Legal Updates for Coverage and Bad Faith
Edited by Allison L. Krupp
Pennsylvania Supreme Court Adopts a Two-part Test for Statutory Bad Faith Claims in PA
Rancosky v. Wash. Nat’l Ins. Co., 2017 Pa. LEXIS 2286 (Pa. 2017)
By Allison L. Krupp
In this significant case, the Pennsylvania Supreme Court has interpreted the bad faith test from Terletsky v. Prudential Prop. & Cas. Ins. Co., 649 A.2d 680 (Pa. Super. 1994). Specifically, the court held that, in order to recover in a bad faith action, the plaintiff must present clear and convincing evidence that: (1) the insurer did not have a reasonable basis for denying benefits under the policy; and (2) the insurer knew of or recklessly disregarded its lack of a reasonable basis.
The court also held that “[p]roof of an insurance company’s motive of self-interest or ill-will is not a prerequisite to prevailing in a bad faith claim under § 8371,” and that, “[w]hile such evidence is probative of the second Terletsky prong … evidence of the insurer’s knowledge or recklessness as to its lack of a reasonable basis in denying policy benefits is sufficient.” Hence, there is no third prong to the test for bad faith in Pennsylvania. As such, proof that the insurer acted in self-interest or with ill-will is merely probative of the second prong of the test. The court noted, however, that “[m]ere negligence is insufficient for a finding of bad faith under § 8371.”
The court went on to discuss the issue of punitive damages in the context of statutory bad faith, stating, “Consequently, as § 8371 does not distinguish between the standard for finding ‘bad faith’ generally and ‘bad faith’ allowing for punitive damages, we find no basis for concluding that the General Assembly intended to impose a higher standard of proof for bad faith seeking punitive damages when it created the right of action.” Id.
Insured Not Collaterally Estopped from Pursuing UIM Benefits
Fernandez v. Erie Ins. Group, No. 1002 EDA 2016 (Pa. Super. Ct. 2017) (non-precedential)
By Allison L. Krupp
In this case, the Superior Court considered whether the insured’s underlying personal injury action against the tortfeasor collaterally estopped her from obtaining underinsured motorist (UIM) benefits in excess of $37,000. The appellant was involved in a motor vehicle accident with the alleged tortfeasor, who was insured by State Farm with liability limits of $50,000. The insured filed suit against the alleged tortfeasor, and the parties agreed to submit the case to binding arbitration. The arbitrator entered an award of $87,000 in favor of the insured. The insured signed a “General Release In Fully Settlement of All Claims,” which expressly included the following handwritten provision written and initialed by the appellant: “By signing this release, Appellant expressly reserves the right to pursue her underinsured motorist claim against Erie Insurance Co.” Erie subsequently filed a motion for summary judgment in which it argued that the arbitrator’s award in the underlying arbitration collaterally estopped the insured from seeking damages in excess of the award. The trial court ruled that the insured’s arbitration award collaterally estopped her from obtaining UIM benefits in excess of $37,000.
The Superior Court reversed and considered that, under collateral estoppel principles, the arbitration award was binding to the extent of the arbitrator’s jurisdiction, which depended upon the terms of the arbitration agreement. The court considered that the arbitration award indicated that the arbitrator would mold her finding to $50,000 “based on the parties’ prior agreement.” The court also considered that the handwritten proviso made by the appellant within the release specifically carved out an exception, which authorized the insured to pursue UIM benefits from Erie, but it did not address whether the arbitration award places a ceiling on recoverable UIM benefits. Thus, the court disagreed with Erie’s contention that the arbitration award and the release collaterally estopped the insured from recovering UIM benefits in excess of $37,000. The court, therefore, reversed the trial court’s decision.
Insured Not Entitled to Stacked UIM Benefits Where a Vehicle Was Later Added to an Existing Policy
Baldridge v. Amica Mutual Ins. Co., 2:17-cv-00273-AJS (W.D. Pa. 2017)
By Allison L. Krupp
The court considered whether the insured was entitled to stacked underinsured motorist (UIM) benefits for the four vehicles listed on his Amica policy, which originally listed three vehicles. The insured later added the fourth vehicle. The insured argued that he never executed a valid waiver rejecting UIM coverage for the fourth vehicle; therefore, he was entitled to a determination that he had UIM coverage on the fourth vehicle. The defendant argued that it never provided liability coverage on the fourth vehicle; consequently, the defendant was not required to offer UIM coverage on the fourth vehicle. The court considered that the plain reading of Section 1731(a) of the Motor Vehicle Financial Responsibility Law states: “No motor vehicle liability insurance policy shall be delivered unless underinsured motorist coverages are offered.” The defendant produced portions of the subject policy, which indicated that the fourth vehicle was “not covered” for “liability.” The only coverage for which the fourth vehicle was “covered” was the “other than collision loss” coverage. The court found that, because the fourth vehicle was not insured for liability, it concurred with the defendant that the plain and unambiguous reading of the relevant statutes would indicate the defendant was never required to offer UIM benefits on the fourth vehicle. Thus, no signed waiver of UIM benefits was required by law.
State Farm Prevails in Bad Faith Action Where Alleged Delay Was Due to Insured
Turner v. State Farm Fire & Cas. Co., 2017 U.S. Dist. LEXIS 81922 (M.D. Pa. 2017)
by Brian J. Murren
The United District Court for the Middle District of Pennsylvania granted State Farm’s Motion for Summary Judgment with respect to the plaintiffs’ bad faith claim. This case arose as a result of a fire that destroyed the plaintiffs’ home and its contents and their claim for benefits under their State Farm homeowners policy. The plaintiffs alleged that State Farm refused to pay for certain covered damages under their policy and unreasonably delayed payment on other lost property. State Farm contended it reasonably and promptly compensated the plaintiffs and that the delay in payment was the result of the plaintiffs’ failure to perform their obligations under the policy. The court emphasized the plaintiffs’ failure to comply with the policy’s “Duties After Loss” provision as they did not produce documentation of the lost property after being requested to do so on separate occasions by different adjusters for 18 months following the fire. The court found that the plaintiffs’ failure to perform their reporting duty under the contract impeded State Farm’s investigation of their claim. As a result, the court held that the delay in payment was a direct result of the plaintiffs’ failure to perform their contractual duties under the policy (i.e. submitting a property inventory). Moreover, the court held that the delay could not serve as an appropriate basis for a finding of bad faith on State Farm’s part, stating, “Plaintiffs may not now seek to profit due to their lack of action.” Thus, State Farm’s motion for summary judgment was granted.
Allstate Granted Summary Judgment on Bad Faith Claim Due to Insured's Refusal to Cooperate with Claims Investigation
Doherty v. Allstate Indem. Co., 2017 U.S. Dist. LEXIS 52975 (E.D. Pa. 2017) (Appeal has been filed by Plaintiff)
by Brian J. Murren
The United States District Court for the Eastern District of Pennsylvania granted Allstate’s Motion for Summary Judgment with respect to the insured’s bad faith claim. This case arose out of a landlord property insurance policy issued to an insured who owned multiple rental properties, which she leased to college students. In 2014, following numerous complaints from the insured’s tenants, the Township revoked the insured’s rental licenses for the properties and then sued the insured for refusing to allow inspections of the units. The insured then sued Allstate, claiming the insurer was required to provide compensation for the damage to the rentals, which preceded the notices of violations and revocation of her rental license. The plaintiff also alleged Allstate violated the Commonwealth’s bad faith statute by failing to timely open a claim and begin its investigation and by refusing to pay her benefits under the policy.
Among a litany of other claims asserted by the insured/plaintiff, the court found nothing in the record to support her contention that Allstate acted in bad faith by failing to timely open a claim and initiate an investigation or by failing to pay benefits. Rather, the court found the delays were attributable to Allstate’s inadvertent misfiling of the insured’s initial letters to Allstate in a separate claims file for the same insured. Furthermore, the delays were attributable to the insured’s refusal to cooperate with Allstate representatives. After becoming aware of the potential claim, Allstate made repeated attempts to contact the insured to determine the nature of her claim; however, the insured remained “selectively uncommunicative” throughout the entire claims process, preventing Allstate from gathering the necessary details to investigate the claims. The court noted that, while the record established certain mistakes on Allstate’s part, the record of evidence was not convincing enough to establish that Allstate acted in bad faith, particularly given the insured’s failure to cooperate and provide the requisite information Allstate had requested on numerous occasions. Thus, the court granted Allstate’s motion for summary judgment.
Federal Appeals Court Reverses Decision to Remand a Declaratory Judgment Action Back to State Court
Kelly v. Maxum Specialty Ins. Grp., 868 F. 3d. 274 (3d. Cir. 2017)
by Brian J. Murren
The 3rd Circuit Court of Appeals reversed a decision from the United States District Court for the Eastern District of Pennsylvania regarding the District Court’s discretionary jurisdiction under the Declaratory Judgment Act (DJA). The District Court had refrained from exercising jurisdiction over the removal of a declaratory judgment action pursuant to the DJA on the grounds that the underlying state action was a prior, parallel proceeding.
This case arose from a motor vehicle accident and the plaintiffs’ claim against a tavern insured under a dram shop liability policy issued by State National Insurance Company. The policy had been procured by the tavern’s insurance broker, Carman Corporation. When the plaintiffs filed suit against the tavern, the tavern requested that Carman notify State National of its obligation to defend and indemnify the tavern under the dram shop policy, which Carman failed to do. After the plaintiffs secured judgment against the tavern, the tavern assigned them the rights to sue Carman for its failure to notify State National about the litigation. The plaintiffs sued Carman in Pennsylvania state court for negligence and breach of contract, and they concurrently brought a separate state court action against both Carman and its professional liability insurer, Maxum, seeking a ruling that Maxum had an obligation to defend and indemnify Carman. Maxum removed the case to the Eastern District, asserting diversity jurisdiction, pursuant to 28 U.S.C. § 1332. The Eastern District granted the plaintiffs’ motion to remand on the grounds that the underlying state proceeding against Carman was a prior, parallel proceeding pursuant to the DJA. The Eastern District ruled that the insurance coverage issues could be resolved in the pending state court action since Maxum could be added as a party to that suit.
The Third Circuit Court held that, while the presence of a related state court proceeding was a factor to consider pursuant to the DJA, the District Court failed to consider other factors enumerated by the court. Although the existence of a parallel proceeding is a significant factor, the Third Circuit held that the mere potential or possibility that two proceedings will resolve claims between the same parties is insufficient to make those proceedings parallel. Rather, the court noted that there must be a substantial similarity in issues and parties between contemporaneously pending proceedings. The Third Circuit further noted that “[d]efining ‘parallel state proceeding’ so broadly balloons a court’s discretion to decline a DJA action beyond the measured bounds we set forth in our prior decisions.”
Superior Court Reverses and Remands Due to Trial Court's Misapplication of the Law of the Case of Doctrine
Windows v. Erie Ins. Exch., 161 A.3d 953 (Pa. Super. 2017)
by Brian J. Murren
This case arose from Erie’s denial of an insurance claim made by the plaintiff homeowners following the infiltration of raw sewage into their home. In a one-line order, Judge Paul Lutty of the trial court denied Erie’s motion for summary judgment. Erie had argued that the policy’s general exclusion for water damage unambiguously excluded coverage for the plaintiffs’ losses because the back up of raw sewage and water through the sewer system into the basement contributed to those losses. The case proceeded to trial, and the jury returned a verdict in favor of the plaintiffs. Erie subsequently filed a post-trial motion seeking a new trial, arguing the trial court had erred by holding that the denial of Erie’s summary judgment motion had established the law of the case, thereby denying Erie a trial on whether the plaintiffs’ losses were covered by the policy and whether the water-damage exclusion applied. Judge Michael McCarthy denied Erie’s post-trial motion.
On appeal, the Superior Court addressed whether Judge Lutty had abused his discretion or committed an error of law in denying of Erie’s motion for summary judgment and whether Judge McCarthy had abused his discretion or committed an error of law in denying Erie’s post-trial motion. The Superior Court affirmed Judge Lutty’s denial of Erie’s motion for summary judgment, determining that Erie had failed to meet its burden of proving that the water damage provision in the policy unambiguously excluded the plaintiffs’ loss. The court found it compelling that the policy failed to define the phrase “backs up.”
However, the Superior Court reversed Judge McCarthy’s denial of Erie’s post-trial motion. The court found Judge McCarthy’s Pa. R.A.P. 1925(a) opinion was not supported by the record and that Judge McCarthy misunderstood Judge Lutty’s denial of summary judgment. The court noted that, based on the record, and in the absence of an opinion from Judge Lutty in denying summary judgment, the Superior Court cannot determine the precise basis for Judge Lutty’s decision and that it is improper to speculate on his rationale. Therefore, Judge McCarthy erred by reading into the denial of summary judgment a legal conclusion neither articulated by Judge Lutty nor necessary to the denial. As a result, the Superior Court reversed the judgment on the post-trial motion and remanded the matter for further proceedings.
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