Transcript Pennsylvania Bad Faith Law

BAD FAITH
LITIGATION
February 18, 2008
Lee Applebaum
Fineman, Krekstein & Harris, P.C.
1735 Market Street, 6th Floor
Philadelphia, PA 19103
(215) 893-9300
www.finemanlawfirm.com
www.Pabadfaithlaw.com
Bad Faith is the Absence
of Good Faith
 There is no such thing as “bad" faith
 Bad faith should not be based on bare
feelings about loyalty, but on actual conduct
reflecting honesty or dishonesty
 Just the facts ma’am
What Does the Law Mean
by Bad Faith
 Statutory Bad Faith, 42 Pa.C.S. § 8371
 Contractual Bad Faith
 Cowden v. Aetna, 389 Pa. 459, 134 A.2d 223
(1957)
 The Birth Center v. The St. Paul Companies,
Inc., 567 Pa. 386, 787 A.2d 376 (2001)
Statutory Bad Faith
42 Pa.C.S. § 8371
 In an action arising under an insurance policy, if the
court finds that the insurer has acted in bad faith
toward the insured, the court may take all of the
following actions:
 (1) Award interest on the amount of the claim from the
date the claim was made by the insured in an amount
equal to the prime rate of interest plus 3 percent.
 (2) Award punitive damages against the insurer.
 (3) Assess court costs and attorney’s fees against the
insured.
Burden of Proof and
Elements of Claim
 Clear and Convincing Evidence
 Terletsky v. Prudential Property and Casualty
Ins. Co., 437 Pa. Super. 108, 649 A.2d 680,
688 (Pa. Super. 1994), appeal denied, 659
A.2d 560 (Pa. 1995)
 Defendant did not have a reasonable basis for
denying benefits under the policy
 This is interpreted to be an objective basis
 Defendant knew or recklessly disregarded its lack of
reasonable basis in denying the claim
Ill will and evil motive not
an element
 Greene v. United Servs. Auto. Ass'n
 ill will and evil motive not elements
 Factors that go to second element of
Terletsky test
Bad Faith Claim vs. Bad
Faith Conduct
 Toy v. Metropolitan Life Insurance
Company, 928 A.2d 186 (Pa. 2007)
 What is a cognizable “bad faith” claim?
 Supreme Court appears to say only
failure to pay, indemnify or defend.
 “Bad faith” conduct may be evidence to
establish claim, but is not essence of
claim.
Examples of Contexts for
Bad Faith Conduct
 Investigation failures: inadequacies, delays, mindset of denial,
ignoring evidence
 Poor communications with insured; lying about policy
 Selecting biased neutral arbitrator
 Securing biased witness testimony; ignore witnesses
 Attorney delaying litigation
 UIPA/UCSP violations
 Unreasonable interpretation of policy
 No legal research or failure to consult counsel
 Biased expert selection or instruction as to results
 Inexperienced adjustors; poor or no supervision
 No claims handling guidelines
Bad Faith Conduct During
Litigation
 Erie v. Hollock, 842 A.2d 409 (Pa. Super. 2004)
 If payment not made, conduct may cause delay
 If made, conduct is in the nature of concealment or a
cover-up of other bad faith acts or conduct
 Discovery violations typically not part of bad faith case
 Query to what extent evidence of bad faith conduct
during bad faith litigation itself is admissible if the claim
has been fully paid by that time.
What is not bad faith
conduct.
 Claims procedures must be reasonable not perfect, i.e.
claims process need not be flawless
 Conclusions of investigation need not be correct, if
reasonable
 Reasonable, if incorrect, policy interpretation
 Need not eliminate all possibilities at odds with
conclusion
 Settlement offer can be reasonable even if less than
insured would like
 Carrier is permitted to defend itself vigorously
 Carrier can reverse position in light of new information
 See, e.g., Employers Mutual v. Loos p. 159
Appraisals
 In a property damage case, be aware of
whether an appraisal provision exists that
would allow the insurer to take the matter to an
appraisal where each party can pick their own
damage appraiser, who then mutually select an
umpire to decide the proper amount. Invoking
this process promptly, if available under policy,
may avoid claims of bad faith. Cf. Borden v.
Amica Mutual Insurance Company, No. 04-175,
2006 U.S. Dist. LEXIS 75069 (W.D. Pa.
September 30, 2006).
Contractual Bad Faith
 Fiduciary duty of good faith created by
contract
 No tort duty of good faith at common law
 Breach of duty must be established by
clear and convincing evidence
 Only need to prove negligence, unlike §
8371
Bad Faith & Failure to
Settle (Cowden)
 The insurer refusing to settle must accord its insured the same
faithful consideration it gives its own interest in determining
whether to settle a case
 There is a bona fide belief that there is a good possibility of
winning the case
 The chance of a finding of non-liability must be real and
substantial;
 Look to environmental factors (judge, jury, similar cases, quality of
witnesses) and
 The decision to litigate must be made honestly.
 The insurer’s sincere belief in its position by itself is insufficient to
defeat a contractual bad faith claim when failing to settle (DeWalt
v. The Ohio Casualty Insurance Company, 513 F. Supp. 2d 287
(E.D. Pa. April 10, 2007))
Statutory and Contract
Remedies Compared
 A breach of insurance contract claim permits recovery
of unpaid sums due and costs of defense
 Under Cowden, contractual bad faith permits recovery
of excess verdict where insurer failed to settle within
policy limits
 Birth Center also permits recovery of consequential
damages, including, e.g., damages to business
reputation
 Statute only goes to attorneys’ fees, punitives and
super interest
 Attorneys’ fees, costs, consequential damages (Corch),
can be used as part of basis upon which to calculate
punitive damages, as well as unpaid benefits
Discovery: Usual areas of
pursuit and dispute
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Claims file
Manuals/Procedures
Reserves
Personnel files
Other cases (Punitives “nexus” analysis)
Underwriting
Financial statements
Communications with counsel
Attorney client issues
 Advice of Counsel
 Majority view is only discoverable if affirmatively raised
 Minority view is raised as soon as carrier says it acted in good
faith
 Attorney as claim handler: no privilege or work
product protection because not acting as attorney
 Scope of the privilege: Under strict reading of 42
Pa.C.S. 5928, no privilege for communications from
attorney to lawyer that do not include communications
from client. (Gillard v. AIG and Nationwide v. Fleming)
 Work product privilege requires anticipation of litigation
Experts
 Not required
 Not permitted where fact finder capable of determining
reasonableness or as to subjective intent
 Not permitted on legal conclusions
 Permitted for complex or technical insurance issues
 Must have adequate basis in facts for report
 Trial court has discretion in allowing
 Experts have been allowed to testify on:
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Claims procedures
Reasonableness of insurer conduct
Compliance with statutes, regs and industry standards
Mindset of denial (Corch p. 283)
Procedural Basics
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Two year statute of limitations, § 8371
Jury trial in Federal Court, § 8371
No jury in State Court, § 8371
Be aware of removal issues (jurisdictional
amount, fraudulent joinder)
 Be aware of preemption issues (ERISA)
 Defendant not subject to § 8371 because
of status as non-insurer
The Law of Punitive
Damages
 Be sure to look at U.S. Supreme Court precedent
 Ratio is no more than 9 to 1, in most cases
 Elements to Consider
 The degree of reprehensibility of the defendant's
misconduct.
 The disparity between the actual or potential harm
suffered by the plaintiff and the punitive damages
award.
 The difference between the punitive damages
awarded by the jury and the civil penalties
authorized or imposed in comparable cases.
 Pennsylvania courts will clearly still consider the
wealth of the defendant.
More Elements to
Punitives
 Reprehensibility Factors (“The existence of any one of
these factors weighing in favor of a plaintiff may not be
sufficient to sustain a punitive damages award; and the
absence of all of them renders any award suspect.”)
 The harm caused was physical as opposed to
economic.
 The tortious conduct evinced an indifference to or a
reckless disregard of the health or safety of others.
 The target of the conduct had financial vulnerability.
 The conduct involved repeated actions or was an
isolated incident.
 The harm was the result of intentional malice,
trickery, or deceit, rather than mere accident.
Jury can’t consider nonparties’ harm in punitives/but
can be told of them!
 Philip Morris, USA v. Williams, 127 S. Ct. 1057
(2007)
 Jury can not award punitive damages based
upon harm to others.
 But, evidence of harm to others is relevant to
the reprehensibility prong of the punitive
damages analysis.
 Up to Judges to give proper instructions and
take other steps to avoid due process
violations.
Bifurcation
 Federal Rule of Civil Procedure Rule 42(b) provides for
separate trials: (1) to further convenience; or (2) to
avoid prejudice; or (3) “when separate trials will be
conducive to expedition and economy....”
 The last line of F.R.C.P. 21 states: “The court may also
sever any claim against a party.”
 Pennsylvania Rule of Civil Procedure 213(b): “The
court, in furtherance of convenience or to avoid
prejudice, may, on its own motion or on motion of any
party, order a separate trial of any cause of action,
claim, or counterclaim, set-off, or cross-suit, or of any
separate issue, or of any number of causes of action,
claims, counterclaims, set-offs, cross-suits, or issues.”
Everyone is cool answering
to themselves only.
Will the reasoning hold up
under objective scrutiny?
How will your witness fare
at trial?