Pa. Federal Bad Faith Suit Against State Farm Dismissed: Revised Repair Estimates Not In Bad Faith

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SCRANTON, Pa.,  Dec. 7 — A federal judge  granted State Farm’s motion for summary judgment on a bad faith claim  in a homeowners insurance dispute, finding that the insured failed to show that State Farm’s issuance of an estimate and revised estimates constituted bad faith as a matter of Pennsylvania law.

Joan Yatsonsky filed a homeowners’ insurance claim with State Farm arising out of water damage from broken pipes at the Yatsonsky’s home.   Within three days of the claim,  State Farm sent a disaster mitigation contractor to examine the property.  A State Farm claims representative also discovered mold in the home and told Yatsonsky that mold was not a covered loss in the policy.

State farm sent Yatsonsky an estimate of the covered damages to her home in the amount of $18,426.34.    She disputed the valuation, and submitted an estimate of damages from her contractor, Grimm Construction, for $43,403.00.  State Farm then revised its original estimate and agreed to pay an additional $15,979.50 based on Grimm Construction’s estimate.  State Farm also agreed to pay for additional mitigation services, but Yatsonsky continued to dispute the amount.

State Farm then met with Yatsonsky and Grimm Construction at the property for an inspection, and the insurer revised its estimate for a second time, mailing Yatsonsky a check for an additional $3,874.36.  The insurer then advised Yatsonsky that she could claim an additional $11,719.32 upon completion of repairs.

The parties failed to resolve their discrepancies in estimates, and Yatsonsky decided to demolish the home and rebuild.  She also sued State Farm  Wayne County, Pa., for breach of contract and bad faith.  State Farm removed the case to  U.S. District Court for the Middle District of Pennsylvania.

State Farm obtained early summary judgment on the breach of contract claim because suit filed beyond the one year limitations period in the policy.  Following discovery State farm sought summary judgment on the bad faith claim as well.

U.S. District Judge James M. Munley granted the motion, ruling:.

“plaintiff fails to present evidence that State Farm’s claims management was anything other than what it claimed:  an attempt to further investigate the water damage at plaintiff’s home to determine the value of her claim…Plaintiff has offered no expert evidence pertaining to State Farm’s investigation.  Plaintiff cites no internal State Farm communication or testimony establishing that State Farm acted out of spite during its investigation.  In sum, plaintiff has presented no competent evidence from which a reasonable jury could find that the number of State Farm employees assigned to her claim establishes bad faith.”

Judge Munley disagreed with Yatsonsky’s claim that multiple estimates issued by State Farm did not constitute bad faith:

 “Contrary to plaintiff’s arguments, the undisputed facts establish that State Farm conducted a detailed investigation over the course of one year.  State Farm inspected plaintiff’s home on five different occasions from January 2014 through June 2014.  During each inspection, State Farm met with plaintiff, or plaintiff’s contractor, and reviewed the damage to plaintiff’s home.  The parties also attempted to reconcile the estimates at these meetings.  Additionally, based on its inspections, State Farm mailed payments to plaintiff totaling $38,280.20 from January 2014 – June 2014.  These $38,280.20 payments are only $5,122.80 less than plaintiff’s initial $43,403 estimate from Grimm construction.. . . In short, plaintiff has failed to produce evidence ‘so clear, direct, weighty and convincing as to enable a clear conviction, without hesitation, about whether or not the defendants acted in bad faith.. . . At most, the available evidence may demonstrate that State Farm’s investigation and estimates were arguably negligent.  The bad faith doctrine, however, is not implicated by mere negligence.  Accordingly, the court will grant State Farm’s motion for summary judgment on plaintiff’s bad faith claim.”

Joan Yatsonsky v. State Farm Fire & Casualty Co., No. 15-1777, M.D. Pa.; 2016 U.S. Dist. LEXIS 167224

In-House Legal Departments / Outside Counsel – New Year’s Resolutions

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As I look back over a year’s worth of posts, I can see that efficiency and cost certainty in the use of outside counsel by insurers is a common theme.  2017, I predict, will bring more of the same for insurance companies and their in house legal departments:  an institutional imperative to control costs and to gain cost certainty, in the matters they refer to outside law firms.  With that in mind, we take a quick look at some new year’s resolutions, and see whether there is any way to line up the resolutions of in house legal departments and outside law firms.

Resolution:  Know The Alternative Fee Options

The duty of outside firms to offer, and in house legal departments to utilize, alternative fee arrangements to continue efficiency in operations requires familiarity by both sides with the large variety of alternative fee tools available.  A complete review of some of the most common options appears on this resource page.

Alternative fee options are the language of efficiency in the engagement outside law firms, the coin of the realm for lean and effective operation in the years ahead.  It pays both insurers and outside law firms to be conversant in this language, and to communicate with each other in this language.

Resolution: Utilize Legal Project Management (LPM)

There has traditionally been an inverse relationship between insurers’ in house counsel affinity for LPM, and outside law firms’ competence and ability to provide it.  As insurers resolve again to control cost with effective LPM in 2017, competitive and responsive outside law firms must learn to use LPM effectively.  This requires repetitive use of LPM and case budgeting, and refining the process with each successive use.  It requires the reasonable cost projection of a legal matter, so the client can make informed decisions.

LPM projection and budgeting enable in house legal departments to make strategic decisions about which matters to fight, and which matters to resolve, and more importantly, when to do so.  LPM provides in house legal departments with important dashboard items, and they will increasingly expect outside law firms to provide these services as part of working for the insurer in 2017 and beyond.

Resolution:  Big Data Feedback

In a closely related resolution, in house legal departments at insurance companies will continue to expect more and useful data from outside law firms as to the value provided and the relationship of that value to the amount and type of the legal services billed.  Outside law firms must therefore continue to develop metrics tailored to each individual client to provide the client the data it needs and wants to make assessments as to whether matters are run efficiently, and outside law firms are providing value.

Outside firms which do not keep pace with the need to collect and feed back big data to clients on these issues will continue to lag in 2017 and beyond, and the pressure to keep up by providing requested data, and interpretation will be on the rise.

Resolution:  Cooperation and Collaboration, Not Conflict and Contention

The legal landscape is a challenging one now, and it is likely to continue to be so.  Outside law firms comfortable with the traditional hourly arrangement are oftentimes slow to modernize, and this failure creates a tension between a client and their outside lawyers on whether the fit is right, and whether the billable hour is in the best interests of the client.

Outside law firms must overcome such tension, and begin to view themselves as collaborators and business partners of the insurance in house legal departments they represent.  Alternative Fee Arrangements, LPM, and the aggregation and use of data to feedback to the clients are three primary vehicles for such positive change in 2017, and going forward .