Pennsylvania Courts continue to interpret the scope of the term “occurrence” in the CGL policy narrowly. Recently, in Berkley Specialty Ins Co vs. Masterforce Construction Corporation, (3rd Circ., No. 21-1287, May 11, 2023), in a non-precedential opinion, the US Court of Appeals for the 3rd Circuit affirmed a judgment in favor of an insurer seeking a declaration that it did not owe its insured defense or indemnity for property damage claims arising out of a defective work product.
In Berkley, the insurer issued CGL policies to Masterforce in 2012 and 2013. The CGL policies limited coverage to property damage caused by an “occurrence”. The policies in question defined occurrence in part as “an accident including continuous or repeated exposure to substantially the same general, harmful conditions.”
Customers of Masterforce, the Brandts, brought claims against Berkley’s insured for faulty roof panel installation which caused property damage. The U.S. District Court for the Middle District of PA granted Berkley’s motion for summary judgment, finding that it did not owe a duty of defense or indemnity to Masterforce under a long line of Pennsylvania case law which holds that claims relating to faulty or defective workmanship do not constitute a fortuitous occurrence under the CGL policy.
In affirming the District Court’s ruling, the Third Circuit Court of Appeals provided a succinct yet comprehensive review of Pennsylvania case law beginning with Kvaerner Metals vs. Commercial Union Insurance Company and a line of case which followed and expanded upon Kvaerner.
The Appeals Court noted that claims for property damage arising out of defective or faulty workmanship were not fortuitous under the definition of “occurrence” because damage arising from faulty workmanship was foreseeable. The Court specifically rejected the Brandts’ argument that it should distinguish between damage to the work product performed by the contractor and damage to other property. The Court noted that this was a distinction without a difference, pointing to prior precedent, that property damage arising from faulty workmanship including damage to property other than the work itself was too foreseeable to be considered an accident.
While the Berkley Specialty opinion is non-precedential, the opinion itself contains citations to a number of precedential opinions which exclude claims of faulty workmanship from the definition of occurrence under the CGL policy, whether that workmanship caused damage to the work itself or to other property.
Insurers can and should continue to take advantage of the narrow definition of “occurrence” in CGL policies given it by Pennsylvania courts. For a copy of the Berkley Specialty opinion, or for additional information about how insurers can effectively handle defective workmanship claims and coverage disputes, contact me at chaddick@dmclaw.com or 717-731-4800.
I’ve always thought “bad” behavior was as good a teacher, if not a better one, than good behavior. This is no less true in the world of insurance coverage analysis than in other endeavors. With that in mind, here are five things insurers DO NOT want from their outside coverage counsel. They are instructive guideposts for insurers on what to avoid when working with outside coverage counsel.
Starting With An Answer And Working Backwards
This should be as self-evident as it is lethal — insurers are looking for what coverage counsel thinks, not what coverage counsel thinks the insurer wants them to think. Insurance coverage lawyers are sought out for coverage analysis because they are knowledgeable, trusted, and above all else, independent advisors. Insurers look to coverage lawyers who produce deliverables which are the product of thoughtful analysis of the policy language, the claims investigation and the facts, and the applicable jurisdictional statutory and/or common law.
I am grateful that in three decades of practice I have never had an insurance company client ever tell me, or even hint at, what they wanted me to conclude. This is not to say that I, and they, never have very early “gut reactions” or hunches as to what the answer to a coverage question might be. It is to say, however, that such early hunches have no place directing or determining the final work product. A “hunch” is fine, as long as it is kept in its place, and put through rigorous analysis and research which results in a final opinion. A hunch might be right, and it might not. What is important is that it is not exalted to the status of an answer without the necessary legwork and toil which tests and challenges it.
The “answer” to a coverage question should always be the result of coverage analysis, never the cause or the governor of it. Enough said.
Delay
The fog and smoke and fast pace of the insurance claims business makes for considerable uncertainly and unpredictability in terms of when insurance coverage questions might even arise, and, more importantly, when answers to those questions might be required. An insurer, for example, may be under the gun to make a decision to enter a defense of an insured, and to get a pleading filed ahead of a deadline.
Because of that, it is important that the insurer and coverage counsel be on the same page from the initial consult about when an answer to a coverage question is required. It may be a matter of days, or it may be a matter of weeks. What is important is that both the insurer and coverage counsel are working off of the same timetable as to when the final work product needs to be furnished.
Can unforeseen circumstances impact the delivery date of a coverage opinion? Of course they can (see fog, smoke, and unpredictability above). As soon as such difficulties arise, however, the insurer must be advised. Extensions to file answers to pleadings in underlying litigation, for example, can be secured, to provide some additional breathing room.
Insurers want to know when they will have an answer to a coverage question, and they don’t want to have to harangue coverage counsel for an overdue work product. The “when” of a coverage analysis must be the product of initial, and ongoing consultation between the insurer and coverage counsel.
Surprises
I have never had an insurer thank me for bad news. However, I have had insurers thank me a number of times for delivering bad news as early and as clearly as possible, along with suggestions and options which might lessen the impact of “bad” news relating to a coverage opinion. There is a lesson here, for certain.
Whenever possible, I like to schedule a quick status call with a client halfway between when a coverage opinion is requested, and when it is to be delivered. This provides a built-in early warning mechanism if a coverage question might be heading in a direction not originally anticipated, or if some development in claims investigation necessitates an answer which is not what might have originally been expected. (Better still, it is also a great opportunity to advise the insurer that there are as of yet no surprises).
Time is a gift. Coverage counsel should strive to give as much of it as possible to the insurer, especially if there is unexpected news. Almost by definition, the earlier a surprise is delivered to the insurer, the less of a surprise it becomes.
Incidentally, this proposition is equally true if unforeseen circumstances may require additional expense to the insurer, such as additional claims file or investigative materials which need to be reviewed before the final work product is provided. Insurers want to know sooner rather than later, and their first notice of unexpected expense should never, ever, be on an invoice.
Murkiness
If an insurer wanted to hear an overly general “maybe/maybe not” or excessive hedging on a coverage opinion, it could have saved itself the cost of an outside coverage opinion altogether and come to the same conclusion itself for free. It is true, of course, that coverage analysis is not an exact science. However, insurers do not want murkiness or generalities in the coverage opinions they request and obtain. They want guidance. And the art of guidance requires as much clarity as possible.
How is murkiness in coverage analysis to be avoided? Thoroughness is the first touchstone: A thorough analysis is much more likely to move coverage counsel off of the dreaded 50/50 opinion on outcome than is a cursory one. A complete and detailed review of the claims facts, the policy, and applicable law (including law from other jurisdictions if there is no law directly on point in the jurisdiction of assignment) is far more likely to get experienced coverage counsel to an expression of one likelihood versus another.
Likelihood and probability are far more useful to an insurer than a coin flip. At the end of the day, coverage counsel is expected to express a coverage opinion, not a coverage coin flip. A position must be taken, even if that position expresses probabilities, ranges of probabilities, and identifies “known unknowns” and even “unknown unknowns” which could affect the assessment. Follow up or supplemental coverage opinions can be provided, which leads us to our last black flag.
Lack of Follow Up / Follow Through
A coverage opinion is oftentimes non-static. That is, there may be variables which might not yet be filled in by the current claims investigation or facts not yet known which could have an impact on coverage counsel’s opinion. I never finish a coverage opinion without reminding/inviting the insurer for whom I am working to reach back out and advise if any additional facts have come to light which may change the coverage opinion in some way.
I also typically make at least one follow up call to my insurance company clients following the coverage opinion for this purpose, and also to make sure that there is nothing else they might require. For example, would they like some guidance as to a declination or reservation of rights letter? Should an examination under oath on a pivotal issue be taken? Would the insurer like guidance on the possible plusses and minuses of pursuing a declaratory judgment? In addition to being good business, such follow up is, more importantly, good client service.
Conclusion
In the final episode of the 1994 season of Seinfeld called “The Opposite,” the hapless yet somehow lovable George Costanza stumbles upon unfamiliar success by rejecting every instinct he has, and doing the opposite of what those instincts tell him. Insurers who seek out the opposites of the five black flags identified above from their coverage counsel will secure greater value in the coverage advice they obtain.
Additional Resources
For additional guidance to insurers on getting better, bulletproof coverage opinions, look here and here.
For additional guidance to insurers on whether to file declaratory judgment actions, look here.
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.
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.)
PITTSBURGH, Sept. 28— The Pennsylvania Supreme Court declined to require a showing of intentional ill will or malice to establish bad faith claims against insurers in Pennsylvania, calling such ill will merely a factor in the analysis.
In Rancosky v. Washington National Insurance, the Court affirmed the state’s Superior Court which held that an insurer’s motive of self-interest or ill will is only one factor that can be considered in an analysis of potential bad faith conduct under Pennsylvania’s bad faith statute. The Superior Court held that Washington’s predecessor, Conseco Health Insurance Co. did not have a reasonable basis to deny medical benefits to LeAnn Rancosky for the treatment of her ovarian cancer, or to refuse to honor a waiver of premium provision in her health insurance policy following her diagnosis.
Rancosky sued the insurer in the Pa. Court of Common Pleas in 2008, and her estate later won $31,000 jury verdict on breach-of-contract claims. Conseco won the bench trial at that level on the bad faith claims however, after the trial judge ruled that Rancosky demonstrated no ill will or actual malice on the part of Conseco in the handling of her claim.
In affirming the Superior Court and sending the case back to the trial court under the clarified bad faith test, Justice Max Bear noted:
“We do not believe that the General Assembly intended to create a standard so stringent that it would be highly unlikely that any plaintiff could prevail thereunder when it created the remedy for bad faith. . . Such a construction could functionally write bad faith under Section 8371 out of the law altogether.”
The Supreme Court confirmed a long standing two part bad faith test first announced in a prior Superior Court ruling in 1994 in the case of in Terletsky v. Prudential. In Terletsky, the Court held that an insurance company’s bad faith was established when the insured demonstrates that 1.) the insurer lacked a reasonable basis for denying benefits under the policy, and 2.) the insurer knew or recklessly disregarded its lack of a reasonable basis in denying the claim.
The Supreme Court affirmed the intermediate appeals court finding that dishonest purpose or motive of self interest was not a third element of the Terletskystandard, but rather an element that could be considered as part of the second prong of the Terletskytest.
PITTSBURGH, April 4 — This week, the Pennsylvania Supreme Court heard oral argument on whether intentional ill will or malice was a required element to make out a claim for insurance bad faith in Pennsylvania, exposing insurers to punitive damages.
In Rancosky v. Conseco, the Pa. Superior court reversed a trial court ruling in favor of an insurer on bad faith claims following a bench trial. The Superior Court held that the insurer did not have a reasonable basis to deny benefits to LeAnn Rancosky following her diagnosis of ovarian cancer in 2003. The intermediate appeals court relied on its 1994 ruling in Terletsky v. Prudential, and held that while it was a consideration, ill will and malice was not a stand-alone requirement to establish insurer bad faith.
Ms. Rancosky and her husband sued Conseco in the Washington County Court of Common Pleas in 2008, and eventually won a $31,000 jury verdict on breach-of-contract claims. Conseco prevailed, however, on the bad faith claims.
During argument this week, Conseco argued to the state Supreme Court that Pennsylvania’s bad faith statute does not contemplate punitive damage awards against carriers without evidence of a malicious motive. In response, Rancosky’s estate argued that proving ill will was exceptionally difficult, and that making bad motive a requisite element would allow insurers to handle claims recklessly and carelessly without fear of penalty.
Law360.com reported that during argument earlier this week, Justice Max Baer saw the appeal of Rancosky’s arguments, stating “It’s hard to prove that kind of motive, and if you’re going to hold the insured to that burden then you tend to put the rabbit in the hat and the insurance company wins because they say, ‘We’re the most incompetent organization in the world. We were dead wrong, but we had no motive of ill will.’”
A ruling is anticipated later this year.
Editor’s note: Justice Baer’s comments during oral argument this week are emblematic of a trending misconception that the Pa. Bad Faith Statute created anything beyond an intentional tort cause of action. There is a large body of case law in both Pa. state and federal courts holding that mere negligence is not bad faith, and that an insurer has the legal right to be wrong on claims decisions, as long as the decision can be supported by a reasonable basis.
There should be no real dispute that reasonable but negligenct claims decisions are not actionable, and that intentionally malicious claims decisions are actionable , under the bad faith statute. The current battleground in Pennsylvania appears to be the class of claims decisions which lie in the twilight between these two signposts, i.e., claims decisions made recklessly, and wanton disregard to the insured’s rights. Rancosky is an attempt to find clarity in this twilight.
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.
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
PITTSBURGH, Jan. 10– A federal judge from the Western District of Pa. has dismissed both bad faith and coverage claims in which a homeowner sought coverage for defective workmanship on the home as part of a demolition and rebuild.
In Wehrenberg v. Metro. Prop. & Cas. Ins. Co., No. 14-1477, 2017 U.S. Dist. LEXIS 3242 (W.D. Pa. Jan. 10, 2017),U.S. District Judge Mark R. Hornack granted summary judgment to Metropolitan P&C Insurance Company on both breach of contract and bad faith claims brought by insured homeowner, Wehrenberg. leased the house to a tenant, Hyatt, and authorized Hyatt to demolish and reconstruct the house.
Hyatt abandoned the house after gutting it, and the house, which had structural problems, was left unfinished. Wehrenberg submitted a claim the Metropolitan regarding the condition of the house, calling it “vandalism.” Metropolitan denied the claim and Wehrenberg filed suit, claiming both breach of contract and bad faith.
Relying on policy language, Metropolitan moved for summary judgment on all claims on the following grounds: (1) the loss was not “sudden and accidental direct physical loss or damage” under the terms of the Policy, (2) even if the loss is covered, the insured did not timely notify Metropolitan of the loss, and (3) the damages claimed were explicitly excluded from coverage under the Policy, which did not cover construction related damage, and stated that the insurer was not responsible to pay for vandalism if the property was vacant for more than thirty days.
In granting the motion for Metropolitan, Judge Hornak held:
“First, the Court concludes that Plaintiff cannot, on the record before the Court, meet his burden of proving that his loss is covered by his Policy in the first instance. The Policy specifically provides that Defendant will only cover “sudden and accidental direct physical loss or damage to [Plaintiff’s] property.”. . . Under Pennsylvania law, “sudden and accidental” “mean[], respectively, ‘abrupt’ and ‘unexpected or unintended.'” U.S. Fire Ins. Co. v. Kelman Bottles, 538 F. App’x 175, 181 (3d Cir. 2013).”
The judge also dismissed the bad faith claims made by the insured, holding:
“In this case, as explained, there is no viable breach of contract claim, so the first part of Plaintiff’s bad faith claim cannot succeed. Second, Plaintiff argues that Defendant acted in bad faith by failing to adequately investigate his claim. In his papers, Plaintiff lists a variety of ways in which he asserts Defendant’s investigation was inadequate, including that Defendant did not conduct enough interviews to uncover the facts of the case and that Defendant did not look into allegedly stolen tiles brought into the house. ECF No. 88 at 12. Defendant however, asserts that an adequate investigation was conducted and that it included an inspection of the house, interviews of Plaintiff and Hyman, consultation with its legal counsel, and the taking of Plaintiff’s Examination Under Oath. ECF No. 82 at 20. Plaintiff’s claim ultimately fails because he has not cited to anything in the record to support his argument—he merely alleges problems existed without providing any record evidence to prove them.”
badfaithadvisor.com 