April 2007 Bad Faith Cases Standard Of Liability In Statutory Bad Faith Claim Differs From Standard For Contract-Based Bad Faith Claim (Philadelphia Federal)

In DeWalt v. The Ohio Casualty Insurance Company, 513 F. Supp. 2d 287 (E.D. Pa. April 10, 2007), the insured (Guffey) was the driver of a car involved in a one-car accident that seriously injured three passengers, including DeWalt, who subsequently brought a claim against Guffey.  The carrier had informed DeWalt’s counsel earlier of the amount of coverage, but that there was a policy limits problem because of the number of claimants.  One of the three claimants took an excessively long time to respond to the carrier with his claims.  Nearly a year after the accident, the carrier informed counsel for the three claimants that the carrier would pay the limits, but the three needed to agree on a distribution.  (The limits were $25,000 per person and $50,000 accident, far less than what the three were demanding).

After this, DeWalt filed suit. The carrier eventually settled with the two other claimants for $12,500 each and offered DeWalt the remaining $25,000 three months later. DeWalt rejected the limits offer, and proceeded to trial against Guffey, winning a verdict in excess of $4,000,000. Guffey settled with DeWalt and assigned him any claims she had against her carrier. DeWalt then brought this contract action for bad faith as well as a statutory action for bad faith to recover the unpaid amount of his verdict.  Defendant moved for summary judgment.

In granting the carrier’s motion, the court first held that the standard for liability in a statutory bad faith claim differs from the standard in a contract-based bad faith claim.  In a statutory claim, the two part standard articulated in Terletsky v. Prudential Property & Cas. Ins. Co. (discussed below) applied, requiring that a plaintiff show the insurer lacked a reasonable basis for denying coverage and the insurer knew or recklessly disregarded its lack of reasonable basis.

In contract based bad faith claims, however, the court held that the Terletksy standard does not apply, and used the standard articulated in Cowden. This requires that the insurer refusing to settle accord its insured the same faithful consideration it gives its own interest in determining whether to settle a case; that there is a bona fide belief that there is a good possibility of winning the case; that the “chance of a finding of non-liability must be real and substantial and the decision to litigate must be made honestly.” Thus, the insurer’s sincere belief in its position is insufficient to defeat a contractual bad faith claim when failing to settle.

Moreover, rather than requiring knowing or reckless conduct, this court found that, following the Third Circuit’s decision in Haugh v. Allstate Ins. Co., 322 F.3d 227 (3d Cir. 2003), “a contract claim for bad faith requires evidence that an insurer acted negligently or unreasonably in handling the potential settlement of claims against its insured.”

The district court, however, applied the clear and convincing evidence standard to both types of bad faith.  See also McPeek v. Travelers Casualty and Surety Company of America, No. 2:06-cv-114, 2007 U.S. Dist. LEXIS 46628 (W.D. Pa. June 27, 2007) (a case involving the carrier’s refusal to advance defense expenses based upon it interpretation of a policy exclusion, applying DeWalt’s differing standards, and refusing summary judgment for either party).

The court then applied these standards and held that the defendant’s conduct did not satisfy the standard for either a statutory or a contract-based bad faith claim.  First, before finding for the carrier, the court ruled that an actual refusal to settle was not a necessary predicate for a bad faith claim, in rejecting the carrier’s argument that there could be no liability because it made an offer to settle at policy limits. In then holding for the carrier, the court found that it was reasonable for the carrier to wait until it had received the medical records and claims of all injured passengers before offering DeWalt the policy limits. In addition, the court held that the delay in obtaining the medical records of the other passengers was caused by the passengers, not the carrier, and it therefore did not act in bad faith in delaying payment of defendant’s claim. Finally, the court held that defendant’s failure to communicate the status of the investigation and claims to its insured did not constitute bad faith because the lack of communication did not cause the excess verdict.

Date of Decision:  April 10, 2007
DeWalt v. The Ohio Casualty Insurance Company, United States District Court for the Eastern District of Pennsylvania, 2:05cv740, 2007 U.S. Dist. LEXIS 26901, 513 F. Supp. 2d 287 (E.D. Pa. April 10, 2007)(McLaughlin, J.)