RECENT DEVELOPMENTS
IN PENNSYLVANIA
BAD FAITH LITIGATION
Presented to:
BELL & CLEMENTS
APRIL 4, 2006
S. David Fineman, Esquire
Jay Barry Harris, Esquire
FINEMAN KREKSTEIN & HARRIS
www.finemanlawfirm.com
ANALYZING THE
BAD FAITH STATUTE
42 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
 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
 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
STATUTORY
DAMAGES
 Interest
 Punitive Damages
 Court costs and
attorney’s fees
CONSEQUENTIAL
DAMAGES
 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
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Failure to investigate
Failure to perform legal research
Reliance on untrustworthy expert report
Unreasonable interpretation of policy provisions
Misrepresentation of fact or policy provisions
COMMON LAW OR
THIRD PARTY BAD FAITH
TRIPARTITE RELATIONSHIP
Insured
Defense
counsel
Insurer
DUTIES ASSUMED UNDER THE
TRIPARTITE RELATIONSHIP
Insurer will investigate, appoint counsel, defend
and/or settle claim
 Insurer and Insured – fiduciary relationship
 Defense Counsel appointed to defend Insured
 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

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The Insured
The Claimant through an assignment
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
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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 …

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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
 No breach of contract by insurer
 Recoup costs, attorney’s fees

DISCOVERY ISSUES IN
BAD FAITH LITIGATION
CLAIMS AND TRAINING MANUALS
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Unduly burdensome and broad request
Trade secrets
Focus on the policy provisions in dispute
Focus on the instructions and procedures
relevant to cause of action
In camera review
Cost shifting
PERSONNEL FILES
Relevant if contains performance and field
reviews of those handling insured’s claim
• Supervisor’s personnel file may also be relevant
• Privacy issues
•
RESERVES

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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
 Nationwide policies
 Wealth of company
 Is there a nexus between other actions and
individual plaintiff’s specific harm?

AVOIDING BAD FAITH
AVOIDING BAD FAITH
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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 …
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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