Is That Low Offer Supported by the Record? Grappling With What Constitutes a Bad Faith Claim in the Middle District of Pennsylvania

When Benjamin Franklin stated that nothing in this world can be said to be certain except death and taxes, it’s now clear that the ambiguity of bad faith insurance litigation had momentarily slipped his mind. While we can surely forgive Ben for the omission, can we forgive the courts for the growing mire of seemingly conflicting precedent on just what the standard is for pleading a bad faith claim? In short, maybe.

The acrimony involved with deciphering what constitutes a legally sufficient bad faith claim has once again reared its ugly head with dueling opinions out of the United States District Court for the Middle District of Pennsylvania. In one corner, Judge Mannion allowing a homeowner’s bad faith insurance claim to proceed past the pleadings due to a low offer possibly not being supported by the record. In the other corner, Judge Brann granted an insurance carrier’s motion for partial summary judgment on a bad faith claim due to a low offer being supported by the record.

Before delving into the minutiae of these opinions, let’s take a moment to refresh our collective recollection of insurance bad faith.

In the insurance context, “bad faith” means “any frivolous or unfounded refusal to pay proceeds of a policy.” Terletsky v. Prudential Prop. & Cas. Ins. Co., 649 A.2d 680, 688 (Pa. Super. 1994) (quoting Black’s Law Dictionary 139 (6th ed. 1990)); see 42 Pa. C.S.A. § 8371 (providing a remedy for bad faith). To succeed on a bad faith claim, a plaintiff must demonstrate that:

1. the insurer lacked a reasonable basis for denying benefits; and
2. the insurer knew or recklessly disregarded its lack of reasonable basis.

Verdetto v. State Farm Fire & Cas. Co., 837 F. Supp. 2d 480, 484 (M.D. Pa. 2011), affirmed, 510 Fed. Appx. 209 (3d Cir. 2013).

A plaintiff asserting a bad faith claim must establish it by clear and convincing evidence, even on summary judgment. Bodnar v. Nationwide Mut. Ins. Co., 660 F. App’x 165, 167 (3d Cir. 2016) (citing Post v. St. Paul Travelers Ins. Co., 691 F.3d 500, 523 (3d Cir. 2012)). The clear and convincing evidentiary standard requires a plaintiff to show “that the evidence is so clear, direct, weighty and convincing as to enable a clear conviction, without hesitation, about whether or not the defendants acted in bad faith.” J.C. Penny Life Ins. Co. v. Pilosi, 393 F.3d 356, 367 (3d.Cir. 2004).

While an insurer has a duty to accord the interests of its insured the same consideration it gives its own interests, “an insurer is not bound to submerge its own interest in order that the insured’s interests may be made paramount, and an insurer does not act in bad faith by investigating and litigating legitimate issues of coverage.” J.C. Penney Life Ins. Co. v. Pilosi, supra, 393 F.3d at 368. In fact, a reasonable basis is all that is required to defeat a claim of bad faith. Bodnar, 660 F. App’x at 167. Notably, “mere negligence or bad judgment does not constitute bad faith; knowledge or reckless disregard of a lack of a basis for denial of coverage is necessary.” Id. (quoting Post, supra, 691 F.3d at 523).

With that insurance bad faith refresher out of the way, we can now push forward in an attempt to parse the Meiser and Newhouse decisions.

In Meiser v. State Farm, 2018 U.S.Dist. LEXIS 167991 (M.D.Pa. Sep. 28, 2018), a dump truck crashed into the plaintiff’s house after a vehicle pulled into the path of the truck. The plaintiff’s house was insured under a homeowner’s policy issued by State Farm Fire and Casualty Insurance Company. The plaintiff filed a claim for damages allegedly caused to her house by the crash. After investigating the damage, State Farm issued the plaintiff a check for $558.91 ($2,243.58 less the plaintiff’s $1,562.00 deductible). The plaintiff requested that State Farm reevaluate its estimate as she alleged that the estimate was not sufficient to pay for the total actual damages and costs of repair. State Farm refused. The plaintiff then hired her own appraiser to prepare a damage estimate for her house. This appraiser determined the value of the loss to be $39,281.67. Additionally, the insurer for the vehicle that pulled into the path of the dump truck determined that the plaintiff’s house sustained significant structural damages and estimated her damages to be about $60,000. State Farm did not revise its estimate after the plaintiff provided it with both estimates. The plaintiff subsequently brought an action for breach of contract and bad faith in the Schuylkill County Court of Common Pleas. State Farm removed the suit to the Middle District and filed a partial motion to dismiss, seeking to dismiss the plaintiff’s bad faith claim. Judge Mannion denied State Farm’s motion to dismiss and allowed the plaintiff’s bad faith claim to proceed to discovery.

Judge Mannion’s decision seems to turn on the procedural posture of the case, with the plaintiff reaping the benefit of the liberal pleading standard. Specifically, Judge Mannion cited to the plaintiff’s allegation that State Farm unreasonably refused to pay benefits being supported by the extreme disparity between the plaintiff’s estimates and State Farm’s estimate. Id., 2018 U.S.Dist. LEXIS 1679 at *8. Further, Judge Mannion found that the plaintiff’s allegations that State Farm misrepresented pertinent facts regarding coverage and whether the plaintiff’s house was structurally damaged, as found in the plaintiff’s estimates, would require discovery to determine if they could be substantiated. Id., at *9.

In Newhouse v. GEICO, 2018 U.S.Dist. LEXIS 175785 (M.D.Pa. Oct. 12, 2018), the plaintiff was injured after being rear-ended by an intoxicated driver. After recovering the policy limit from the other driver’s insurer ($15,000), the plaintiff submitted a claim for underinsured motorist (UIM) coverage to his own insurer, GEICO. The plaintiff sought to recover his own policy limit ($200,000), but GEICO offered only $10,000. GEICO’s position did not change after further negotiations and investigation. The plaintiff then brought an action for breach of contract, bad faith and loss of consortium in the Clinton County Court of Common Pleas. GEICO removed the suit to the Middle District and subsequently moved for partial summary judgment on the plaintiff’s bad faith claim. Judge Brann granted GEICO’s motion for partial summary judgment on the bad faith claim.

Judge Brann’s decision turns on the heightened burden of proof for bad faith claims, which requires clear and convincing evidence. Id., 2018 U.S.Dist. LEXIS 175785 at *2. Specifically, Judge Brann focused on the fact that two doctors, including the plaintiff’s own medical expert, believed that a preexisting medical condition had contributed to the plaintiff’s current ailments. Id., at *4. Judge Brann found that GEICO was not prohibited from considering these doctors’ opinions regarding alternate causation. Id., at *5. Thus, Judge Brann concluded that while reasonable minds could differ as to the true sum of the plaintiff’s loss, it could not be said that GEICO’s estimate was “frivolous or unfounded.” Id.

Now that we’ve placed both decisions under a microscope, what are the takeaways? Well, keep in mind that the liberal pleading standards are more often than not going to let a bad faith claim continue to discovery if the complaint contains any allegations which purport to show that an insurer’s low offer could possibly not be supported by the record. Don’t allow yourself, or the insurer, to be discouraged by a loss at the pleading stage. Take solace in the fact that the liberal standards will be kicked to the curb once you get to summary judgment. There, you will be able to put the plaintiff’s feet to the fire of the clear and convincing evidentiary standard. Of course, you are going to need to have something akin to the alternate causation doctors’ opinions in Newhouse in your pocket to deliver the coup de grâce to the bad faith claim. But you wouldn’t be vehemently fighting the bad faith claim if you didn’t have something like that, right?

*Andrew is an associate in our Harrisburg, Pennsylvania office. He can be reached at 717.651.3538 or atrhoads@mdwcg.com.

^{Defense Digest, Vol. 25, No. 1, March 2019. Defense Digest is prepared by Marshall Dennehey Warner Coleman & Goggin to provide information on recent legal developments of interest to our readers. This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2019 Marshall Dennehey Warner Coleman & Goggin. All Rights Reserved. This article may not be reprinted without the express written permission of our firm. For reprints, contact tamontemuro@mdwcg.com.}