Judge Rules IME Policy Provision May Violate Pa. Motor Vehicle Law

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SCRANTON, May 15  — A Pennsylvania federal judge  dismissed  bad faith and other claims against Allstate Insurance Co.  in a class action, but permitted claims brought under the Pennsylvania Motor Vehicle Financial Responsibility Law (MVFRL)  by a woman injured in a car accident.

In Sayles v. Allstate Insurance Co., No. 16-1534, M.D. Pa., 2017 U.S. Dist. LEXIS 71760),  Sayles filed suit after the company denied her claim for medical benefits for injuries she sustained following an automobile accident.  According to Sayles, Allstate denied her claim  because she did not first obtain a physical examination, as required in the insuring agreement.  The suit, originally filed against Allstate in Pike County,  was removed to federal Court.

Sayles claimed Allstate’s policy requirement of a mandatory medical examination violated provisions of the MVFRL which permit medical examinations by court order.  She also advanced claims under the Unfair Trade Practices and Consumer Protection Law, and for bad faith under 42 Pa,C.S.A. section 8371.  Sayles also sought class certification for Allstate policyholders denied medical benefits where Allstate had not first obtained a court-ordered physical examination

Allstate moved to dismiss all claims relating to its policy’s examination requirement, which permits it to require  insureds to undergo an independent medical examination (IME) by a physician of Allstate’s choosing as a condition precedent to payment of medical expenses.  Allstate claimed the provision was enforceable notwithstanding Section 1796 of the MVFRL, because Section 1796 relating to court-ordered IME’s  was permissive in nature, not mandatory.

U.S. Middle District Judge Richard Caputo granted the motion to dismiss as to the bad faith claims, but denied the motion regarding Sayles’ claims that the policy provision requiring IME’s violated the MVFRL:

“[T]he Court predicts that the Pennsylvania Supreme Court would find Allstate’s examination requirement, as alleged, in conflict with § 1796 of the MVFRL and thus void as against public policy.  The examination requirement conflicts with the plain language of the statute and is inconsistent with the twin purposes of § 1796.  Moreover, the Court is not persuaded by the ‘implication’ of the Superior Court’s decision in Fleming and, consequently, departs from the conclusion reached by the district court in Williams.  Instead, the Court finds it appropriate to rely on the opinion of the district court in Scott, as well as the opinions of Judge [R. Stanton] Wettick [Jr.] in Erie and Hoch.  Additionally, the Court finds the analogous case law from the Commonwealth of Kentucky addressing a similar statutory provision under similar factual circumstances compelling.  Accordingly, in light of the above discussion, Allstate’s Motion to Dismiss will be denied with respect to Counts I and II of Sayles’s Complaint.”

In dismissing both statutory and common law bad faith claims against Allstate, Judge Caputo recognized that the law regarding mandatory IME’s in Pennsylvania was not fully settled, and that Allstate was not unreasonable in relying on some lower court precedent which had approved of similar mandatory examination provisions.  He wrote, therefore:

“It was reasonable for Allstate to rely on [precedent] which supported Allstate’s decision to deny Sayles’s medical benefits based on her failure to submit to an IME per the terms of the Policy.  Because Sayles’s bad faith claim is predicated entirely on the examination requirement, the Court finds that the Complaint alleges only that Allstate made a ‘reasonable legal conclusion based on an area of the law that is uncertain or in flux.’ . . .  Accordingly, the Court will grant Allstate’s Motion to Dismiss with respect to Count IV of Sayles’s Complaint.”

The judge also dismissed Sayles’ claims for violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law, unjust enrichment and intentional misrepresentation.

Sayles v. Allstate, No. 16-1534, M.D. Pa., 2017 U.S. Dist. LEXIS 71760) (Caputo, J.)

 

Pa. Judge: Bad Faith Case Severed, Jury To Hear Common Law Bad Faith Claims

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Pennsylvania’s  Westmoreland County Court of Common Pleas has denied a motion to stay of discovery in a  bad faith case pending completion of a UIM case, but has also ordered severance of trial of the bad faith claims under which common law bad faith claims will be tried by a jury, and statutory bad faith claims will be tried by the judge.

In Madeja v. State Farm Mutual Automobile Ins. Co., No. 5493 of 2016 (C.P. Westmoreland Co. April 11, 2017 Scherer, J.), the plaintiffs advanced both common law bad faith claims and statutory bad faith claims,  The trial court ordered those claims severed from the underlying UIM claim.  In a bit of a quirk, however, the court ruled that depending on the verdict returned on the UIM claim,  the common law bad faith claims would be heard with the same jury that determined the UIM claim while the court would hear the statutory bad faith claim on a non-jury basis.

A copy of the trial court order can be found here.

Editor’s note:  The trial court order in this case points out the somewhat unique nature of bad faith law in Pennsylvania — it is a two-headed creature with both a common law component and a statutory law component.  In this writer’s experience, trials of both statutory and common law bad faith claims is not the norm — statutory bad faith claims are usually singly tried to the bench in state court.  The court order in question sets up for a potentially unruly and cumbersome bad faith trail, given the likelihood of overlapping evidence presented on the common law and statutory bad faith claims.   The Court might streamline the process by simply taking evidence in a single bad faith proceeding, and then letting the jury render a verdict on the common law claims, with the Court issuing a decision on the statutory bad faith claims. 

The ruling could serve as an incentive to the plaintiffs’ bar to not only plead common law bad faith claims, but seek trial of those claims in an effort to work around what has traditionally been the province of the trial judge in bad faith cases. 

 

 

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Reservation of Rights Letters: Lack of Specificity Proves Fatal To CGL Insurer In South Carolina

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COLUMBIA, S.C. – Law360.com recently featured the South Carolina Supreme Court Ruling in Harleysville Group Insurance vs. Heritage Communities Inc. as one of the five most important but potentially overlooked insurance rulings in the first quarter of this year.  The Harleysville case points up  the peril insurers face for issuing general, non-specific reservations of rights letter.

In Harleysville, the South Carolina Supreme Court held that a reservation of rights letter which did not clearly state why a carrier believed a CGL policy may not provide coverage for a loss could bind the insurer to cover the loss.  The  Court affirmed a special referee’s decision that Harleysville was obligated to insure a prorated share of large verdicts entered against developers of two Myrtle Beach condominium complexes for a series of construction defect cases.

Harleysville agreed to defend the developer,  Heritage Communities Inc. and related companies in the underlying litigation under the CGL policies, but issued several reservation of rights letters during the defense which were used later to question the insurer’s coverage obligations.    A special referee ruled that the insurer had failed to properly reserve its right to dispute coverage for the actual damages verdicts against Heritage because the letters included only “generic denials of coverage” accompanied by verbatim copies of policy provisions.

The South Carolina high court agreed  that the reservations of rights letters were insufficient, as they did not adequately place the insureds on notice  of the insurer’s specific concerns and arguments against coverage.  Writing for the Court, Justice John W. Kittredge held:

“It is axiomatic that an insured must be provided sufficient information to understand the reasons the insurer believes the policy may not provide coverage…At the hearing before the Special Referee, Harleysville produced letters it sent to former Heritage principals and counsel between December 2003 and February 2004. These letters explained that Harleysville would provide a defense in the underlying suits and listed the name and contact information for the defense attorney Harleysville had selected to represent Heritage in each matter. These letters identify the particular insured entity and lawsuit at issue, summarize the allegations in the complaint, and identify the policy numbers and policy periods for policies that potentially provided coverage. Additionally, each of these letters (through a cut-and-paste approach) incorporated a nine- or ten-page excerpt of various policy terms, including the provisions relating to the insuring agreement,  Harleysville’s duty to defend, and numerous policy exclusions and definitions. Despite these policy references, the letters included no discussion of Harleysville’s position as to the various provisions or explanation of its reasons for relying thereon. With the exception of the claim for punitive damages, the letters failed to specify the particular grounds upon which Harleysville did, or might thereafter, dispute coverage… Here, except as to punitive damages, Harleysville’s reservation letters gave no express reservation or other indication that it disputed coverage for any specific portion or type of damages.”

(emphasis added).  Justice Kittredge went out to point out, for example, that Harleysville did not identify the basis on which it intended to contest that no “occurrence” took place, as defined in the policy.  On that basis, the Court affirmed the referee’s finding that Harleysville could not contest coverage under the CGL policies based on the reservation of rights letters it issued.

Editor’s Note:  The obvious takeaway here is that insurers should not skimp when it comes to the drafting of reservation of rights letters.  The better practice is to have inside or outside counsel prepare specific reservation letters as part of the coverage analysis or coverage opinion, if and when reservation letters are indicated. 

This ruling cautions against any conventional view that reservation of rights letters are merely “cookie cutter” documents that can be generated primarily by word processors.  Reservation of rights form letters may be used as a starting point, but never an ending point — the letters must ultimately contain specific gounds supporting any reserved claim, and wherever possible include citation to facts and information tending to suggest a reasonable dispute as to the terms of the policy on which reservation is being made.  CJH

Harleysville Group Ins. v. Heritage Communities, Inc., No. 2013-001291 (South Carolina, 2017)

Re-Purposing The Free Initial Consultation For The Benefit of Insurers and Corporate Clients

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Alternative fee arrangements are out of the bag by now.  They are being tried and used by insurers as part of ongoing efforts to bring cost-certainty to outside legal fees.  Badfaithadvisor.com has a complete survey of alternative fee options here.

But that is not the end of the leverage in favor of  insurers and corporate clients.  And to that end,  I am going to let you all in on a very big secret.  Not only that, I am going to invite — no — I’m going to dare, you to take advantage of it, and here it is:   I would rather my clients and prospects talk to me for free about matters of concern to them ,  than to let them  talk to any of my competitors.  Under any terms.

And so, the free initial consultation, long a staple of the plaintiff’s bar, has been co-opted and re-purposed for my insurance company and other corporate clients.

Insurance and corporate clients, and prospective clients who are interested in testing the waters, are given  free initial consultations of anywhere from 30 minutes to 2 hours (and sometimes more)  to review documents, and to discuss cases they are considering assigning to outside counsel.  But I offer the same thing to the same clients and the same prospects who are actually looking to AVOID sending a matter to outside counsel, too.  This provides value to them in the form of an informal first or second opinion which will give them early clarity on a matter, and peace of mind on potential action plans for handling those claims or matters.

The free initial document review / consultation is a win – win for clients and prospects.  If they do decide to retain me, on either en alternative or conventional fee basis, they have familiarized me with the matter they will be assigning and brought me up to speed at no cost to them, thereby reducing their overall legal expense on the matter.   If they decide to keep the matter in-house, they have received the value of an outside look for free, and I have hopefully created good will my clients will remember when the next matter comes up for consideration.

There are and will always be major coverage matters and bet-the-company litigation which insurers and corporate clients on which clients will seek outside representation.  Free initial consultations on both these matters and matters which clients never assign to outside counsel is another way to provide value to clients in business environments encouraging the limitation and reduction of outside legal expense.

C.J. Haddick

Water, Water Everywhere: Water Damage Exclusion Bars Coverage, Florida Judge Rules

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MIAMI, March 28 — A commercial property insurance policy’s water exclusion barred recovery for water related damage and  repair costs arising from a backed up pipe, a Florida judge has ruled.

In Ken Cameron and Michelle Cameron v. Scottsdale Insurance Co., No. 16-21704, S.D. Fla., 2017 U.S. Dist. LEXIS 45474, U.S. District Judge Marcia Cooke  granted Scottsdale’s motion for summary judgment in a coverage suit filed by the Camerons.  Scottsdale had previously denied coverage on a claim the Camerons made under a commercial property policy insuring their apartment complex after a pipe collapsed in the internal plumbing system and caused water and property damage.

Ken and Michelle Cameron originally filed suit in the 11th Judicial Circuit Court for Miami-Dade County, Fla., against Scottsdale Insurance Co., seeking a declaration that coverage was owed for water damage which occurred on one of their apartment properties. Scottsdale removed the action to federal court, and after losing an initial motion to dismiss, prevailed on a motion for summary judgment.

According to the suit, a  plumber found an “acute pipe failure” when the pipe collapsed.  Scottsdale denied coverage pursuant to an exclusion  for water – related losses.   Scottsdale argued that the policy in question did not cover damage from water originating from a drain.  The exclusion applied to  “water that backs up or overflows or is otherwise discharged from a sewer, drain, sump, sump pump or related equipment.”

The Camerons opposed the summary judgment motion claiming that the exclusion applied only to water backups or overflows deriving outside their property’s premises.
Judge Cooke held that the policy contained no definition of “drain” but that the term ordinarily refers to a “conduit for draining liquid, as a ditch or a pipe.”  She further held:

“Though the parties dispute whether the collapsed pipe was a ‘sewer’ and refer to the pipe by different names—a ‘sewer line’ for Respondent, a ‘sanitary line’ for Petitioners—it was, at the very least, a ‘drain.’  Parties do not seriously dispute this point or that there was a back up and overflow from the pipe.  More importantly, the [water exclusion] does not differentiate between drains found inside or outside the Petitioners’ property line or their plumbing system.  By its very terms, then, the [water exclusion] bars payment for the water damage and other repairs stemming from the Petitioners’ collapsed and backed up pipe… Because I find the [water exclusion] bars recovery for Petitioners in this case, it is unnecessary to analyze the other Policy provisions parties raise.  The lack of coverage for underground pipe damage is inconsequential, since it does not cover any purported water damage Petitioners allege.  The water damage exception does not impinge on the [water exclusion], as discussed above.  And I need not analyze the deterioration exclusion since the [water exclusion] undergirds my decision.”

Ken Cameron and Michelle Cameron v. Scottsdale Insurance Co., No. 16-21704, S.D. Fla., 2017 U.S. Dist. LEXIS 45474

No Bad Faith Claim Where UIM Claim Not Covered Under Antique Auto Policy

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PITTSBURGH, March 13 – U.S. District Magistrate Judge Cynthia Reed Eddy has dismissed both a bad faith and breach of contract claim against an issuer  of an antique auto policy where the alleged injury occurred in a vehicle not covered under the UM/UIM portion of the policy.

Bish v. Am. Collectors Insurance, Inc., et. al., (W.D. Pa., March 13, 2017)(Eddy, U.S.D.M.J.)

Disagreement Over ACV Estimate Insufficient To Support Bad Faith Claim, Judge Rules

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PITTSBURGH, March 2  —  An ACV basis estimate upon which a homeowners’ claims offer was made by State Farm Insurance  did not lack a reasonable basis, a federal judge ruled in dismissing the homeowners bad faith claim.  In Randy Gowton v. State Farm Fire and Casualty Co., U.S. District Judge Cathy Bissoon dismissed Gowton’s bad faith claim against State Farm, finding that the  insured  failed to show that his insurer’s offer to settle “was not supported by a thorough and even-handed investigation.”

Gowton sustained damage to his home in a fire, and submitted an estimate from his contractor to State Farm for a replacement cost benefit of $293,911.80.  After performing its own inspection, State Farm offered just $112,694.50, based on a replacement cost estimate of $187,874.50, less  depreciation of $75,180.15.  Gowton’s policy was payable on an “actual cash value benefits” basis.

Gowton sued State Farm in the Fayette County Court of Common Pleas, and after removing the case to federal court, State Farm moved to dismiss the bad faith count.  A breach of contract count had previously been dismissed by Judge Bissoon on statute of limitations grounds.

Judge Bissoon held that mere disagreement on the value of a claim following a reasonable investigation could not support a claim for bad faith:

“Gowton has failed to allege any facts to suggest that State Farm’s settlement offer lacked a reasonable basis or was not supported by a thorough and even-handed investigation… Significantly, Gowton’s response brief reiterates that he is not alleging that State Farm was dilatory, failed to communicate, performed an unsatisfactory or biased investigation or unreasonably delayed in considering his claim.  Rather, Gowton simply alleges that State Farm’s estimate was per se unreasonable for no other reason than that it differed from his own.. In the absence of any supporting facts from which it might be inferred that the company’s investigation was biased or unreasonable, this type of disagreement in an insurance case is ‘not unusual,’ and ‘cannot, without more, amount to bad faith.”

“This conclusion is bolstered by an examination of the exhibits referenced throughout Gowton’s Amended Complaint.  State Farm performed an initial inspection of the property only two days after the damage occurred and provided a detailed, 38-page estimate within a month thereafter.  State Farm’s estimate contains a room-by-room assessment of the damage; detailed measurements; design drawings; materials analysis; and line by line estimates of the cost and depreciation of the construction materials necessary to rebuild the home.  This is precisely the type of thorough and adequate investigation that vitiates a claim of bad faith.”

Randy Gowton v. State Farm Fire and Casualty Co., et al., No. 15-1164, W.D. Pa., 2017 U.S. Dist. LEXIS 29390 (Bissoon, J.)