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

ANALYZING THE BAD FAITH STATUTE

42 P.S.C.A. § 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:

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.

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

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

“ACTED IN BAD FAITH” Bad faith is not defined in the statute 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 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

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

DAMAGES STATUTORYDAMAGES  Interest  Punitive Damages  Court costs and attorney’s fees CONSEQUENTIALDAMAGES  Breach of duty of good faith and fair dealing  Liable for known and foreseeable compensatory damages  Emotional distress?

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

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

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

COMMON LAW OR THIRD PARTY BAD FAITH

TRIPARTITE RELATIONSHIP Insurer Defense counsel Insured

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

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

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

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

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

BAD FAITH CONDUCT DURING LITIGATION

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

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?

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

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

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

DISCOVERY ISSUES IN BAD FAITH LITIGATION

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

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

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

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

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

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

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

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