BAD FAITH BAD FAITH LITIGATIONLITIGATIONFebruary 18, 2008February 18, 2008Lee Applebaum and Michael SaltzmanLee Applebaum and Michael SaltzmanFineman, Krekstein & Harris, P.C.Fineman, Krekstein & Harris, P.C.1735 Market Street, 61735 Market Street, 6 thth Floor FloorPhiladelphia, PA 19103Philadelphia, PA 19103(215) 893-9300(215) 893-9300www.finemanlawfirm.comwww.finemanlawfirm.comwww.Pabadfaithlaw.comwww.Pabadfaithlaw.com

Bad Faith is the Absence Bad Faith is the Absence of Good Faithof Good Faith

There is no such thing as “bad" faithThere is no such thing as “bad" faith Bad faith should not be based on bare Bad faith should not be based on bare

feelings about loyalty, but on actual conduct feelings about loyalty, but on actual conduct reflecting honesty or dishonestyreflecting honesty or dishonesty

Just the facts ma’amJust the facts ma’am

What Does the Law Mean What Does the Law Mean by Bad Faithby Bad Faith

Statutory Bad Faith, 42 Pa.C.S. § 8371Statutory Bad Faith, 42 Pa.C.S. § 8371 Contractual Bad FaithContractual 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 FaithStatutory Bad Faith42 Pa.C.S. § 837142 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 Burden of Proof and Elements of ClaimElements of Claim

Clear and Convincing EvidenceClear 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 basisThis 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 Ill will and evil motive not an elementan element

Greene v. United Servs. Auto. Ass'n ill will and evil motive not elementsill will and evil motive not elements Factors that go to second element of Factors that go to second element of

TerletskyTerletsky test test

Bad Faith Claim vs. Bad Bad Faith Claim vs. Bad Faith ConductFaith 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 Examples of Contexts for Bad Faith ConductBad Faith Conduct

Investigation failures: inadequacies, delays, mindset of denial, Investigation failures: inadequacies, delays, mindset of denial, ignoring evidenceignoring evidence

Poor communications with insured; lying about policyPoor communications with insured; lying about policy Selecting biased neutral arbitratorSelecting biased neutral arbitrator Securing biased witness testimony; ignore witnessesSecuring biased witness testimony; ignore witnesses Attorney delaying litigationAttorney delaying litigation UIPA/UCSP violationsUIPA/UCSP violations Unreasonable interpretation of policyUnreasonable interpretation of policy No legal research or failure to consult counselNo legal research or failure to consult counsel Biased expert selection or instruction as to resultsBiased expert selection or instruction as to results Inexperienced adjustors; poor or no supervisionInexperienced adjustors; poor or no supervision No claims handling guidelinesNo claims handling guidelines

Bad Faith Conduct During Bad Faith Conduct During LitigationLitigation

Erie v. Hollock, 842 A.2d 409 (Pa. Super. 2004)Erie v. Hollock, 842 A.2d 409 (Pa. Super. 2004) If payment not made, conduct may cause delayIf payment not made, conduct may cause delay If made, conduct is in the nature of concealment or a If made, conduct is in the nature of concealment or a

cover-up of other bad faith acts or conductcover-up of other bad faith acts or conduct Discovery violations typically not part of bad faith caseDiscovery violations typically not part of bad faith case Query to what extent evidence of bad faith conduct Query to what extent evidence of bad faith conduct

during bad faith litigation itself is admissible if the claim during bad faith litigation itself is admissible if the claim has been fully paid by that time.has been fully paid by that time.

What is not bad faith What is not bad faith conduct.conduct.

Claims procedures must be reasonable not perfect, i.e. Claims procedures must be reasonable not perfect, i.e. claims process need not be flawlessclaims process need not be flawless

Conclusions of investigation need not be correct, if Conclusions of investigation need not be correct, if reasonablereasonable

Reasonable, if incorrect, policy interpretationReasonable, if incorrect, policy interpretation Need not eliminate all possibilities at odds with Need not eliminate all possibilities at odds with

conclusionconclusion Settlement offer can be reasonable even if less than Settlement offer can be reasonable even if less than

insured would likeinsured would like Carrier is permitted to defend itself vigorouslyCarrier is permitted to defend itself vigorously Carrier can reverse position in light of new informationCarrier can reverse position in light of new information See, e.g., See, e.g., Employers Mutual v. LoosEmployers Mutual v. Loos p. 159 p. 159

AppraisalsAppraisals

In a property damage case, be aware of In a property damage case, be aware of whether an appraisal provision exists that whether an appraisal provision exists that would allow the insurer to take the matter to an would allow the insurer to take the matter to an appraisal where each party can pick their own appraisal where each party can pick their own damage appraiser, who then mutually select an damage appraiser, who then mutually select an umpire to decide the proper amount. Invoking umpire to decide the proper amount. Invoking this process promptly, if available under policy, this process promptly, if available under policy, may avoid claims of bad faith. may avoid claims of bad faith. Cf.Cf. Borden v. Borden v. Amica Mutual Insurance CompanyAmica Mutual Insurance Company, No. 04-, No. 04-175, 2006 U.S. Dist. LEXIS 75069 (W.D. Pa. 175, 2006 U.S. Dist. LEXIS 75069 (W.D. Pa. September 30, 2006). September 30, 2006).

Contractual Bad FaithContractual Bad Faith

Fiduciary duty of good faith created by Fiduciary duty of good faith created by contractcontract

No tort duty of good faith at common lawNo tort duty of good faith at common law Breach of duty must be established by Breach of duty must be established by

clear and convincing evidenceclear and convincing evidence Only need to prove negligence, unlike § Only need to prove negligence, unlike §

83718371

Bad Faith & Failure to Bad Faith & Failure to Settle (Settle (CowdenCowden))

The insurer refusing to settle must accord its The insurer refusing to settle must accord its insured the same faithful consideration it gives insured the same faithful consideration it gives its own interest in determining whether to settle its own interest in determining whether to settle a casea case

There is a bona fide belief that there is a good There is a bona fide belief that there is a good possibility of winning the casepossibility of winning the case

The chance of a finding of non-liability must be The chance of a finding of non-liability must be real and substantial; real and substantial;

Look to environmental factors (judge, jury, Look to environmental factors (judge, jury, similar cases, quality of witnesses) andsimilar cases, quality of witnesses) and

The decision to litigate must be made honestly.The decision to litigate must be made honestly.

Statutory and Contract Statutory and Contract Remedies ComparedRemedies Compared

A breach of insurance contract claim permits recovery A breach of insurance contract claim permits recovery of unpaid sums due and costs of defenseof unpaid sums due and costs of defense

Under Under CowdenCowden, contractual bad faith permits recovery , contractual bad faith permits recovery of excess verdict where insurer failed to settle within of excess verdict where insurer failed to settle within policy limitspolicy limits

Birth CenterBirth Center also permits recovery of consequential also permits recovery of consequential damages, including, e.g., damages to business damages, including, e.g., damages to business reputationreputation

Statute only goes to attorneys’ fees, punitives and Statute only goes to attorneys’ fees, punitives and super interestsuper interest

Attorneys’ fees, costs, consequential damages (Attorneys’ fees, costs, consequential damages (CorchCorch), ), can be used as part of basis upon which to calculate can be used as part of basis upon which to calculate punitive damages, as well as unpaid benefitspunitive damages, as well as unpaid benefits

Discovery: Usual areas Discovery: Usual areas of pursuit and disputeof pursuit and dispute

Claims fileClaims file Manuals/ProceduresManuals/Procedures ReservesReserves Personnel filesPersonnel files Other cases (Punitives “nexus” analysis)Other cases (Punitives “nexus” analysis) UnderwritingUnderwriting Financial statementsFinancial statements Communications with counselCommunications with counsel

Attorney client issuesAttorney client issues

Advice of CounselAdvice of Counsel Majority view is only discoverable if affirmatively raisedMajority view is only discoverable if affirmatively raised Minority view is raised as soon as carrier says it acted in good Minority view is raised as soon as carrier says it acted in good

faithfaith Attorney as claim handler: no privilege or work Attorney as claim handler: no privilege or work

product protection because not acting as attorneyproduct protection because not acting as attorney Scope of the privilege: Under strict reading of 42 Scope of the privilege: Under strict reading of 42

Pa.C.S. 5928, no privilege for communications from Pa.C.S. 5928, no privilege for communications from attorney to lawyer that do not include communications attorney to lawyer that do not include communications from client. (from client. (Gillard v. AIGGillard v. AIG and and Nationwide v. FlemingNationwide v. Fleming))

Work product privilege requires anticipation of litigationWork product privilege requires anticipation of litigation

ExpertsExperts

Not requiredNot required Not permitted where fact finder capable of determining Not permitted where fact finder capable of determining

reasonableness or as to subjective intentreasonableness or as to subjective intent Not permitted on legal conclusionsNot permitted on legal conclusions Permitted for complex or technical insurance issuesPermitted for complex or technical insurance issues Must have adequate basis in facts for reportMust have adequate basis in facts for report Trial court has discretion in allowingTrial court has discretion in allowing Experts have been allowed to testify on:Experts have been allowed to testify on:

Claims proceduresClaims procedures Reasonableness of insurer conductReasonableness of insurer conduct Compliance with statutes, regs and industry standardsCompliance with statutes, regs and industry standards Mindset of denial (Mindset of denial (CorchCorch p. 283) p. 283)

Procedural BasicsProcedural Basics

Two year statute of limitations, § 8371Two year statute of limitations, § 8371 Jury trial in Federal Court, § 8371Jury trial in Federal Court, § 8371 No jury in State Court, § 8371No jury in State Court, § 8371 Be aware of removal issues (jurisdictional Be aware of removal issues (jurisdictional

amount, fraudulent joinder)amount, fraudulent joinder) Be aware of preemption issues (ERISA)Be aware of preemption issues (ERISA) Defendant not subject to § 8371 because Defendant not subject to § 8371 because

of status as non-insurerof status as non-insurer

The Law of Punitive The Law of Punitive DamagesDamages

Be sure to look at U.S. Supreme Court precedentBe sure to look at U.S. Supreme Court precedent Ratio is no more than 9 to 1, in most casesRatio is no more than 9 to 1, in most cases Elements to ConsiderElements 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 More Elements to PunitivesPunitives

Reprehensility 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 non-Jury can’t consider non-parties’ harm in parties’ harm in punitives/but can be told of punitives/but can be told of them!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 Judge to properly instruct jury on limiting punitive damages to case at hand.

BifurcationBifurcation

Federal Rule of Civil Procedure 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.”

How will your witness How will your witness fare at trial?fare at trial?