Category: Bad Faith

Fear Not: Withdrawing A Defense Following Reservation Of Rights

Photo by Esdras Jaimes on Pexels.com

I recently had an insured’s attorney tell me, with a straight face (I’m assuming it was straight — it was hard to tell on the phone) that the insurance company I represented on a coverage matter could not withdraw a defense to his client because, counsel claimed, the insurer had already agreed to provide a defense under a reservation of rights, and the insurer “can’t change its mind.”

In fairness, this claim can, under certain very limited circumstances, actually be true! But the set of circumstances under which it can be true is dwarfed by the set of circumstances under which it is likely not true. And so, without further delay, a quick refresher on how an insurer can properly and lawfully withdraw a defense after initially agreeing to provide one pursuant to a reservation of rights.

The majority of this post assumes that the defense which the insurer would like to withdraw is being provided pursuant to a reservation or rights. After all, why would an insurer reserve rights in the first place if it did not, on occasion, intend to lawfully exercise those rights? This post further assumes some development has occurred which justifies the insurer’s change in position. A common example of this is when covered counts in a complaint against an insured are dismissed from an action, leaving only claims which are not covered by the policy in question.

Reserving rights before a defense is withdrawn is the better practice by far. But there is some authority suggesting that a predicate reservation of the right to withdraw a defense is not strictly required in order to subsequently withdraw that defense if the circumstances justify it, and the insurer is not contractually obligated to defend or indemnify. See, e.g., Windt, Allan. 1 Insurance Claims and Disputes § 4:29 (6th ed.). The theory behind this proposition is that the insuring agreement either requires defense and indemnity or it does not. Did I mention, however, that reserving rights is the better practice by far? I did? Good.

Some insurers will ask from time to time whether a declaratory judgment action should be filed in a given case in order to properly withdraw a defense. Generally, and in Pennsylvania, for example, a declaratory judgment action is not a prerequisite to withdrawing a defense. See, Selective Way Ins. Co. v. Hosp. Grp. Servs., Inc., 2015 Pa. Super. 146, 119 A.3d 1035, 1052 (2015). While doing so may be advisable in certain cases, it is not a black letter requirement. (I recently addressed the subject of when and why to file declaratory judgment actions here).

So how is withdrawal done in a way to avoid or minimize both the hassle, and the cost and expense of not doing so properly? Here are a few important basics.

The Golden Rule

“Thou Shalt Not Prejudice The Insured.”

The Golden Rule of Withdrawing A Defense

Everybody knows, or should know, this one. It is the Alpha and the Omega of deciding whether, when, and how to withdraw a defense which had been provided under a reservation of rights. A few observations are, however, in order.

Prejudice must most often be actual and demonstrable — there must be some harm occasioned to the insured which would make withdrawing improper. And in the vast majority of cases, claims of prejudice are tied to when in a civil proceeding the defense is withdrawn. A simple guideline: the later in a case a defense is withdrawn, the bigger the risk of prejudice to the insured, and the more dangerous a withdrawal can be for the insurer.

The underlying case may reach a point of such progress, however, that prejudice will be presumed, and an insurer will be estopped from withdrawing a defense. The clearest example of this is an insurer’s attempt to withdraw a defense after it has defended the insured to verdict. This, to use a legal term, is a “big no-no,” and my eloquent legal advice on this subject is, “don’t do that.” See, e.g., Treadways LLC v. Travelers Indem. Co., 467 Fed. Appx, 143, 148 (3d Cir. 2012).

There are several miscellaneous points to make as part of the prejudice discussion. First, the naked claim that an insured is prejudiced by a withdrawal of a defense because it must now pay for its own defense is not sufficient justification to prevent an insurer from withdrawing. This is no more a justification to obligate an insurer to defend than is the reverse claim by the insurer to relieve itself of the duty to defend. Legal fees are not sufficient justification in and of themselves to carry the day, for the insured or the insurer.

A second lesser, but still important, point is that insurers can reduce their exposure to prejudice claims after deciding to withdraw a defense by assisting the insured with a soft landing and transition. An insurer can offer to make insurance defense counsel available, at the insurer’s expense, to the insured’s personal counsel for a window of 30 to 45 days, for example, to assist personal counsel with the assumption of the insured’s defense. It can also and should also ensure that the insured’s litigation file, electronic and/or hard copy is properly transferred to new counsel. Nothing, I advise insurers, evaporates prejudice claims better than actively working to prevent even the appearance of prejudice after the decision to withdraw.

There can never be any guarantees that insurers won’t face claims of “you can’t change your mind” by disgruntled insureds, or their lawyers, once the decision to withdraw a defense has been taken. However, as one Court has observed, “There is no principle of Pennsylvania law that the duty to defend automatically attaches at the outset of the litigation and cannot afterwards terminate.” Com. Union Ins. Co. v. Pittsburgh Corning Corp., 789 F.2d 214, 217–18 (3d Cir. 1986).

Withdrawing a defense following a reservation of rights can be done without adverse consequence or penalty. It just has to be done properly.

Advertisement

Coverage Attorney 1, ChatGPT 0

Insurance coverage counsel, take heart. In the most recent issue of his Coverage Opinions newsletter , Attorney Randy Maniloff published the results of an insurance coverage exam he recently administered to the ChatGPT AI engine. The results of the five question exam? “ChatGPt got 4 out of 5 wrong,” wrote Maniloff, “but not just wrong — dead wrong.”

ChatGPT, Esquire managed to answer only one question correctly concerning the non -insurability of punitive damages under Oklahoma law. The Bot botched the four remaining questions regarding aspects of the duty to defend, the pollution exclusion, and the insurer’s obligation to pay pre-tender defense costs.

Maniloff mercifully gave ChatGPT a bonus question which it also answered correctly. It is bad faith for an insurer to make a coverage determination using a Magic 8 ball, ChatGPT said. In three decades of practice, however, I’ve thankfully never been asked for a legal opinion on that particular question.

I caught up briefly with Randy after enjoying his piece, which like all of his writing, came with ample amounts of both wit and insight. “ChatGPT may – and that’s a may – have some value for general discussion of the law concerning a coverage issue,” Maniloff told me. “But coverage determinations are not made based on general discussions of legal issues,” he added.

The amusing exercise does offer a serious take-away. The analysis of insurance coverage questions requires highly specialized insight, and the ability to not only understand the import of policy provisions, but the nuance of the facts to which those provisions are applied. While AI might progress to some levels of further competence on the subject, it is not there currently.

Not today, ChatGPT. Not today…..

Failure To Comply With Pa.M.V.F.R.L. Renewal Notice Requirements Not Bad Faith, Pa. Federal Judge Rules

Pittsburgh, July 12th. A federal judge in the Western District of Pennsylvania recently granted summary Judgment to an auto insurer in a coverage and bad faith case, ruling that in the presence of a valid UM/UIM rejection by the insured, subsequent non-compliance with the renewal notice requirements of the Pa.M.V.F.R.L. neither provided the basis for policy reformation, nor a bad faith claim.

In a ruling by Magistrate Judge Kelly, adopted by Judge Hornak, the court found that the insurer’s failure to include a proper renewal notice regarding the rejection of UIM coverage was a violation of the MVFRL. It also found, however that such violations do not allow private civil remedy, beyond administrative review, and such a violation could neither form the basis of reformation of the policy, or of a bad faith cause of action

The court also found that since there had been a prior valid rejection of UM/UIM coverage by the insured, the claims adjuster’s denial of a claim for such benefits was objectively reasonable.

Keeler v. Esurance, U.S. District Court Western District of Pennsylvania No. 20-271 (W.D.Pa. July 12, 2021) (Kelly, M.J.) Link: https://www.govinfo.gov/app/details/USCOURTS-pawd-2_20-cv-00271/USCOURTS-pawd-2_20-cv-00271-0

State Auto Had Reasonable Basis To Deny Pipe Burst Claim, Federal Court Rules; Contract and Bad Faith Claims Dismissed

pipe%20leak%203

PITTSBURGH, Oct. 11 – A federal judge has ruled that State Auto Insurance Company was entitled to summary judgment on breach of contract and bad faith claims arising out of a water loss because the insureds violated a continuous occupation provision contained in their homeowners policy.

In Gerow v. State Auto, U.S. District Judge Kim Gibson found that State Auto was not liable to pay the water loss claim, and it could also therefore not be liable for acting in bad faith toward the insured plaintiffs in the case.  The case was originally filed in Pa. state court but removed to the U.S. District Court for the Western District of Pa.

On January 16, 2016, the Gerows suffered a pipe burst water loss at the insured premises, insured by State Auto.  State Auto denied the claim, however, pursuant to an investigation which determined that the house in question was not occupied at the time of the loss,  in violation of the terms of subject homeowners policy which required continuous occupancy.  After State Auto denied the claim, the insureds filed breach of contract and bad faith claims against the insurer.  After the case was removed to federal court, the parties filed cross motions for summary judgment as to both claims.

Judge Gibson found that the insureds did not meet the continuous residency  condition of the policy, and that State Auto had not waived the provision.  He therefore granted summary judgment on the coverage claim to State Auto.

The insureds argued they could still maintain a bad faith action against the insurer however, claiming that State Auto erroneously advised them to seek water remediation and then denied coverage, and failed to inform them that they were not complying with the residency requirement.

Judge Gibson dismissed these arguments, however, after employing the traditional Pennsylvania two part bad faith test — whether the insurer’s position lacked a reasonable basis, and whether it knew or recklessly disregarded the lack of basis.  Judge Gibson wrote that State Auto:

“clearly had a reasonable basis for denying coverage for the Subject Loss: the Policy required Plaintiffs to reside at the Subject Property, and Defendant concluded, after an investigation, that Plaintiffs did not reside there, a conclusion with which this Court agrees…[Therefore, State Auto] could not have known or recklessly disregarded a lack of reasonable basis.”

Judge Gibson also relied in part on a prior Western District ruling which precluded a bad faith claim from proceeding when a lack of coverage was found.

Gerow v. State Auto Prop. & Cas. Co., U. S. District Court Western District of Pennsylvania Case No. 3:17-cv-203, 2018 U.S. Dist. LEXIS 175007 (W.D. Pa. Oct. 11, 2018) (Gibson, J.)

Bad Faith Claims Against Individual Claims Adjuster Arising Out of UM/UIM Claim Dismissed By Federal Judge

ACCIDENT

PHILADELPHIA, Aug. 9 –  A bad faith action against an individual claims adjuster has been dismissed by a U.S. District Court Judge, who found that the joinder of the adjuster  in a coverage and bad faith action arising out of a UM/UIM claim was done fraudulently to defeat federal removal jurisdiction.

In Reto v. Liberty Mutual Insurance, U.S. District Judge Timothy Savage denied Retos’ motion to remand the Retos’ case to state court after Liberty Mutual removed the case, contending that the joinder of Liberty Mutual adjuster Stephania DeRosa was fraudulent for the purposes of destroying federal diversity jurisdiction.

Judge Savage noted that Liberty met its burden in opposing the motion for remand:

“[the]removing party has a heavy burden of persuading a court that joinder is fraudulent….[however] the claims against [the claim representative] are wholly insubstantial and frivolous…there is no basis to support a contract [against the claims handler, and] only the principal [Liberty Mutual] may be held liable.”

Judge Savage ruled that the claim representative was only an agent, without a stand-alone contract with the insured.  Finally, the Court held that the Pa. Bad Faith Statute did not apply to claims representatives, but rather only to insurers.  Accordingly, Judge Savage dismissed Ms. DeRosa as a defendant, and denied the Retos’ motion to remand the case to state court.

Reto v. Liberty Mutual Insurance, U. S. District Court Eastern District of Pennsylvania, CIVIL ACTION NO. 18-2483, 2018 U.S. Dist. LEXIS 133336 (E.D. Pa. Aug., 8, 2018) (Savage, J.)

Third Circuit Continues To Rule Faulty Workmanship Not Covered By CGL Policy

  con3

PHILADELPHIA, JUNE  6 – The Third Circuit U.S. Court of Appeals  has recently affirmed a ruling in favor of Selective Way Insurance Company, holding that Selective does not have a duty to defend or indemnify an insured contractor for claims of faulty workmanship arising out of a ondominium construction project. 

In Lenick Construction, Inc. v Selective Way Insurance Company, Lenick was impleaded as a third-party defendant in litigation as the general contractor, Westrum, for defects at the Villas at Packer Park Condominium project.   Lenick notified Selective after it was joined,  seeking defense and indemnity and, while denying the request for indemnity, Selective agreed to defend Lenick in the case under a reservation of rights. 

Lenick sued Selective in the Philadelphia Court of Common Pleas, seeking a declaratory judgment obligating Selective to provide defense and indemnity from Selective , after which Selective removed the action to federal court.  Thereafter, the parties filed cross motions for summary judgment. 

In affirming the US District Court’s conclusion that the allegations against Lenick were not covered by the CGL policy issued to Lenick by Selective, the Third Circuit relied upon Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 589 Pa. 317, 908 A.2d 888, 896-97 (Pa. 2006) and held that the claims in the Joinder Complaint against Lenick did not allege a fortuitous “occurrence” such that the claim would be covered.  In the Opinion written by Chief Judge Hardiman, the Court held that a fair reading of the Complaint against Lenick was that Lenick was guilty of faulty workmanship. 

While Lenick contended that some of the damage to its work occurred as a result of the faulty workmanship of other contractors such that an occurrence could be found, the Court disagreed, referring again to the underlying complaint against Lenick which alleged Lenick’s faulty workmanship, not that Lenick’s work was damaged by the faulty workmanship of others.  Summary judgment in favor of Selective was therefore affirmed.

Lenick Constr., Inc. v. Selective Way Ins. Co., 2018 U.S. App. LEXIS 15197, 2018 WL 2727394

 

 

New Jersey Senate Passes Bad Faith Bill

discovery

TRENTON,  June 8 –  The State Senate of New Jersey has passed a Bill which will, if passed by the General Assembly and signed by the Governor, impact bad faith litigation in the Garden State.  On June 7, 2018, the New Jersey State Senate passed New Jersey Senate Bill 2144, the New Jersey Insurance Fair Conduct Act (IFCA).  The statue provides for remedies and damages against insurers who commit “an unreasonable delay or unreasonable denial of a claim for payment of benefits under an insurance policy” or a violation of New Jersey’s Unfair Claims Settlement Practices Act  (UCSPA).  The UCSPA catalogs more than ten different forms of insurer misconduct.

 In its current form, the statute is unclear as to whether or not it adheres to the New Jersey Supreme Court’s common law standard of bad faith conduct which holds that mere negligence is not bad faith and the refusal to settle a debatable claim does not constitute bad faith.  Under Supreme Court precedent, a bad faith Plaintiff must successfully show that there are no debatable reasons for the denial of insurance benefits. 

 The bill passed by the State Senate proposes treble damages and attorney fees as well as cost recovery as part of the remedies.  The Bill also provides for actual damages and the above-mentioned remedies “upon establishing” prohibited conduct, although it is silent as to the requisite burden of proof, e.g. preponderance of the evidence, clear and convincing proof.  The Bill has been referred to the State General Assemblies Banking & Commerce Committee. 

NJ Senate Bill 2144, New Jersey Insurance Fair Conduct  Act

 

Guest Column – Attorney David Cole: The Proper Care & Feeding Of A Bad Faith Litigation Expert

 

 

outside-counsel

In its unanimous opinion in Rancosky v. Washington National Insurance Company, 170 A.3d 364 (Pa. 2017), the Pennsylvania Supreme Court confirmed the elements of an insurance bad faith action under Pennsylvania’s bad faith statute. The Court stated: “we adopt the two-part test articulated by the Superior Court in Terletsky v. Prudential Property & Cas. Ins. Co., 649 A.2d 680 (Pa. Super. 1994), which provides that, in order to recover in a bad faith action, the plaintiff must present clear and convincing evidence (1) that the insurer did not have a reasonable basis for denying benefits under the policy and (2) that the insurer knew of or recklessly disregarded its lack of a reasonable basis. Additionally, we hold that proof of an insurance company’s motive of self-interest or ill-will is not a prerequisite to prevailing in a bad faith claim under Section 8371, as argued by Appellant. While such evidence is probative of the second Terletsky prong, we hold that evidence of the insurer’s knowledge or recklessness as to its lack of a reasonable basis in denying policy benefits is sufficient.” Id. at 23-24. Additionally, the Court noted that mere negligence is insufficient for a finding of bad faith under §8371. Id. at 18.

The Rancosky opinion did not change the pursuit, or the defense, of insurance bad faith claims, so much as it confirmed a body of intermediate appellate case law that had developed over the last 24 years. Most practitioners and courts had applied the Terletshy test since its publication in 1994. With Rancosky now firmly establishing what is required to prove bad faith, experts used by the parties in insurance bad faith litigation will need to tailor their reports to that standard.

Experts, of course, are not required by statute or case law in Pennsylvania insurance bad faith cases. Experts are employed by the parties at the discretion of the trial judge. Experts are to provide opinion on the reasonableness of the insurer’s conduct to assist the judge or jury in determining if the insurer acted in bad faith. Experts are to opine on the reasonableness of the insurer’s conduct, not on whether they believe the insurer acted in bad faith. That decision is reserved for the trier of fact. Most courts permit expert testimony to assist in assessing the reasonableness of the involved insurer’s conduct.

Post-Rancosky, what does an expert need to assess the reasonableness of the insurer’s conduct? In other words, what do litigators need to provide an expert in order for him or her to prepare an informed, credible report, one that will stand up to summary judgment motion and trial cross-examination? This article will address these questions. My observations are based on my 15 years and over 50 expert reports in insurance bad faith cases, mostly as an expert for the defense. A second planned article will address what counsel can expect in an insurance bad faith expert report.

What Does the Expert Need to Evaluate An Insurance Bad Faith Claim?

Let’s make the answer simple: SEND ALL NON-PRIVILEGED FILE MATERIAL TO ME and let me review them and decide what is important to my review of the insurer’s conduct. And please don’t try to influence my opinion by sending only the documents that support your client’s position, or only the “pertinent” documents that you believe are determinative of the insurer’s conduct.

Another reason to send it all to me is to avoid surprise and embarrassment at trial. I don’t want to ever have to say I have not seen a document from the file. I won’t appear surprised at trial, and I won’t have to embarrass counsel by pointing out that counsel never provided me with the document.

Finally, do not send an unredacted claim file. I don’t want to rely on documents in my report that were not produced to opposing counsel. To do so is to risk the credibility of my report, or at least result in an order from the court requiring production of the documents in question and me having to perhaps amend my report.

What Do I Expect To See In The Claim File?

What is typically contained in a claim file will depend on the type of claim involved. For example, a property damage claim will not contain medical reports and records. An auto personal injury liability claim file will not contain a fire cause and origin report. Having said that, we can generalize what most claim files should contain, as follows:

  • Insurance policy: The applicable insurance policy and declaration page for the date of loss.
  • Correspondence: All correspondence, including letters, e-mail and texts by and between anyone involved in the claim.
  • Reports: Police, doctors, witnesses, parties, experts, investigators, counsel.
  • Court related documents: Pleadings, motions, discovery and opinions from the bad faith action and pertinent documents from the underlying tort suit if there was one.
  • Log entries: Pennsylvania insurance regulations require insurers to maintain records of their claim handling activity sufficient to permit the Insurance Department to assess what was done on a given claim. Typically, this is done by insurers through a “claim log”, either manual or more likely today by computer entry. These notes are often invaluable in assessing the insurer’s conduct in a bad faith case. It is the place where claims adjusters can sort out their thinking on a claim and explain their actions, or fail to do so.
  • Claim specific records: For example, medical records in injury cases and damage assessments and insurer has allegedly failed to adhere to its own internal claims handling procedures) the insurer’s claims handling manual and “best claims practices” should be provided to me.

Not all claim files will contain all these items.

Some counsel will go in the other direction, and want to send me everything, even their “work product”, such as their summary of the case, their theory of the case, a chronology they prepared for the case, their summary of medical records in the case, etc. I do not want that information; I want to review the file on my own, prepare my own chronology, summarize the issues in my own way, and form my own understanding of the case.

I am being paid to reach my own conclusions about the insurer’s conduct, not “parrot” counsel’s view of the case. To do otherwise – that is, to provide me your work product – can make for a very uncomfortable cross-examination for me, and an effective challenge to the credibility of the defense for you.

David Cole is owner of David Cole Consulting, Inc. and he may contacted at 844-744-5600 or dcole@philadefense.org. For more information about Mr. Cole and his litigation support services, please see his website at  www.colelitigationconsulting.com 

CJ Haddick Guests On A.M. Best’s “Updates In Insurance and Bad Faith Podcast”

insagent

A.M. Best has published the most recent episode of its Updates In Insurance Coverage and Bad Faith podcast earlier today, in which I discuss some recent developments in insurance coverage and bad faith law with the show’s host, John Czuba.  You can listen to the episode via the link below.

A transcript of the podcast can be found here:

PodcastTranscript-137PodcastTranscript-137

 

PRESS RELEASE: Haddick Featured Guest on National AM Best Insurance Podcast

alert

 

 

Contact:  Greta Kelly, Assoc. Marketing Director

Dickie, McCamey & Chilcote

412-392-5311

gkelly@dmclaw.com

 

Dickie McCamey Attorney Haddick is Featured Speaker on National Podcast

February 2018 (Harrisburg, PA) –  For Immediate Release – Dickie, McCamey & Chilcote, P.C. attorney Charles E. Haddick, Jr. will be the featured speaker on A.M. Best’s monthly podcast, which airs February 28, on the Legal Talk Network. Haddick’s episode will focus on recent national trends in bad faith insurance coverage law.

Mr. Haddick is a shareholder of Dickie, McCamey & Chilcote, P.C. and is the Location Chair of the Harrisburg office. He has practiced law for almost 30 years. He concentrates his practice in the areas of insurance coverage and insurance bad faith litigation; insurance fraud, arson, fire and explosion cases; cybersecurity and cyber insurance coverage and litigation; professional liability including insurance agency errors and omissions; subrogation; and general liability defense. Haddick is the author and editor of the legal insurance blog www.badfaithadvisor.com.

Mr. Haddick received his J.D. from The Dickinson School of Law of the Pennsylvania State University. He is AV Preeminent® Peer Review Rated by Martindale-Hubbell® and he is also listed in Best Lawyers in America® for Insurance Law.

The Insurance Law Podcast examines timely insurance issues from an attorney’s point of view and is published by Best’s Directory of Recommended Insurance Attorneys. Guest speakers are prominent attorneys from across the United States who specialize in insurance defense. To listen or subscribe to the Insurance Law Podcast, click here.

###

About Dickie, McCamey & Chilcote, P.C.: Dickie, McCamey & Chilcote, P.C. is a nationally recognized law firm providing comprehensive legal expertise in a multitude of practice areas. Headquartered in Pittsburgh, Pennsylvania and founded more than 100 years ago, the firm serves industry-leading clients across the country from offices throughout the mid-Atlantic region in Delaware, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina and West Virginia, the Southwestern region in California, and the Rockies in Colorado. For more information: 800-243-5412 or www.dmclaw.com.

17 Locations | 10 States | 1 Firm

%d bloggers like this: