BAD FAITH LITIGATION

1. BAD FAITH LITIGATION February 18, 2008 Lee Applebaum Fineman, Krekstein & Harris, P.C. 1735 Market Street, 6th Floor Philadelphia, PA 19103 (215) 893-9300 www.finemanlawfirm.com www.Pabadfaithlaw.com

2. There is no such thing as “bad" faith Bad faith should not be based on bare feelings about loyalty, but on actual conduct reflecting honesty or dishonesty Just the facts ma’am Bad Faith is the Absence of Good Faith

3. What Does the Law Mean by Bad Faith • Statutory Bad Faith, 42 Pa.C.S. § 8371 • Contractual 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)

4. Statutory Bad Faith42 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.

5. Burden of Proof and Elements of Claim • Clear and Convincing Evidence • Terletsky v. Prudential Property and Casualty Ins. Co., 437 Pa. Super. 108, 649 A.2d 680, 688 (Pa. Super. 1994), appealdenied, 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 basis • Defendant knew or recklessly disregarded its lack of reasonable basis in denying the claim

6. Ill will and evil motive not an element • Greene v. United Servs. Auto. Ass'n • ill will and evil motive not elements • Factors that go to second element of Terletsky test

7. Bad Faith Claim vs. Bad Faith 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.

8. Examples of Contexts for Bad Faith Conduct • Investigation failures: inadequacies, delays, mindset of denial, ignoring evidence • Poor communications with insured; lying about policy • Selecting biased neutral arbitrator • Securing biased witness testimony; ignore witnesses • Attorney delaying litigation • UIPA/UCSP violations • Unreasonable interpretation of policy • No legal research or failure to consult counsel • Biased expert selection or instruction as to results • Inexperienced adjustors; poor or no supervision • No claims handling guidelines

9. Bad Faith Conduct During Litigation • Erie v. Hollock, 842 A.2d 409 (Pa. Super. 2004) • If payment not made, conduct may cause delay • If made, conduct is in the nature of concealment or a cover-up of other bad faith acts or conduct • Discovery violations typically not part of bad faith case • Query to what extent evidence of bad faith conduct during bad faith litigation itself is admissible if the claim has been fully paid by that time.

10. What is not bad faith conduct. • Claims procedures must be reasonable not perfect, i.e. claims process need not be flawless • Conclusions of investigation need not be correct, if reasonable • Reasonable, if incorrect, policy interpretation • Need not eliminate all possibilities at odds with conclusion • Settlement offer can be reasonable even if less than insured would like • Carrier is permitted to defend itself vigorously • Carrier can reverse position in light of new information • See, e.g., Employers Mutual v. Loos p. 159

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

12. Contractual Bad Faith • Fiduciary duty of good faith created by contract • No tort duty of good faith at common law • Breach of duty must be established by clear and convincing evidence • Only need to prove negligence, unlike § 8371

13. Bad Faith & Failure to Settle (Cowden) • The insurer refusing to settle must accord its insured the same faithful consideration it gives its own interest in determining whether to settle a case • There is a bona fide belief that there is a good possibility of winning the case • The chance of a finding of non-liability must be real and substantial; • Look to environmental factors (judge, jury, similar cases, quality of witnesses) and • The decision to litigate must be made honestly. • The insurer’s sincere belief in its position by itself is insufficient to defeat a contractual bad faith claim when failing to settle (DeWalt v. The Ohio Casualty Insurance Company, 513 F. Supp. 2d 287 (E.D. Pa. April 10, 2007))

14. Statutory and Contract Remedies Compared • A breach of insurance contract claim permits recovery of unpaid sums due and costs of defense • Under Cowden, contractual bad faith permits recovery of excess verdict where insurer failed to settle within policy limits • Birth Center also permits recovery of consequential damages, including, e.g., damages to business reputation • Statute only goes to attorneys’ fees, punitives and super interest • Attorneys’ fees, costs, consequential damages (Corch), can be used as part of basis upon which to calculate punitive damages, as well as unpaid benefits

15. Discovery: Usual areas of pursuit and dispute • Claims file • Manuals/Procedures • Reserves • Personnel files • Other cases (Punitives “nexus” analysis) • Underwriting • Financial statements • Communications with counsel

16. Attorney client issues • Advice of Counsel • Majority view is only discoverable if affirmatively raised • Minority view is raised as soon as carrier says it acted in good faith • Attorney as claim handler: no privilege or work product protection because not acting as attorney • Scope of the privilege: Under strict reading of 42 Pa.C.S. 5928, no privilege for communications from attorney to lawyer that do not include communications from client. (Gillard v. AIG and Nationwide v. Fleming) • Work product privilege requires anticipation of litigation

17. Experts • Not required • Not permitted where fact finder capable of determining reasonableness or as to subjective intent • Not permitted on legal conclusions • Permitted for complex or technical insurance issues • Must have adequate basis in facts for report • Trial court has discretion in allowing • Experts have been allowed to testify on: • Claims procedures • Reasonableness of insurer conduct • Compliance with statutes, regs and industry standards • Mindset of denial (Corch p. 283)

18. Procedural Basics • Two year statute of limitations, § 8371 • Jury trial in Federal Court, § 8371 • No jury in State Court, § 8371 • Be aware of removal issues (jurisdictional amount, fraudulent joinder) • Be aware of preemption issues (ERISA) • Defendant not subject to § 8371 because of status as non-insurer

19. The Law of Punitive Damages • Be sure to look at U.S. Supreme Court precedent • Ratio is no more than 9 to 1, in most cases • Elements 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.

20. More Elements to Punitives • Reprehensibility 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.

21. Jury can’t consider non-parties’ harm in punitives/but can be told of 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 Judges to give proper instructions and take other steps to avoid due process violations.

22. Bifurcation • Federal Rule of Civil Procedure Rule 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.”

23. Everyone is cool answering to themselves only.

24. Will the reasoning hold up under objective scrutiny?

25. How will your witness fare at trial?