Sentinel. The Bad Faith

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1 Contacts: Matthew M. Haar Joseph C. Monahan Amy L. Piccola Matthew J. Antonelli A.J. Kornblith Patrick F. Nugent Meghan Talbot Insurance Practice Standing guard on developments in the law of insurance bad faith around the country CONTENTS Northern District of New York: No Bad Faith Failure To Settle Where Adverse Verdict Against Insured Appeared Improbable and Plaintiff Demanded Global Settlement pages 1-2 Western District of Texas Grants Summary Judgment for Insurer on Bad Faith Claim Arising from Denial of Coverage Under Commercial Crime Insurance Policy pages 2-3 Superior Court of Pennsylvania: No Reasonable Basis for Denial of Disability Benefits Where Doctor Makes Equivocal Statements Regarding Insured s Ability to Work pages 4-5 District of Nevada: No Duty to Defend or Indemnify When Coverage is Precluded by the Policy, and Insureds Own Statements Negate Potential for Coverage pages 5-6 Northern District of New York: No Bad Faith Failure To Settle Where Adverse Verdict Against Insured Appeared Improbable and Plaintiff Demanded Global Settlement Phelps v. GEICO Indem. Co., No. 6:12-cv-1585, 2015 WL (N.D.N.Y. Mar. 30, 2015). After an adverse verdict against the insured arising out of a car accident, the insured assigned his rights against his insurer to the plaintiff, who brought a claim for bad faith failure to settle against the defendant s insurer. The court granted summary judgment for the insurer, holding that the result was unexpected given the known facts and that the insurer never had a true opportunity to settle the case. During whiteout conditions in a blizzard on March 5, 2007, a three-car accident occurred in upstate New York. One of the drivers, Melissa Ranger, was subsequently ticketed for driving on the wrong side of the road. The other two drivers, Christopher Dwyer and Jamie Cogan, were not ticketed. Two passengers in Ranger s car, sisters Beatrice and Bonnie Phelps, were injured in the crash. Dwyer had an automobile policy with GEICO Indemnity Company ( GEICO ) with a $25,000 limit of liability. He reported the claim to GEICO on the day of the accident, telling GEICO that Ranger came into his lane and hit him. Ranger and Cogan also had insurance with considerably higher policy limits. In September 2008, Beatrice Phelps filed suit against all three drivers. Dwyer forwarded the papers to GEICO, who in turn appointed defense counsel. GEICO also specifically advised Dwyer that he might want to obtain his own attorney to protect against the possibility of a verdict greater than the policy limit. In the lead-up to the trial, Phelps attorney continually insisted that she would only accept a global settlement that implicated all three drivers insurance policies. Immediately before trial, Ranger s insurer tendered her policy limits of $50,000. Phelps attorney said he would settle the case for $85,000. However, Cogan s insurer refused to offer more than $3,000, meaning that the $85,000 amount could not be reached even if GEICO offered the full $25,000 limit of Dwyer s policy. In any event, GEICO never offered more than $5,000. Delaware Maryland Massachusetts New Jersey New York Pennsylvania Washington, DC

2 After the trial, the jury returned a verdict of $154,900 for Phelps that found Ranger and Dwyer each 50 percent liable. GEICO then paid its $25,000 limit to Phelps. Dwyer subsequently assigned any rights he had against GEICO for a claim of bad faith to Phelps, who sued GEICO in New York state court. GEICO removed the suit to the U.S. District Court for the Northern District of New York. GEICO moved for summary judgment on the bad faith claim. The Court noted that under New York law, the plaintiff must establish that the insurer exhibited gross disregard in failing to settle a claim against the insured. The court must consider several factors, including: whether the insurer considered the insured s interests as well as its own in making settlement decisions; whether the insurer lost an actual opportunity to settle the claim when all serious doubts as to liability were removed; whether it adequately investigated the claim; what settlement Tesoro filed suit against National Union for breach of contract and breach of the implied covenant of good faith and fair dealing, seeking declaratory relief, actual damages, and exemplary and punitive damages. Tesoro filed a motion for partial sumattempts were made by the insurer and when; whether the insurer kept the insured informed of settlement negotiations; the potential magnitude of damages that might result from a failure to settle; and other evidence that might establish the insurer s bad faith in refusing to settle. The Court found that nearly all of these factors weighed against a finding of bad faith here and accordingly granted summary judgment for GEICO. In particular, it held that based on the evidence presented and GEICO s investigatory efforts, an adverse verdict in excess of the policy limits against Dwyer was not probable. Further, there was never an opportunity for GEICO to settle the case because Phelps attorney insisted on a global settlement, such that without a greater contribution from one or both of the other drivers insurers even the full limit of the GEICO policy would not have been enough to meet the demand. Western District of Texas Grants Summary Judgment for Insurer on Bad Faith Claim Arising from Denial of Coverage Under Commercial Crime Insurance Policy Tesoro Refining & Marketing Co. LLC v. Nat l Union Fire Ins. Co. of Pittsburgh, Pa., Cv. No. SA:13-CV-931-DAE (W.D. Tex. Apr. 7, 2015). Insurer entitled to summary judgment on bad faith claim where insured failed to show that denial of claim was unreasonable, that the insurer did not timely investigate its claim, or that the insurer committed an extreme act resulting in injury independent of the policy claim. Plaintiff Tesoro Refining & Marketing Company LLC filed this action against defendant National Union Fire Insurance Company of Pittsburgh, Pennsylvania for breach of contract and breach of the covenant of good faith and fair dealing arising from National Union s denial of coverage for a claim submitted under a commercial crime insurance policy. Tesoro sold fuel on credit to Enmex Corp., a petroleum distributor. The manager of Tesoro s credit department was alleged to have forged a letter of credit related to the sale. Tesoro submitted an initial claim to National Union for losses due to forgery or alteration. National Union denied the claim, and Tesoro thereafter submitted an amended claim for losses due to employee theft. National Union denied the amended claim as well. 2

3 mary judgment seeking judgment on the proper interpretation of theft under the policy and whether the credit department manager s conduct was covered under the policy. National Union filed a motion for summary judgment on all of Tesoro s claims, arguing that Tesoro failed to show that its loss was covered under its policy. National Union also filed a motion, in the alternative, for partial summary judgment on Tesoro s bad faith and punitive damages claims. The court denied Tesoro s motion for partial summary judgment, granted National Union s motion for summary judgment, and denied as moot National Union s motion, in the alternative, for partial summary judgment. With respect to Tesoro s bad faith claim, National Union argued that it was entitled to summary judgment because Tesoro could not show that National Union knew or should have known that there was no reasonable basis for denying Tesoro s claim, and because Tesoro could not show extra-contractual damages. Tesoro argued that National Union s liability for its claim was reasonably clear, that National Union s investigation into its claim was pretextual and improper, and that it pled extra-contractual damages in the form of attorneys fees. The court explained that [a]n insurer is liable for breach of the duty of good faith and fair dealing if the insurer knew or should have known that it was reasonably clear that the claim was covered (internal quotation omitted). An insurer is not liable, however, for an erroneous denial of a claim as long as a reasonable basis for denial of the claim exists. The court noted that [i]n most circumstances, an insured may not prevail on a bad faith claim without first showing that the insurer breached the contract (internal quotation omitted), but acknowledged the possibility that in denying the claim, an insurer may commit some act so extreme that it would cause injury independent of the policy claim (internal quotations omitted). The court also explained that an insurer has a duty to timely investigate its insured s claims regardless of the final coverage determination. The court determined in a preceding portion of its opinion that National Union s denial of coverage was not only reasonable, but in fact correct. As a result, to prevail on its bad faith claim, Tesoro would need to show that National Union either failed to timely investigate [its] claim or committed an act so extreme as to cause injury independent of its policy claim. The court ruled that Tesoro failed to do either. First, Tesoro did not argue that National Union failed to timely investigate its claim. Rather, Tesoro argued that National Union undertook a pretextual investigation calculated to result in a denial of coverage and to gain an unfair advantage in the litigation. The court explained that [t]he common-law tort of bad faith does not include a mechanism by which a factfinder could conclude that the denial was pretextual even though there was a reasonable basis for denying the claim (internal quotation omitted). Here, National Union had a reasonable basis for denying the claim: that the credit department manager s alleged falsification and forgery of documents indicating that the Enmex account was adequately collateralized was not theft under the policy. Thus, the court rejected Tesoro s argument that National Union s investigation was pretextual and conducted in bad faith. Second, Tesoro did not identify any act by National Union that caused it injury beyond the denial of its claim. Indeed, Tesoro had shown no additional injury other than the costs and attorneys fees necessary to bring this suit, which cannot be recovered absent a showing of wrongful conduct by the opposing party. The court, therefore, found that there was no genuine dispute of material fact as to Tesoro s good faith and fair dealing claim, and ruled that National Union was entitled to judgment in its favor as a matter of law. 3

4 Superior Court of Pennsylvania: No Reasonable Basis for Denial of Disability Benefits Where Doctor Makes Equivocal Statements Regarding Insured s Ability to Work Mohney v. Am. Gen. Life Ins. Co., Nos WDA 2013, 2046 WDA 2013, 2015 WL (Pa. Super. Ct. May 8, 2015). The Superior Court of Pennsylvania finds that there was no reasonable basis for insurer s denial of benefits where the denial was based on equivocal statements from the insured s doctor regarding the insured s ability to perform, with accommodations, certain light-duty work. Timothy A. Mohney worked as a coal miner. Mohney purchased disability and life insurance on an automobile loan from U.S. Life Credit Life Insurance Company ( U.S. Life ), the predecessor-in-interest to American General Life Insurance Company ( American General ). Mohney also purchased disability and life insurance from U.S. Life in connection with a home mortgage. After Mohney suffered a back injury as a result of a traffic accident, he submitted disability claims under his two policies. U.S. Life began making payments. U.S. Life initially sent Mohney monthly continuation claims reports for his doctor to verify his disability status, but eventually placed him on automatic status. Over a year after placing Mohney on automatic status, U.S. Life sent questionnaires to Mohney and his treating physician requesting information about Mohney s condition and ability to work. Mohney s doctor indicated that his restrictions included no heavy lifting or bending and stated that he did not expect Mohney s condition to improve such that he could return to work as a coal miner. Mohney s doctor did, however, indicate that Mohney might be able to return to work possibly in a light duty position. U.S. Life s claims investigator then sent the doctor a second questionnaire, asking whether Mohney could perform the duties of a security guard, automobile salesperson, or an automobile self-service attendant. Mohney s doctor answered yes to each of these jobs, but qualified his answer by stating that Mohney would only be able to perform the work if certain accommodations were provided. The doctor further recommended a trial employment before Mohney would be able to proceed with full time light duty employment. After receiving the doctor s response to the second questionnaire, U.S. Life terminated Mohney s benefits under the two insurance policies. U.S. Life stated that because Mohney was able to perform the regular duties of an occupation that he was qualified for based on his education, training or experience, he was no longer totally disabled and therefore no longer qualified for benefits. Mohney filed a complaint in the Armstrong County Court of Common Pleas alleging fraud, breach of contract, violation of the Unfair Trade Practices and Consumer Protection law, and bad faith. Prior to trial, the trial court entered summary judgment in U.S. Life s favor on all of Mohney s claims except for breach of contract. The court then went on to determine that Mohney had met his burden to prove that he was totally disabled within the meaning of his two insurance policies. Accordingly, U.S. Life had breached its contracts with Mohney. Both parties appealed from the trial court s findings. On appeal, the Superior Court affirmed the trial court s ruling on the breach of contract claim but reversed the trial court s award of summary judgment to U.S. Life on the bad faith claim. The Superior Court reasoned that Mohney s doctor s response to the second questionnaire was equivocal in nature and did not definitively establish whether Mohney was able to engage in or perform any occupation. Rather, the court reasoned that at best, the doctor s responses established that Mohney may be able to perform certain light duty tasks. The court went on to conclude that this equivocal response from the doctor could not serve as a reasonable basis for denying benefits. The court remanded to the trial court for a determination of whether U.S. Life had acted in bad faith. Following a bench trial, the trial court ruled in U.S. Life s favor on the bad faith issue, concluding that although U.S. Life s ultimate denial of benefits was incorrect, its investigation was sufficiently thorough and provided it with a reasonable basis to conclude that Mohney was not totally disabled under the 4

5 terms of his insurance policies. The parties again appealed this finding. On appeal, the Superior Court emphasized that to win on his bad faith claim, Mohney needed to prove both that: 1) U.S. Life did not have a reasonable basis to deny his benefits; and 2) that U.S. Life knew of or recklessly disregarded its lack of a reasonable basis in denying his claim. The court again discussed the equivocal nature of Mohney s doctor s statements and concluded that U.S. Life lacked a reasonable basis to deny benefits. According to the court, the doctor s responses made it clear that Mohney s condition had not improved; however, U.S. Life s termination of benefits letter mischaracterized the doctor s statements and stated that the doctor had affirmatively recommended that Mohney could perform certain job functions. Accordingly, the Superior Court found that U.S. Life lacked a reasonable basis to deny benefits. Another issue Mohney raised on appeal was the trial court s decision to exclude Mohney s proposed expert witness. Mohney attempted to offer expert testimony regarding proper claims handling, procedures for review of policy language, and the need for adjusters to be trained in proper application of relevant case law. The Superior Court noted that while the decision on whether to permit expert testimony in a bad faith case is left to the discretion of the trial judge, the trial court in this case abused its discretion. Because the issues presented involved complex questions of standards in the insurance industry with regard to training of claims adjusters, the appellate court found that expert witness testimony should have been permitted. Because it concluded that the trial court committed errors of law and abused its discretion, the Superior Court remanded for a new trial on the question of whether U.S. Life acted in bad faith. District of Nevada: No Duty to Defend or Indemnify When Coverage is Precluded by the Policy, and Insureds Own Statements Negate Potential for Coverage Benchmark Ins. Co. v. G.L. Const. Co., 3:14-cv-00326, 2015 WL (D. Nev. Apr. 13, 2015). Court finds that there was no potential for coverage necessary to trigger insurer s duty to defend where the plain language of the policy precluded coverage for certain of the underlying causes of action and where insured s own statements made clear that the alleged illegal dumping at issue occurred prior to policy inception. Gordon Lemich is the owner and operator of G.L. Construction Company, which is a Nevada licensed contractor that engages in excavation work. G.L. purchased a commercial general liability policy from Benchmark Insurance Company ( the Policy ). Pursuant to the Policy, Benchmark agreed to defend G.L. against any suit seeking tort damages for property damage. Lemich and G.L. were both sued by two third parties, Cerebus and NNH. Cerebus sued upon the basis that a property bought from G.L. was not properly constructed nor up to code; in addition to holding title to defective construction, the defects caused Cerebus to incur fines for noncompliant wiring and costs for cleaning and removal of hazardous waste. NNH also sued as a co-plaintiff, alleging further that during G.L s ownership of the property, it had dumped dirt and debris on NNH s adjacent property. Upon receipt of the complaint, Lemich contacted Benchmark s third-party claims administrator requesting that Benchmark provide defense services pursuant to the Policy. The claims administrator denied the request, finding that G.L. s actions were not covered by the Policy either because they did not constitute an occurrence or because they fell within exceptions to coverage as outlined in the Policy. Cerebus and NNH then filed an amended complaint; Lemich then made another demand for Benchmark to defend it in the action. Benchmark again denied G.L. s claim because it determined that (1) the dumping allegedly happened prior to the Policy s inception, (2) the statute of limitations barred certain claims, and (3) G.L. s dumping was not an occurrence as defined by the Policy. Nevertheless, Benchmark agreed to provide G.L. with a defense in the Cerberus Action under a reservation of rights. 5

6 Benchmark, in turn, filed an action against G.L. and Lemich, requesting a declaratory judgment that the Policy does not cover property damage caused by G.L. s intentional dumping. G.L. and Lemich responded by filing a counterclaim against Benchmark alleging that the denial of G.L. s insurance claim was done in bad faith. Shortly thereafter, G.L. and Lemich moved for summary judgment on the issue of whether Benchmark had a duty to provide G.L. with a defense in the Cerberus Action. The court denied the motion, first finding that there was a genuine dispute of material fact as to whether the dumping was due to a mistake by Lemich. Upon Lemich and G.L. s motion for reconsideration, the court again found against the plaintiffs, holding that the factual dispute was immaterial and that the Policy could not apply to the negligent trespass. As the alleged dumping occurred in 2004, it began before the Policy s issuance and/or would be subject to the Policy s deemer clause. In turn, Benchmark filed a motion for summary judgment. Benchmark argued that G.L. s actions as alleged in the Cerberus complaint raised absolutely no potential for coverage under the Policy. G.L. and Lemich, however, argued that the possibility for coverage was plain from the face of the complaint, and that Benchmark s denial of coverage amounts to bad faith worthy of punitive damages. The court granted Benchmark s motion for summary judgment. The court noted that the duty to defend the insured is broader than the duty to indemnify, and that the duty to defend is triggered if the claim potentially seeks damages within the coverage of the policy. Nevertheless, the court reasoned that the duty to defend is not absolute and requested a potential for coverage. A potential for coverage can be ascertained by comparing the allegations of the complaint and the facts known to the insurer with the terms of the policy. The court found that the timing of the alleged occurrences was dispositive; Benchmark had no duty to provide G.L. with a defense in the Cerberus Action because (1) coverage for the causes of action arising from Lemich s alleged improper modification of the property was precluded by the Policy, and (2) the alleged dumping and damage to NNH s property first occurred prior to the Policy s issuance in October Further, the court noted that Benchmark permissibly took the terms of the Policy and compared it to the Cerberus complaint and, in light of the information provided by G.L. and Lemich themselves, determined whether there was any potential for coverage. G.L. and Lemich s demand letter stated that no dumping had occurred after The court held that [c] ertainly Benchmark was not required to simply turn a blind eye towards facts offered to it by G.L. and Lemich that negated a potential for coverage. Neither should the Court now pretend that G.L. never informed Benchmark that the dumping occurred prior to the Policy s issuance. Finally, G.L. and Lemich unsuccessfully argued that the actual facts surrounding G.L. s dumping were irrelevant to Benchmark s duty to provide a defense in the Cerberus Action because the complaint alleged that at least some dumping occurred during the policy period. According to the court, such an argument ignores the unambiguous terms of the Policy which contains a deemer provision. Pursuant to this provision, there is a potential for coverage only if the property damage alleged in the underlying lawsuit first takes place during the policy period. Since G.L. and Lemich themselves asserted contrary facts, they had no potential for coverage under the Policy. Therefore, there was no basis for the claim for bad faith, and the counterclaim for punitive damages was denied. This publication has been prepared by the for information purposes only. The provision and receipt of the information in this publication (a) should not be considered legal advice, (b) does not create a lawyer-client relationship, and (c) should not be acted on without seeking professional counsel who have been informed of the specific facts. Under the rules of certain jurisdictions, this communication may constitute Attorney Advertising Saul Ewing LLP, a Delaware Limited Liability Partnership. ALL RIGHTS RESERVED. Baltimore, MD 500 East Pratt St. Charles O. Monk, II Boston, MA 131 Dartmouth St. Richard D. Gass Chesterbrook, PA 1200 Liberty Ridge Dr. Michael S. Burg Nathaniel Metz Harrisburg, PA 2 North Second St. Joel C. Hopkins Newark, NJ One Riverfront Plaza Stephen B. Genzer New York, NY 555 Fifth Ave Philadelphia, PA 1500 Market St. Bruce D. Armon Pittsburgh, PA One PPG Place David R. Berk Charles Kelly Princeton, NJ 650 College Rd. E Marc A. Citron Washington, DC 1919 Pennsylvania Ave, NW Mark L. Gruhin Andrew F. Palmieri Wilmington, DE 222 Delaware Ave. William E. Manning Wendie C. Stabler