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.)

 

 

 

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.)

UM/UIM Rejection Form Need Not Comply Verbatim With Statute, State High Court Rules

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HARRISBURG, Feb.22 – In a 5-2 decision, the Pennsylvania Supreme Court ruled that a UM/UIM rejection form which did not comply verbatim with the statutory requirements for rejection was valid, finding the differences between the form and the statutorily required language “inconsequential.”

In Ford v. Am. States,  the Plaintiff rejected UM/UIM coverage in her auto policy by signing a form which, according to the opinion, was identical to the statutorily required waiver in 75 Pa.C.S.A. sec. 1731 except for the following:  1.) the form referenced “motorists” instead of “motorist” in its title line and first sentence, and 2.) it injected the word “motorists” between  Underinsured” and “coverage” in the second sentence.

The American States form read, therefore, as follows:

REJECTION OF UNDERINSURED MOTORISTS PROTECTION

By signing this waiver I am rejecting underinsured motorists coverage under this policy, for myself and all relatives residing in my household. Underinsured motorists coverage protects me and relatives living in my household for losses and damages suffered if injury is caused by the negligence of a driver who does not have enough insurance to pay for all losses and damages. I knowingly and voluntarily reject this coverage.

In affirming summary judgment in favor of American States, Justice Max Baer rejected Ford’s argument that the form she signed violated Section 1731, and cited to Robinson V. Travelers Indemnity Co., 520 Fed. Appx. 85 (3d Cir. 2013).  In Robinson, the identical language used by American States was found to be in compliance with the Pa.M.V.F.R.L.:

“the Third Circuit observed that the MVFRL does not define the phrase “specifically comply” and that courts have not been uniform in their treatment of UIM coverage rejection forms that add language to the statutory form. Robinson, 520 Fed.Appx. at 88. As to the specific circumstances in the case, the court reasoned that the addition of the word “motorists” into the rejection form did not introduce any ambiguity and, in fact, made the form consistent with the rest of the MVFRL. Id. While the court opined that it is a better practice for  insurance companies not to supplement the statutory language of the MVFRL’s rejection form, the court nonetheless concluded that the insurer’s rejection form was valid because: it included the entirety of the statutory text; the addition of the word “motorists” did not introduce ambiguity into the form and did not alter the scope of the coverage.”. .  when a UIM rejection form differs from the statutory form in an inconsequential manner, the form will be construed to specifically comply with Section 1731 of the MVFRL.”

Justice Baer did caution, however, that the safer practice for insurers was to replicate the statutory language to avoid any question of non-compliance of UM/UIM rejection forms.

Ford. v. American States Ins. Co. (Pa., Feb. 22, 2017) (Baer, J.)

Pennsylvania Federal Judge Finds Condo Policy Vacancy Exclusion Ambiguous; Rules Cincinnati Insurance Owes Water Loss

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SCRANTON, Pa., Feb. 10 — A Pennsylvania federal judge ruled Feb. 10 that a vacancy exclusion in a policy was ambiguous, and obligated Cincinnati insurance to reimburse its insured for water related losses.

In Village Heights Condominium Association v. The Cincinnati Insurance Co., No. 16-554, M.D. Pa., 2017,  U.S. Middle District John Jones granted the Condominium Association’s motion for summary judgment, holding that the sum total of the Condominium’s buildings were more than 31% occupied, and therefore not vacant within the meaning of the vacancy exclusion in the Cincinnati policy, and exclusion which the Court found ambiguous.

The Village Heights is  a community comprising 50 units consisting of stand-alone homes, and apartment units. Mr. and Mrs. Herb Graves, owners of  stand-alone Unit 205 were not living in their unit and had it up for sale.  In March 2015, while on vacation, a pipe burst occurred inside the Graves unit causing significant water damage to common areas owned by the Condominium Association.

Cincinnati declined coverage, claiming that the “Vacancy Provision,” precluded indemnity because the Graves’ unit was vacant for more than 60 days.  The Association filed suit against Cincinnati, and the case was removed to the U.S. District Court for the Middle District of Pennsylvania.

The parties in their cross-motions for summary judgment disputed whether “the policy was intended to insure the separate buildings, apart and distinct from each other, or whether the Policy meant to cover the nineteen buildings as one, making up a single ‘blanket building.’”  The policy defined a building as vacant “unless at least 31% of its square footage” is rented or used.

In finding for the Association, Judge Jones held that the exclusion was ambiguous on the issue of whether the policy provided blanket building coverage to the condominium association as a unified building or as separate buildings:

 “‘Simply put, the Policy’s Declarations do not define any terms, they merely identify the coverages available under the Policy.  Thus, the Declarations do not define a “Blanket Building,” but rather indicate that the Policy provides Blanket Building Coverage.  . . .’  Finally, the Vacancy Provision, which appears in Section Six (6) of the Policy, appears to contain its own separate definitions of the term ‘building,’ which differ according to whether the Covered Property is owned by an owner or general lessee, or is leased to a tenant and is with respect to that tenant’s interest in the property.  Where, as here, the Policy is issued to an owner, the Vacancy Provision defines ‘building’ as ‘entire building.’  In a subsequent paragraph, the Vacancy Provision then refers to “the building where ‘loss’ occurs” to further specify its terms, including a requirement that the building be vacant for sixty (60) days.”

Editor’s Note:  The Court’s ruling points to a potentially unintended exposure for property and casualty insurers.  Caution should be exercised by insurers regarding both  the wording of vacancy exclusions, and how units and buildings are defined when the policy in question insures Homeowners and Condominium Associations, as opposed to individual home or unit owners.

For a copy of  the opinion in Village Heights Condominium Association v. The Cincinnati Insurance Co., No. 16-554, M.D. Pa., 2017 (Jones, J.), email me at chaddick@dmclaw.com.

 

 

 

National Union Tail Coverage On Liability Policy Insufficient, New York Judge Finds

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New York, Feb. 28 – A New York state judge has ruled that a 60-day Extended Reporting Period (ERP) Endorsement requiring that both the claim be made against the insured, and the insured’s report to the insurer take place only within the 60-day extended reporting period violates New York Insurance Regulations covering minimum ERP requirements.

The insured, New York Institute of Technology (NYIT)  sought defense and indemnity for an underlying defamation suit which was filed against it during the end of the  policy period. NYIT did not notify National Union of the claim, however, until after the polkcy expired but within the liability policy’s 60 day “tail” ERP.

National Union denied coverage on the ground that  the policy’s ERP provision only extended coverage for claims both made against the insured and reported within the 60-day tail period.   NYIT sued National Union in New York state court to compel defense and indemnity.   National Union then filed a motion to dismiss based on the language of the ERP.

New York State Trial Judge Barbara Jaffe denied the insurer’s dismissal motion, finding that National Union’s ERP provision was unenforceable, because it fell short of minimum requirements for extended reporting periods, also known as “tail coverage,” under applicable  New York insurance regulations.  She wrote:

“Pursuant to the applicable regulation, the policy should have afforded plaintiff an additional 60 days at the end of the policy term to provide defendant notice of the claim ‘for injury or damage that occurred,’ as it did here, ‘during the policy term,’ notwithstanding that plaintiff did not first receive notice of the claim against it during the ERP.”

Judge Jaffe found National Union policy’s ERP provision  was unambiguous.  She also found, however, that the ERP was invalid under New York Law.  Judge Jaffe found that as written, the National Union ERP imposed an “additional obstacle to coverage,”  and created a gap in coverage, excluding a class of claims for which the New York insurance regulations required coverage, i.e., claims made against the insured within the policy period, but not reported to the insurer until the tail period.

New York Institute of Technology vs. National Fire Union Ins. Co. of Pittsburgh, Inc. (New York County, New York, Feb. 23, 2017, Jaffe J.)

New York Rolls Out New Cybersecurity Requirements for Banks, Insurers

 

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Harrisburg, Feb. 22 –  According to the New York Department of Financial Services, new cybersecurity rules aimed at safeguarding consumer data go into effect on March 1, 2017.  The regulations  will require banks, insurers, and money services to strengthen their cybersecurity protocols by, in part, putting data security programs in place, and accepting greater responsibility for monitoring the vendors with whom they do business.  The rules also require reporting breaches within 72 hours.

The new rules impose obligations which could create liability from regulatory actions or consumer litigation. According to attorneys quoted in a recent article appearing on Law360.com,  the new guidelines will give enterprising  plaintiffs’ lawyers new claims against financial services firms, as well as firm directors and officers. Under the new DFS scheme, Company executives must certify compliance with the NY DFS regulations on an annual basis. Should those certifications prove incorrect, they could provide the basis for the DFS or consumers to make claims against banks, insurers and other financial services firms for breach of such certification.  Because of that, companies should devote considerable  attention and resources to two areas: 1.) implementation of cybersecurity programs and systems in compliance with DFS requirements; and 2.) making sure company executives have liability insurance coverage for cyber-related missteps, including coverage for both regulatory and consumer  claims.

With respect to adequately insuring cyber exposures, companies should undertake review of D&O policies to make sure any cyber-related liability is not excluded, and also that the insurance will cover the costs of defending against regulatory actions and any resulting penalties.  With respect to DFS requirements for the supervision of third-party vendors, the rules call for vendors to encrypt  nonpublic information and to set up robust protection systems.  Companies should require and review both vendor cybersecurity policies and related liability insurance products to make sure the vendors have technology errors and omissions coverage.  Companies may wish to secure additional insured protection in such policies as well.

A copy of the regulations may be found here:  nydfs-cybersecutiry-regs-03012017

 

 

Cybercrime Insurance Outlook 2017: Man vs. Machine

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HARRISBURG, Feb. 17 – As 2017 unfolds, it remains to be seen whether an emerging trend of stricter readings of cybercrime insurance policies to limit or exclude the reach of computer fraud  crimes protection coverage will continue.  One case decided late last year illustrates the trend, and the view that whether or not computer fraud coverage applies will be based in large part on the degree of human involvement in bringing about the criminal losses.

In Apache Corp. v. Great American Ins. Co, No. 15-20499, 2016 WL 6090901 (5th Cir. Oct. 18, 2016),  the Fifth Circuit Court of Appeals ruled that a policy covering losses arising out of computer fraud did not apply to a fraudulent financial transfer “that was the result of other events and not directly by the computer use.”

Of interest to the appeals court in Apache was that the crime started with a telephone  call from the thief, posing as a vendor to the insured, requesting a change of bank wiring instructions through which the insured paid the vendor.  Pursuant to Apache’s request  for the change of wiring instructions in writing, the thief provided the instructions via email, although the email address did not match the vendor’s email domain on file.  After a telephone call made by Apache following up the email , however, Apache instructed its bank to change the wiring instructions.

Apache discovered that the wiring change was ultimately fraudulent,  resulting in net losses of $2.4 million. Apache filed a claim with Great American under its crime protection insurance policy which included computer fraud coverage. The insuring agreement in the Great American policy provided for payment of losses “resulting directly from the use of any computer to fraudulently cause a transfer of [such money] from inside the premises or banking premises … to a place outside those premises.”

Great American denied the claim on the grounds that the losses did not result directly from the use of a computer, but rather human error.  Apache sued Great American for coverage in Texas state court,  and the case was removed to the U.S. District Court for the Southern District of Texas, after which both parties cross – moved for summary judgment. The federal district court granted the insured’s motion for summary judgment in favor of coverage,  and denied the insurer’s motion for summary judgment, but refused to impose statutory penalties on the insurer.

Following appeal by both parties to the U.S. Court of Appeals for the Fifth Circuit, the appeals court reversed judgment for Apache, relieving Great American of its indemnity obligations.  A three-judge panel held that that numerous intervening non-computer actions were taken between the digital actions of the posing vendor’s email and the computer bank transfer of funds.  Such non-computer acts, the court noted, included telephone calls, approval of the change in wiring instructions by Apache’s management, the receipt and processing of invoices by Apache, and Apache’s approval of invoices for payment.  The court finally found that Apache’s instructions to the bank to effectuate the wiring change were verbal as well.

The Court held:

“The email was part of the scheme; but, the email was merely incidental to the occurrence of the authorized transfer of money. To interpret the computer-fraud provision as reaching any fraudulent scheme in which an email communication was part of the process would. . . convert the computer-fraud provision to one for general fraud.. . . We take judicial notice that, when the policy was issued in 2012, electronic communications were, as they are now, ubiquitous, and even the line between “computer” and “telephone” was already blurred. In short, few—if any—fraudulent schemes would not involve some form of computer-facilitated communication. This is reflected in the evidence at hand. Arguably, Apache invited the computer-use at issue, through which it now seeks shelter under its policy, even though the computer-use was but one step in Apache’s multi-step, but flawed, process that ended in its making required and authorized, very large invoice-payments, but to a fraudulent bank account.”

For the Apache court, then, a critical area of focus in the analysis of coverage of cyber-crime insurance is the nexus between the crime, and the degree of computer, versus human, involvement. Apache, and decisions like it, impose rather strict limits on the scope of cyber-insurance coverage, setting a bright line between fraud which is primarily the result of flawed human systems, and fraud which is primarily digital, and computer-driven.

Cyber-crime and related technology insurance coverage is still very much an emerging insurance market.  Policy language, therefore, remains varied, and such variance imposes obligations on both insurers and insureds to be precise in their understanding of what kinds of protections  the policy terms, conditions, and endorsements provide.

Apache Corp. v. Great American Insurance Company, No. 15-20499, 2016 WL 6090901 (5th Cir. Oct. 18, 2016)