Pa. Federal Judge Orders Westport To Produce Underwriting Manual, But Not Personnel Files, In Discovery

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PITTSBURGH, March 7 – A federal judge has granted an insured’s motion to compel the insurer’s underwriting manual in a bad faith case, but denied the motion as  to production of personnel files.

In Westport Ins. Co. v. Hippo, Fleming & Pertile, U.S. District Judge Kim Gibson decided the discovery dispute amidst a declaratory judgment action filed by Westport, and a bad faith counterclaim against Westport by the insured, the Hippo law firm.This case involves cross actions for declaratory judgments on a lawyer’s professional liability policy, and bad faith claims by the attorneys against the carrier. The attorneys moved to compel production of the insurer’s underwriting manual and the underwriting files, as well as the personnel files of three employees identified as having worked on the coverage file.

There was no clear case law on production of underwriting files, though the 2011 Consugar case decided by Judge Munley in the Middle District had some relevance. Thus, as with most discovery issues, the court looked at the particulars of the case before it.

The court found that production of the underwriting materials was proper. Although the insured did not bring any underwriting claims, the court observed that in supporting their bad faith claim, the attorneys argued that there were premium increases imposed by the insurer relating to commencement of the underlying litigation. Thus, “[g]iven the bad faith claim and the related allegations, the underwriting materials may well be relevant.” [Note: The opinion does not indicate whether the bad faith claims are under section 8371, common law contractual bad faith, or both. Thus, the question as to whether a premium increase can constitute the actionable denial of a benefit under a statutory bad faith claim is not clear.]

The insureds were not successful in obtaining the personnel files. They argued they were entitled to the information in the personnel files to gain knowledge about “the insurer’s corporate policy, standards, and procedures … relating to [the insurer’s] state of mind and relationship with its employees, and information regarding the relationship between the corporate policies and the training of the claims employees”

“Because there is a strong public policy against disclosure of personnel information, such requests are subject to a heightened relevancy standard.” Again, there was no clear case law, and the court stated it must look at the particular facts of the case. Relevant factors in the discovery of personnel files include “whether there is another way for the requesting party to obtain the information sought … whether there is other evidence suggesting the personnel files are likely to include relevant information … how broad the request is … and how closely the personnel files relate to the requesting party’s claims.”

The balance weighed against production. Although the “request is relatively narrow in that it asks for only the files of the employees who worked on its claim and has agreed to a number of redactions, the other factors do not meet the heightened relevancy requirement.” “The reasons supplied … for wanting the personnel files such as whether the claims employees had some incentive to deny its claim and the nature of the relationship between the company and its employees could likely be obtained through the depositions of those employees.” “Likewise, [the insured] has not presented any other evidence to support the[] theory that the personnel files are likely to include information relevant to their claims.” Thus, the insureds could not meet the heightened standards in obtaining personnel files.

 

 

 

 

Westport Ins. Co. v. Hippo, Fleming & Pertile (W.D. Pa. March 7, 2017)(Gibson, J.)

 

 

 

Claims Delay Not Unreasonable, In Bad Faith, Judge Rules

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SCRANTON, Pa., Jan. 31 — An auto insurer did not unreasonably delay processing of a claim, a Pennsylvania federal judge has ruled.   In Thomas and Colleen Meyers v. Protective Insurance Co., No. 16-1821, M.D. Pa., 2017 U.S. Dist. LEXIS 11338, a delay in the payment of an auto claim at issue in the case was found not so unreasonable as to constitute bad faith.

Thomas Meyers was insured by a hit-and-run vehicle while working as a delivery man on  Jan. 21, 2014.  He filed a claim alleging serious injury  with  Protective Insurance Co.,  for uninured/underinsured motorist benefits on April 23, 2014.  Meyers sought medical expenses and wage loss of more than $120,000.00 on Feb. 1, 2006.  He claims to have received no response from Progressive for more than three months.

On May 26, 2016, Meyers rejected a settlement offer from Protective in the amount of $225,000 .  Meyers later rejected an increased offer, and Protective hired counsel requesting additional time to review the claim.  Protective’s counsel required Meyers to complete four medical evaluations.

Meyers sued the Protective in the Lackawanna County, Pa., Court of Common Pleas, stating claims for breach of contract, common law, and  statutory bad faith pursuant to 42 Pa. C.S. §8371.  Protective removed the action to the U.S. District Court for the Middle District of Pennsylvania and moved to dismiss all claims including breach  of “fiduciary duty,” bad faith and a loss of consortium claim.

Judge A. Richard Caputo dismissed all fiduciary claims, holding, “[u]nder Pennsylvania law, an insurer owes a duty of good faith and fair dealing toward their insureds.  It is well-established, however, that there is no fiduciary duty owed to an insured in the context of an underinsured/uninsured motorist benefits.”

Judge Caputo also rejected the bad faith claims, including allegations that Protective’s failure to communicate constituted bad faith, finding such claims unsupported.  The judge found  that the insurer contacted the Meyerses four times requesting information and/or providing updates on the investigation between March 9, 2016, and May 24, 2016:

“Moreover, after the first settlement offer was rejected by Plaintiffs, Defendant, within only one week, proposed a new, higher, settlement offer.  Although Defendant often did not immediately respond to Plaintiffs’ communications, an allegation of ‘failure’ to communicate is inconsistent with reality.  Defendant’s communications may be described as tardy, but I cannot impute bad faith or even unreasonable delay, especially in light of the fact that Defendant made a settlement offer within three-and-a-half months after receiving Plaintiffs’ estimate of damages.  Although ‘[d]elay is a relevant factor in determining whether bad faith had occurred,’ [Kosierowski v. Allstate Ins. Co., 51 F.2d 583, 588 (E.D.Pa.1999)], I am unable to find precedent supporting the proposition that an insurance company’s investigation of a claim lasting three-and-a-half months is unreasonably lengthy. . . “[t]here is also no evidence that Defendant failed to objectively and fairly evaluate Plaintiffs’ claims, or that the settlement offer was so inadequate as to constitute bad faith.”

Judge Caputo also did not find Protective’s settlement offers unreasonably low:

“First, given that the damages package provided by Plaintiffs included a ‘medical lien and wage loss documentation in an amount in excess of $122,000,’ a settlement offer that is higher by nearly $100,000 than the proposed damages package is not unreasonable, and ‘bad faith is not present merely because an insurer makes a low but reasonable estimate of an insured’s damages.’  Secondly, Plaintiffs’ assertion of a verdict potential is an opinion as to the value of their claim, not an objective measure of it, and because such an assertion is nothing more than a legal conclusion, it must be disregarded.  Simply put, Plaintiffs’ subjective belief as to the verdict potential of their claims cannot constitute evidence of bad faith on the part of Defendant because Defendant’s subjective belief as to the value of the claim may reasonably, and permissibly, differ.”

The judge granted Protective’s 12(b)(6) motion, and gave the Plaintiffs 21 days to amend their complaint.

Thomas and Colleen Meyers v. Protective Insurance Co., No. 16-1821, M.D. Pa., 2017 U.S. Dist. LEXIS 11338

 

Faulty Construction Not Covered Loss Under Nationwide Builders’ Policy, Pa. Federal Judge Rules

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PHILADELPHIA, Nov. 16  — Two homebuilders insured by Nationwide Mutual Insurance Company accused in an underlying lawsuit of poor workmanship are entitled to no coverage, U.S. District Judge Michael M. Baylson ruled earlier  this week, because such workmanship did not constitute a fortuitous  “occurrence” which would trigger coverage under the policy.

William Tierney III sued  Robert and Hannelore Bealer, owners of Affordable Homes for foundation cracks and water leakage problems they built for Tierney in Pennsylvania State Court.   The complaint alleged that a May 2014 flooding of the home’s basement was due to faulty construction.   In response to Bealers’ requests for defense and indemnity in that case, Nationwide declined, citing no triggering  occurrence under policy, despite the Bealers’ claims that the problems were actually caused by superseding events including heavy storms and shifting ground.

The Bealers sued Nationwide for coverage in 2015, and the suit was removed to Federal Court.

Judge  Baylson, citing Pennsylvania law requiring analysis of the underlying complaint only, found that Nationwide was within its rights to deny coverage under the language of the policy:

“The Bealers’ alternative explanation for the cause of Tierney’s property damage is outside the scope of this analysis because it is not pled in the underlying complaint. . . Tierney’s factual allegations are that a failure to properly design and construct the property caused the damage at issue. These are faulty workmanship claims, and the Bealers’ attempts to reframe them as based on an ‘occurrence’ due to the ‘degree of fortuity’ involved in the intervening factors that allegedly led to the damage, are unavailing.”

Bealer v. Nationwide (E.D. Pa., No. 16-3181, Nov. 16, 2016)(Baylson, J.)

Inclusion of Adjuster Not Sufficient To Defeat Removal Jurisdiction In Bad Faith Case

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DALLAS, Oct. 6  — Ruling that the insured failed to shoe that an  adjuster could be directly liable for the claims alleged, a federal judge in Texas denied the insured request for remand of a removed bad faith case.

In  Ministerio Internacional Lirios del Valle v. State Farm Lloyds, et al., No. 16-1212, N.D. Texas; 2016 U.S. Dist. LEXIS 137453, the plaintiff sued State Farm Lloyds in the 160th Judicial District Court of Dallas County, Texas, over a property damage claim.   The suit included claims for breach of contract, breach of the duty of good faith and fair dealing and violations of the Texas Insurance Code.  The complaint included allegations that adjuster Aaron Galvan, who conducted an investigation denied the claim on grounds that the damage was uncovered, was liable.

State Farm Lloyds removed the case to the U.S. District Court for the Northern District of Texas, arguing the adjuster was not properly named as a defendant.  The plaintiffs moved for remand, and Judge Sidney A. Fitzwater denied the motion, holding:

“Defendants have met their heavy burden of demonstrating that there is no reasonable basis to predict that Ministerio might be able to recover against Galvan. . . Galvan is an adjuster, and ‘[a]n adjuster “cannot be held liable under this section [of the Texas Insurance Code] because, as an adjuster, he does not have settlement authority on behalf of the insurer…[the adjuster had] no obligation to provide a policyholder a reasonable explanation of the basis in the policy for the insurer’s denial of a claim, or offer of a compromise settlement of a claim.”

The judge also found that Galvan could not be held liable because the sections of the Texas Insurance Code relied upon by the Plaintiff applied to specifically listed ‘insurers,’ and Galvan was  “not an insurer.”

Ministerio Internacional Lirios del Valle v. State Farm Lloyds, et al., No. 16-1212, N.D. Texas; 2016 U.S. Dist. LEXIS 137453 (October 4, 2016, Fitzwater, J.)

Editor’s Note:  joinder of individual adjusters is a common tactic used by insureds to attempt to defeat federal removal jurisdiction, because it provides a “same state” defendant as the plaintiff.  While cases across the country have gone both ways, the individual liability of an adjuster is highly questionable under standard agency principles, if he or she is acting in the course and scope of his or her employment.

 

Concurrent Clause Exclusion Bars Sewer Backup Claim

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FRANKFORT, July 26 — A Kentucky appeals court ruled that a concurrent cause exclusion barred coverage provided under a Sewer and Drain Back-Up endorsement  in a policy issued by Maryland Casualty Co.  to a building owner and eye car practice.   The court affirmed summary judgment for the insurer in the case.

Eye Doctor Caroline L. Hendy, Insight Properties LLC and Eye Deal Eye Care II PLLC were insured by Maryland Casualty.  On Nov. 30, 2010 extensive damage was done to the insureds’ office building following heavy rains.  The doctor discontinued her practice for nearly 5 full days, and furnished an engineers’ report which attributed the damage to a collapsed drainage tile on a neighboring property which was under construction.

On March 7, 2011, the insureds sued Maryland Casualty in state court for negligence and bad faith  after the insurer declined coverage on grounds of the concurrent clause exclusion.  While the policy provided coverage for sewer backup, the policy also contained flood and surface water exclusions, and a concurrent cause exclusion which, Maryland Casutalty asserted, made the sewer backup coverage inapplicable to the loss.

Maryland Casualty was granted  summary judgment by the trial court, which found that the concurrent causes of heavy rain and surface water from overflow of a nearby creek likely contributed to the loss and the insureds’ damages.  The court held that the surface and flood water exclusions applied, regardless of any other contributory or concurrent event.

The Kentucky appeals court affirmed summary judgment for Marlyand Casualty, holding that the sewer backup coverage provision was essentially irrelevant  when the trial court determined that flood or surface water contributed to the loss:

“When viewing the record in a light most favorable to Appellants and resolving all doubts in their favor, we cannot conclude that the trial court erred in finding that there were no genuine issues of material fact and that [Maryland Casualty] was entitled to a Judgment as a matter of law. The policy language is not ambiguous and expressly provides an exclusion from covered loss for damages resulting from ‘flood, surface water . . . [or] overflow of any body of water.”

Dr. Caroline I. Hendy, et al. v. Maryland Casualty Co., No. 2015-CA-001030, Ky. App.; 2016 Ky. App. Unpub. LEXIS 502

Standalone Cyber Coverage Enters Mainstream Market

 

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NEW YORK, July 20 – According to a report appearing in insurancejournal.com, AIG has rolled out a standalone cyber policy that provides primary insurance protection for property damage, bodily injury, business interruption, product liability and a number of other cyber risks.  It is a broad spectrum product specifically aimed

The insurance giant is marketing CyberEdge Plus as offering primary protection for

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What is envisioned here is to combine cyber insurance and risk mitigation offerings, with traditional coverage concepts informing its cyber approach. AIG said that the blend gives customers “knowledge, data and experience developed over decades of underwriting, evaluating and mitigating property, casualty and financial line risks.” AIG also touts the product as the first primary coverage written in a standalone policy designed to address cyber exposures such as property damage, bodily injury and business interruption.

Property/casualty insurers consider cyber to be a fast-evolving risk. They have worked hard to adapt, however, with companies including OneBeacon, Liberty Mutual and The Hanover launching new cyber policies targeting specific areas.

Kevin Kalinich, global practice leader, cyber insurance for Aon Risk Solutions, said that the insurance industry “has done a reasonable job of addressing personally identifiable information related to cyber exposures, such as those faced by retail, financial institutions, healthcare and hospitality.”

And it makes sense, he said, to target cyber coverage on basic areas such as bodily injury, property damage and business interruption.

“As nearly every organization in every industry embraces technology, cyber exposures arise in new areas that can result in bodily injury, tangible property damage and business interruption,” Kalinich said.

He added that AIG previously tried to address these new exposures “via a drop down difference in conditions structure, which sits above existing property, general liability, crime, professional liability, etc…”

With this in mind, Kalinich said that AIG’s new CyberEdge Plus product is a change, because it helps make clear “that the policy is primary coverage with respect to cyber perils, including broader coverage in terms of tangible damages.”

Kalinich added that Aon has worked with carriers including AIG to develop “a number of innovative cyber insurance and services solutions across multiple lines of business, industries, geographies and size of business.”

Use Privilege Logs To Win Bad Faith Discovery Battles

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There is no more critical or touchy stage of discovery in a bad faith case than the request for the claims file.  It will color the rest of the discovery course, including, most notably, depositions of claims personnel.  Inevitably the request for the file comes, seeking every bit of data, electronic and hard copy, which ever existed in the claims file.  The request contains no restrictions, and no reasonable bounds – the bane of insurance company counsel’s existence.  How to respond, yet again, without having to fight World War III?

A well-prepared privilege log provides insurance company counsel with an opportunity to frame and present argument on discovery motions before they are ever filed.  And yet this opportunity is overlooked — passed over for  rote, form privilege log entries like “Not Discoverable:  Attorney Client Privilege” and the like.  These bland entries will neither  satisfy plaintiff’s counsel, nor a judge.  So take a step back and look differently at the privilege log which accompanies your initial  claims file production.  Look at the opportunity as a chance to file a free discovery brief, and treat it as such.  Get the jump on making valid arguments to protect those portions of the claims file which need not be disclosed under the applicable jurisdiction’s discovery law.

First, a quick look at an example regarding the discovery of claims reserve information, and then a review of the basic elements of privilege log entries which will persuade judges and protect portions of the insurer’s claims file:

Bad Privilege Log Entry Example:  “Objection.  Claims Reserves Are Not Discoverable”

Much Better Privilege Log Entry Example:  “Reserve information is non-discoverable work product and/or is irrelevant and disclosure of information will not lead to admissible information. See, Safeguard Lighting Sys. , Inc. v. N.Am. Specialty Ins., 2004 WL 3037947 (E.D.Pa. 2004); Union Carbide Corp. v. The Travelers Indemnity Co., 61 F.R.D. 411 (W.D.Pa. 1973); Fidelity & Deposit Co. of Maryland v. McCulloch, 168 F.R.D. 516 (E.D.Pa. 1996); and Williams v. Nationwide Mut. Ins. Co., 750 A.2d 881 (Pa.Super. 2000). Reserving is an insurance accounting instrument largely designed for purpose of regulatory compliance, and not evidence of an insurer’s opinion as to either the actual value or settlement value of the claim.  See, id.”

The differences in the two privilege log entries is apparent, but it is not simply the size — don’t confuse length with persuasive substance.  The better privilege log entry contains the following elements:

  • specific reference to the discovery sought, identifying it with as much particularity as possible;
  • Comprehensive statement of case law and rule of procedure which supports insurance company counsel’s position that the discovery sought is protected from discovery.
  • Where possible, additional identification of important public policy principles which weigh in favor of protecting the discovery sought.  Common sense and logical arguments can also appear here.

In addition to providing a jump on the opposition should the dispute make its way to a judge, it demonstrates to the reviewing judge that the objections were not “knee-jerk” or form objections not worthy of the judge’s consideration.  It sets up the insurer’s counsel as credible and thoughtful in the mind of the Court , which will not hurt the insurer, of course.

Good insurance company counsel do not look at privilege logs as merely something to be thrown together as part of preparing discovery answers.  They look at logs instead  as an opportunity to advocate for the protection of discovery at a key point in the bad faith or coverage case.

CJH