The Legal Intelligencer Blog

Public Policy Reason to Protect Disclosure of Reserve Information

There is a sound public policy rationale to protect disclosure of reserve information in discovery. This idea was brought to my attention by attorney Bryon Kaster of our Insurance Litigation / Bad Faith Discovery unit in Harrisburg. Simply stated, if an insurer were going to be compelled to disclose reserve information in bad faith cases, and if such information were going to be improperly used to argue it as an opinion on the part of an insurer as to the merits or value of an insurance claim, insurers will, no doubt, be tempted and encouraged to artificially set reserves lower, not higher, so that they more closely related to offers of settlement on claims they were making. They would do this for fear that discovery of this information would otherwise be used against them to demonstrate that they had, for example, made unreasonably low settlement offers.

A settlement offer takes into account a myriad of factors and reflects more accurately the insurer’s valuation of a claim than does reserve information, which takes into account only one:  worst case scenario. To use one as a means of learning the other is like using historical climate records in place of a thermometer to tell the temperature. It substitutes “worst possible” for “most probable,” and unless courts preserve the distinction, insurers will be wary of doing so also.

So what is the public impact of that? If done over a sufficiently long period of time, this could lead to one or more insurers and subsequently the entire insurance industry being undercapitalized to pay insurance claims. Carried to its logical extension, the unchecked discovery of insurance reserves and then misappropriation of their use could actually thwart the intended purpose of insurance reserving in the first place – fiscal soundness and ability to pay claims. 

Thus, we see demonstrated a sound public policy reason protecting against the disclosure of insurance reserve information. If insurers know the information is protected from discovery in bad faith civil litigation, they will feel free to reserve at “worst case scenario,” without fear of that being used against them in civil litigation to prove unreasonably low offers.  

Charles Haddick
Dickie McCamey & Chilcote
http://www.dmclaw.com

I welcome feedback from readers, along with any suggestions for topics you would like to see discussed in this space.  Please e-mail me at [email protected].

Discovery of Insurance Reserve Information in Bad Faith Litigation

It is very common in bad faith litigation for the aggrieved insured to seek discovery of the reserve history in order to track the amount reserved by the defendant insurer in the underlying case.  This is presumably done in an attempt to establish that the insurer recognized the claim had a high value, but was trying to take advantage of (or “low-ball”) the insured with an offer at a substantial discount to reserves. In upcoming posts, we will discuss why such a use is a misuse, and how such a use misconstrues the statutory and legal bases for the requirement of insurance reserves under Pennsylvania law. We will also take a brief look at why requiring insurers to disclose reserves may create a dangerous disincentive on the part of insurers to adequately reserve claims, defeating the very purpose of setting aside reserves for insurance claims in the first place.

The Reserving Requirement under Pennsylvania Law

Insurers are statutorily required to set reserves upon notice of losses potentially covered by policies. The statute says nothing whatever about reserving only for those claims which are probable, or even likely. One court has written, of reserving:  "This requirement guarantees that insurance companies have the funds to pay claims as they become due.  This requirement enables the insurance department to monitor the financial condition of insurance companies to protect consumers and hopefully maintain solvency despite unliquidated pending claims." (See Executive Risk Indemnity Inc. v. Cigna Corporation, Philadelphia Court of Common Pleas, 2006).  (See also, Oak Lane Printing & Letter Service Inc. v. Atlantic Mutual Insurance Co., District Court for the Eastern District of Pennsylvania, 2007). 

Thus, we see, even from this brief review, that reserves are required by legislation, regulation and common law as a fiscal and accounting safeguard, not a proxy for measuring the merits of given insurance claims, as bad faith plaintiffs’ discovery sometimes suggests. 

Just Ask Claims Representatives, Executives and Experts

Bad faith discovery aimed at unearthing reserve information could bear the cloak of legitimacy if, in the industry, there were testimony from insurance professionals that reserving practices were undertaken with a view toward rendering an opinion toward the merits of a claim.  However, their testimony in the writers’ experience is consistent with the purpose of reserving set out in the legislation and case law: Reserving is not a barometer reflecting analysis of the merits of an insurance claim. 

As an accounting device, reserving is focused on liquidity and thus always views a claim from “worst case scenario” perspective. Claims representatives will often undertake separate analyses and make separate assessments of claims’ “current values,” “actual and factual values,” or “settlement values.”  Such other measures provide a far more accurate picture of an underlying claim’s current value based on known facts from the current claims information.

Charles Haddick
Dickie McCamey & Chilcote
http://www.dmclaw.com

I welcome feedback from readers, along with any suggestions for topics you would like to see discussed in this space.  Please e-mail me at [email protected].

Superior Court: Insurer's Reasonable Reliance on UIPA Regs Cannot Support Bad Faith Claim as Matter of Law

On May 24, in Jones v. Nationwide, a panel of the Pennsylvania Superior Court unanimously affirmed preliminary objections granting a demurrer in favor of Nationwide Property and Casualty Insurance Co., dismissing a class action complaint against them, which, in part, claimed that Nationwide committed bad faith by prorating deductible reimbursements under its auto policies. The plaintiffs claimed that such a practice, though Nationwide contended it relied on regulations promulgated under the Unfair Insurance Practices Act, constituted a breach of contract, bad faith conversion and unjust enrichment, and also sought an injunction to stop the practice.

In affirming dismissal of the complaint at the trial court level, the Superior Court relied on Harnick v. State Mutual Insurance Company, the 2009 U.S. District Court for the Eastern District of Pennsylvania case, also involving the practice of prorating deductible reimbursements. The Harnick court found that the insured defendant did not commit bad faith in acting in reasonable reliance on valid state insurance regulations. The court found the reasoning in Harnick to be persuasive. The panel in Jones therefore adopted Harnick’s reasoning as sound and affirmed the trial court’s order granting the demure in favor of Nationwide.

This is not to say that an insurer cannot still be incorrect, or liable for breach of contract if enforcement or reliance on the regulations is inconsistent or violative of the insurance policy at issue. But being wrong, even being negligent, has never been sufficient evidence of bad faith in Pennsylvania, and the breach of contract and bad faith remedies in the state have always been distinct. (See, e.g., Smith v. Westfield Ins. Co., 2007) (Westfield did a thorough investigation and made a reasonable finding. That the determination may turn out to be incorrect does not mean that it had a dishonest purpose or was made with reckless disregard for the truth).

The ruling in Jones makes sense, as a sort of “pre-emption with boundaries” defense, and offers protection to insurers who act in reasonable reliance on valid state insurance regulations. Inasmuch as one of the chief inquiries in bad faith litigation is the conduct of an insurer viewed objectively, i.e., whether an insurer acts reasonably, an insurer’s practice in following regulations enacted under unfair insurance practice statutes would seem to be a good stake in solid ground, and therefore a good ground to provide protection to those insurers electing to proceed down such a path. Judged from such a perspective, Jones appears to be in agreement with Harnick, and to articulate a fair boundary line for bad faith claims.

Charles Haddick
Dickie McCamey & Chilcote
http://www.dmclaw.com

I welcome feedback from readers, along with any suggestions for topics you would like to see discussed in this space.  Please e-mail me at [email protected].

Court Stays Bad Faith Claim, Picks Up Breach of Insurance Contract Claims First

On Aug. 2nd Judge Albert Masland of the Cumberland County Court of Common Pleas in ECSM Utility Contractors, Inc. v. Selective Insurance Group, Inc., et. al. granted in part the defendant’s motion to bifurcate and stay the plaintiff’s bad faith claims in a combined coverage and bad faith case. 

Judge Masland wrote:

 “First, the court agrees that resolution of plaintiff’s contract claim in defendants favor could eliminate the need for consideration of the bad faith claims. . . Second, defendants believe the contract claim is ripe for resolution via summary judgment. Thus, if defendants are correct, the entire matter may be resolved expeditiously without resort to a jury trial and onerous discovery regarding the bad faith claims. Accordingly, the court grants defendants’ motion in part and stays plaintiff’s statutory bad faith claims pending the resolution of defendants’ motions for summary judgment. However, should the court deny these motions, the stay will be lifted and plaintiff will be able to pursue its bad faith claims in anticipation of a jury trial on the contract claims, which, if successful, will be immediately followed by a non-jury trial of the bad faith claims. Finally, in light of plaintiff’s concerns regarding protracted litigation caused by this stay, the court directs defendants to file their motions for summary judgment within 30 days. . .”

I believe that  Masland has delivered in a few short lines a relatively simple mechanism for dealing with the oftentimes thorny problem of combined breach of contract and faith cases. 

Severance and stay are, it seems, simple mechanisms that are often requested in combined cases like ECSM, but are all too often denied for fear of somehow bogging down the case. Masland seems to have resolved that issue effectively by imposing upon the defendants the duty to file a dispositive motion on the coverage issue within a brief amount of time. Thus, the approach taken by Masland would also, it seems, impose upon defendant insurers seeking to avail themselves of the benefit of bifurcation and stay, the obligation not to request bifurcation and stay until such time as they are ready to seek a dispositive ruling on a breach of contract/coverage issue by way of motion such as motion for summary judgment.

Charles Haddick
Dickie McCamey & Chilcote
http://www.dmclaw.com

I welcome feedback from readers, along with any suggestions for topics you would like to see discussed in this space.  Please e-mail me at [email protected].

Supreme Court Decision Provides Insurers Latitude to Argue Offset in UM/UIM Arbitrations

Could in Turn Provide "Reasonable Basis Defense" in Bad Faith Litigation

In what one would think would provide additional “reasonable basis” cover for an insurer in bad faith litigation, the Pennsylvania Supreme Court last month ruled in Tannenbaum v. Nationwide Insurance Company that an insurer could successfully argue income loss benefits provided under both group plan and personal disability  policies could be used to offset what would otherwise  be recoverable income loss benefits in UM/UIM arbitrations.   In so doing, the Court begain its analysis by examining § 1722 of the Motor Vehicle Financial Responsibility Law, entitled “Preclusion of Recovering Required Benefits” which provides:

In any action for damages against a tortfeasor, or in any uninsured or underinsured motorist proceeding, arising out of the maintenance or use of a motor vehicle, a person who is eligible to receive benefits under the coverages set forth in this subchapter, or workers' compensation, or any program, group contract or other arrangement for payment of benefits as defined in section 1719 (relating to coordination of benefits) shall be precluded from recovering the amount of benefits paid or payable under this subchapter, or workers' compensation, or any program, group contract or other arrangement for payment of benefits as defined in section 1719. (emphasis added)

 Justice Saylor, in writing for the majority, held that under simple wording of the statute, the leglislative purpose was to  to remediate spiraling insurance costs.  The disability benefits at issue received by Tannenbaum, he found,  fell within with the group/program  arrangement classification within § 1722 and, therefore,  having fallen into such a  classification,  precluded their  re-recovery in a UM/UIM proceeding as Nationwide had successfully  argued in a UM/UIM arbitration in that case. 

Trial court and Superior court rulings reversing a panel of arbitrators’ offset consistent with Nationwide’s argument were reversed, and the court held, “in summary under section 1722’s plain terms, an insured’s recovery under UM/UIM policies may be offset by group/program/arrangement benefits including disability benefits purchased in whole or in part by the insured at least so long as those benefits are not subject to subrogation.” 

So, how and why does an opinion dealing with UM/UIM arbitration and the Pa.M.V.F.R.L. belong in a blog dealing with insurance bad faith?  Because six to seven  out of every ten bad faith claims I am asked to defend arise out of the handling of UM/UIM claims, and claims handling, including UM/UIM claims handling, is the factual focus of all fad faith claims. The law affecting how those claims are to be handled  is in  a constant state of flux,  and the Tannenbaum decision represents a recent and a significant pronouncement in terms of the litigation of UM/UIM claims. 

It is fairly widely considered now, and has been for some years,  that UM/UIM proceedings are adversarial as between an insurer and an insured.  See, e.g., Condio v. Erie Insurance Exchange, 899 A.2d 1136, 2006 Pa. Super. 92.  As such, insurers are entitled to look after their interests,  at least to the same degree that they are required to look after the interest of their insureds.  The courts are bound, therefore, from time to time, to  take up the question of whether and how an insurer is entitled to argue damages defenses in UM/UIM proceedings.  Tannenbaum presented the specific question of whether , if an insured is receiving income loss benefits from a group or disability plan, those benefits could  and should be used to offset income loss benefits under a UM/UIM policy which are recoverable in a UM/UIM settlement or arbitration, and, consequently whether, in the context of a bad faith analysis, whether it is reasonable for an insurer is reasonable to make such an argument.  

Assuming, of course, in the particular case considered, there is evidence of such collateral sources of income loss benefits, and that benefits were paid under such collateral sources, such evidence combined with the rather clear pronouncement in the Tannenbaum case would appear to provide sufficient cover for insurers to make the argument that there is a valid basis to claim an  offset pursuant to 75 Pa.C.S.A § 1722.  It would further appear that such an argument can be made now, both during the UIM settlement negotiation and arbitration proceedings. 

I welcome feedback from readers, along with any suggestions for topics you would like to see discussed in this space.  Please e-mail me at [email protected].

A Survey of Significant Bad Faith Cases From 2009

As we approach the start of summer 2010 in Pennsylvania, I thought it might be interesting with that tiny big of distance to take a quick sample of significant bad faith cases from around the country decided in 2009. 

North Dakota:  What Are The Fundamental Elements of Bad Faith? - Dakota Minnesota and Eastern Railroad Corp. v. Acuity

In Dakota Minnesota and Eastern Railroad Corp. v. Acuity, the Supreme Court of South Dakota ruled that the requisite elements of a bad faith claim in that state, similar to the elements in Pennsylvania, were proof that (1) a insurer’s denial lacked a reasonable basis under the insurance contract and (2) the insurer knew or recklessly disregarded the lack of the reasonable basis for the denial. The court in Dakota Minnesota did allow the for the possibility that an insurer’s knowledge of a lack of a reasonable basis might be inferred, as opposed to being established directly,  but also held that an insurer would escape bad faith liability when its challenges for denials of insurance claims were “fairly debatable.” This is generally consistent with Pennsylvania law, see, e.g., Santer v. Teachers Insurance and Annuity Association. 

California: Is Violation of Underwriting Guidelines Bad Faith?

In Kevorkov v. Direct Insurance Co., a California appeals court ruled that violations by GEICO Insurance of its own underwriting guidelines could not serve as a foundation for a bad faith claim because the underwriting guidelines were not included in the insurance contract.  Presumably, the basis for the finding that not having been included in the contract, the guidelines did not constitute a duty assumed to the insured. 

Delaware:  Does Insurer Owe Fiduciary Duty To Insured?

In Brousseau v. Laccetti, a U.S. District Court in Delaware declined to find that insurer-insured relationship gave rise to a fiduciary obligation owed to the insured.  The court also ruled that an individual insurance adjuster could not be individually liable for a bad faith denial of coverage under a long term disability policy, and that an insuring agreement did not create a fiduciary obligation running from the insurer to the insured.  The court did not put any credence in the insured’s argument the fact that the insuring agreement was called an “insurance trust” created a fiduciary relationship, either.

Miscellaneous Insurer Claims Practices - Independent Medical Examinations

The 9th U.S. Circuit Court of Appeals has held that it is not bad faith for an insurer to request an independent medical examination where there was conflicting medical opinion as to the reasonableness of the need for spinal surgery for an insured, especially where an automobile insurance policy provided for an independent medical examination in the event an insured sought PIP insurance benefits. The case is Saddler v. State Farm Mutual. 

Also last year the 11th Circuit held that simply because an insurer rendered a claims decision promptly was not in and of itself conclusive proof of bad faith. See Johnson v. GEICO General Insurance Co. Consider the obverse of the situation in Pennsylvania, where at least one court has ruled that an insurer’s agreement to reconsider a claim is not bad faith, either. The case is CRS Auto Parts v. National Grange Insurance Co. These decisions, it seems, would tend to foster common sense public policies encouraging insurance companies to render prompt both  claims decisions where possible,  and at the same time keep open and flexible minds to reconsider claims decision where appropriate also.

Can an Insurer Defend Itself In Court? Litigation Conduct

Finally, a federal district court last year in Paducah, Ky., ruled that an insurer’s conduct in defending itself and opposing a UIM claim could not in itself constitute evidence of bad faith,  and simply constituted permissible  “litigation conduct.”  The district court relied on earlier precedent from the Supreme Court of Kentucky to protect the insured’s right to defend the claim.  The right to defend the cases in litigation is an important one. To tortify it as bad faith conduct would have a chilling effect on an insured’s right to defend itself.  See, e.g., Buddy v. State Farm Mutual. See also, Knotts v. Zurich Insurance. 

Conclusion

Insurers and insureds around the country struggle with the very same issues in bad faith litigation that insurers and insureds do in Pennsylvania. While it appears that the current trend is to provide insurers with a bit of breathing room and latitude within which to operate and render claims decisions, there will continue to be tension on the rope between insurers and insureds that will have to be overseen by the courts in Pennsylvania and the other states.  

Charles Haddick

3rd Circuit Rules Insurer’s Failure to Follow Best Practices Not Bad Faith As Matter of Law

Last month the 3rd U.S. Circuit Court of Appeals in a slip opinion ruled that an insurer’s failure to follow best practices does not give rise to a bad faith claim, affirming a summary judgment in favor of that insurer. 

In Smith v. Continental Casualty Co. (Slip Copy), Stacey and Marjorie Smith took an assignment of bad faith rights from their former financial adviser, James Sprecher, whom they had sued for negligence, breach of contract and negligent misrepresentation as part of a settlement with the adviser, according to the opinion. Sprecher had previously tendered his defense to his professional liability carrier, Continental Casualty Co., but Continental declined coverage under an exclusion that eliminated coverage for claims against Sprecher arising out of the sale of non-approved financial products.  Sprecher settled with the Smiths for $150,000 and assigned to the Smiths bad faith and breach of contract rights against Continental, the opinion noted.

The trial court, in a ruling by Judge John E. Jones III, granted summary judgment for Continental on the breach and bad faith counts.  In affirming the ruling, the 3rd Circuit affirmed the trial court ruling that an exclusion in the professional liability policy for liability arising out of non-approved financial products was a valid ground to deny Sprecher’s tender of defense and indemnity to Continental.  In disposing of the coverage issue as it had, the court also naturally moved on to affirm dismissal of the bad faith count and in so doing, emphasized the “clear and convincing” burden of proof that a plaintiff has in a bad faith case.  The court also confirmed the traditional two elements of proving a bad faith claim: the insurer lacked a reasonable basis for denying benefits and the insurer or recklessly disregarded such a lack of a reasonable basis.  The court specifically ruled:

“For the Smiths to succeed, there must be evidence from which a fact finder could conclude that Continental had no “reasonable basis for denying benefits” and that it knew of or disregarded the lack of a reasonable basis.  Here there is evidence of neither: Continental clearly did have a reasonable basis for the denial of coverage . . . and there is no evidence whatsoever to support the second prong.  While perhaps Continental should have spoke with Sprecher before it made a final coverage decision, a failure to follow best practices does not give rise to a bad faith claim.  Summary judgment is properly granted. “

Parenthetically, the court added that while ambiguities in insurance policies are held against the drafter, there were no such ambiguities present with respect to Continental’s denial in this case.

I view Smith as significant not so much the court’s analysis of the coverage claim, as that appears to be rather straightforward, but more so for the 3rd Circuit’s specifically addressing the plaintiff’s allegation that the insurer’s failure to speak with Sprecher before denying his request for defense and indemnity constituted a violation of the insurer’s own best practices, and was therefore bad faith.   I view it as significant because bad faith plaintiffs often attempt to make out bad faith cases based on a insurer’s failure to follow either the state insurance regulations or the insurers own claims guidelines.  The 3rd Circuit ruling in Smith is another in a rather long line of cases, especially on the federal level, holding that insurer’s deviation from their insurance regulations or its own claims guidelines is not sufficient clear and convincing evidence of bad faith.  The rationale given for such a holding is that such departures from protocol are as equally consistent with mistake as they are any alleged intentional misconduct.  See e.g., Employers Mutual v. Loos and Pittas v. Hartford Life Ins. Co.  See also Oehlmann v. Met Life Ins. Co.; Toy v. Metropolitan Life Ins. Co.; and Moss Signs v. State Auto Insurance Co.

To be sure, there can be circumstances in which an insurer’s failure to follow guidelines might be actionable. However, such circumstances would appear to be limited to situations where an insurer willingly buries its head in the sand to avoid garnering information that would lead to having to provide a benefit to a putative insured.  In such a case, however, there is more evidence than a mere departure from the insurer’s guidelines; rather, there is rather clear evidence supporting the second element of a bad faith claim, knowledge of a lack of a reasonable basis or a reckless disregard for the same.   

Charles Haddick
Dickie McCamey & Chilcote
http://www.dmclaw.com

Litigating the Bad Faith Case: The First 30 Days

In answering a question about keys to successful outcomes in insurance coverage and bad faith litigation at a recent conference, it occurred to me there are several critical elements, which, if taken care of within the first 30 days of any bad faith case, will enhance the prospects of a successful outcome. I offer a list of those elements below, but I would love to hear any ideas our readers have on the same topic; please e-mail them to me at [email protected].

Here are some of the more important things that came to mind:

1. Where Are We Litigating?

Jurisdiction and venue are at times overlooked in bad faith cases. To those lawyers representing insureds, they have the first opportunity to select jurisdiction and venue and therefore, an assessment of which setting would be more favorable to the insured is of utmost importance. The defendants may have a say also, however, inasmuch as a bad faith case may be removable by the defendant to federal court if the requirements under the federal removal statute are met.

2. Immediate Assessment of Pleadings.

The scope of the bad faith case will be defined, now and later, by the pleadings. Are there any matters set forth in the complaint or defenses set forth in the answer that are susceptible to legal challenge, and which might be stricken at the outset? While often this decision must be made in a very brief amount of time, it is nevertheless critical, inasmuch as both insurers and insureds should try to define the issues in a case in a way that works to their respective advantages.

3. Information Gathering.

Before you begin your review in a bad faith case, whether on behalf of an insurer or insured, you must know what to review, and you must be reasonably certain that all important information has been obtained. Counsel for the insured will, as part of their initial interview and assessment of the case, obtain from their her client as much documentation as possible concerning both the insured's coverage at issue and process of the insurance claim, which is the subject of the bad faith suit. So, counsel for insurers must make sure they immediately receive all relevant documentation, especially the entirety of the claims file, usually composed of activity logs, claim documents, correspondence and other documents, whether paper or electronic.

4. Intensive Document Analysis

Both sides in bad faith litigation will benefit from their counsel's early, aggressive and thorough analysis and review of the claims documentation at issue. In counsel's reviewing the documentation at least two purposes are served. First, counsel can make an early assessment of the strengths and weaknesses of the bad faith case. Second, a thorough review of the claims records produces a roster of knowledgeable individuals at the insurance company who should be thoroughly interviewed to complete the initial assessment process, or in the case of insured's counsel, who should be deposed. Information begets information.

5. Ask Questions.

Once the documentation has been reviewed, counsel for insureds should meet not only with their client, but potentially the insured's agent to determine whether or not any useful information can be obtained from the insurance agency that procured the policy.

The task of interviewing is generally more comprehensive for those lawyers representing insurers in the early stages. Each and every individual in the claims process, from the claims adjuster to the claims manager and possibly higher if individuals higher up in the chain of command who were involved in the claims decision must be thoroughly questioned regarding the documents, and the claim itself. Inconsistencies in the documents can often times be explained, or problem spots identified and counsel may receive additional information which would prompt them to raise additional claims and defenses, or adjust their assessment of the case.

6. Get More Information and Continue to Refine Your Thinking.

Relatively quickly in the litigation process, counsel should issue interrogatories and request for production of documents to the other side and continually try to fill in as many informational gaps as possible regarding the insurance claim at issue. In addition, third parties such as insurance agents, or other witnesses with important knowledge can be subpoenaed for their documents, and possibly their depositions as well. The receipt and analysis of these documents oftentimes falls outside of the initial 30-day period, but to the extent any requests for information can be made within the first 30 days, they should be. Receipt of the information in response to such requests serves to allow counsel for insurer and insured to continue to refine their assessment of the merits of the bad faith case.

7. Feed the Information Back to Your Client.

Bad faith counsel should, at or near the end of the 30-day period, be able to provide their client with a reasonably solid assessment of the relative strengths and weaknesses of the positions in the bad faith case. For those counsel representing insurers, they are oftentimes required to furnish comprehensive initial suit analyses and chronological analysis of the claims documents within the first 30 to 45 days following assignment.

Good initial reporting will include the results of interviews of key claims personnel, in the case of bad faith defense counsel.

What's So Important About the First 30 Days?

The more information counsel develops within the first 30 days of accepting the bad faith suit assignment, the better able she is to assess the prospects for the case and begin handling it efficiently. The above list will assist counsel in getting the 30-day ball rolling.

Charles Haddick
Dickie McCamey & Chilcote
http://www.dmclaw.com

Wettick Puts Gunn Case to Use

 A trial court has used its own reasoning on severance and stay to deny bad faith discovery in an underlying contract dispute. On Sept. 9, in Wutz v. State Farm Insurance Co., Judge R. Stanton Wettick denied a plaintiff discovery in a bad faith case relating to State Farm’s evaluation of the claim. All parties agree that information sought was relevant only to the bad faith case.  State Farm, for its part, further argued that to allow discovery relating to State Farm’s evaluation of the underlying UM/UIM claim, State Farm would be as unfairly prejudiced as would “the defense in a football game [being required] to furnish its defensive formation for the upcoming play to the Plaintiff before the Plaintiff selected the play that it would call.”  Wettick agreed with State Farm, and ruled pursuant to his earlier ruling in Gunn v. The Hartford Insurance Co., and disallowed the discovery. 

Wettick recalled that a court will not necessarily permit discovery of information in the files of the insurance company relevant to the bad faith claim, and that the insurance company should have an opportunity to show that the discovery of certain information relevant to the bad faith claim will unfairly prejudice the insurance company.  Thus, Wettick in the case before him refused to allow discovery of State Farm’s evaluation ranges relating to the underlying claim, as well as the factors what were considered in evaluating the claim.

In terms of the mechanics of his ruling, the judge denied the plaintiff’s motion for in camera review of the documents, and ruled that at the beginning of trial State Farm’s counsel should have ready an unredacted copy of the claims activity log and should furnish the documents to plaintiffs immediately after the beginning of jury deliberations in the UIM claim.  The order also noted that State Farm, inasmuch as it was not asserting advice of counsel in the bad faith claim, retained the right to assert attorney-client privilege and protect documents accordingly. 

The ruling by Wettick in the Wutz case was an early one in the wake of his ruling in Gunn, and one in which insurers may be able to protect from discovery in a UIM case, claims evaluation and mental impression which is relevant to a bad faith claim are certainly not relevant to the underlying UIM claim.  From this writer’s experience, rarely is a bad faith complaint limited to solely a claim of undervaluation.  Therefore, Wettick’s ruling in Wutz could have considerable impact in bad faith discovery going forward.

Charles Haddick 

Federal Western District Court Dismisses Bad Faith Case on Statute of Limitations Grounds

The U.S. District Court for the Western District of Pennsylvania has recently ruled that the two-year statute of limitations applicable to first-party bad faith actions under 42 Pa.C.S.A. § 8371 barred claims by bad faith plaintiffs bringing a claim more than two years after the claim was denied.  In Sicora v. State Farm Insurance Co., District Judge Joy Flowers Conti granted summary judgment in favor of State Farm Insurance in a bad faith case premised upon the handling of an underlying underinsured motor vehicle claim.

The underlying claim was filed by the insureds on Sept. 12, 2005. The plaintiffs admitted that State Farm notified the insureds that coverage was denied under the policy on Dec. 27, 2005.  On June 23, 2008, more than two years and six months following State Farm’s denial, plaintiffs initiated suit in the Court of Common Pleas in Allegheny County. The suit was removed, and State Farm filed a motion for summary judgment on the statute of limitations issue pursuant to Federal Rule of Civil Procedure 56(c).

Conti affirmed some rather important principles with respect to the statute of limitations in bad faith cases. First, he confirmed that the statute of limitations for §8371 actions is two years.  More importantly, she ruled that the bad faith claim “begins accrue ‘when the insurer first provides definite notice of a refusal to indemnify or defend.’” From there, it was a simple math exercise for the court to conclude that the claim was filed too late. 

Conti went further, addressing and dismissing plaintiff’s argument that a subsequent denial letter issued by State Farm less than a year before the plaintiff filed suit, did not constitute a new denial and new act of bad faith.  Conti observed that “courts have consistently rejected this argument with respect to the accrual of a claim pursuant to the bad faith statute.” Conti also pointed out that this rule obtained even where the may actively seek information before issue the second denial letter. 

Conti’s decision in Sicora appears to be in line with controlling 3rd Circuit precedent.  It is a decision that is equally important to insurers and insureds in that it clearly delineates when a cause of action under § 8371 begins to accrue, and thus, when a cause of action expires.  It also demises any argument that an insured can make “continuous trigger” or “new trigger” argument regarding subsequent denials of the claim in an effort to avoid dismissal of untimely filed case.