1. RECENT DEVELOPMENTS IN PENNSYLVANIA BAD FAITH LITIGATION
Presented to:
BELL & CLEMENTS
APRIL 4, 2006
S. David Fineman, Esquire
Jay Barry Harris, Esquire
FINEMAN KREKSTEIN & HARRIS

2. ANALYZING THE BAD FAITH STATUTE

3. 42 P.S.C.A. §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 the following actions:

4. 42 P.S.C.A. §8371
(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%.
(2) Award punitive damages against the insurer.
(3) Assess court costs and attorney fees against the insurer.

5. INDEPENDENT CAUSE OF ACTION
Not dependent upon breach of contract claim
Can survive even if breach of contract claim is dismissed, i.e. statute of limitations

6. SCOPE OF BAD FAITH STATUTE
Applies to insurance companies
Does not apply to self-insureds, insurance agents, claim representatives, peer review physicians, investigators and third party claim administrators
Applies to unreasonable, intentional or reckless denial of benefits
Does not apply to wrongful cancellation of an insurance policy, solicitation of customers or attempts to regulate the insurance industry

7. “ACTED IN BAD FAITH” Bad faith is not defined in the statute
Defined by the case law as any frivolous or unfounded refusal to pay proceeds of a policy
Fraud not necessary
Dishonest purpose
Breach of a known duty (good faith and fair dealing)
Acting in self interest or ill will
Negligence or bad judgment insufficient

8. BURDEN OF PROOF Clear and convincing evidence
Higher threshold than “more likely than not” standard
Evidence must be clear, direct, weighty and convincing to demonstrate bad faith

9. DAMAGES STATUTORY DAMAGES Interest Punitive Damages
Court costs and attorney’s fees
CONSEQUENTIAL
DAMAGES
Breach of duty of good faith and fair dealing
Liable for known and foreseeable compensatory damages
Emotional distress?

10. STATUTE OF LIMITATIONS
Triggered by denial letter:
Action under Bad Faith Statute - akin to a tort claim – two year statute of limitations
Breach of Good Faith and Fair Dealing – contract claim – four year statute of limitations

11. JURY TRIAL DETERMINED BY VENUE
Federal Court - Jury trial
State Court - No jury trial
Caveat - breach of contract claim can still be tried by jury in state court

12. EXAMPLES OF BAD FAITH Failure to investigate
Failure to perform legal research
Reliance on untrustworthy expert report
Unreasonable interpretation of policy provisions
Misrepresentation of fact or policy provisions

13. COMMON LAW OR THIRD PARTY BAD FAITH

14. TRIPARTITE RELATIONSHIP
Insured
Defense counsel
Insurer

15. DUTIES ASSUMED UNDER THE TRIPARTITE RELATIONSHIP
Insurer will investigate, appoint counsel, defend and/or settle claim
Insurer and Insured – fiduciary relationship
Defense Counsel appointed to defend Insured
Defense Counsel and Insured – attorney-client relationship

16. ASSESSING INSURED’S EXPOSURE
Insurer must consider the following:
Risk of Liability
Range of an adverse verdict
Strengths and weaknesses of all the evidence

17. ASSESSING INSURED’S EXPOSURE continued …
Insurer must consider the following:
Verdict history of the particular geographic area in similar cases
Claimant’s, insured’s and witness’ appeal and persuasiveness at trial
Keep insured reasonably informed of significant developments

18. PURSUING A COMMON LAW BAD FAITH CLAIM
The Insured
The Claimant through an assignment
Garnishment

19. INSURER’S FAILURE TO FILE DECLARATORY ACTION
Underlying action resolved, without insurer providing a defense
Insurer could not test factual allegations established in the underlying action
Insurer proceeds at its own peril

20. BAD FAITH CONDUCT DURING LITIGATION

21. EXAMPLES OF BAD FAITH Failure to offer legitimate defense
Failure to properly prepare for deposition to avoid providing meaningful answers
Instructing company witnesses not to properly prepare for depositions
Failure to disclose the actual policy limits
Relying on a shoddy expert report
Failure to make realistic settlement offers where liability is established

22. REQUESTING INSURED TO RELEASE BAD FAITH CLAIM
Was the underlying claim disputed?
Did insurer offer to settle the sum owed?
Was insurer’s offer contingent upon demanding a release of the contractual and bad faith claim?

23. UNFAIR INSURANCE PRACTICES ACT
May be considered when determining whether an insurer acted in bad faith
Limited to allege violations relevant to underlying action
All violations of the UIPA are not related to denial of benefits

24. BAD FAITH IS NOT … Litigating a disputed claim
Being involved in discovery disputes
Refusing to make an offer in a frivolous suit
Asserting policy defenses where insured breaches the insurance contract, i.e. fails to cooperate
Issuing a reservation of rights letter

25. REVERSE BAD FAITH Insured commits fraud
No breach of contract by insurer
Recoup costs, attorney’s fees

26. DISCOVERY ISSUES IN BAD FAITH LITIGATION

27. CLAIMS AND TRAINING MANUALS
Unduly burdensome and broad request
Trade secrets
Focus on the policy provisions in dispute
Focus on the instructions and procedures relevant to cause of action
In camera review
Cost shifting

28. PERSONNEL FILES
Relevant if contains performance and field reviews of those handling insured’s claim
Supervisor’s personnel file may also be relevant
Privacy issues

29. RESERVES Ordinary course of business
Germane to insurer’s valuation of the claim
Work product privilege
Relevance

30. EROSION OF ATTORNEY-CLIENT PRIVILEGE
Advice-of-counsel defense
Did insurer seek legal advice on certain subjects?
Information related to the insurer’s seeking of, or failure to seek, legal advice on the interpretation of the issues

31. EROSION OF ATTORNEY-CLIENT PRIVILEGE continued …
Any legal decision, authority or secondary source that carrier relied upon to determine the meaning of an exclusion
Attorney acting as the lead investigator

32. PUNITIVE DAMAGE CLAIMS
Other litigation
Nationwide policies
Wealth of company
Is there a nexus between other actions and individual plaintiff’s specific harm?

33. AVOIDING BAD FAITH

34. AVOIDING BAD FAITH Communication – with insurer and to the insured
Avoid mindset of denial
Weigh all factors before refusing to settle
Once obligation is clear, make payment without delay
Respond promptly
Evaluate all the information before making a coverage decision

35. AVOIDING BAD FAITH continued …
Seek legal counsel where law is not clear
Independently analyze all data
Know your policies and procedures
Assume anything in writing is discoverable
Spend the time to properly prepare your defense to a bad faith claim
Always respond to settlement demand