PA Products Law Continues to Develop as Federal Courts Nix Strict Liability for Medical Devices

In a recent decision levied in the wake of Tincher v. Omega Flex, Inc., the United States District Court for the Western District of Pennsylvania concluded that Pennsylvania products law does not impose strict liability on medical devices such that claims of design defect, manufacturing defect and failure to warn are inapplicable.

In Cogswell v Wright Medical, plaintiff Roy Cogswell sued the manufacturer of his failed hip replacement after complications caused him to experience continuous pain and undergo additional surgeries.  More specifically, Cogswell alleged that defendant Wright Medical Technology, Inc. was strictly liable for his ongoing hip condition on theories of, among other things, design defect, manufacturing defect and failure to warn.  After removing the case to the United States District Court for the Western District of Pennsylvania, however, Wright Medical objected to Cogswell’s products claims, arguing that the hip replacement falls into a class of “unavoidably unsafe” products that social utility inoculates from strict liability.

Operating in the post-Tincher world of Pennsylvania products law, Judge Cathy Bissoon dutifully considered the Restatement (Second) of Torts to predict whether Pennsylvania’s state courts would subject medical devices to strict liability.  In particular, Judge Bissoon focused her attention on Comment k to Section 402(a) of the Second Restatement that had previously been interpreted by Pennsylvania jurists to except prescription medications from strict liability.  Even though Judge Bissoon noted that this aspect of the Restatement had not been previously interpreted in the context of medical devices, she ultimately adopted the Superior Court’s statement in dicta that there is “no reason why the same rationale applicable to prescription drugs may not be applied to medical devices” as both are inherently risky and beneficial to society.

All told, Cogswell is an interesting decision for Pennsylvania insofar as it continues to reflect the federal courts’ adherence to Tincher while also indicating that the Second Restatement’s pyrrhic victory in many ways stagnated the Commonwealth’s development of fundamental concepts in products law.  As a result, Cogswell implicitly confirms the unfortunately unpredictable cycle of products jurisprudence in Pennsylvania where there is considerable delay between the federal courts’ preliminary consideration of novel concepts and the Commonwealth’s eventual endorsement or rejection of the same.  Thanks to Adam Gomez for his contribution.  Please email Brian Gibbons with any questions.

The Wild West: PA Supreme Court Allows Insureds Being Defended Under a ROR to Settle Cases Without Carrier Consent.

Yes, you read the title of this post correctly. PA insureds being defended under a ROR can now settle their case without insurer consent. If the coverage issues are ultimately resolved against the insurer, so long as the insured’s settlement was “fair and reasonable”, the carrier is stuck with the result. Such is the 3-2 (PA’s Supreme Court is 3 judges short of a full complement because of a variety of scandals) decision in the case of Babcox & Wilcox Company, et al. v. American Nuclear Insurers, et al.

The central facts of Babcox are as follows. Class action lawsuits were filed against Babcox & Wilcox back in the 1990s. These class actions claimed that the plaintiffs had suffered bodily injury and property damage caused by emissions from nuclear facilities owned by Babcox & Wilcox. In response to the lawsuits, American Nuclear Insurers and Mutual Atomic Energy Liability Underwriters (collectively “ANI”) agreed to defend Babcox & Wilcox under a reservation of rights. ANI reserved its right to contest indemnity in respect of damages that were not caused by nuclear energy hazard, damages in excess of the policy limits, and claims for injunctive relief and punitive damages.

As the underlying class actions progressed, ANI believed that the cases were defensible because of, among other things, the lack of medical and scientific support for plaintiffs’ claims. ANI thus refused to settle the case at the demands being made. However, Babcox & Wilcox thought otherwise and decided to settle the class actions for a total of $80,000,000 – a high figure but less than the Policy limits of $320,000,000. It appears that the settlement was specific to damages that were covered by the Policy. In light of this, Babcox & Wilcox then demanded that ANI reimburse it for the $80,000,000 settlement. ANI declined and argued that Babcox & Wilcox had breached the Policy’s “consent to settle clause.” It is this argument that the PA Supreme Court has now rejected by holding that “where an insured accepts a settlement offer after an insurer breaches its duty by refusing the fair and reasonable settlement while maintaining its reservation of rights and, thus, subjects an insured to potential responsibility for the judgment in a case where the policy is ultimately deemed to cover the relevant claims”, an insurer is obligated to pay that settlement if the settlement is “fair and reasonable from the perspective of a reasonably prudent person in the same position of [the Insureds] and in light of the totality of the circumstances.”

There’s a lot to digest in the opinion (as well as the dissent), but as we told the press, we think this case is a game changer. Insurers are now faced with a no win situation. If they think a coverage issue may someday arise and they don’t reserve and defend, they face the potential of being estopped from raising the defense at a later point in time (or they might be faced with an §8371 bad faith claim for reckless claims handling). However, if a coverage concern is raised, the insurers lose the right to control the settlement negotiations as the insured can, on its own, resolve the case. In this regard, we think case values might skyrocket since a plaintiff no longer has to take a discount on her case because of a fear of coverage concerns. Rather, the plaintiff can settle and then assume the right to contest coverage. If the coverage concerns are ultimately rejected by the court, the insurer will have to pay the “fair and reasonable” settlement amount, which might well be a higher number than what the case otherwise would have settled at. In short, Pennsylvania just became a lot less hospitable to the insurance industry.

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

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

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 .

When Must You Commence a DJ in PA? New Guidance from the Appellate Court.

In 2007, a seventeen year old hotel worker was killed in a car accident after drinking on the job. A negligence based wrongful death action was thereafter commenced against the hotel operator. In 2012, on the eve of trial, Selective Way Insurance Company (“Selective”) commenced a declaratory judgment action asserting that no coverage was owed for various reasons. The insured (Hospitality Group Services (“HGS”)) answered and asserted that the declaratory judgment action was untimely as more than four years had passed since suit was filed – contract actions in PA are subject to a four year statute of limitations. Selective claimed that the action was timely as a declaratory judgment action did not need to be commenced until the carrier denied defense or indemnity coverage. The trial court rejected Selective’s position and held that “the statute of limitations for an insurance carrier to file a declaratory judgment action regarding its duty to defend and indemnify its insured begins to run at the time the insurance company receives the civil complaint in an action against its insured.” The case went up on appeal and the Superior Court of Pennsylvania has now issued its decision.

The Superior Court reversed the trial court and held that the time to commence a declaratory judgment action begins when “the insurance company had a sufficient factual basis to support its contentions that it has no duty to defend and/or indemnify the insured.” The Superior Court noted that just when that basis existed depended on the specific facts of the case and could range from when a complaint was received or when “the case develops and the claim is winnowed down to a recovery.”

As we told the press, this decision, the first of its kind in Pennsylvania, is obviously significant. What it means is that insurers need to be proactive in asserting, in litigation, their coverage position or run the risk of waiving that position – or even worse, walking themselves into a a bad faith claim based upon the commencement of untimely and thus impermissible litigation.

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

Insurer Has No Say in Drafting Verdict Slip in PA

U.S. District Judge Kim R. Gibson of the Western District of Pennsylvania recently ruled that an insurer has no say in drafting the verdict slip.  The ruling arose in the case of Ellis v. Gadley.  There, Jerry Ellis Construction was sued by Gary Gadley for the improper installation of structural insulated panels on Gary’s roof.

In an attempt to fashion the verdict slip to its advantage, Cincinnati Insurance Company filed a motion to intervene on behalf of its insured, Jerry Ellis Construction.  In its motion, Cincinnati requested that the court allow it to draft a verdict slip for the jury to show the “breakdown of damages by category.”  Cincinnati argued that the jury’s responses on the verdict slip might apply to issues in the insurer’s companion declaratory judgment action against Ellis, in which it seeks a decision that it is not obligated to defend Ellis against Gadley’s claims.  Judge Gibson denied the motion.

The Court’s reasoning for denying the motion appeared to turn on the timing of Cincinnati’s motion to intervene.  Filed on the eve of trial, Judge Gibson found Cincinnati’s argument that it only became aware of its need to intervene disingenuous, especially in light of the fact the Insurer had represented Ellis since 2012 and did not file the motion to intervene until April 8, 2015.  Judge Gibson also found reason to deny Cincinnati’s motion on the grounds that it would place an undue burden on the parties regarding discovery and delay of trial.  Judge Gibson was also concerned about confusing the jurors because it appeared that the suggested interrogatories might inject issues implicating the declaratory judgment action and unrelated to the instant case.

Ultimately, Judge Gibson’s real hang-up about the request, however, appeared to be that Cincinnati was “asking to create categories of damages on the jury verdict form consistent with its interpretation of the underlying insurance policy in the declaratory judgment action.”  Nice try, Cincinnati.  Please email Brian Gibbons with questions.  Thanks to Hillary Ladov for her contribution.

Liberal Use Of “Any” Insured In Policy Defeats Exclusion (PA)

In a recent Pennsylvania Supreme Court decision, the Court highlighted the ambiguity inherent in the use of definite and indefinite articles when associated with the term “insured”. In Mutual Benefit Ins. Co. v. Politsopoulos, et al., a restaurant leased space from property owners. An employee of the restaurant was injured when she fell on an outside set of stairs, and sued the property owners. The property owners, additional insureds under the restaurant’s insurance policy, sought defense and indemnity under the policy. The insurance carrier disclaimed coverage under the employer liability exclusion. The policy in this case included a “Separation of Insureds” clause which provided, subject to exceptions, that the policy applied separately to each insured against whom a claim had been made. At issue in this case is that the employee in the underlying action was not an employee of the property owners thus, the issue turned on the phrase “the insured”.

The Court found that the policy’s varying use of the definite “the insured” with the indefinite “any insured” created ambiguity in the exclusionary language. Because of the interchangeable use of the definite and indefinite throughout the policy, the Court found that as applicable to the exclusion, the term “the insured” could reasonably be taken as signifying the particular insured against whom the claim is asserted, thus, the employee exclusion did not exclude coverage for a non-employee of an additional insured.  Added attention to detail in the underwriting process could have avoided this scenario for the insurer.  Please email Brian Gibbons with any questions. Thanks to Tiffany Davis for her contribution.

Lack of Standing Still Viable Defense Against Data Breaches (PA)

Around September 20, 2010, health insurance carriers Keystone Mercy Health Plan and Amerihealth Mercy Health Plan lost an unencrypted flash drive containing the personal and confidential health information of over 200,000 individuals.  The theft of the information contained on the flash drive not only violated the carriers’ own privacy practices, but breached both federal and states laws, including the HIPPA Privacy Rule and Pennsylvania’s Privacy of Consumer Health Information law.

As a result,Avrum Baum, the father of a special-needs minor insured by the carriers elected to bring suit on behalf of himself, his daughter, and other similarly situated individuals. On behalf of this group, he asserted claims for negligence, negligence per se, and a violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law (UTPCPL), 73 Pa.C.S. § 201-1, et seq. What is more, Baum sought to certify the class of individuals who he alleged had their privacy compromised as a result of the flash drive loss.

On July 25, 2013, the Court of Common Pleas denied the plaintiff’s motion for class certification on all of the courts asserted.

On appeal, the Superior Court upheld the denial of class certification on the negligence claim. The Court found that there was no evidence that the plaintiff or any members of the purported class were at risk of identity theft because the personal health information on the flash drive could not be linked to individuals by name. However, where the Philadelphia Court found that the plaintiff could not establish typicality on the UTPCPL claims, the Superior Court elected to remand the case back to the Court of Common Pleas to determine whether the class could be certified based on the UTPCPL “catch-all provision.”

Thus, the question left to the court was: is there a class to be certified on plaintiff’s claim of deceptive practices under the “catch-all” provision of the UTPCPL which prohibits one from “engaging in any other fraudulent or deceptive conduct which creates a likelihood of confusion or of misunderstanding.” 73 Pa.C.S. § 201-2(4)(xxi).

Ultimately, the Court of Common Please determined that Baum could not satisfy the typicality and adequacy standards that are required for class certification. The Court found that unlike other members of the class, the plaintiff’s daughter did not lose her personal data. None of the information on the flash drive could be linked to her identity. As such, plaintiff was rendered an inadequate representation of the group. Furthermore, the plaintiff did not give any consideration in exchange for the policy covering his daughter. Instead, the insurance was paid for by the state through Medicaid.

Baum serves as a reminder of the difficulties associated with data breach claims. If this case is any indication, these difficulties will not be going away any time soon.  Please email Brian Gibbons with any questions.  Thanks to Erica Woebse for her contribution.

DDoS Attacks on Local Universities Highlights Increasing Cybersecurity Risks (PA & NJ)

Penn State and Rutgers University join the ever-growing list of victims to cybersecurity attacks. In only the past two months, both universities have suffered distributed denial of service attacks, or as they are more commonly referred, DDoS attacks.

A DDoS attack is intended to render a server or network unavailable to its users. DDoS attackers use multiple devices and multiple internet connections to flood a victim’s computer system with web traffic until it is crippled by the requests and goes offline. Aside from the debilitating effects of DDoS attacks, they are difficult to combat. Victims cannot focus their efforts on deflecting attacks from a single attacker or a single source. Rather, the victim is flooded with requests from hundreds or even thousands of sources. While DDoS attacks are often just a frustrating nuisance for a victim to deal with, these attacks are continuing to evolve into a serious threat for network operators across the world. For Rutgers, the DDoS attack not only caused multiple internet outages, but affected the university’s final exam schedule.

So, what makes universities such a target for DDoS and other cybersecurity attacks? As explained in a recent article in the New Jersey Law Journal, universities are relatively easy targets. The article quotes Vincent Polley, the head of technology consultancy KnowConnect to explain that because the university structure is a “confederation of schools that are fairly loosely coordinated…[there’s] frequently not a lot of top-down management.” Universities store vast amounts of their students’ personal and financial information, as well as sensitive research materials.

This begs the question: what can universities and colleges across the country do to protect their students’ information? According to a recent article in the New York Times, Penn State, like many other universities and colleges across the country, are beefing up their authentication requirements. Authentication requirement are generally used before a university system can be accessed remotely. Authentication techniques can be broken into three categories: (1) things only a specified individual knows (i.e. a password, pin number, mother’s maiden name, or other type of security question; (2) things that only a specified individual would have (i.e. a key, card badge, token, one-time password); or (3) something specific about the specified individual (i.e. an encoded fingerprint, voice recognition or an iris scan).

To further beef up security, schools like Penn State are requiring a two-factor authentication, which incorporates two of the above mentioned techniques to create a multilayer defense against unauthorized access. However, how effective these measures are against DDoS attacks and other cyberattacks remains to be seen.  Thanks to Erica Woebse for her contribution.  Please email Brian Gibbons with any questions.

Catch 22- defense and indemnity of fraudulent claims (PA)

The United States District Court for the Eastern District of Pennsylvania recently found that an insurer had a duty to defend but, not a duty to indemnify in a matter involving a claims made policy. The issue was whether, prior to the inception of a policy of insurance, the insured had reason to know that based on its actions a claim could reasonably be anticipated. In the underlying case, the plaintiff alleged that the insured, prior to the inception of the insured’s insurance policy, emailed derogatory and damaging confidential information about plaintiff to a third party.

The insured timely notified the insurer and averred that it did not furnish confidential or damaging information, and that the emails referenced were forged. After defending the insured for over a year, the insurer initiated a declaratory judgment because the alleged conduct occurred prior to the effective date of the policy, and the insured knew of should have known that it would be the basis of a claim. Such knowledge violates an exclusionary provision which disclaims coverage for claims arising from any act or omission the insured had a basis to believe, prior to the policy inception, might reasonably be expected to be the basis of a claim.

The court found that the mere allegation that the insured sent emails disclosing confidential information does not establish that the insured had knowledge that something it did could give rise to a claim against it. Moreover, the policy states that it will provide coverage even for fraudulent claims, so it must do so until the final adjudication of the underlying action. Unfortunately, the only way to determine whether the insured had the requisite knowledge is if the finder of fact determines that the insured disseminated the information. If so, the claim would not be covered under the policy and the insurer would not have to indemnify the insured. Alternatively, if the finder of fact determines that the insured is not liable in the underlying action, there would be nothing to indemnify.

To disclaim or not to disclaim, that is the question…especially when it comes to fraudulent claims remember that when disclaiming on the basis of prior knowledge, an insurer should have some indication, other than the allegations, that speaks to that knowledge. Thanks to Tiffany Davis for his contribution.  Please email Brian Gibbons with any questions.

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

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.