and [the] actual policy.” He reviewed the claim with the adjuster, “and he reviewed the definition of collapse in [the actual] policy and, they both agreed that the cause of her loss was ‘wear/tear/deterioration’ and that her loss ‘[did] not fit [the policy] definition of collapse.’”

Thus there was no bad faith because the court found that the insurer conducted a prompt and reasonably thorough investigation of the claimed loss, and provided a reasonable basis to deny the claim, and summary judgment was granted to the insurer.

Date of Decision: March 17, 2015

Boulware v. Liberty Ins. Corp., CIVIL ACTION NO. 3:13-CV-1541, 2015 U.S. Dist. LEXIS 32223 (M.D. Pa. March 17, 2015) (Mannion, J.)

OCTOBER 2014 BAD FAITH CASES: COURT FINDS “LACK-OF-FORTUITY” EXCLUSION IMPLIED IN EVERY ALL RISK INSURANCE POLICY, AND NO BAD FAITH WHERE DENIAL HAD A REASONABLE BASIS (Philadelphia Federal)

Published on October 7, 2014 in PA - Claims Handling Procedures, PA - Experts and PA - General Bad Faith and Litigation Issues. Closed
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In Fry v. Phoenix Insurance Company, the insured homeowners suffered a wall collapse, after a long history of issues with the wall. There were various expert reports on problems with the wall that led the court to conclude that the insureds had knowledge of both potential problems causing the collapse, and that they failed to timely act to prevent the collapse after having been specifically warned it would occur absent certain actions.

First, coverage was properly denied because the policy only covered collapses if the causes were hidden from the insured, and such was not the case here.

Second, and of significant interest, is the court’s then finding that there was no coverage because the collapse was not the result of chance or accident, i.e., it was not fortuitous. The court specifically found that “under Pennsylvania law, a lack-of-fortuity exclusion is implied in every all-risk policy, such as the Policy at issue here.”

The court ruled that Third Circuit precedent established this principle, citing support from appellate case law: “there is an implied exclusion in every all-risk insurance policy for losses that are not fortuitous”; the “Supreme Court of Pennsylvania would recognize a ‘judicially created “fortuity” exclusion from coverage’ based on the generally accepted principle that ‘every “all risk” contract of insurance contains an unnamed exclusion — the loss must be fortuitous in nature’”; “The fortuity requirement is based on ‘[p]ublic policy considerations and the general nature of insurance,’ preventing an insurance policy ‘from providing coverage for a policyholder’s losses unless those losses are fortuitous.’”; “[W]e predict that the Pennsylvania Supreme Court would place on the insurer the burden of proving that the circumstances of the loss were such that coverage would be inconsistent with that public policy.”

The court then addressed what the Third Circuit meant by “fortuity”. “A fortuitous event … is an event which so far as the parties to the contract are aware, is dependent on chance.” “Such an event ‘may be beyond the power of any human being to bring the event to pass; it may be within control of third persons, provided that the fact is unknown to the parties. The thrust of the definition is that the occurrence be unplanned and unintentional in nature.’” “’In essence, the doctrine precludes coverage from losses that are certain to occur.’” “’Typically, the inherent fortuity doctrines preclude coverage based on what the insured knew or should have known about its potential liability at the inception date of the insurance policy at issue….”

Moreover, the court ruled that the determination of whether a claimed loss is fortuitous is a question of law for the court. Although the court indicated the determination of fortuity was solely a legal issue, the court concluded its analysis that the loss in this case was not fortuitous because no reasonable jury could find the loss fortuitous, thus indicating there may be some role for the jury on the issue.

As to the specific record, independent of the precise cause, all of the experts had told the insureds the wall would collapse unless they took certain actions, they did not, and the wall collapsed, i.e., no fortuity.

Thus summary judgment was granted on the breach of contract claims, and the bad faith claim was dismissed as the court’s analysis demonstrated denial was reasonable.

Date of Decision: September 19, 2014

Fry v. Phoenix Ins. Co., CIVIL ACTION NO. 12-4914, 2014 U.S. Dist. LEXIS 131504 (E.D. Pa. September 19, 2014) (Stengel, J.)