RECENT DEVELOPMENTSRECENT DEVELOPMENTSIN PENNSYLVANIAIN PENNSYLVANIA

BAD FAITH LITIGATIONBAD FAITH LITIGATION

Presented to:Presented to:

BELL & CLEMENTSBELL & CLEMENTS

APRIL 4, 2006APRIL 4, 2006

S. David Fineman, EsquireS. David Fineman, Esquire

Jay Barry Harris, EsquireJay Barry Harris, Esquire

FINEMAN KREKSTEIN & HARRISFINEMAN KREKSTEIN & HARRISwww.finemanlawfirm.comwww.finemanlawfirm.com

ANALYZING THE ANALYZING THE BAD FAITH BAD FAITH STATUTESTATUTE

42 P.S.C.A. §837142 P.S.C.A. §8371

In an action arising under an In an action arising under an insurance policy, if the court insurance policy, if the court finds that the insurer has acted finds that the insurer has acted in bad faith toward the in bad faith toward the insured, the court may take all insured, the court may take all the following actions:the following actions:

42 P.S.C.A. §837142 P.S.C.A. §8371

(1)(1) Award interest on the amount Award interest on the amount of of the claim from the date the the claim from the date the claim claim was made by the insured was made by the insured in an in an amount equal to the prime amount equal to the prime rate of rate of interest plus 3%.interest plus 3%.

(2)(2) Award punitive damages Award punitive damages against against the insurer.the insurer.

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

INDEPENDENT CAUSE OF INDEPENDENT CAUSE OF ACTIONACTION

Not dependent upon breach of contract Not dependent upon breach of contract claimclaim

Can survive even if breach of contract Can survive even if breach of contract claim is dismissed, i.e. statute of claim is dismissed, i.e. statute of limitationslimitations

SCOPE OF BAD FAITH STATUTESCOPE OF BAD FAITH STATUTE

Applies to insurance companiesApplies to insurance companies Does not apply to self-insureds, insurance Does not apply to self-insureds, insurance

agents, claim representatives, peer review agents, claim representatives, peer review physicians, investigators and third party physicians, investigators and third party claim administratorsclaim administrators

Applies to unreasonable, intentional or Applies to unreasonable, intentional or reckless denial of benefitsreckless denial of benefits

Does not apply to wrongful cancellation of Does not apply to wrongful cancellation of an insurance policy, solicitation of an insurance policy, solicitation of customers or attempts to regulate the customers or attempts to regulate the insurance industryinsurance industry

““ACTED IN BAD FAITH”ACTED IN BAD FAITH”

Bad faith is not defined in the statuteBad faith is not defined in the statute Defined by the case law as any frivolous Defined by the case law as any frivolous

or unfounded refusal to pay proceeds of a or unfounded refusal to pay proceeds of a policypolicy Fraud not necessaryFraud not necessary Dishonest purposeDishonest purpose Breach of a known duty (good faith and fair Breach of a known duty (good faith and fair

dealing)dealing) Acting in self interest or ill willActing in self interest or ill will Negligence or bad judgment insufficientNegligence or bad judgment insufficient

BURDEN OF PROOFBURDEN OF PROOF

Clear and convincing evidenceClear and convincing evidence Higher threshold than “more likely than Higher threshold than “more likely than

not” standardnot” standard Evidence must be clear, direct, weighty Evidence must be clear, direct, weighty

and convincing to demonstrate bad faithand convincing to demonstrate bad faith

DAMAGESDAMAGES

STATUTORYSTATUTORYDAMAGESDAMAGES

InterestInterest Punitive DamagesPunitive Damages Court costs and Court costs and

attorney’s feesattorney’s fees

CONSEQUENTIALCONSEQUENTIALDAMAGESDAMAGES

Breach of duty of Breach of duty of good faith and fair good faith and fair dealingdealing

Liable for known Liable for known and foreseeable and foreseeable compensatory compensatory damagesdamages

Emotional Emotional distress?distress?

STATUTE OF LIMITATIONSSTATUTE OF LIMITATIONS

Triggered by denial letter:Triggered by denial letter:

Action under Bad Faith Statute - akin to a Action under Bad Faith Statute - akin to a tort claim – two year statute of limitationstort claim – two year statute of limitations

Breach of Good Faith and Fair Dealing – Breach of Good Faith and Fair Dealing – contract claim – four year statute of contract claim – four year statute of limitationslimitations

JURY TRIALJURY TRIALDETERMINED BY VENUEDETERMINED BY VENUE

Federal Court - Federal Court - Jury trialJury trial

State Court - State Court - No jury trialNo jury trial

Caveat - breach of contract claim can still Caveat - breach of contract claim can still be tried by jury in state courtbe tried by jury in state court

EXAMPLES OF BAD FAITHEXAMPLES OF BAD FAITH

Failure to investigateFailure to investigate Failure to perform legal researchFailure to perform legal research Reliance on untrustworthy expert reportReliance on untrustworthy expert report Unreasonable interpretation of policy Unreasonable interpretation of policy

provisionsprovisions Misrepresentation of fact or policy Misrepresentation of fact or policy

provisionsprovisions

COMMON LAW ORCOMMON LAW ORTHIRD PARTY BAD THIRD PARTY BAD

FAITHFAITH

TRIPARTITE RELATIONSHIPTRIPARTITE RELATIONSHIP

InsurerDefense counsel

Insured

DUTIES ASSUMED UNDER THE DUTIES ASSUMED UNDER THE TRIPARTITE RELATIONSHIPTRIPARTITE RELATIONSHIP

Insurer will investigate, appoint counsel, Insurer will investigate, appoint counsel, defend and/or settle claimdefend and/or settle claim

Insurer and Insured – fiduciary Insurer and Insured – fiduciary relationshiprelationship

Defense Counsel appointed to defend Defense Counsel appointed to defend InsuredInsured

Defense Counsel and Insured – attorney-Defense Counsel and Insured – attorney-client relationshipclient relationship

ASSESSING INSURED’S ASSESSING INSURED’S EXPOSUREEXPOSURE

Insurer must consider the following:Insurer must consider the following:

Risk of LiabilityRisk of Liability Range of an adverse verdictRange of an adverse verdict Strengths and weaknesses of Strengths and weaknesses of allall the the

evidenceevidence

ASSESSING INSURED’S ASSESSING INSURED’S EXPOSUREEXPOSUREcontinued …continued …

Insurer must consider the following:Insurer must consider the following:

Verdict history of the particular Verdict history of the particular geographic area in similar cases geographic area in similar cases

Claimant’s, insured’s and witness’ appeal Claimant’s, insured’s and witness’ appeal and persuasiveness at trialand persuasiveness at trial

Keep insured reasonably informed of Keep insured reasonably informed of significant developmentssignificant developments

PURSUING A COMMON LAWPURSUING A COMMON LAWBAD FAITH CLAIMBAD FAITH CLAIM

The InsuredThe Insured The Claimant through an The Claimant through an

assignmentassignment GarnishmentGarnishment

INSURER’S FAILURE TO FILEINSURER’S FAILURE TO FILEDECLARATORY ACTIONDECLARATORY ACTION

Underlying action resolved, without Underlying action resolved, without insurer providing a defenseinsurer providing a defense

Insurer could not test factual allegations Insurer could not test factual allegations established in the underlying action established in the underlying action

Insurer proceeds at its own perilInsurer proceeds at its own peril

BAD FAITH BAD FAITH CONDUCTCONDUCT

DURING LITIGATIONDURING LITIGATION

EXAMPLES OF BAD FAITHEXAMPLES OF BAD FAITH

Failure to offer legitimate defenseFailure to offer legitimate defense Failure to properly prepare for deposition Failure to properly prepare for deposition

to avoid providing meaningful answersto avoid providing meaningful answers Instructing company witnesses not to Instructing company witnesses not to

properly prepare for depositionsproperly prepare for depositions Failure to disclose the actual policy limitsFailure to disclose the actual policy limits Relying on a shoddy expert reportRelying on a shoddy expert report Failure to make realistic settlement offers Failure to make realistic settlement offers

where liability is establishedwhere liability is established

REQUESTING INSURED TO REQUESTING INSURED TO RELEASE BAD FAITH CLAIMRELEASE BAD FAITH CLAIM

Was the underlying claim disputed?Was the underlying claim disputed? Did insurer offer to settle the sum owed?Did insurer offer to settle the sum owed? Was insurer’s offer contingent upon Was insurer’s offer contingent upon

demanding a release of the contractual demanding a release of the contractual and bad faith claim?and bad faith claim?

UNFAIR INSURANCEUNFAIR INSURANCEPRACTICES ACTPRACTICES ACT

May be considered when determining May be considered when determining whether an insurer acted in bad faithwhether an insurer acted in bad faith

Limited to allege violations relevant to Limited to allege violations relevant to underlying actionunderlying action

All violations of the UIPA are not related to All violations of the UIPA are not related to denial of benefitsdenial of benefits

BAD FAITH IS NOT …BAD FAITH IS NOT …

Litigating a disputed claimLitigating a disputed claim Being involved in discovery disputesBeing involved in discovery disputes Refusing to make an offer in a frivolous suitRefusing to make an offer in a frivolous suit Asserting policy defenses where insured Asserting policy defenses where insured

breaches the insurance contract, i.e. fails breaches the insurance contract, i.e. fails to cooperateto cooperate

Issuing a reservation of rights letterIssuing a reservation of rights letter

REVERSE BAD FAITHREVERSE BAD FAITH

Insured commits fraudInsured commits fraud No breach of contract by insurerNo breach of contract by insurer Recoup costs, attorney’s feesRecoup costs, attorney’s fees

DISCOVERY ISSUES IN DISCOVERY ISSUES IN BAD FAITH LITIGATIONBAD FAITH LITIGATION

CLAIMS AND TRAINING CLAIMS AND TRAINING MANUALSMANUALS

Unduly burdensome and broad requestUnduly burdensome and broad request Trade secretsTrade secrets Focus on the policy provisions in Focus on the policy provisions in

disputedispute Focus on the instructions and Focus on the instructions and

procedures relevant to cause of actionprocedures relevant to cause of action In camera reviewIn camera review Cost shiftingCost shifting

PERSONNEL FILESPERSONNEL FILES

• Relevant if contains performance and field Relevant if contains performance and field reviews of those handling insured’s claimreviews of those handling insured’s claim

• Supervisor’s personnel file may also be Supervisor’s personnel file may also be relevantrelevant

• Privacy issuesPrivacy issues

RESERVESRESERVES

Ordinary course of businessOrdinary course of business Germane to insurer’s valuation of the Germane to insurer’s valuation of the

claimclaim Work product privilegeWork product privilege RelevanceRelevance

EROSION OFEROSION OFATTORNEY-CLIENT PRIVILEGEATTORNEY-CLIENT PRIVILEGE

Advice-of-counsel defense Advice-of-counsel defense Did insurer seek legal advice on certain Did insurer seek legal advice on certain

subjects?subjects? Information related to the insurer’s Information related to the insurer’s

seeking of, or failure to seek, legal advice seeking of, or failure to seek, legal advice on the interpretation of the issueson the interpretation of the issues

EROSION OFEROSION OFATTORNEY-CLIENT PRIVILEGEATTORNEY-CLIENT PRIVILEGE

continued …continued …

Any legal decision, authority or secondary Any legal decision, authority or secondary source that carrier relied upon to source that carrier relied upon to determine the meaning of an exclusiondetermine the meaning of an exclusion

Attorney acting as the lead investigatorAttorney acting as the lead investigator

PUNITIVE DAMAGE CLAIMSPUNITIVE DAMAGE CLAIMS

Other litigationOther litigation Nationwide policiesNationwide policies Wealth of companyWealth of company Is there a nexus between other actions Is there a nexus between other actions

and individual plaintiff’s specific harm?and individual plaintiff’s specific harm?

AVOIDING BAD AVOIDING BAD FAITHFAITH

AVOIDING BAD FAITHAVOIDING BAD FAITH

Communication – with insurer and to the Communication – with insurer and to the insuredinsured

Avoid mindset of denialAvoid mindset of denial Weigh all factors before refusing to settleWeigh all factors before refusing to settle Once obligation is clear, make payment Once obligation is clear, make payment

without delaywithout delay Respond promptlyRespond promptly Evaluate all the information before Evaluate all the information before

making a coverage decisionmaking a coverage decision

AVOIDING BAD FAITHAVOIDING BAD FAITHcontinued …continued …

Seek legal counsel where law is not Seek legal counsel where law is not clearclear

Independently analyze all dataIndependently analyze all data Know your policies and proceduresKnow your policies and procedures Assume anything in writing is Assume anything in writing is

discoverablediscoverable Spend the time to properly prepare Spend the time to properly prepare

your defense to a bad faith claimyour defense to a bad faith claim Always respond to settlement demandAlways respond to settlement demand