Thursday, December 15, 2011

2011 Year-end Review Article on Bad Faith Cases

The following article of mine was published in the December 13, 2011 edition of the Pennsylvania Law Weekly.

Bad-Faith Decisions in Auto Law Context Abound in 2011


Daniel E. Cummins

The Legal Intelligencer/ Pennsylvania Law Weekly

December 13, 2011

Over the past year or so there were a great number of notable bad-faith decisions handed down by the various courts of Pennsylvania. Here's a review and analysis of the most significant ones. As you will see, a number of them came were handed down by federal courts.

Handling of UM Claims

The most comprehensive bad-faith decision in the auto law context over the past year was issued by Senior U.S. District Court Judge Maurice B. Cohill Jr. of the Western District of Pennsylvania in the case of Wisinski v. American Commerce Group Inc.

In a decision that reads as a thorough primer on the handling of uninsured motorists claims, the court outlined the alleged missteps by the carrier in the handling of the underlying uninsured motorist benefits claim. The carrier at one point incorrectly represented to its insured that the limits were only $50,000 but later corrected that to note the available limits were actually $100,000. The court also faulted the carrier for initially refusing to arbitrate the claim despite clear arbitration language in the policy.

The court also noted that UM carrier initially offered only $7,798 to settle this matter involving allegedly significant injuries. As the case proceeded, the carrier eventually coughed up its $100,000 limits. Then, in settlement, the carrier presented the claimant with a release that contained language requiring the plaintiff release any bad-faith claims against the carrier. Plaintiffs counsel would not agree to such language and secured a revised release.

In his decision, Cohill found, by clear and convincing evidence, that the insurer had acted in bad faith toward its insured. The court's ruling left for a jury decision only the issue of the amount of damages the plaintiff was entitled to under the circumstances presented.

In another notable bad-faith decision from the past year, Judge Carmen D. Minora issued a decision in the Lackawanna County Court of Common Pleas case of Struble v. Erie Insurance Exchange, allowing a bad-faith claim in an uninsured motorist case to proceed beyond the pleadings stage.

In this case, Erie denied coverage in response to the plaintiff's claims for uninsured motorist benefits. Minora noted that since the plaintiff had established both that UM/UIM coverage had been requested by the plaintiff during the application process, and that Erie could not produce any signed waivers of that requested coverage, it was a viable allegation by the plaintiff that any provisions in the subject Erie contract to the contrary were void as against law and public policy and should be reformed to reflect UIM coverage.

Given that punitive damages are an allowable remedy under the bad-faith statute, the court also denied the demurrer to that claim.

In terms of delays in handling UIM claims, the U.S. District Court for the Eastern District of Pennsylvania found that a 42-month delay between the claimant's demand for UIM arbitration and the issuance of the UIM carrier's settlement check was not bad faith in the case of Thomer v. Allstate.

The Thomer court held that, in order for a delay in responding on the part of the carrier to be considered bad faith under the bad-faith statute, 42 Pa.C.S.A., Section 8371, the claimant must show that (1) the delay was attributable to the carrier, (2) the insurer had no reasonable basis for the actions it took that resulted in the delay, and (3) the carrier knew or recklessly disregarded the fact that it had no reasonable basis to deny payment.

Here, some of the delays were attributable to the claimant and conflicting medical records supported the carrier's process of evaluating the claim. As such, the court granted summary judgment in favor of the carrier on the bad-faith claims presented.

Handling of UIM Claims

U.S. District Court Judge A. Richard Caputo for the Middle District of Pennsylvania granted summary judgment in favor of Progressive Casualty Insurance Co. in the post- Koken bad-faith case of Calestini v. Progressive Insurance Co.

In this decision, Caputo granted summary judgment in favor of the carrier on the bad-faith claim after finding that "the plaintiff has failed to bring forth clear and convincing evidence of bad faith on the part of the defendant in handling plaintiff's UIM claims."

The court rejected the plaintiff's allegation that the UIM carrier failed to expeditiously evaluate the claims presented. The court noted that the carrier's actions in this matter of desiring to conduct additional discovery on the causation issues in this case involving a plaintiff with an extensive medical history was supported by the opinion of the defense medical expert who raised questions as to the causation and extent of injuries issues. For these reasons, the court granted summary judgment in favor of the carrier on the bad-faith claim.

The latest opinion from the state Superior Court in the context of UIM bad-faith litigation is the case of Rhodes v. USAA Casualty Insurance Co.

This matter involved discovery issues raised in a bad-faith case based upon an underlying UIM claim pursued by an injured party against USAA with regard to a motor vehicle accident that occurred in July 2000.

In Rhodes, the injured party asserted a total value on the claim presented was $235,000. The third-party carrier had already tendered its $35,000 liability limits and another UIM carrier had tendered its limits of $15,000.

Based upon the total value he placed on the claim, the injured party offered to settle with USAA for $175,000. In response, USAA offered $5,000 to settle. The injured party claimed that this offer was not made in good faith and requested arbitration. According to the opinion, at some point thereafter, USAA eventually did agree to settle the claim for $175,000 in December 2003.

The injured party later filed suit against USAA for breach of contract for allegedly failing to act in good faith in the handling of the UIM claim.

In its decision in Rhodes, the state Superior Court addressed a discovery issue involving the efforts by USAA to secure the plaintiff's attorney's files relevant to the claim presented by the plaintiff against the other UIM carrier relevant to the same accident and claims of injury. The question of "reverse bad faith" was raised by the carrier in terms of the plaintiff's provision of discovery on the claims presented.

The trial court in Rhodes had touched upon the notion of "reverse bad faith" in its decision on the issue by noting that "[i]n the context of a bad faith insurance claim, the conduct of the plaintiffs and the possibility that their actions constituted bad faith is relevant because the possibility exists that the defendant acted in reliance on information provided to it by the plaintiffs that was inaccurate as a result of bad faith on the plaintiffs' part." Under this rationale, the trial court granted USAA's motion to compel the discovery desired. This appeal followed.

The Superior Court reversed and emphasized that there were no allegations of bad faith or lack of cooperation asserted with regards to the conduct of the insured asserted in this matter. Accordingly, the appellate court found that the only issue was the reasonableness of USAA's settlement offers and whether it acted in bad faith in refusing to meet the injured party's settlement demand sooner.

As such, the court rejected USAA's attempt to "turn the tables" and shift the focus to the injured party's conduct. The Rhodes court ultimately ruled that USAA failed to demonstrate how the files of the plaintiff's attorney in the related UIM litigation would be relevant to this bad-faith litigation. Consequently, the trial court order compelling discovery of the file of injured party's attorney regarding the related UIM claim was reversed.

Insurance Applications

In the case of Grassetti v. Property and Casualty Insurance Co. of Hartford, U.S. District Court Judge James M. Munley of the Middle District of Pennsylvania held that a policyholder who signed a form rejecting uninsured motorist coverage could move forward with his bad-faith claim on an allegation that the insurer failed to use language specified by state law on the UM rejection form.

The plaintiff was allegedly injured as a result of a May 2007 hit-and-run motor vehicle accident. Coverage was denied by the uninsured motorist carrier on the grounds that the injured party had rejected UM coverage during the application process.

In his bad-faith action against the carrier, the injured party argued that the carrier had acted unreasonably in denying coverage. The injured party essentially asserted that the UM rejection form was invalid because it did not strictly comply with the requirements of Pennsylvania's Motor Vehicle Financial Responsibility Law, 75 Pa.C.S. Section 1731(b), pertaining to the content of the rejection of coverage form.

The carrier's form was found to deviate from the statutorily required language in one respect. The carrier's form referred to "Uninsured Motorists Coverage," while the statutory language referred only to "Uninsured Coverage."

Munley held that, in reading the complaint in a light most favorable to the plaintiff, it appeared that the plaintiff had adequately pled a cause of action under Pennsylvania's bad-faith statute, 42 Pa.C.S.   § 8371, given that Section 1731(c)(1) of the MVFRL requires strict compliance waiver language of Section 1731(b) and given that the plaintiff had adequately asserted in the complaint that the defendants withheld payment upon a claim without a reasonable basis and that defendants did so knowing they did not have a reasonable basis.

Post-Koken Bad-Faith Claims

Over the past year, a dichotomy has arisen between the Pennsylvania state courts and the federal courts in terms of how post- Koken cases involving bad-faith claims will be handled.

In his decision in the cases of Gunn v. Automobile Insurance Co. of Hartford, Conn., Allegheny County Common Pleas Court Judge R. Stanton Wettick Jr. had outlined a framework that has been followed by a number of other trial courts as the proper way to proceed for the handling of the discovery and trial issues in state court post- Koken consolidated claims involving UM/UIM and bad-faith claims.

Under Wettick's framework, no discovery on the bad-faith claims would be permitted until the conclusion of the trial in the UM or UIM claims. Furthermore, the UM or UIM claims would be tried first in front of a jury and, once the jury came back with its verdict on those claims, the bad-faith discovery would be turned over to the plaintiff and the court would proceed directly into the nonjury bad-faith trial with the same trial judge presiding over that matter. Wettick did note that the plaintiff could request a continuance of the nonjury bad-faith trial if the plaintiff needed time to study the carrier's bad-faith discovery responses.

In the decision of Craker v. State Farm, U.S. District Court Chief Judge Gary L. Lancaster of the Western District of Pennsylvania addressed a discovery-based motion to sever and stay filed by the UIM carrier. In ruling, without specifically referencing the same, the federal court held that it was not going to follow the discovery timetable created by Wettick in terms of the bad-faith portion of the post- Koken claim presented.

In this matter, the plaintiff sought bad-faith discovery during the pendency of both the UIM claim and the bad-faith claim in this post- Koken consolidated matter. The UIM carrier, State Farm, refused to participate in such discovery under the assertion that it did not need to respond to bad-faith discovery requests until the UIM claim was resolved.

The plaintiff filed a motion to compel State Farm to respond to the bad-faith discovery requests. State Farm argued that it would be irreparably prejudiced if it were forced to produce its UIM claims file, including the mental impressions, conclusions and opinions of the handling claims representative, in response to these discovery requests while the UIM claim was still pending. As an additional defense to the plaintiff's motion to compel, State Farm filed a motion to sever and stay the bad-faith claim.

The Craker court denied the motion to sever and stay the bad-faith claim and also granted the motion to compel filed by the plaintiff seeking discovery relevant to the bad-faith claim. Lancaster did deny a portion of the plaintiff's motion to compel as to waiver of the attorney-client privilege as he found that the parties had not provided the court with sufficient facts to decide that issue.

On the severance issue, Lancaster noted that although the parties argued in their briefs as to whether or not the UIM claim and the bad-faith claim should be tried together, bifurcation of the trial was not the "real question" being presented to the court. Rather, the court viewed the issue presented as to whether or not State Farm was entitled to "phased discovery" as requested (i.e. no bad-faith discovery until the UIM claim was completed).

Lancaster stated that, even if he decided to bifurcate the trial, he would not have necessarily ruled in favor of a phased discovery plan.

The court noted that phased discovery is permissible under F.R.C.P. 26(f)(3(B) if requested. In this case, the parties had noted in their pretrial submissions to the court that discovery was not anticipated to be completed in phases. The court found that State Farm's stated intention in its pretrial submissions that they planned to object to any bad-faith discovery to be "inconsequential" in the face of the other agreement of the parties that discovery would not be completed in phases.

Lancaster also noted that, based upon the parties' pretrial submissions, the court had entered a discovery order with a single deadline for discovery. It was also pointed out by the court that State Farm's motion to sever and stay, which was being viewed by the court as a motion for phased discovery, was filed 12 days beyond the discovery deadline and was, therefore, untimely.

Lancaster, nevertheless, reviewed the merits of the motion to sever and stay the bad-faith claim and found that it would be inappropriate to postpone discovery on the bad-faith claim until the UIM claim was resolved as that would delay the entire resolution of the matter.

The court noted that, if the cases were severed and stayed, a new set of discovery deadlines after the completion of the UIM portion of the case would be required. Additionally, the court was troubled by the fact that, in such a scenario, not only would the resolution of the entire matter be delayed but the same jury that decided the UIM claim could not be used to secure an "advisory verdict" on the bad-faith claim.

Lancaster additionally found that proceeding as requested by State Farm would not foster the interests of judicial economy. The court also went on to reject a number of other arguments put forth by State Farm in favor of the severance of claims.

As noted, the Craker decision is contrary to state court decisions from around the Commonwealth, including decisions from Wettick on how to handle discovery in combined UIM and bad-faith cases. In his opinion, Lancaster did not cite any state court decisions but did note that, although State Farm apparently cited such decisions, State Farm was the party that removed the case from the Court of Common Pleas and its different set of rules and had therefore subjected itself to the Federal Rules of Civil Procedure as they would be applied in the Western District.

In denying State Farm's motion with respect to the discovery issues, the court in Craker did note that State Farm would again have the opportunity to request a severance, or bifurcation, of the bad-faith claim from the UIM claim at the time of trial.

Remedies Permitted

In the case of Simmons v. Nationwide Mutual Fire Insurance Co., U.S. District Court Judge Terrence F. McVerry for the Western District of Pennsylvania addressed the remedies available to claimants in bad-faith actions. The case of Simmons involved an insured who sued his carrier based upon the carrier's refusal to pay on a claim based upon a theft of a number of the insured's tools.

The carrier in this case challenged the insured's demand for compensatory damages as part of his recovery. Reviewing the current status of bad-faith law in Pennsylvania, while the Simmons court agreed that a claim for compensatory damages was not recognized under the bad-faith statute, 42 Pa.C.S.A. § 8371, such a claim could be made under the common law theory of contractual bad faith.

Stated otherwise, the court held that, in Pennsylvania, a duty of good faith and fair dealing is implicit in an insurance contract. It therefore follows that, in addition to a statutory bad-faith claim, a plaintiff may bring a cause of action for breach of the contractual duty of good faith and fair dealing in the insurance context, which would permit an insured to recover compensatory damages for a carrier's failure to act in good faith.

Ultimately, the Simmons court found that the plaintiff was permitted to pursue on the remedies allowed by the bad-faith statute and the additional remedies for bad faith that may arise under a standard breach of contract action.

It is anticipated that a number of new bad-faith decisions will come down in 2012 as the first of a number of post- Koken automobile accident cases make it through the system to trial.

Daniel E. Cummins is a partner and civil litigator with the Scranton law firm of Foley Cognetti Comerford Cimini & Cummins. His civil litigation blog, "Tort Talk," may be viewed at

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