Bad Faith Claims Dismissed in Household, Regular Use Exclusion Case


SCRANTON, June 13 — A federal judge in Pennsylvania has dismissed a number of breach of contract and bad faith claims, arising out of an auto  insurance claim which the judge said was potentially barred by the policy’s household or regular use exclusions.

According to the opinion written by U.S. District Judge Richard P. Conaboy, Plaintiff Richard Myerski was involved in a car  accident with an uninsured driver while Myerski was driving his mother’s car, which was insured through First Acceptance Insurance Co. Inc.  Myerski was neither a named insured nor a member of his mother’s household at the time of the accident.

First Acceptance denied a claim for benefits with First Acceptance made by Myerski’s mother, however, contending that Myerski lived with Morris at the time of the accident, even though the police report listed Myerski at a different residence address.  Myerski told the insurer he lived with his mother and drove the car “all the time.”

Myerski sued First Acceptance in the Lackawanna County, Pa., Court of Common Pleas, for breach of contract, bad faith, and  breach of the covenant of good faith and fair dealing, in addition to breach of contract and negligence claims.  The case was removed to the U.S. District Court for the Middle District of Pennsylvania and First Acceptance moved to dismiss good faith and fair dealing, bad faith, negligence and vicarious liability claims.

In granting the motion, Judge Conaboy held that dismissal of the bad faith claims were appropriate:

“[t]he facts alleged show that Defendants reasonably denied the claim for damage to the insured’s vehicle based on the policy exclusion: Plaintiff himself stated that he lived with his mother and drove the vehicle ‘all the time’…Even if there is evidence which could support a claim that Plaintiff mistakenly made the August 25, 2015, statement about his residence, Plaintiff does not point to evidence undermining his statement that he used the car ‘all the time,’ usage which would fall under the ‘regular or frequent operator’ exclusion. In fact, Plaintiff does not assert that this exclusion does not apply. Importantly, Defendants’ August 25, 2015, correspondence to Ms. Morris indicates there is no coverage for damage to her auto based on the exclusion set out above — it does not limit the application of the exclusion to Plaintiff’s place of residence. Given the admissions in Plaintiff’s statement and the basis for denial identified in Defendants’ August 25, 2015, correspondence, Plaintiff’s assertion that bad faith is evidenced by Defendants’ failure to properly investigate Plaintiff’s residence is not an accurate assessment of the bases upon which the exclusion may apply in this case. It follows that Defendants’ alleged refusal to further investigate Plaintiff’s residence and failure to pay for damage to Ms. Morris’ auto cannot be considered ‘frivolous or unfounded’ refusals.”

Judge Conaboy further wrote:

“Given the lack of factual support in the record supporting Plaintiff’s assertion of PIP [personal injury protection] and UM [underinsured motorist] claims at the early stage of the claims handling process, the fact that there is no evidence that Plaintiff sought clarification regarding PIP and UM coverage following the call where [First Acceptance claims adjuster Beverly] Bowers allegedly denied all claims, and the fact that the Police Report states that no one was injured and the other vehicle was insured, the ‘clear and convincing evidence’ that Defendants acted in bad faith on the basis of Ms. Morris’ conversation with Ms. Bowers is lacking. Thus, I conclude the record does not provide the evidentiary requirements for establishing a bad faith claim during the initial period and Plaintiff’s statutory bad faith claim is properly dismissed.”

The Judge permitted breach of contract and statutory claims under the Pa.M.V.F.R.L to proceed, and permitted the Plaintiff an opportunity to amend the bad faith allegations, though recognizing that doing so would likely be “futile.”

 Myerski v. First Acceptance Ins. Co., (M.D. Pa. June 1, 2016, Conaboy, J.)



Post-Litigation Claims Documents Not Discoverable, Court Rules


OAKLAND, May 31 – A California federal district magistrate has shielded from discovery  information in its insurer’s file generated after  the filing of coverage litigation.

Magma, a technology company,  sought coverage for underlying securities litigation from Genesis, which had written Magma’s excess  directors and officers insurers coverage.  Magma requested discovery of its excess insurer’s “claims handling information.” After Genesis provided information up to but not following the date of the coverage suit against it, Magma requested  the excess insurer’s file for the period following the beginning of the coverage litigation, including information about the excess insurer’s reinsurance and reserves.

Magma argued that Genesis’ duty of good faith and fair dealing continued even after coverage litigation commences, and on that basis argued the post litigation claims documents were discoverable .

White and the cases that followed it concerned whether an insured’s bad faith claim could be based on evidence of an insurer’s conduct during coverage litigation — but in all of those cases, the conduct at issue was already known to the insured. In Magma, by contrast, the insured technology company was seeking discovery of information unknown to it, contained within the excess insurer’s own internal files.

District Magistrate Howard R. Lloyd wrote that the possibility of post litigation bad faith conduct was not sufficient grounds to make the post-litigation information discoverable.  Lloyd called the company’s discovery request on that basis speculative, and without more, a “fishing expedition into the heart of the insurer’s litigation strategy. . . the insurer has an absolute right to defend against the insured’s claims, and opening up its litigation file to its insured would undermine its fair day in court.”

Judge Lloyd ruled, that the work product privilege of  Federal Rule of Civil Procedure 26(b)(3)(A) protected the information.

Genesis Insurance Company v. Magma Design Automation, Inc. No. 5:06-cv-05526, (N.D. Cal. May 31, 2016)

Pa.: State Farm Adequately Pled Chiropractor Billing Fraud


PHILADELPHIA, May 20 — A federal judge has denied a motion to dismiss State Farm Mutual Automobile Insurance Co.’s amended complaint of billing fraud against a chiropractic and physical therapy practice.  It ruled also that State Farm need not prove justifiable reliance on the bills at this stage of the case.

U.S. District  Judge J. Curtis Joyner of the Eastern District of Pennsylvania also found that State Farm’s  amended claims were both timely, and adequately alleged misrepresentation in the billing submitted by the defendants.

State Farm alleges that  Eastern Approach Rehabilitation LLC, Aquatic Therapy of Chinatown Inc., Leonard Stavropolskiy, P.T., D.C., and Joseph Wang, P.T., D.C., submitted false and fraudulent insurance claims on behalf the practice’s patients.  State Farm claims that the defendants  created a series of records for patients suffering from “moderate-to-severe joint dysfunctions, pain, and muscle spasms across multiple regions of the spine,”  and that these impressions from initial examinations were copied and pasted into subsequent treatment notes.  The amended complaint contends that planned treatments recorded in the notes were simply pre-determined, and not individually tailored to each patient.

State Farm also alleges claims that dating back to 2010, the practicioners took action to hide the nature of the fraudulent activity through the use of software to randomize and synonymize similar observations and diagnoses.  The amended complaint alleges that this conduct created the impression that diagnosis and treatment of patients was individualized when in fact it was not.

State Farm alleges damages in excess of $850,000.

On Feb. 17, Judge Joyner granted the motion to dismiss the original complaint,  but allowed State Farm to file an amended complaint.  He ruled that the amended complaint, however, sufficiently set forth misrepresentations allegedly made by the defendants, and that, at least at the pleading stage, the insurer need not show  justifiable reliance on the misrepresentations allegedly made in the billings.

State Farm Mutual Automobile Insurance Company v. Leonard Stavropolskiy, P.T., D.C., et al., No. 15-cv-5929, E.D. Pa.; 2016 U.S. Dist. LEXIS 65234

Washington: No Water Damage Coverage For Unoccupied Building


WASHINGTON, June 9 – The Supreme Court of the state of Washington has ruled that there is no coverage under a property insurance policy for water damage to a vacant building, rejecting  the policyholder’s claims that provisions relating to vacancy and building occupation were ambiguous.

Essex Insurance Company issued a property insurance policy to Kat Suen and May Far Lui . The insureds had evicted the building tenant, but did not provide notice to Essex that the building was no longer occupied.  Subsequently, water damage was caused on the property after a a sprinkler pipe froze and burst.

After issuing  payments totaling $293,598.05, Essex discovered that the building had been unoccupied for almost 60 days at the time of the loss. Essex sent a denial letter to the Luis, referencing a policy provision which suspended coverage when the insured property was vacant or unoccupied.

Essex offered the Luis not to recoup the $293,598.05 paid if the Luis waived additional payment on the claim, which the Luis contended was  $758,863.31 in total.  The Luis declined, and sued Essex to recover the full claimed amount plus bad faith damages. In doing so, they claimed that the vacancy exclusion did not apply because the property was not vacant for  60 consecutive days.  That was not disputed by either side.

The trial court denied Essex’s summary judgment motion but an appeals court reversed.  In a unanimous opinion, the Washington Supreme Court affirmed an appeals court’s finding of no coverage, and held that a typical insured would understand that the policy in question substantially limited coverage from the first day an insured structure became vacant, and suspended coverage altogether if the building stays vacant for 60 days, calling the language plain and unambiguous.  The Court further found that water damage was a coverage which was restricted after the first day the insured building became vacant, concluding therefore that  there was no coverage for the water damage.

The Supreme Court rejected the insured’s argument that the vacancy provisions of the policy were vague and ambiguous, finding that such arguments ignored the plain meaning of the provisions and would create an unresolvable contradiction between the vacancy provisions which, in the opinion of the Court, simply did not exist.

Lui v. Essess Ins. Co., (Wash. June 9, 2016)Lui v. Essex Ins. Co., (Wash. June 9, 2016)

Ninth Circuit: Payment Delay In UM/UIM Claim Not Bad Faith


SAN FRANCISCO, May 25 — Summary judgment in favor of an insurer in an insurance breach of contract and bad faith lawsuit was appropriate because an insured failed to submit timely support of her claim, a Ninth Circuit U.S. Court of Appeals panel has ruled.

Plaintiff Carol Sierzega was insured by Country Preferred Insurance Co., and filed a claim after she was involved in an accident with Shirleen Okelberry, who was uninsured at the time of the mishap.  Sierzega recovered a trial verdict of more than $4 million against Okelberry, and Country Preferred tendered Sierzega the $50,000 underinsured motorist policy limits.   Sierzega sued County Preferred  for breach of contract, breach of the implied covenant of good faith and fair dealing and violation of the Nevada Unfair Claims Practices Act for failing to pay the claim more promptly.

After removing the case to the U.S. District Court for the District of Nevada, County Preferred won summary judgment on all claims,  after which Sierzega appealed to the Ninth Circuit.

The Ninth Circuit affirmed the summary judgment in County Preferred’s favor, ruling that the District Court did not err in granting summary judgment on the breach of the implied covenant of good faith and fair dealing claim because there was no clear basis upon which County Preferred was on notice of a potential UIM claim, the Court ruled.
“Upon receiving notice of the claim, Country Preferred requested additional information, but it took Sierzega’s counsel more than five months to respond, with a demand letter. Once counsel sent the demand letter making clear that Sierzega was making an underinsured claim, Country Preferred promptly requested that Sierzega provide Okelberry’s policy limits and her medical records. Country Preferred also sent requests for records to Sierzega’s medical providers and notified Sierzega that some of the providers had not responded. Despite these efforts, Country Preferred still was not in possession of medical bills that established expenses greater than Okelberry’s policy limit at the time the judgment was entered in Sierzega’s civil case against Okelberry.”
The three-judge panel held that the summary judgment in favor of the insurer on the bad faith claims were proper because:
“[t]he delay in obtaining Okelberry’s policy limit information was a result of Allstate’s initial refusal to release the information, and there is no evidence that Sierzega was unable to obtain her own medical records from the non-responding providers and provide them to Country Preferred…Once Country Preferred obtained sufficient information about the policy limits and established that Sierzega’s medical bills exceeded Okelberry’s policy limit, Country Preferred paid Sierzega’s full claim. As a result, no reasonable jury, viewing the evidence in a light most favorable to Sierzega, would infer that Country Preferred was ‘act[ing] unreasonably and with knowledge that there [was] no reasonable basis for its conduct.”
Summary judgment on the breach of contract and unfair claims practices claims were also affirmed by the panel of  Circuit Judges M. Margaret McKeown and Michelle T. Friedland and Senior Judge Joan H. Lefkow of the Northern District of Illinois, who was sitting by designation.
Carol Sierzega v. Country Preferred Insurance Co., No. 14-15979, 9th Cir.; 2016 U.S. App. LEXIS 9087

3rd Circuit Rules Discovery Conduct Not Basis for Bad Faith Claim, Distinguishes Hollock


PHILADELPHIA, May 10 – The U.S. Court of Appeals for the Third Circuit has affirmed the dismissal of a disability insurance breach of contract and bad faith case, ruling in part that the insurer’s discovery practices in the case could not serve as the basis for a valid claim under the Pennsylvania Bad Faith Statute.

Dr.  John Duda  sued Standard Insurance, his disability insurer, claiming a wrist injury prevented him from performing the functions of his job as an orthopedic surgeon.  Duda conceded that he could still perform many functions, such as minor surgeries, office consults, and serving as an independent medical examiner.  He also failed to produce sufficient medical documentation, claiming that he was either self-treating for the injury, or treated by partners in his medical practice as a professional courtesy.

The Third Circuit affirmed the District Court’s dismissal of Duda’s breach of contract and bad faith claims.  Regarding the latter claim the Court held:

Duda attempts to prop up his insurance-based bad faith claim under 42 Pa. Cons. Stat. § 8371 by claiming that Lincoln engaged in bad faith during the discovery stage of the instant litigation.  However, Pennsylvania courts have held that § 8371 “clearly does not contemplate actions for bad faith based upon allegation of discovery violations.”  O’Donnell ex rel. Mitro v. Allstate Ins. Co., 734 A.2d 901, 908 (Pa. Super. Ct. 1999).  Although the Hollock v. Erie Insurance Exchange case, upon which Duda relies, allowed for the possibility that an insurer’s actions during litigation, at least in some circumstances, may be admissible evidence in support of the underlying bad faith claim, 842 A.2d 409, 414-15 (Pa. Super. Ct. 2004), it also emphasized that a bad faith claim is still established upon a showing that the insurer “refused to pay the proceeds of [the] policy” because of “a frivolous or unfounded reason,” id. at 416.

The three judge panel concluded that Standard had a reasonable basis to deny Duda’s claims for coverage.

Duda v. Standard Ins. Co. et. al., (3rd. Cir., May 10, 2016)

Bad Faith Allegations Too General, Dismissed Again In Pa. Federal Court


PHILADELPHIA, June 8 – A  federal magistrate judge in Philadelphia has found that overly broad bad faith allegations in a complaint filed against New Jersey Manuracturers Insurance Company should be dismissed.  The Court ruled that the insured plaintiff made only conclusory allegations insufficient to withstand the early challenge.

Mary Camp settled and auto accident claim with the tortfeasor’s insurer for $82,000, and then made a demand to her insurer, New Jersey Manufacturers Insurance Co. (NJMIC), for UIM benefits, seeking $221,412 for future medical treatment requirements.  NJMIC denied the claim, and Camp sued the insurer in the U.S. District Court for the Eastern District of Pennsylvania.  The complaint included claims for breach of contract and bad faith.

NJMIC filed a motion to dismiss the bad faith claims as insufficiently conclusory pursuant to F.R.C.P. 9.  NJMIC contended that the bad faith claims were simply  “a generic and non-specific reference to bad faith without enumerating any specific conduct of the defendant other than a disagreement over the value or amount of the claim.”

It was the second time Magistrate Judge Marilyn Heffley granted a motion to dismiss.  She earlier granted the same motion in March, but granted Camp leave to amend her complaint.  Camp’s amended complaint was not sufficiently different, according to Judge Heffley, with withstand dismissal.  In dismissing the similarly conclusory allegations, she wrote:

“The bad faith allegations in subsections (i) through (k) of paragraph 35 of the Amended Complaint remain unchanged from Camp’s original pleading. They include claims that NJMIC ‘engag[ed] in dilatory and abusive claims handling,’ ‘fail[ed] to adopt or implement reasonable standards in evaluating plaintiff’s claim,’ and ‘act[ed] unreasonably and unfairly in response to plaintiff’s claim.’ These allegations are devoid of factual specificity as to what claims handling practices were abusive or how NJMIC acted unreasonably. As the Third Circuit [U.S. Court of Appeals] ruled in Smith [Smith v. State Farm Mutual Automobile Insurance Co. (506 F. App’x 133, 136 [3d Cir. 2012])], without such details, a plaintiff has “fail[ed] to allege a legally sufficient cause of action for bad faith under [Pa. Consolidated Statutes] § 8371…

Alhough bad faith may be found where an insurer fails to communicate its reasons for denying a claim to an insured, in this case, according to the facts pled by Camp in her Amended Complaint, NJMIC actually did provide a reason for denying the claim. In paragraph 23 of the Amended Complaint, Camp alleges that in response to her submission for UIM coverage, NJMIC responded that it ‘[would] not be making a settlement offer as “it appears [Plaintiff] has been fairly compensated by the tort carrier for the injuries she sustained in the loss.”’ Thus, the facts alleged in the Amended Complaint clearly contradict the legal conclusion that Camp asks this Court to accept. Accordingly, Camp’s bad faith claim is insufficient to state a claim upon which relief can be granted.”

(Mary Camp v. New Jersey Manufacturers Insurance Co., No. 16-1087, E.D. Pa.; 2016 U.S. Dist. LEXIS 74496)

Minnesota: Insurance Coverage for Fraudulent Bank Transfer


MINNESOTA, May 20 –  The U.S. Court of Appeals for the Eighth Circuit Court has ruled that the State Bank of Bellingham was covered for losses caused by an unauthorized wire transfer by hackers.  The Bank sough coverage under a financial institution bond underwritten by BancInsure, Inc. for a transfer of nearly $500,000.00 to  a foreign bank account.  The bond is treated as an insurance policy under Minnesota state law.

According to the opinion, the unauthorized transfer occurred when a bank employee, using an electronic token, password, and passphrase as well as those of another bank employee, executed an authorized wire transfer but left the tokens “open” on an operating computer following completion of the transaction. The following day, two unauthorized transfers were discovered, only one of which the Bank was able to reverse. A forensic investigation of the breach  revealed that a computer virus created a breach in access which permitted the fraudulent transfers.

A federal district court ruled that the computer fraud was the legal cause of the loss, not the bank employees’ breach of bank policies and practices regarding the use of confidential passwords, or failure to update antivirus software. The appeals court affirmed the ruling in favor of coverage, and held that while other possible factors may have “played an essential role” in the loss, they  did not make the unauthorized transfers “certain” or “inevitable” such that there would be no coverage under the bond.

State Bank v. BancInsure, Inc., 2016 U.S. App. LEXIS 9235 (8th Cir. Minn. May 20, 2016)

Portion of P.F. Changs’s Cyber Losses Not Covered By Chubb Policy


PHOENIX, June 1 – According to an article published last week on written by Judy Greenwald, a federal court in Arizona has held hat Chubb Ltd. does not have to reimburse P.F. Chang’s for costs related to  a 2014 data breach under its cyber policy.

Federal Insurance Co., a unit of  Chubb Ltd. unit sold a Cybersecurity policy P.F. Chang’s China Bistro Inc. parent corporation, effective Jan. 1, 2014, to Jan. 1, 2015.  The policy was sold and represented as coverage for “direct loss, legal liability, and consequential loss resulting from cyber security breaches,” according to the opinion, authored by District Judge Stephen M. McNamee.

Chang’s entered into a contract  with Bank of America Merchant Services L.L.C. to process credit card payments made by Chang’s customers.  On June 10, 2014, Chang’s learned that computer hackers had obtained and disclosed 60,000 customer credit card numbers.

Federal had already paid Chang’s more than $1.7 million for breach related costs.

Bank of America separately sought nearly $2 million in costs arising from the breach from Chang’s, which Change’s reimbursed.  Federal, however, denied Change’s request for coverage  of this third party reimbursement, after which Chang’s filed suit.

Judge McNamee agreed with Federal that policy language requiring Federal to pay Chang for losses related to privacy injuries was inapplicable to the B of A claim, holding that the bank’s records were not themselves compromised by the breach.  The judge wrote, “The court agrees with Federal; (Bank of America) did not sustain a privacy Injury itself, and therefore cannot maintain a valid claim for injury against Chang’s.  The judge granted  Chubb’s motion for summary judgment in part on that basis.

P.F. Chang’s China Bistro, Inc. v. Fed. Ins. Co., 2016 U.S. Dist. LEXIS 70749 (D. Ariz. May 26, 2016)

Georgia: Lead Paint Claims Barred by CGL Pollution Exclusion


GEORGIA, May 26 – The Georgia Supreme Court has ruled that a CGL policy pollution exclusion bars coverage for claims against the insured landlord for injuries resulting from  lead paint ingestion.

In Georgia Farm Bureau Mut. Ins. Co. v. Smith, 784 S.E.2d 422 (Ga. 2016) the insurer sought a declaratory judgment that it did not owe defense or indemnity to its insured landlord in an underlying suit against the landlord by a tenant who claims she sustained as a result of ingesting lead paint in a rental home.   Georgia Farm Bureau relied on an absolute pollution exclusion in the policy.  The exclusion by its terms did not cover injury “arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants.’”  The policy defined “pollutants” as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”

The insurer won summary judgment on the exclusion at the trial court level, the court holding that lead-based paint was unambiguously a “pollutant” as defined in the policy.  An appeals court reversed, observing a split in jurisdictions, noting that some jurisdictions applied the exclusion only in instances of “industrial pollution.” The insurer appealed.

The Georgia Supreme Court reversed, finding that the absolute pollution exclusion applied from injury arising from exposure to lead-based paint.

Georgia Farm Bureau Ins. v. Smith et. al., 784 S.E.2d 422 (Ga. 2016)

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