AUGUST 2011 BAD FAITH CASES MVFRL PREEMPTS BAD FAITH CLAIMS WHERE FACTS ALLEGE FALL WITHIN NARROW PURVIEW OF ITS TREATMENT SECTION, 1797(Philadelphia Federal)

In McWalters v. State Farm Mutual Insurance Company, the court was faced with the issue of whether Pennsylvania’s Motor Vehicle Financial Responsibility Law (MVFRL) pre-empted the plaintiffs’ bad faith claim under 42 Pa.C.S. § 8371.  After a thorough analysis addressing extensive case law on the subject, the court concluded that section 1797 of the MVFRL did preempt the bad faith claims in this case.

The Court observed that section 8371 was enacted at the same time section 1797 was amended.  That later section applies to “Customary charges for treatment,” solely in the context of motor vehicle insurance policies.  The relevant section, (b)(4), addresses challenges to the reasonableness and necessity of medical treatment or rehabilitative services or merchandise, through peer review and appeals to court.  It’s remedies include that where a “court determines that medical treatment or rehabilitative services or merchandise were medically necessary, the insurer must pay to the provider the outstanding amount plus interest at 12%, as

well as the costs of the challenge and all attorney fees.”

Applying the principle of statutory construction that a special provision in a statute controls over a general provision in a statute in the event of a conflict, if the two cannot be reconciled.  While the Pennsylvania Supreme Court has not ruled, and there is some split in authority, the court observed that the Third Circuit has determined there is an irreconcilable conflict and section 1797 controls.

In determining whether there is preemption, however, the court still must look to the specific nature of the facts and bad faith alleged.  Section 1797 is of narrow scope, “limited to those situations in which a disputed claim is to be submitted to the PRO procedure.” It only applies where “the insured is asserting a denial of first party benefits that was made following the process outlined in §1797.” Thus, “Section 1797 preempts Section 8371 where both

are applicable;” but where “an insurer’s malfeasance goes beyond the scope of Section 1797,” “courts have reconciled the two statutes and found bad faith claims to supplement claims under

Section 1797.”

In that case, the plaintiff alleged that the insurer provided Plaintiffs and Class members with motor vehicle insurance policies and accepted premiums for the coverage provided to Plaintiffs; knew and/or should have known that Plaintiffs and Class members were likely to place confidence and trust in Defendant and/or its agents, servants and/or employees to process claims in good faith in their best interests;  acted in bad faith by denying proper coverage to Plaintiffs and Class members by denying proper payment for medical benefits as required by the issued insurance policies and Pennsylvania law; acted with willful, intentional, gross and/or

reckless disregard for the injury and risk of economic loss inflicted upon Plaintiffs and Class members; and that as a direct and proximate result of its acts and omissions, Plaintiffs and members of the Class have suffered injury in the form of economic losses.

The court concluded from these “very general allegations,” that the gravamen of the statutory bad faith claim was the denial of first party medical benefits and nothing more. It found that there were no allegations that the carrier failed to properly invoke or follow the PRO process, denied or refused coverage, improperly invoked a coverage exclusion or otherwise misinterpreted or misapplied the insurance contract.  Thus, the scope of the purported bad faith allegations fell squarely within the purview of section 1797, and the bad faith claim was deemed preempted and was dismissed.

Date of Decision:  July 21, 2011

McWalters v. State Farm Mut. Auto. Ins. Co., Civil Action No.. 10-4289, U. S. District Court for the Eastern District of Pennsylvania, 2011 U.S. Dist. LEXIS 79288 (E.D. Pa. July 21, 2011) (Joyner, C. J. )