JUNE 2009 BAD FAITH CASES SUPERIOR COURT AFFIRMS DECISION TO DENY BOTH SEVERANCE OF BAD FAITH CLAIM FROM UIM CLAIM AND STAY OF BAD FAITH DISCOVERY (Superior Court)

In Gunn v. Automobile Insurance Company, the insured brought a UIM based claim for breach of contract and bad faith.  The carrier sought to sever and stay the bad faith case while the UIM claim was decided by a jury.  The carrier also sought to preclude discovery from proceeding  in the bad faith case while the underlying UIM claim was at issue. 

The trial court rejected the arguments that the bad faith claim was dependent on the outcome of the UIM claim, and that considerations of judicial economy, prevention of unnecessary expense to the parties, and prejudice to insurer, required the bad faith claim to be stayed pending the outcome of the UIM claim.  Because the bad faith claim can only be heard by a judge in Pennsylvania state courts, Mishoe v. Erie Ins. Co., the trial court found that there was already severance since the jury would rule on the UIM claim and then the judge would rule on the bad faith claim. 

Thus, the only issue was whether discovery on the bad faith claim should be stayed, and the trial court found no reason to do so.  To the contrary, the trial court found “a trial of the bad faith claim held immediately after the trial of the UIM claim is likely to be the most efficient and fairest method of resolving the UIM claim because it avoids duplicate testimony and permits the judge to make his or her decision when the judge best recollects the relevant evidence.”

The Superior Court was thus faced with a practical consequence of the Pennsylvania Supreme Court’s decision in Insurance Federation of Pa., Inc. v. Department of Insurance, colloquially known as the “Koken” case.  In Koken, the Supreme Court had ruled that Pennsylvania’s Insurance Department was not authorized  to require mandatory arbitration for UM and UIM claims.  Because of the Department’s stance, policies had included such clauses, but post-Koken such arbitration provisions are being phased out and replaced by new policies that do not mandate arbitration. “Consequently, the trial courts of Pennsylvania will begin to frequently encounter complaints which raise both UIM and bad faith claims.” 

This was the first appellate opportunity to address whether the two claims in such a soon to be burgeoning set of cases, should be severed and/or stayed. However, the Superior Court found the trial judge’s order to be interlocutory and quashed the appeal. 

Applying the test to determine whether an otherwise non-final order might fall under the “collateral order doctrine”, the court applied a three standard test:  “(1) [is the order at issue] separable from and collateral to the main cause of action where, (2) [is] the right involved is too important to be denied review, and (3) [whether] the question presented is such that if review is postponed until final judgment in the case, the claim will be irreparably lost.”  Even though the Superior Court quashed the appeal, it did give some further address to the bad faith issue in focusing on the test’s second prong, the importance of the right involved; and the third prong on irreparable loss of a right.

The Superior Court found that “the trial court’s decision not to stay the bad faith proceeding neither goes beyond the particular litigation at hand nor implicates a right deeply rooted in public policy sufficient to set aside the general rule that only final orders are appealable as of right.” The insurer had basically argued that permitting bad faith discovery to go ahead could be a waste of time if the insurer won the UIM claim.  The Superior Court found that “an analysis of a motion to stay a bad faith claim depends on the specific circumstances and allegations of the particular litigation at hand.”  Because the trial court rulings on the prejudice associated with the stay were tied to the facts and nature of the particular case, rather than some more general principle apparently, the right involved seemed not to be sufficiently important to require immediate appellate review.

As to the public interest, the carrier argued that because Koken had opened the floodgates to a new form of litigation, stays of bad faith actions were necessary in the public interest to mitigate that flood.  The Superior Court disagreed, and found that such a concern “must be balanced against the protraction and delay in litigation created by permitting appeals from interlocutory orders denying stay of a bad faith claim. We do not find that Appellant’s concerns outweigh the countervailing interests of avoiding piecemeal litigation or delay.”  Further, the court clearly did not want to become a haven for interlocutory appeals of discovery stay decision during the pendency of cases.

Finally, there was no evidence of irreparable loss, as in the limited category of immediately appealable discovery orders involving work product or attorney-client privilege matters.  It found the insurer’s concerns about disclosure of privileged or protected information speculative, noting various efforts the insurer could make to limit or object to such disclosure during the discovery process before the trial court.

Apparently, the argument was not presented to the Superior Court that some trial courts in Pennsylvania have held attorney advice to the insurer virtually discoverable per se in bad faith litigation; though this does not appear to be a majority view.  See, e.g., Jones v. Nationwide Ins. Co.; Gen. Refractories Co. v. Fireman’s Fund Ins. Co., 45 Pa. D.&C. 4th 159 (C.C.P. Phila. 2000).  For a contrary view see, e.g., Saltern v. Nor-Car Fed. Credit Union, No. 02-2175, 2003 U.S. Dist. LEXIS 7679 at *4 (E.D. Pa. Apr. 16, 2003) (citing Jones, but then stating that Third Circuit precedent provides that “advice is not placed in issue merely because it is relevant … A waiver can be found only where a client has made the decision and taken an affirmative step in the litigation to place the advice of attorney in issue … This occurs where the client attempts to prove a claim or defense by disclosing or describing an attorney-client communication.”) (emphasis added).  The lone Gunn dissenter seemed to recognize this issue and that the threat of disclosure of work product or privileged information might be much less speculative than the majority maintained, citing to Wisconsin law of similar effect.  The failure to cite to Pennsylvania court decisions indicates that the real threat under Pennsylvania law many not have been fully considered.

Date of Decision:  April 15, 2009

Gunn v. Auto. Ins. Co., No. 1345 WDA 2008, 971 A.2d 505, 2009 Pa. Super. LEXIS 85, SUPERIOR COURT OF PENNSYLVANIA (Pa. Super. April 15, 2009) (Allen, J.)