Tendering Policy Limits Could Constitute Settlement Agreement

A Pennsylvania Court found a settlement existed once policy limits were tendered to a plaintiff.

In Wise v. Hyundai Motor Company, plaintiffs’ daughter died in an automobile accident.  Plaintiffs sued Hyudai Motors (and others). USAA insured the defendants. After commencing the lawsuit in 2010, plaintiffs sent a letter to defense counsel demanding full insurance policy limits.  In response to this demand, in 2012, defense counsel responded with a letter “offering” the policy limits.  After the offer letter was issued, defense counsel was only minimally involved in the litigation, since the products liability action against the car manufacturer had taken precedence.  Four years later, once the plaintiffs and the manufacturer settled, plaintiffs informed defendants they would be now be asserting a bad faith claim against their insurer, USAA, for failing to properly defend defendants in the action.

Defendants countered that plaintiffs’ new claim must fail since the parties entered into a settlement back in 2012, when defendants tendered the policy limits to plaintiffs.

In determining whether plaintiffs and defendants agreed to settle the claim in 2012, the court first looked to the plaintiffs’ 2010 letter.  The court noted that although the letter did not use the word “settlement,” the letter was clearly intended to act as a settlement offer, because plaintiffs had demanded policy limits from defendants.  The court then looked to defendants’ 2012 letter, which, it determined, clearly tendered the policy limits to plaintiffs, despite using the phrase “offering.”  Thus, the court reasoned there had been a meeting of minds, and a settlement had been reached based on the two letters.

Thus, this case illustrates the importance of making sure any offer or demand to opposing counsel expressly states what is being demanded, offered or accepted, to avoid unnecessary motion practice to clarify whether the parties actually intended to settle a matter.

Thanks to Colleen Hayes for her contribution to this post.


PA Court Enforces Settlement Where Policy Limits Demanded And Offered

In Wise v. Hyundai Motor Company, a passenger died in an automobile accident and her estate sued the owner of the car, the driver of the car, and various insurance companies. This lawsuit was originated in Monroe County, Pennsylvania and implicated Pennsylvania law. Of interest here was that the estate of the decedent sent a policy limit demand to the insurance company of the driver and owner of the car (USAA).

USAA’s counsel replied, “offering” the policy limit of $115,000. At no point, in either the letter to USAA’s counsel or the reply, was the word “settlement” used. Plaintiff’s counsel never responded to the policy limit offer. From that point, USAA’s counsel was minimally involved in the matter, as the case primarily focused on products liability against Hyundai.

Four years after the policy limit demand, decedent’s estate settled with the products defendants and subsequently asserted a bad faith claim against USAA for failure to defend the driver and owner of the car, as USAA did not participate in any pre-trial proceedings or offered an expert and thus, arguably, could not assert a defense at trial. Decedent’s estate asserted this is cause for a bad faith claim. USSA, in response, moved to enforce the earlier $115,000 “settlement.”

The court held that, he policy limits were demanded and offered in return, and as such there was a settlement.  Although optimally there would be evidence that plaintiff send a letter accepting the policy limit offer, the course of conduct of the parties can also establish acceptance. The course of conduct showed that USAA had minimally been involved in the litigation after the policy limit offer, did not engage in discovery, and circulated a letter to all counsel stating USAA would not be involved in the litigation as the full policy limits had already been tendered. As such, all parties acted with the belief that settlement had been reached – including the plaintiff and the court therefore agreed to enforce the settlement.

Thanks to Matt Care for his contribution to this post and please write to Mike Bono if you would like further information.

Insurers May be Liable for Foreseeable Consequences if there is a Breach of the Covenant of Good Faith and Fair Dealing.

In Mano Enterprises, Inc. v. Metropolitan Life Insurance Company, plaintiff attempted to assign its policy to a third-party.  The insurance company then placed a hold on the policy that resulted in a lapse of the policy due to non-payment of premium.  The Court held that there were issues of fact as to whether the insurance company appropriately refused to process the assignment of the policy by the plaintiff, and any damages for the foreseeable consequences.

Insurers should remain cognizant of potential liability incurred in the event that policy determinations effect contractual obligations.

Thanks to Valerie Prizimenter for her contribution to this post.






Lack of Explanation in Coverage Decision May Constitute Bad Faith

Making the wrong coverage decision generally does not constitute bad faith.  However, failing to explain the decision might.

In Rosewood Cancer Care Inc. et al. v. The Travelers Indemnity Co., a water leak damaged $1 million radiation machine. The insurer agreed to cover the radiation machine as “business personal property” which allowed up to $103,000 in coverage per the policy to replace the machine. Rosewood argued that the machine was a “building fixture,” which warranted $560,000 in coverage per the policy.

The insured sued for a declaration that the radiation machine should have been covered as a building fixture, rather than business personal property. The insured also alleged bad faith and breach of contract claims against the insurer for failing to provide coverage for the machine as a fixture, and for allegedly failing to provide an explanation for the denial of coverage as a building fixture after multiple requests. The insurer maintained that the radiation machine was business personal property since it was capable of being bought, sold, moved, installed or removed from the building.

On motion, the court ruled that the radiation machine should have been covered as a building fixture, since the machine was permanently attached to the building and would have required significant drilling through concrete to remove. The court allowed plaintiff to proceed to trial on the allegation of bad faith stemming from the alleged failure to provide a written explanation for its coverage decision.

This case demonstrates that for an insurer to prevent viable bad faith claims, communication with the insured and explanation is key.

Thanks to Rachel Freedman for her contribution to this post.




Is The Pennsylvania Bad Faith Test Bad?

On August 30, 2016, the Pennsylvania Supreme Court granted a Petition for Allowance of Appeal in Rancosky v. Washington National Insurance Company, agreeing to review certain current requirements to prove bad faith.

In its order, the Supreme Court agreed to review the current requirements for proving insurer bad faith in Pennsylvania, and if it determined these requirements were proper, it agreed to review whether the factor of “motive of self-interest or ill-will” was a mandatory prerequisite to proving bad faith, or whether it was merely a discretionary condition.  In the intermediate appellate court, the Superior Court had previously held that proving a “dishonest purpose” or “motive of self-interest or ill-will” was merely a discretionary condition that was probative of the issue of whether “the insurer knew of or recklessly disregarded its lack of reasonable basis in denying the claim.”

The Opinion of the Supreme Court, when issued, could drastically reshape the current landscape in Pennsylvania’s bad faith law.  Pennsylvania’s statute on bad faith does not define a standard for bad faith, and the current rule was established by the Superior Court in Terletsky v. Prudential Prop. And Cas. Ins. Co.  437 Pa.Super 108 (1994).  The Terletsky rule requires a plaintiff to satisfy a two-part test: (1) that the insurer did not have a reasonable basis for denying benefits under the policy; and (2) the insurer knew or recklessly disregarded its lack of reasonable basis in denying the claim.”  The Pennsylvania Supreme Court’s order granting review offered a sweeping basis for reviewing the Terletsky test, and could alter how insurers are forced to approach defending bad faith in the future.  We will issue further guidance on this issue once the Court issues its opinion.

Thanks to Konrad Kreb for his contribution to this post.




WCM Partner Fights on the Side of Angels and Against Policyholders.

Such was the mission tasked to Partner Bob Cosgrove when he was asked to be a panel speaker at a March 22, 2016 Anderson Kill sponsored seminar entitled “Fight Night: Attacking and Defending Insurance Claims.” Mr. Cosgrove was asked to explain (to a pro policyholder audience) how and why insurance companies analyze claims and why, contrary to policyholder beliefs, such behavior is typically reasonable. Hopefully, the explanations stuck.

For more information about this post, please e-mail Bob Cosgrove .

Preventing Prejudice With Severance

Oftentimes when an insured sues its insurer for breach of contract, it asserts a claim for bad faith.  Insurers should consider severing the claims to avoid prejudice.

In Custom Designs & Mfg. Co. Inc. v. Atlantic States Ins. Co., the plaintiff’s property was destroyed in a fire.  Atlantic States Ins. Co. insured the property.  Following the fire, the plaintiff made a claim under its insurance policy for the loss.

Upon investigation of the loss, Atlantic calculated the plaintiff’s business interruption losses at approximately $1.2 million, which it paid the plaintiff.  The plaintiff disputed this total and a neutral appraiser was retained to calculate the loss.  Ultimately, the appraiser concluded the plaintiff’s losses totaled approximately $2.1 million, almost $900,000 more than Atlantic had calculated.  The plaintiff filed a petition with the court seeking an award for the calculated difference as well as prejudgment interest.  Atlantic paid the difference but refused to pay the prejudgment interest.  Consequently, the plaintiff filed a complaint against Atlantic for breach of contract and bad faith.

In its complaint, the plaintiff contended that Atlantic breached the insurance contract, when it deliberately refused to provide coverage for the plaintiff’s claim.  In respect of its bad faith claim, the plaintiff averred Atlantic failed to properly investigate the plaintiff’s claims, failed to make payment of the prejudgment interest, breached its fiduciary duty, and caused the plaintiff severe financial harm.

In response to the plaintiff’s complaint, Atlantic filed a motion seeking a protective order and to sever the plaintiff’s bad faith claims.  Atlantic argued allowing the plaintiff to conduct discovery, in respect of its bad faith claim, would cause severe prejudice to Atlantic.

Ultimately, the court denied Atlantic’s request for a protective order, concluding Atlantic failed to show the scope of the plaintiff’s requested discovery contained information protected by attorney-client privilege or work product.  Conversely, the court granted Atlantic’s request to sever the plaintiff’s bad faith claim, holding Atlantic could be prejudiced by trying the plaintiff’s breach of contract claim simultaneously with its bad faith claim, as the bad faith claim was not relevant to the breach of contract claim, and the bad faith claim could prejudice and confuse a jury in reaching a verdict.  However, regardless of this holding, the court refused to stay discovery for the bad faith claim.

Thus, as this case illustrates, if a breach of contract and a bad faith claim are both asserted against an insurer, a court may grant an insurer’s motion to sever the bad faith claim, as prior courts have held trying breach of contract claims simultaneously with bad faith claims could result in unnecessary prejudice to an insurer.

Thanks to Colleen Hayes for her contribution to this post.



There’s No Sausage in my Stromboli: Sausage vendor Loses Bad Faith Battle Against Excess Insurer (PA)

In Charter Oak Insurance Company v. Maglio Fresh Foods, No. 14-4094, 2015 U.S. App. LEXIS 19268 (3d Cir. Nov. 4, 2015), the Third Circuit held that because the underlying lawsuit did not present a covered “advertising injury” claim, and there was no exhaustion of the primary policy, the insured’s excess carrier could not have acted in bad faith.

South Philadelphia is well-known for its Italian specialties, including Stromboli and sausages. Leonetti’s, a prominent supplier of Stromboli, brought a lawsuit against competitor Maglio Fresh Foods, arguably best known its sausages. The lawsuit alleged that after Maglio found a new manufacturer and terminated its private label manufacturing agreement with Leonetti’s, Maglio continued to use boxes reflecting product information about the Stromboli made by Leonetti’s. The lawsuit further alleged that Maglio was selling Stromboli under the “Forte” brand name, although Leonetti’s had purchased and obtained exclusive rights to distribute Forte products.

Maglio was defended by its primary insurer, Charter Oak Fire Insurance Company, pursuant to a reservation of rights letter. The Charter Oak policy had a limit of $1 million.  American Guarantee & Liability Insurance Company, Maglio’s excess and umbrella insurer, acknowledged the claim.

Following a jury trial, the jury returned a verdict in favor of Leonetti’s on the Maglio brand claim. (There was a mistrial as to the Forte brand claim, which was later re-tried and resulted in the jury finding in favor of Leonetti.) The jury awarded $2 million in compensatory damages and $555,000 in punitive damages. Upon learning of the verdict, American Guarantee informed Maglio that it had no duty to provide a defense or indemnity since Charter Oak was providing a defense and because the Maglio brand claim was not covered.

Following unsuccessful settlement discussions, Maglio entered into a settlement agreement and assignment of rights with Leonetti’s, awarding $4.5 million to Leonetti’s and assigning to Leonetti’s its claims against the insurers. In response to Maglio’s settlement, Charter Oak informed Maglio that it breached the policy’s cooperation clause and filed a declaratory judgment seeking a ruling that the claims in the underlying lawsuit were not covered under the policy. American Guarantee, a defendant in the declaratory judgment action, filed a cross-claim seeking a similar declaratory judgment. Maglio responded with allegations of breach of contract and bad faith.

The district court granted the insurers’ motions for summary judgment, concluding that neither policy covered either claim.  Specifically, the Maglio brand claim did not constitute an “advertising injury,” and the verdict for the Forte brand claim did not exhaust the limits of the underlying insurance policy. The counterclaims and cross-claims brought by Maglio, however, proceeded to trial. Charter Oak settled with Maglio immediately prior to trial.

Following a bench trial, the district court concluded that American Guarantee did not act in bad faith. Further, it held that Charter Oak’s tender of its policy limits did not affect American Guarantee’s obligation to defend Maglio since Charter Oak continued its defense, and the policy limits were not exhausted by the claim. Further, there was no bad faith because American Guarantee acted properly with respect to the Forte brand claim by hiring coverage counsel and monitoring the underlying action. Maglio appealed.

The Third Circuit upheld the lower court’s decision since the American Guarantee policy clearly did not apply to either the Maglio brand claim or the Forte brand claim. The court reasoned that even if the Maglio brand claim fit within the definition of “advertising injury,” the District Court properly determined that coverage was excluded under the “knowledge of falsity” exclusion. “It is undisputed that Taubman, Maglio’s broker and sales manager, testified that he knew the Maglio brand boxes contained false statements and did not accurately represent the product contained within them.” In addition, the Third Circuit stated that Maglio’s bad faith claim must fail since it was difficult to conceive how American Guarantee acted in bad faith when it owed no duty to indemnify.  Further, the Third Court found significant that American Guarantee’s defense provision was never triggered by the Forte brand claim since the Charter Oak policy was never exhausted. Therefore, the Third Circuit affirmed the district court.  Thanks to Hillary Ladov for her contribution to this post.  Please email Brian Gibbons with any questions.

How to Settle Multiple Claims Against One Insured? Check Your Jurisdiction.

When an insurer is faced with multiple claimants commencing multiple suits against its insureds, the insurer can use one of two methods in settling those claims: 1) the pro-rata approach; or 2) first-come, first-served approach.

In the pro-rata approach, each claimant usually receives a percentage of his proven damages, based on the total amount of damages of all claimants and the policy limits.  Conversely, in the first-come, first-served approach, the insurer has the discretion to settle multiple claims on a first-come, first-served basis as long as it acts in good faith.  Under this rule, it has been generally held that a liability insurer can settle with some claimants although to do so may exhaust the insurance funds.

It appears that New Jersey follows a version of the first-come, first-served approach.  In Doitch v. Narendrakumar, the Court held “absent bad faith, an insurer may settle with one or more claimants, notwithstanding that the settlement may exhaust the policy limits.”  Further, in its analysis the Court explained that when a presumptively valid and adequate award has been made to one of several claimants, the fact that the remaining claimants, or any of them, have not been taken into the confidence of settling parties falls short of establishing an equitable claim against the insurer.

Applying the above principles to the facts at issue, the Doitch Court noted that the insurer, had negotiated a very favorable settlement in respect of claims asserted against its insureds; and that it would be fatuous to require an insurer to proactively search for additional claims before entering into a global settlement.  Further, prior to entering into the settlement, the insureds were fully aware that the settlement would exhaust their policy limits but would not resolve all pending claims against them.  Thus, the Court concluded, under these circumstances, the insurer had not acted in bad faith when it settled some, but not all, of the claims against its insureds.

It is important to make sure you know your jurisdictions approach to settling multiple claims before proceeding with global settlement, to avoid any potential bad faith claims.

Thanks to Colleen Hayes for her contribution to this post.

PA Courts Miss Out on Opportunity to Weigh In on Video Conference EUO

After U.S. District Judge A. Richard Caputo of the Middle District of Pennsylvania denied Erie Insurance Exchange’s motion to dismiss a bad faith suit stemming from a home burglary, the plaintiff discontinued the suit.

At the heart of the controversy between Erie and its insured, is the question of whether an examination under oath by video conference satisfied the provision in the policy requiring the insured to cooperate with insurer’s investigation of the claim.

The dispute over the insured’s compliance stemmed from a request by Erie’s counsel for the insured to appear for an EUO to recount details pertaining to the burglary claim.  Following the burglary, the insured moved to Florida and insisted he could appear only by video conference.  Erie, however, refused to conduct a video conference, claiming, among other things, that it would make the use of exhibits too difficult and that since the incident occurred in Pennsylvania, the EUO should also take place in Pennsylvania.  Thereafter, the insured’s counsel emailed Erie claiming that the insured could not travel due to injuries.  In response, Erie filed a motion for summary judgment, alleging that the insured was not cooperating with its investigation under the terms of the policy and requesting that the court dismiss the insured’s bad faith claim.

Judge Caputo denied Erie’s request and made it clear that “It is a question of fact for the fact-finder as to whether or not [the insured’s] offer to submit to an EUO by video conference satisfied this provision to ‘cooperate’ with Erie in their investigation of [the insured’s] claim.”  Judge Caputo further opined that “a reasonable juror could find that EUO by video conference was sufficient to constitute cooperation, particularly given [the insured’s] medical condition.  However, a reasonable juror could also find that [the insured’s] refusal to appear in the commonwealth of Pennsylvania for the EUO, as specifically requested by Erie, failed to satisfy this provision requiring cooperation.”

The question of whether an insured’s offer to submit to an EUO by video conference satisfies insured’s obligation to cooperate with the insurer’s investigation will remain for another day.  Thanks to Hillary Ladov for her contribution to this post.  Please email Brian Gibbons with any questions.