Federal Middle District Court of Pennsylvania Addresses Post-Koken Issue

In Bukofski v. USAA Casualty Ins. Co., 2009 WL 1609402, No. 3:08-CV-1779 (M.D.Pa. 2009, Munley, J.) a decision handed down three days ago on June 9, 2009, Federal Middle District Judge James M. Munley held in a post-Koken case that a plaintiff may proceed on a bad faith claim against an insurance company who issued a new insurance policy without an arbitration clause without notifying the insured-plaintiff of the removal of the arbitration clause from the policy.

The Bukofski case arose out of a motor vehicle accident that occurred on October 11, 2007. The plaintiff eventually filed a lawsuit against her own carrier USAA alleging that, among other things, the carrier purposefully withheld first party benefits and UIM benefits with respect to the accident. The case was filed in Luzerne County, removed to the Middle District Federal Court and came before Judge Munley on the defendant carrier's Motion to Dismiss.

With respect to the allegation that the carrier had acted in bad faith by unilaterally removing the arbitration clause from the UIM portion of the policy without notice to the insured-plaintiff, the plaintiff complained that the carrier took such actions to delay the payment of UIM benefits and to attempt to secure leverage in settlement discussions by exposing the plaintiff to a protracted lawsuit as opposed to a quicker arbitration. The plaintiff was also upset that the carrier had removed the clause without explaining the ramifications of such removal on the plaintiff's ability to recover UIM benefits under the policy.

The carrier defended by arguing that the mere removal of the arbitration clause was not bad faith, particularly since the removal of the clause had happened months before the accident. The carrier also asserted that, in any event, it was within the rights of the carrier to remove the clause in light of the decision in Insurance Federation of Pennsylvania, Inc. v. Koken, 889 A.2d 550 (Pa. 2005), which held that automobile insurance policies in Pennsylvania are no longer required to include arbitration clauses.

Judge Munley noted that, after his review of the issue, he believed "it would be inappropriate to dismiss this part of the complaint at this time." The Judge was "not convinced" that the bad faith statute did not apply to the carrier's act of removing an arbitration clause from an insurance policy.

Judge Munley further noted that the "presence of an arbitration clause deals directly with the defendant's contractual obligations and clearly arise from the insurance policy." As such, the Judge ruled that "[i]f, as plaintiff asserts, the defendant removed the clause without notification to the plaintiff in order to force favorable settlements of UIM claims, then a statutory bad faith claim might be established." Accordingly, the carrier's Motion to Dismiss in this regard was denied.

Elsewhere in the opinion, Judge Munley also rejected the carrier's Motion to Dismiss the bad faith claim under a preemption argument. That is, the carrier argued that the plaintiff's bad faith claim was based primarily upon allegations of improper conduct by the carrier with respect to the carrier's handling of the plaintiff's separate first party medical benefits claim.

More specifically, the defendant carrier asserted that the plaintiff's statutory Section 1783 bad faith claim was thereby preempted by the remedies provided by statutes related to first party medical benefits claims, such as Section 1797 of the Motor Vehicle Financial Responsibility Law.

Judge Munley disagreed with this assessment and found that, based upon the allegations of the Complaint, it was clear that the plaintiff was making a bad faith claim based upon the carrier's handling of the UIM claim and not the carrier's handling of the first party medical benefits claim. The Judge noted that "[m]erely because some of the bad faith evidence alleged by the plaintiff relates to first-party medical benefits claim does not mean that the bad faith claim with regard to the handling of the UIM claim is preempted." Accordingly, the carrier's Motion to Dismiss based upon MVFRL preemption was denied.

In his opinion, Judge Munley did grant some portions of USAA's Motion to Dismiss. The Court agreed with the carrier that the plaintiff's count in the Complaint of an alleged failure of the Defendant to comply with the duties of good faith and fair dealing in handling the plaintiff's insurance claims should be dismissed as Pennsylvania law does not recognize a separate common law remedy to an insured for a violation of an implied duty of good faith and fair dealing with respect to the breach of an insurance contract. Rather, this type of claim was found to merge with, and be a part of, the plaintiff's separately asserted breach of contract claim.

Similarly, the Court also granted the Defendant's Motion to Dismiss the plaintiff's claim of a breach of a fiduciary duty with regards to the facts alleged. While the Court rejected the carrier's contention that there was no fiduciary duty between the carrier and its insured, the Court did dismiss this count of the Complaint finding that the breach of fiduciary duty claim was redundant of the breach of contract claim.

Judge Munley also dismissed the plaintiff's claim that the Defendant carrier had acted negligently towards her as that claim was subsumed by the breach of fiduciary duty claim. Also, as the parties' relationship was by contract, the separate tort action was barred by the "gist of the action" doctrine under Pennsylvania law. Judge Munley also rejected the plaintiff's claim of negligent infliction of emotional distress claim in this bad faith claim.

The remainder of the opinion addresses procedural issues with respect to the wording of the Complaint.

It remains to be seen whether this case will be (or even can be at this stage) appealed to the Third Circuit. Plaintiff's counsel is Tim Lenahan of the Scranton law firm of Lenahan & Dempsey, and John Nardone, Esquire. USAA was represented by Attorneys Bryon Kaster and Charles E. Haddick, Jr. both of the Camp Hill law firm of Dickie, McCamey & Chilcote, P.C.

Thanks to Paul Oven, Esquire of the Moosic law firm of Dougherty, Leventhal & Price for bringing this case to my attention.