Practicing solely in the area of first party claims and studying, debating and analyzing with others at Merlin Law Group raises the bar and makes our law firm members better at what we do. We also study other cases to learn winning techniques and what to avoid. Bad faith cases are never easy. But I was somewhat surprised when I studied a recent Pennsylvania court’s decision to go out of its way to find delays and understatements “reasonable.”1 I wonder if the court would have ruled the same if an insurer stopped his paycheck and prevented him from making decisions for 17 months?
As noted in The Pennsylvania Supreme Court upholds bad faith standards but does not require a showing of intentPennsylvania does not require bad faith by the insurer to prove bad faith:
[W]e holds that, to prevail in a bad faith insurance claim under section 8371, a plaintiff must show by clear and convincing evidence (1) that the insurer did not have a reasonable basis for denying benefits under the policy and (2) that the insurer knew or recklessly disregarded its lack of reasonable grounds to deny the claim. We further hold that proof of the insurer’s subjective motive of self-interest or malice, while perhaps probative of the second part of the test above, is not a necessary condition for success on a bad faith claim. Rather, evidence of the insurer’s knowledge or reckless disregard of its lack of reasonable basis to deny the claim is sufficient to show bad faith under the second prong.
Pennsylvania also had codified claims handling standards set forth in Claims Processing Requirements by State – Pennsylvania:
The Pennsylvania Code provides that a carrier must acknowledge the claim, provide all claim forms, instructions and reasonable assistance to the claimant within 10 business days of receiving the claim. They must respond to all “relevant” communications within 10 business days. The insurance company must complete their investigation within 30 days of receiving notification of the claim. If they cannot meet this deadline, they must send written notice to the insured stating why additional time is needed within those 30 days and every 45 days thereafter. They must notify a first party applicant of the acceptance or denial of the claim within 15 business days of receiving a proof of loss. Finally, the carrier must inform all first-party claimants with whom it negotiates whether a statute of limitations may affect their rights at least 30 days before the statute of limitations expires.
A federal trial court in Pennsylvania from earlier this year found:
“Bad faith on the part of the insurer is any frivolous or groundless refusal to pay the proceeds of a policy; it is not necessary that such refusal be fraudulent.’ Atiyeh v. Nat’l Fire Ins. Co., 742 F.Supp. 2d 591, 598 n.14 (ED Pa. 2010) (citing Terletsky v. Prudential Prop. & Cas. ins. Co.649 A.2d 680, 688 (Pa. Super. Ct. 1994)). “For an action against an insurer for failure to pay a claim, such conduct constitutes a dishonest purpose and constitutes a breach of a known duty (i.e, good faith and fair dealing), through any motive of self-interest or malice; mere negligence or bad judgment is not bad faith.'”…
To succeed on a bad faith claim under § 8371, the plaintiff must “[D]show that the insurer (1) lacked a reasonable basis for denying benefits and (2) knew or recklessly disregarded its lack of reasonable basis.” Id. at 598 (quoting Toy v. Metro. Life Ins. Co., 928 A.2d 186, 193 (Pa. 2007). At the same time, ‘[S]section 8371 is not limited to an insurer’s bad faith in denying a claim. An action for bad faith can [also] extend to the insurer’s investigation methods.’ Greene v. United Servs. Car. Ass’n936 A.2d 1178, 1187 (Pa. Super. Ct. 2007) (alterations in original) (citing Condio v. Erie Ins. Ex., 899 A.2d 1136, 1142 (Pa. Super. Ct. 2006)). Indeed, the term bad faith “encompasses a wide range of objectionable conduct,” including “lack of good faith investigation of the facts and failure to communicate with the plaintiff.”2
The policyholder’s brief noted delays and a number of allegations of bad faith. However, I also noted that there was no mention of the policyholder engaging an expert to explain how fire losses should be adjusted and what a “reasonable” adjustment of a fire loss would require. While jurors and judges may think they understand the technical aspects of property insurance adjustment, my experience is that they are usually guessing. So either the insurer must recognize what reasonable investigative steps are, or a claims adjuster must explain them. It should be noted that the insurance company hired a claims expert, although the court did not rely on that expert in finding that it was not in bad faith.
So, how did the court deal with this situation? I nearly fell out of my seat when I read the court analogy and discovered:
Like Philadelphia basketball fans, insureds filing a claim with their insurer are urged to “trust the process.” The process should lead to better, more reasonable outcomes: an embattled basketball congress; and reasonable decisions at the right time require decisions by insurance companies. If a basketball franchise doesn’t have a good process, it faces a financial consequence because fans will vote with their feet and their wallets. If an insured does not follow a good process to respond to a claim, it faces a financial consequence in the form of liability.
In this case, Washington Street LLC claims Nationwide Property & Casualty Insurance Company’s lawsuit failed. Nationwide, on the other hand, says it did nothing unreasonable and that Washington Street suffered no harm. In effect, “no harm, no foul.” After reviewing the record, the Court agrees with Nationwide. Its handling of Washington Street’s claim was by no means a model of perfection, but it was not so bad as to constitute bad faith under either Pennsylvania’s bad faith insurance statute or the common law. The court will grant Nationwide’s motion for summary judgment.
Insurance has no comparison to fans buying basketball tickets and hoping for winning entertainment. The policyholder cannot choose another insurance company after the damage has occurred. It is entirely owed to an insurer who is supposed to act quickly and with full payment as soon as possible. For businesses in need of a cash infusion, it can mean the difference between staying in business and being gone forever. Insurance adjusters understand the seriousness of this because they are taught principles that require quick activities that provide insurance benefits quickly and not a year later. Judges should reflect this in rhetoric rather than attempting to provide an entertaining opinion calling for insurers to ignore their good faith obligations.
The court’s education on how serious the insurance claims must be adjusted and the requirements of good faith rests with the policyholder. The two words “bad faith” are often overused without a true understanding of what “good faith” claims management requires. It is a high requirement that the insurance companies must meet. All you have to do is read the textbooks on property insurance adjustment standards – but these were never presented to the Pennsylvania judge in briefing or through expert testimony regarding this information.
You must take personal responsibility. You cannot change the circumstances, the seasons or the wind, but you can change yourself. It is something you are responsible for.
1 Washington Street, LLC v. Nationwide Prop. & Cas. ins. Co.No. 2:21-cv-4374 (ED Penn. Nov. 18, 2022).
2 Smith v. Allstate Ins. Co.No. 2:21-cv-5048 (ED Penn. May 9, 2022).