Bad Faith Claims Litigation by jolinmilioncherie


									                                            Bad Faith

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                                            PENNSYLVANlA BAR INSTITUTE
                                            Continuing Educatio n Ar m of t be Pe"nsylvania Bar Association
            PBI.No. 2011 - 6982             • • • •_ - - - - --            SRIN GING EXC EL LENC E TO CLE
                          TRIAL CONSIDERATIONS

                                                Steven B. Davis
                                                 Karl S. Myers
                                     Stradley Ronon Stevens & Young, LLP

This will provide an overview of certain considerations pertinent to trying “bad faith” claims in
Pennsylvania courts.1

The Deciders: Judges, Juries and Arbitrators

At present, a policyholder does not have the right to seek a jury trial in Pennsylvania state court
on whether an insurer’s conduct violates Pennsylvania’s bad faith statute, 42 Pa.C.S.A. §8371.
Conversely, the right to a jury trial on bad faith in Pennsylvania does exist in federal court.

In Mishoe v. Erie Insurance Co., 762 A.2d 369 (Pa.Super. 2000), aff’d, 824 A.2d 1153 (Pa.
2003), the Pennsylvania’s Supreme Court held that there is no right to a jury trial in an action for
bad faith against an insurer. The Court focused on the language in §8371 stating that “if the
court finds that that he insurer acted in bad faith. . . the court may take all of the following
actions….” Federal courts, on the other hand, have ruled that a jury trial must be permitted
because of the requirements of the Seventh Amendment to the U.S. Constitution. There are also
a number of state and federal court decisions affirming that arbitrators can decide issues of bad
faith and resultant punitive damages (except in UM/UIM matters, in which courts have
determined that arbitrators may not decide issues of bad faith under §8371).

The fact that jury trials on the bad faith issue are available in Pennsylvania federal courts, but not
state courts, can impact forum selection by the policyholder, removal decisions by the defendant

    Pennsylvania’s “bad faith statute” provides:

      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%;

      (2) Award punitive damages against the insurer; and

      (3) Assess court costs and attorney's fees against the insurer.

42 Pa.C.S.A. § 8371.

insurers, and other strategy throughout a litigation, including whether and how to use experts, as
well as whether and when to seek bifurcation of discovery and trial issues. In making these
strategic decisions, it should be noted that the Mishoe decision does not stand for the proposition
that there can be no jury trial in a state court insurance coverage action. To the contrary,
although it is traditionally the court’s role to decide the meaning of a policy, a jury still might
decide questions of fact pertinent to the dispute – just not whether an insurer’s conduct
constituted bad faith under §8371.

The Burden of Proof: The evidence of bad faith must be “clear and convincing”

To recover for a claim of bad faith under § 8371, the policyholder must show that the insurer: (1)
did not have a reasonable basis for denying benefits under the policy, and (2) knew or recklessly
disregarded its lack of a reasonable basis in denying the claim. Terletsky v. Prudential Property
and Casualty Insurance Co., 437 Pa. Super. 108, 649 A.2d 680, 689-90 (1994). Although the
term “bad faith” on the part of an insurer is construed as encompassing “any frivolous or
unfounded refusal to pay proceeds of a policy” and ordinarily imports “a dishonest purpose and
means a breach of a known duty (i.e., good faith and fair dealing), through some motive of self-
interest or ill-will[,]” the statute does not require a plaintiff to prove that the insurer consciously
acted pursuant to such a motive or interest; it is enough if the insurer recklessly disregarded the
lack of a reasonable basis in denying benefits. Klinger v. State Farm Mutual Automobile Ins.
Co., 115 F.3d 230, 233 (3d Cir. 1997) (quoting Terletsky, 437 Pa.Super. 108, 649 A.2d 680,

Pennsylvania law defines reckless conduct as the “intentional acting or failing to act in complete
disregard of a risk of harm to others which is known or should be known to be highly probable
and with a conscious indifference to the consequences.” Pennsylvania's Suggested Standard Jury
Instructions, at 3.10. It has long been recognized that mere negligence in ascertaining whether a
claim is covered is insufficient to support a recovery for bad faith practices. See Polselli v.
Nationwide Mutual Fire Ins. Co., 23 F.3d 747, 751 (3d Cir. 1994); Jung v. Nationwide Mutual
Ins. Co., 949 F. Supp. 353, 356 (E.D. Pa 1997). It is likewise clear that an incorrect analysis of
the applicable law is insufficient to sustain bad faith liability. See Jung, 949 F. Supp. at 356;
Terletsky, 659 A.2d at 690 (opining that where Pennsylvania law was in flux with regard to its
application to the matter at hand, insurer had reasonable basis for disputing claim of coverage
which precluded claim of bad faith, even though insurer was mistaken as to availability of
coverage under law as clarified by appellate court); Polselli, 23 F.3d at 752 (noting that complex
factual situation which created uncertainty as to application of law to facts may mitigate against
finding of bad faith, as may animosity generated by the parties' treatment of each other in
attempting to identify their respective rights and resolve the matter).

Each element of a bad faith claim must be established by evidence which is “clear, direct,
weighty and convincing, so as to enable the [factfinder] to make its decision with a ‘clear
conviction.” Polselli, 23 F.3d at 752. Thus, an insurer's bad faith conduct may not be merely
insinuated. Terletsky, 649 A.2d at 688.

Is Bifurcation Right For Your Case?

There are times when bifurcating the coverage and other issues from the bad faith case makes
sense for some or all of the parties. Bifurcating the bad faith claim may be a strategy for
discovery purposes, trial purposes or both. Whether bifurcation may be appropriate usually
depends on the nature of the coverage dispute, and in cases where an underlying claim is still
active or otherwise in litigation, the status of that underlying claim will need to be considered.
For example, if the reasonableness of a denial of coverage involves questions about information
obtained through developments in an ongoing underlying litigation, the insured or insurer may
prefer to bifurcate bad faith issues to avoid impacting other developments in the underlying
litigation. Generally, if the parties are not in agreement about bifurcation, a showing will need to
be made that bifurcation would create material efficiencies in resolving the case.

In federal court, under Federal Rule of Civil Procedure 42(b), the court has discretion to
bifurcate separate claims and issues “[f]or convenience, to avoid prejudice, or to expedite and
economize.” Fed. R. Civ. P. 42(b). The decision to bifurcate a trial “is a matter to be decided on
a case-by-case basis and must be subject to an informed discretion by the trial judge in each
instance.” Yellowbird Bus Co., Inc. v. Lexington Ins. Co., No. 09-5835, 2010 WL 2766987 (E.D.
Pa. July 12, 2010): The moving party bears the burden of showing that bifurcation would “serve
judicial economy, avoid inconvenience, and not prejudice any of the parties.” In Yellowbird, the
court denied motion to bifurcate where discovery pertaining to a breach of contract claim
substantially overlapped with bad faith insurance claim. Compare AstenJohnson v. Columbia
Cas. Co., No. 03-1552, 2006 WL 1791260 (E.D. Pa. June 22, 2006) (Court granted insurer’s
motion to bifurcate the bad faith claim, finding that “if plaintiff is not ultimately successful on its
claim for declaratory judgment, there will be no need for evidence to be introduced on the bad
faith claim.”).

Pennsylvania state courts also have considered whether bifurcation is appropriate. In
Telecommunications Network Design v. Brethren Mut. Ins. Co., 5 A.3d 331 (Pa. Super. Ct.
2001), it was noted that the trial court bifurcated the issues of coverage and indemnity, reasoning
that the issues of indemnification and bad faith were pertinent only if the insurer had a duty to
defend in the underlying action. Compare Yohe v. Nationwide Mut. Life Ins. Co., 7 Pa. D. &
C.4th 300 (York Co. Ct. Com. Pl. 1990) where the trial court rejected the insurer’s contention
that a claim on the policy should be bifurcated from the bad faith claim, finding that the
questions of whether the plaintiffs were entitled to recover on the policy and the defendant’s
alleged bad faith were closely related, and thus, judicial economy dictated that the two be heard
in the same setting.

Using Experts

In Pennsylvania, experts are not required to establish bad faith. See Bergman v. USAA, 742 A.2d
1101 (Pa. Super. 1999). However, insurance claims experts are often used to provide testimony
on whether the insurance company handled the claim properly, in bad faith, or in accordance
with insurance industry practices and standards. Claims experts also can provide the trier of fact
with an important understanding of how the insurance claims business works. Use of experts –
and picking the right one for your case – is another strategic consideration that can significantly

impact the value of a case.

Admission of expert testimony is a matter that “rests within the sound discretion of the trial
court.” Mora v. Nationwide Mut. Fire Ins. Co., 64 Pa. D. & C.4th 496 (Lawrence C.P. 2003). In
coverage disputes involving allegations of bad faith, there often is concern, and ultimately pre-
trial briefing, over whether an expert’s planned testimony may invade the court's province – e.g.,
in determining whether an interpretation of a policy was reasonable or, in essence, determining
whether the policy language is ambiguous. For an excellent article discussing this issue, see
“The Scope of Expert Testimony In Insurance Bad Faith Cases: Can the Expert Testify On the
Meaning of the Insurance Policy?” 15 Conn. Ins. L.J. 211 (Fall, 2008).

A couple of the more explanatory cases that have looked at use of experts on bad faith issues
include: (1) Dinner v. United Services Auto. Ass’n Cas. Ins. Co., 29 F. App’x 823 (3d Cir.
2002): Under Pennsylvania law, proffered expert testimony that insurer violated Unfair
Insurance Practice Act (UIPA) and the Unfair Claims Settlement Practices (UCSP) regulations in
handling insured's claim for underinsured motorist benefits was excludable as more prejudicial
than probative, in insured's subsequent bad faith action, as conduct prohibited by UIPA and
UCSP was not determinative of the bad faith issue, which related to whether the insurer had a
reasonable basis for denying benefits under the policy and knew or recklessly disregarded its
lack of reasonable basis in denying the claim; (2) McCrink v. People’s Benefit Life Ins. Co., 2005
WL 730688, 66 Fed. R. Evid. Serv. 1082 (E.D.Pa., March 29, 2005): Judge Davis analyzed an
expert’s opinion testimony and determined that the court would not consider the testimony on
issues of contract construction, but would consider it on whether the insurer’s claim handling
constituted bad faith; and (3) Gallatin Fuels v. West Chester Fire Ins. Co., 244 Fed.Appx. 424,
2007 WL 2274437 (3d Cir. 2007) (same).

Jury Instructions

Currently, Pennsylvania’s Suggested Standard Civil Jury Instructions (Third Edition – Vol. II)
includes four (4) instructions for “bad faith” claims. As discussed above, in Mishoe v. Erie
Insurance Co., 762 A.2d 369 (Pa.Super. 2000), affd, 824 A.2d 1153 (Pa. 2003), the court held
that there is no right to a jury trial in an action for bad faith against an insurer. After Mishoe, the
applicability of the subject bad faith jury instructions is more limited in state court, but they are
still used in federal court and referenced in decisions and briefing. Jury instructions on issues
pertinent to bad faith are often subject to pre- and post-trial debate. See, e.g., Gallatin Fuels, Inc.
v. Westchester Fire Ins. Co., 2006 WL 1580251 (W.D.Pa.). The suggested instructions are:


            The plaintiff asserts a claim in this case for what is known as
        insurance bad faith. Under the law, an insurance company must act
        with the utmost good faith and fair dealing toward its insured, and give
        the interests of its insured the same faithful consideration that it gives

its own interests. This heightened duty arises because of the special
relationship between an insurer and its insured and the nature of the
insurance contract.

    An insurance company acts in bad faith if it: (1) does not have a
reasonable basis for what it does, and (2) knows or recklessly disregards
its lack of a reasonable basis.

    Put another way, bad faith occurs if an insurer knowingly or
recklessly acts without a reasonable basis in handling an insured’s

    In deciding whether or not an insurance company acted in bad faith
toward its insured, you consider all of the company’s actions, including
its responses to communications from its insured, its investigation of
the claim, and its handling of settlement negotiations. If you find that
the defendant knowingly or recklessly acted without a reasonable basis,
your verdict must be for the plaintiff.

                           SUBCOMMITTEE NOTE
    First-party bad faith in Pennsylvania has as its genesis the bad faith
statute, 42 Pa.C.S. § 8371, which creates a new cause of action and, in effect,
abrogates the holding of D’Ambrosio v. Pennsylvania National Mutual Casualty
Insurance Co., 431 A.2d 966 (Pa. 1981), in which case the court expressly
refused to recognize a cause of action in tort for first-party bad faith. For case
law involving the definition of bad faith, see Terletsky v. Prudential Property &
Cas. Ins. Co., 649 A.2d 680, 688 (Pa.Super. 1994), app. denied, 659 A.2d 560
(Pa. 1995); Romano v. Nationwide Mutual Fire Ins. Co., 646 A.2d 1228, 1231
(Pa.Super. 1994); Cowden v. Aetna Cas. & Sur. Co., 134 A.2d 223, 228 (Pa.
1957). See also Klinger v. State Farm Mutual Auto. Ins. Co., 115 F.3d 230, 233
(3d Cir. 1997); Polselli v. Nationwide Mutual Fire Ins. Co., 126 F.3d 524, 530 (3d
Cir. 1997); Polselli v. Nationwide Mutual Fire Ins. Co., 23 F.3d 747, 751 (3d Cir.
1994); Klinger v. State Farm Mutual Auto. Ins. Co., 895 F.Supp. 709, 713 (M.D.
Pa. 1995).
    In Mishoe v. Erie Insurance Co., 762 A.2d 369 (Pa.Super. 2000), affd, 824
A.2d 1153 (Pa. 2003), the court held that there is no right to a jury trial in an
action for bad faith against an insurer.

*        *    *       *      *       *       *      *      *       *      *


    An insurance company acts recklessly if it acts with conscious
disregard or deliberate indifference to the rights of its insured.

                            SUBCOMMITTEE NOTE
   See Polselli v. Nationwide Mutual Fire Ins. Co., 23 F.3d 747, 751 (3d Cir.
1994). See Birth Center v. St. Paul Cos., 787 A.2d 376 (Pa. 2001).

  *      *      *       *      *      *      *      *      *       *      *

                    INSURANCE COMPANY

   When an insurance company designates an attorney to communicate
with its insured, the actions of the attorney are those of the insurance

   In this case, therefore, because the defendant authorized Attorney
[name of attorney] to act as its spokesperson, the actions of [name of
attorney] were those of the defendant.

                            SUBCOMMITTEE NOTE
   See Klinger v. State Farm Mutual Auto. Ins. Co., 115 F.3d 230, 234 (3d Cir.

  *      *      *       *      *      *      *      *      *       *      *

                13.31 (CIV) THIRD-PARTY BAD FAITH

   An insurance company has a duty to act in good faith in handling
claims against its insured. By inserting in its policy the right to handle
all claims against the insured, including the right to make a binding
settlement, the insurer assumes a fiduciary position toward the insured
and becomes obligated to act in good faith and with due care in
representing the interests of the insured. If the insurer is derelict in this
duty, it may be liable regardless of the limits of the policy for the entire
amount of the judgment secured against the insured. This does not
mean that an insurance company has an absolute duty to settle a claim
against the insured merely because a possible judgment against the
insured may exceed the policy limits. However, the insurer must give
due consideration to the interests of the insured, as well as its own
interest in determining whether to settle or litigate a case. This good-
faith standard imposed on the insurer under Pennsylvania law requires
more than mere proof of sincerity. Intelligent and objective evaluation of

the case by the insurer must be done in order to best determine the
advisability of settlement. Where there is little or no likelihood of a
verdict within the limits of the policy’s coverage and the injured third
party has offered to settle his or her claim within policy limits, the
insurer must act with the utmost good faith toward the insured in
deciding whether to settle the claim or risk litigation. Good faith requires
that the chance of a finding of non-liability be real and substantial and
that the decision to litigate be made honestly. Failure to offer policy
limits does not evidence bad faith where there was no possibility of
settlement within the policy limits. There must be an expressed
willingness on the part of the third party, the plaintiff in the underlying
litigation, at some point in time, to accept an offer of policy limits.

   The good faith or motives of the plaintiff during settlement
negotiations are irrelevant because there is no duty running between the
claimant and the insurer. The insistence of an insured that the case be
tried rather than settled is a bar to a bad-faith claim against the
insurance company. If the refusal to settle would be a reasonable course
despite the exposure of the company to the full amount of the ultimate
verdict, the refusal to settle is made in good faith. The insurer’s
obligation of good faith requires that a settlement be refused only where
the chance of a finding of non-liability is real and substantial, and the
decision to litigate is honestly made.

                            SUBCOMMITTEE NOTE
    The fiduciary responsibility of the insurer is grounded in the case of Gedeon
v. State Farm Mutual Automobile Insurance Co., 188 A.2d 320 (Pa. 1963). See
also Gray v. Nationwide Mutual Ins. Co., 223 A.2d 8 (Pa. 1966). Cases that
support the wording of this instruction include Cowden v. Aetna Casualty &
Surety Co., 134 A.2d 223 (Pa. 1957); Hall v. Brown, 526 A.2d 413 (Pa.Super.
1987), app. denied, 564 A.2d 916 (Pa. 1989); Shearer v. Reed, 428 A.2d 635
(Pa.Super. 1981), and Ashbrook v. Kowalick, 332 F.Supp. 78 (E.D. Pa. 1971),
affd, 474 F.2d 1338 (3d Cir. 1973). The case of Puritan Insurance v. Canadian
Universal Insurance Co., 775 F.2d 76 (3d Cir. 1985), rejects the notion that the
duty of good faith extends beyond the parties to the contract but does support
the proposition that there is no duty to settle within policy limits where an
insured prevents settlement. In Ashbrook, above, the federal court applying
Pennsylvania law held that the insurance company’s bad faith in refusing to
settle within its $10,000 policy limits was for the jury notwithstanding the fact
that the company offered its policy limits two years before trial, inasmuch as
the plaintiff had offered to settle for policy limits 11 months earlier and placed a

two-week time limit on its offer. The issue of an insurance company’s liability
for bad faith where it is offered the policy limits prior to trial has never been
ruled on by the appellate courts of Pennsylvania and, in each of the cases
decided by the Pennsylvania Supreme Court in this area, the insurance
company did not offer its policy limits at any time prior to trial. However, there
is no Pennsylvania appellate authority that indicates that an offer to settle on
the eve of trial precludes an action for bad faith refusal to settle.
    The instruction includes a number of components, some of which may not
be applicable to each and every case. The trial judge should eliminate those
factual predicates that do not apply.


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