FEBRUARY 2008 BAD FAITH CASES UNFAIR INSURANCE PRACTICE & UNFAIR CLAIMS SETTLEMENT PRACTICES REGULATIONS VIOLATIONS NOT BAD FAITH PER SE, BUT MAY BE EVIDENCE OF BAD FAITH (Middle District)

    

In Oehlmann v. Metropolitan Life Insurance Company, the insurer issued a life insurance policy to the plaintiff’s ex-husband on February 3, 1994 on the life of their daughter (“insured”) and listed as primary beneficiaries the ex-husband and plaintiff who were married at the time of the policy’s issuance.  Each beneficiary was to share fifty percent of the policy proceeds.  Ex-husband and plaintiff were subsequently divorced on January 8, 1999.  On April 26, 2005, the insured died in a house fire at the plaintiff’s house.  Plaintiff and ex-husband submitted claims to insurer in July 2005.  The claims were settled on July 25, 2005 and the insurer established money-market accounts for both plaintiff and ex-husband.  Five days after settlement of the claims, counsel for the ex-husband notified the insurer that the plaintiff’s right to proceeds was disputed and an investigation as to the cause of the fire was ongoing. 

On August 4, 2005, the insurer notified plaintiff of ex-husband’s allegations and designated a time period during which the ex-husband’s counsel could investigate the allegations.  On the same day, and without knowledge of the insurer’s correspondence, plaintiff instituted litigation against the insurer in state court based on its refusal to distribute the proceeds.  On September 27, 2005, the insurer ruled the fire not suspicious but informed the plaintiff and ex-husband that they were rival claimants because the ex-husband believed he was the sole beneficiary.  As a result, the insurer informed the parties that it would distribute the accounts once each side had executed a settlement agreement and release. 

Over the next several months, the plaintiff continued the litigation because the insurer would not distribute the accounts without a release. On February 16, 2006 and March 14, 2006, the plaintiff and ex-husband notified the insurer that they agreed to split the proceeds but both failed to execute the releases.  Plaintiff retained new counsel that initiated this case in state court on May 8, 2006.  This case was subsequently removed to the federal court herein.  In this case, plaintiff pleaded the following causes of action:  1) statutory bad faith; 2) breach of contract; 3) breach of the covenant of good faith and fair dealing; 4) breach of fiduciary duty; 5) negligence; and 6) negligent infliction of emotional distress.  The previous case was discontinued by plaintiff on August 28, 2006.  Ex-husband executed the release on November 4, 2006.  Despite plaintiff never executing the release, the insurer sent plaintiff her account checkbook for the proceeds on November 14, 2006 and sent ex-husband his account checkbook sometime thereafter. 

The subject of the court’s opinion was the insured’s motion for summary judgment as to all plaintiff’s counts.  The court first addressed the plaintiff’s statutory bad faith claim.  The court noted that, to succeed on a statutory bad faith claim, the court must satisfy the test laid out by the Supreme Court of Pennsylvania in Terletsky.  The test requires the insured to prove:  1) that the insurer did not have a reasonable basis for denying benefits under the policy; and 2) that the insurer knew of or recklessly disregarded its lack of a reasonable basis in denying the claim.  In support of its claim, the plaintiff argued that the court should consider alleged violations of the Pennsylvania Unfair Insurance Practices Act (“UIPA”) and/or the Act’s regulations, the Unfair Claims Settlement Practices regulations (“UCSP”), as bad faith per se.  The court noted that the Supreme Court of Pennsylvania had not decided the application of UIPA and UCSP to bad faith claims, but the Superior Court of Pennsylvania had ruled in the Romano case that a trial court may consider alleged violations of the UIPA or the UCSP to determine whether an insurer acted in bad faith.

The court stated that since the test for bad faith was explicitly set forth in Terletsky, the federal courts have abstained from applying the rule of construction announced in Romano.  The court stated that it is bound by the state’s highest court in interpreting statutes, and absent a decision, it was required to determine how the highest state court would resolve the issue.  The court noted that it is free to reach a contrary result from the lower state courts if other persuasive data exists to show that the highest state court would decide otherwise.  The court rejected the plaintiff’s argument that alleged violations of the UIPA and UCSP are bad faith per se.  First, the regulatory standards set forth in UIPA and UCSP are not relevant where the test for bad faith is explicitly set forth under Terletsky.  Second, the UIPA and UCSP are designed to be  implemented and enforced by the Insurance Commissioner of Pennsylvania, and the court does not have the power to usurp the Commissioner’s power in regulating the insurance industry.  Finally, the regulations are applicable to a frequency of conduct that indicates a general business practice and are inapposite to evaluating an individual episode of the alleged bad faith.  While not to be used to establish bad faith per se, the court stated that the standards laid out in the UIPA and the UCSP may be considered concerning the insured’s bad faith conduct in light of those standards.

Date of decision:  December 21, 2007

Oehlmann v. Metropolitan Life Insurance Co., United States District Court for the Middle District of Pennsylvania, Case No. 3:06-CV-01075, 2007 U.S. Dist. LEXIS 93899, (M.D. Pa. 2007) (Kosik, J.). 

R.E.M.