In Watson v. Nationwide Mutual Insurance Company, the court was faced with a carrier’s motion to dismiss and strike an insured’s breach of contract and bad faith claims.  The suit arose from injuries sustained in a car accident that required medical treatment from several physicians.  The insured claimed that, under its policy, the carrier was required to provide first-party medical and uninsured motorist benefits.

The carrier contracted several peer review organizations (“PROs”) to determine whether the insured’s treatment was medically necessary.  The insured responded that the carrier had no reasonable basis for submitting the medical bills to a PRO.  Based upon their findings, however, the carrier denied coverage.  The insured claimed that the PROs yielded defective reports through a “sham peer review process,” which failed to conduct objective reviews of her medical records.

As such, the insured filed suit in the Court of Common Pleas of Lancaster County, alleging breach of contract and bad faith.  The carrier removed to federal court and filed a motion to dismiss and strike portions of the insured’s complaint.

First, the court addressed the bad faith claim.  In its motion to dismiss, the carrier argued that the insured’s suit was preempted by Pennsylvania’s Motor Vehicle Financial Responsibility Law (“MVFRL”).  Under that statute, which governs the carrier’s use of PROs, an insured may seek first-party medical benefits plus interest, costs, and fees, if the court finds that the treatment was medically necessary.  Typically, an insured may not pursue a bad faith claim where a PRO improperly denied first-party benefits.

However, where a carrier’s “alleged bad faith conduct [goes] beyond the scope of” the MVFRL, it is not preempted.  In this case, the insured alleged that the carrier failed to employ the PRO with fair and impartial physicians authoring their reports.  As such, the scope of the bad faith claim exceeded a cause of action permitted under the MVFRL, forcing the court to “permit [the insured] to proceed with her bad faith claim…to the extent that she alleges an abuse or misuse of the peer review process.”

Second, the court examined the insured’s action for punitive damages for breach of contract.  The court quickly granted the carrier’s motion because punitive damages are unavailable in breach of contract actions.  However, the court noted that the insured did state a plausible claim in that the MVFRL permits treble damages, a claim for which the carrier did not seek dismissal.

Third, the insured alleged that she suffered serious emotional distress because her bills were not paid by the carrier.  While the insured did not seek recovery for either negligent or intentional infliction of emotional distress, she incorporated such a claim into her bad faith action.  The court dismissed this claim pursuant to the carrier’s motion because Pennsylvania’s bad faith statute does not authorize damages for emotional distress.

Lastly, the insured cited the Pennsylvania Unfair Insurance Practices Act (“UIPA”) in its action for bad faith.  The carrier argued that this portion of the complaint should be stricken because the UIPA is irrelevant to the bad faith inquiry. 

The court first examined a split in case law on this issue.  The Pennsylvania Superior Court has determined that it is appropriate to consider the UIPA when evaluating a carrier’s bad faith because the bad faith statute leaves certain terms undefined.  However, several courts in the Third Circuit have refused to examine UIPA violations as evidence of bad faith.  Specifically, in Oehlmann v. Metropolitan Life Insurance Company, the Middle District of Pennsylvania ruled that the UIPA is designed to be enforced only by the state’s insurance commissioner. (See also this blog). Allowing a litigant to take advantage of the UIPA would “usurp the Commissioner’s power…under the guise of” the state’s bad faith statute.  The court also noted that the UIPA regulates systemic violations in the insurance industry, not individual episodes of bad faith.  As such, the court concluded that reliance on the UIPA was misplaced. 

In sum, the court granted the carrier’s motion with respect to punitive damages, emotional distress, and the UIPA analysis.  However, it ruled that the insured stated a plausible claim for bad faith, as it was not preempted by the MVFRL.

Date Decided: October 12, 2011

Watson v. Nationwide Mut. Ins. Co., NO. 11-1762, U.S. District Court for the Eastern District of Pennsylvania, 2011 U.S. Dist. LEXIS 118873 (E.D. Pa. Oct. 12, 2011) (Surrick, J.)