Category Archives: Bad Faith

Insurer Foots Large Bill in Settlement with Homeowner Over Furnace Oil Explosion

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Property damage plus a family’s benzene exposure from a home furnace oil explosion equaled a $945,000+ settlement for an insurer in Nebiol v. Erie Insurance Exchange, C.P. Bucks No. 2014-00766.

On February 7, 2013, unburned furnace heating oil exploded in an insured’s home, which contaminated the home and personal items with odor and excessive benzene levels. The insurer initially determined the loss was covered and agreed to pay for the insured’s hotel and remediation costs. After extensive remediation over the course of a year, benzene levels were still excessively high, which prevented the insured from selling the home. At a certain point, the insurer stopped paying its insured’s hotel fees, claiming that at that point the insured voluntarily chose to stay out of the home.

The insured sued claiming breach of contract, negligence, battery (for the benzene exposure), intentional infliction of emotional distress, and bad faith for failing to settle their claim. A settlement was eventually reached whereby the insurer agreed to purchase the home, transfer taxes (totaling $945,000) and cover the hotel expenses until the sale of the home occured (totaling $4,000 per month). Further, the settlement agreement allowed the insured to bring future claims against the insurer relating to benzene-related illnesses they may contract.

This settlement demonstrates the potential for inflated value of claims where extensive property damage is combined with bodily injury, or in this case, the potential for future bodily injury.

Thanks to Rachel Freedman for her contribution to this post.

 

 

PA Court Says Insurance Company Employees May Be Personally Liable for Bad Faith and Other Claims.

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Imagine that a policyholder makes a claim under a policy following an accident. A claims professional, an insurance company employee, then begins to handle the claim. The insured becomes disenchanted with the handling of the claim and a coverage and bad faith lawsuit is filed. Could the insured bring a negligence or consumer fraud claim directly against the claims professional? According to Judge O’Neill of the United States District Court, Eastern District of Pennsylvania (i.e. Philadelphia), the answer is “yes”.

In Kennedy v. Allstate, et al., Rachel Kennedy was injured in a car accident. Rachel Kennedy and her husband, Sean Kennedy, had an underinsured motor policy with Allstate Property and Casualty Insurance (“Allstate”). After settling with the tortfeasor, the Kennedys made a UIM claim under their Allstate policy. When they were unhappy with the results of that claim, the Kennedys instituted suit, in state court, against Allstate as well the Allstate claims professionals working on their claim. The Kennedys claimed, inter alia, that Allstate had improperly evaluated their claims and engaged in intentional delay, misrepresentation and fraud in the course of processing, investigating and arbitrating their claims. In respect of the Allstate adjusters handling their claims, the Kennedys alleged that the adjusters affirmatively misrepresented and concealed material facts so as to delay settling the Kennedys’ claims and to reduce the amount of money Allstate would ultimately have to pay for their claims. As a result, the Kennedys brought a negligence and consumer fraud claim personally against the Allstate adjusters.

In response to the Kennedys’ lawsuit, Allstate removed the case to federal court. Allstate claimed that the Kennedys had fraudulently joined the Allstate adjusters to defeat federal diversity jurisdiction and keep the case in state court; in other words, Allstate claimed that PA does not allow for insurance company employees to be personally sued for their claims decisions.

The Kennedys filed a motion to remand and Judge O’Neill was asked to decide whether the joinder of non-diverse defendants (i.e. the insurance company employees) was “fraudulent” (and designed only to defeat federal diversity jurisdiction) as there was no reasonable or legal basis to support the claims against them. Judge O’Neill ultimately ruled that the joinder was not fraudulent as a viable cause of action existed and thus remanded the case to state court.

In his opinion, Judge O’Neill concluded that there was at least “a possibility” that, under Pennsylvania law, an insurance claims professional owes a duty of care to an insured. If that duty was breached, if, for example, the adjuster failed to reasonably investigate an insured’s claims and/or made misrepresentations regarding the status of the investigation into the insured’s claims, a negligence claim could be filed.

Next, in respect of the viability of an insured bringing a consumer fraud claim against a claims professional (which opens the door to punitive or statutory damages), Judge O’Neill concluded that Pennsylvania allows consumer fraud claims directly against an insurance company’s employees.

While it is important to recognize that Judge O’Neil’s decision only dealt with the threshold issue of whether a colorable claim existed, the case will no doubt be seized upon by policyholder counsel. We fully expect to see an onslaught of claims in which both insurer and insurance professional are named as defendants. As if a claims job was not challenging enough…

Special thanks to Colleen Hayes for her contributions to this post. For more information about it, please e-mail Bob Cosgrove .

Punitive Damages Awarded in Underlying Case Held Not Recoverable Against the Insurer

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The Third Circuit has held that punitive damages cannot be awarded in a bad faith case against an insurer.  In Wolfe v Allstate, the plaintiff was injured when he was struck by a drunk driver.  Plaintiff sued the drunk driver and was awarded compensatory and punitive damages.

The driver’s insurer paid the compensatory damages.  However, the policy did not provide coverage for punitive damages, thus the insurer did not pay the punitive damages award.  The driver assigned his rights against its insurer to the plaintiff who filed an action against the insurer alleging bad faith and breach of contract for Allstate’s failure to pay the punitive damages award.  The court ruled that in a bad faith action, the plaintiff is not entitled to recover as compensatory damages the punitive damages that were awarded in an underlying lawsuit.

Thus, this case stands for the proposition that under Pennsylvania law, evidence of punitive damages should not be admitted in an insured’s bad faith claim against its insurer, as punitive damages cannot be awarded in a bad faith case.

Thanks to Colleen Hayes for her contribution to this post.

 

 

PA Bad Faith Claim Can Be Based on More Than Improper Coverage Denial.

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Bad faith claims can come in many different forms, and a Pennsylvania court recently confirmed such claims can involve an insurer’s reckless conduct, not just an improper denial of a claim.

In Scheirer v. Nationwide Insurance, plaintiff Virginia Scheirer was riding a county bus when she was thrown to the floor and injured when the bus driver swerved to avoid oncoming traffic. Plaintiff had uninsured motorist coverage from Nationwide with limits up to $100,000 per person. Plaintiff notified Nationwide of her claim in July of 2011 and provided the required medical documentation in support of this claim.

In September of 2012, she demanded arbitration, which Nationwide refused.  In April of 2013, Nationwide requested a medical examination and statement under oath of the insured. In May, plaintiff sued in Monroe County, alleging that Nationwide handled her claim with excessive delay. She further amended this claim in June of 2013, alleging breach of contract and bad faith.

Nationwide sought to dismiss the bad faith claims, arguing that plaintiff could not assert bad faith without an unreasonable denial of coverage, and here there was no denial of coverage. In resolving pending summary judgment motions, the trial court ultimately ruled that there are bases for bad faith other than a denial of coverage, citing case law from Davis v. Allstate Property and Casualty Company in the Federal District Court for the Eastern District of Pennsylvania, which held that “bad faith can have various other bases, including an insurer’s lack of investigation, lack of adequate legal research concerning coverage, or failure to communicate with the insured.”

In this case, the court held that there were questions of fact as to whether the insurer had engaged in reckless conduct in respect of its investigation, legal research or communications that precluded the grant of summary judgment.

Thanks to Thalia Staikos for her contribution to this post and please write to Mike Bono for more information.

 

 

 

Pennsylvania Superior Court Finds Insurer Acted In Bad Faith Based On Its Insufficient Investigation

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Failure to conduct a thorough investigation before denying a claim under a policy could result in a finding of bad faith under Pennsylvania law.

In Mohney v. Am. Gen. Life Ins. Co., the insured obtained two disability policies from American General Life Insurance, which was to provide for benefits in the event he became “totally disabled” as defined by the policies.

The insured injured his back, and was unable to return to work.  Initially, American began making payments under the policies. After conducting a limited investigation into the claim (e.g. reviewing status reports from the insured and the insured’s doctor), American discontinued benefits contending that the insured was not “totally disabled,” a requirement to receive payments under the policies.

In response, the insured sued American alleging breach of contract and bad faith.  The court found that the insured produced sufficient evidence showing he was “totally disabled” as defined by the insurance policies, and found that American breached its contract.  In addition, the court reviewed the investigation American conducted in determining that the insured was not “totally disabled” and found it insufficient.  The court noted that the reports were ambiguous regarding the insured’s medical status, and American failed to clarify the discrepancies.  Additionally, although American reviewed status reports provided by the insured, it failed to gather information from other relevant medical/benefit providers.  American also failed to conduct its own independent medical examination.  Furthermore, the court noted that American was unable to cite any Pennsylvania law supporting its interpretation of “totally disabled”.  Thus, the court held that American’s denial of benefits under the policies constituted bad faith.

This case shows that to avoid potentially being found liable of bad faith, an insurer must conduct a thorough independent investigation into an insured’s claim (and not merely rely on the documentation provided by the insured and the insured’s doctors), and ensure that its interpretation of policy terms is supported by applicable and relevant case law.

Thanks to Colleen Hayes for her contribution to this post.

 

 

 

Insufficient Investigation Leaves Open Bad Faith Claim (PA)

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Bad faith insurance lawsuits usually involve a claimant alleging that an insurance company failed to use good faith efforts to settle the underlying dispute or that an insurance company improperly denied benefits that the claimant was owed under the policy. In the latter case, an insurance company can defeat the claimant’s allegations by proving a thorough investigation and sound contract interpretation that is consistent with the jurisdiction’s case law.

In Mohney v Am Gen Life Ins Co., the plaintiff purchased disability and life insurance in connection with an automobile loan and a home mortgage. In the event that plaintiff became totally disabled, both policies provided for the payment of benefits. Shortly thereafter, plaintiff injured his back in a traffic accident and was unable to work as a coal miner. American General Life Insurance (“American”) paid benefits for the first three years but then terminated the payments because plaintiff did not allegedly meet the criteria for total disability.

The trial court entered summary judgment in favor of American on the bad faith claim and held that American proved the plaintiff was not totally disabled within the meaning of the two policies. The plaintiff appealed.

The Pennsylvania Superior Court ruled that the trial court erred in finding that American did not act in bad faith because American did not conduct a sufficient investigation and American’s interpretation of “totally disabled” was at odds with prior Pennsylvania case law. American relied on a doctor’s ambiguous responses concerning the plaintiff’s ability to work. American never sought to clarify and confirm that plaintiff was unable to work or obtain an independent medical evaluation to determine whether plaintiff was in fact totally disabled. American also relied on an investigator’s misrepresentations of fact in letters addressed to plaintiff and the plaintiff’s doctor. The Pennsylvania Superior Court also disagreed with American’s interpretation of “totally disabled” under binding Pennsylvania case law.

Overall, if an insurance company wishes to move for summary judgment on the grounds that it properly denied a claimant benefits, it is necessary to ensure that a sufficient, thorough investigation was performed. A lack of diligence up front can have the unfortunate consequence of prolonging litigation, and with it, the costs of litigation as well.

Thanks to Eric Clendening for his contribution.

For more information, contact Denise Fontana Ricci at .

Incorrect but Not Unreasonable: Defeating Bad Faith in Pennsylvania

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When a court finds insurance policy language to be ambiguous, it may deny an insurer’s motion for summary judgment, or find in favor of coverage.  Does that mean that the insurer who got it wrong acted in “bad faith”?  Apparently not.

In Gray v. Allstate Indemnity Co., the insurer denied coverage to an insured for a fire loss claim caused by vandalism and moved for summary judgment on both the insured’s breach of contract and bad faith claims.  The policy in question excluded coverage if the property had been vacant or unoccupied for a certain period of time prior to the vandalism causing the fire damage.  Holding that the terms “vacant” and “unoccupied” were ambiguous and facts surrounding these conditions in the case were disputed, the court denied summary judgment on the breach of contract claim.

With regard to the bad faith claim, the insured argued that the insurer purposely drafted an ambiguous contract so that the ambiguous language could be used to deny future coverage. The court rejected this argument because both the insurer’s factual basis for denying coverage and interpretation of the policy were determined to be reasonable.

While the court ruled against the insurer’s interpretation of the terms for the breach of contract claim, the way the insurer construed the terms was still a reasonable view. Thus, the court held that “[b]ad faith cannot be found where the insurer’s conduct is in accordance with a reasonable but incorrect interpretation of the insurance policy.” As such, summary judgment was granted to the insurer as to the bad faith claim.

Based on this case, it would appear that a reasonable basis for denial of coverage in Pennsylvania is sufficient to defeat a bad faith claim.

Thanks to Coleen Hill for her contribution to this post.

 

A Lurking Danger in New Jersey’s Embrace of “Fairly Debatable” Standard for Bad Faith Claims

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As reported last month, insurers took comfort when the New Jersey Supreme Court, in a pair of cases decided on the same day, reaffirmed the state’s “fairly debatable” standard for bad faith claims.  So long as an insurer’s rationale for denying a claim is fairly debatable, “bad faith” is not proven or even inferred because the court later disagrees with its decision to deny coverage.  But, as is the case with many wins, this victory may carry a hidden danger.

While the court refused to abandon the “fairly debatable” standard in Badialdi v NJ Manufacturers, and applied that standard in Wadeer v. NJ Manufacturers, the court referred other issues to the New Jersey Civil Practice Committee, which may have the potential to heighten exposure in the future.

The first issue is whether New Jersey Rule 4:42-9(a)(6), which permits an award of attorneys’ fees to insureds who prevail in coverage litigation against their insurer in third-party cases,  should be expanded to apply to first-party claims. The second is whether court rules should be amended to allow insureds to bring a separate first-party bad faith claim against their insurers after the resolution of an underlying UM motorist claim.

The discussion of these proposed changes is still in early stages.  Yet the prospect of new rules– allowing an award of attorneys’ fees in the first party cases and the prospect of separate, post UM lawsuit bad faith litigation– may pose a greater risk down the road. Judicial adherence to the reasonable “fairly debatable” standard for bad faith damages is good news. But the potential for rule changes is troubling. Dare we say the devil is truly in the details?  Thanks to Mike Gauvin for his contribution to this post.  Please email Dennis Wade with any questions.

Pennsylvania Reaffirms Standard in Bad Faith Claims

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Unfair Insurance Practices Act (“UIPA”), 40 P.S. § 1171.2, was enacted to define and prohibit practices in Pennsylvania that constitute unfair or deceptive acts for the insurance business.  Formerly, Pennsylvania courts looked to UIPA terms for guidance on determining whether an insurer acted in bad faith because Pennsylvania’s bad faith statute, 42 Pa.C.S. § 8371, failed to provide a standard.

In 1994, the court in Terletsky v. Prudential Property & Casualty Co established the test for determining bad faith in Pennsylvania.  Under Terletsky, “an insured seeking to establish bad faith must prove: (1) that the insurer did not have a reasonable basis for denying benefits under the policy; and (2) that the insurer knew of or recklessly disregarded its lack of a reasonable basis in denying the claim.” Therefore, bad faith in Pennsylvania is measured by the Terletsky standard.

In Moore v. State Farm Fire Casualty Co., the plaintiff alleged that a violation of the UIPA was evidence of insurer bad faith.  The insurer moved to dismiss the bad faith claim based on a violation of the UIPA.  The court, held that a violation of the UIPA is neither per se evidence of bad faith, nor was the plaintiff prevented from using the violation as evidence of bad faith.

The court clarified that the question relevant to a bad faith determination is “whether the particular conduct (that may or may not violate the UIPA) is relevant to show that the insurer lacked a good faith basis for denying benefits or recklessly disregarded that fact.”

The takeaway is that analyzing a bad faith claim, a violation of the UIPA can be evidence of bad faith, but does not automatically constitute bad faith.

Thanks to Coleen Hill for her contribution to this post.

New Jersey Reaffirms “Fairly Debatable” Standard in Bad Faith Claims

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Reasonable minds may differ.  Historically, New Jersey has followed the wisdom of that maxim in assessing bad faith claims.  Following Pickett v. Lloyd’s in 1993, insurers have enjoyed the right to be wrong.  If an insurer’s decision to disclaim coverage was “fairly debatable,” an insurer would be protected against charges of bad faith claim handling.

Recently, the “fairly debatable” standard came under attack before the New Jersey Supreme Court in Badialdi v. New Jersey Manufacturers Ins. Grp. There, an underinsured motorist proceeded to arbitration against two of his insurers and obtained an award of $29,148.62, which was to be split by the two insurers.  One of the insurers rejected the arbitration award, based on a policy provision, allowing either party to dispute an arbitration award when the award exceeded $15,000.  The insurer contended it was entitled to challenge the arbitration award because, while its portion of the award did not exceed the $15,000 threshold, the entire award did.  The trial court and later, the Appellate Division, disagreed, and upheld the arbitration award, based on the reasoning that the $15,000 threshold applied to a carrier’s liability, not the tortfeasor’s.

The insured then filed a second action against the insurer for breach of contract and bad faith in delaying payment of the award.  In defending the bad faith claim, the insurer argued its reliance on an earlier, non-binding court decision made its position “fairly debatable,” and thus shielded it from a bad faith claim.  The trial court and Appellate Division agreed, ruling the existence of the earlier decision precluded a finding of bad faith.  The insured then appealed to New Jersey’s top Court.

In an amicus brief filed with the Supreme Court, the “New Jersey Association for Justice” argued  the Court should depart from Pickett’s “fairly debatable” standard and permit courts to scrutinize insurers’ behavior more closely during the discovery process.  According to the NJAJ, the “fairly debatable” standard serves as a presumption of reasonableness during the claims handling process.

While acknowledging NJAJ’s concerns, the Court refused to dilute the “fairly debatable” standard, suggesting that intractable complications would arise if the rule were different.  The court reaffirmed the “fairly debatable” standard, holding that reliance on an earlier published decision, even though flawed, shielded the insurer from a bad faith claim.

New Jersey’s insurers have the right to be wrong, provided the stand taken is “fairly debatable” on the law and existing facts.  With Badialdi, New Jersey embraced what is ancient wisdom – – reasonable minds may differ without an ulterior “bad faith” motive.  It is always good news when common sense and time-tested wisdom is used to resolve insurance disputes.

Thanks to Michael Gauvin for his contribution to this post.

For more information, please email Dennis Wade at .