OCTOBER 2015 BAD FAITH CASES: ASSUMING THAT SUBJECTIVE BAD FAITH IS THE STANDARD OF REASONABLENESS, THE INSURER’S INTERPRETATION OF GOVERNING CASE LAW DURING LITIGATION WAS REASONABLE, EVEN IF WRONG (Middle District)

In Douglas v. Discover Property & Casualty Insurance Company, Judge Mariani again identified the issue that there is a split in authority on whether an objectively reasonable basis to deny coverage can per se defeat the first prong of a plaintiff’s statutory bad faith claim, and preclude such a claim from going forward on an “objective” basis.  Put another way, if an insurer delays in paying a claim or denies a claim based on specific reasoning which is incorrect, but it is later determined that no coverage was due under the policy for a different reason, is it still possible to bring a bad faith claim even though no coverage was ever due under the policy.  The majority of cases stated stand for the proposition that a bad faith claim could not be pursued in those circumstances, because there is an objectively reasonable basis for denying coverage; and thus the plaintiff/insured cannot meet the first prong of the Terletsky test.  However, as in the prior cases identifying this issue, the court did not have to decide the issue, because there was no actionable bad faith claim in any event, and summary judgment was granted to the insurer on the basis that the insured could not even establish subjective unreasonableness.

In that UIM case the insured argued that the insurer relied upon a rejection form it knew to be invalid in denying coverage.  However, the insurer had other independent justifications for denying coverage even if the form was invalid.  Further, although an earlier decision went against the insurer on this issue, under the Superior Court’s Vaxmonsky decision, the insurer’s arguments distinguishing that case as to the form’s validity, asserted repeatedly during the litigation process, was not unreasonable.

On the later point, the court stated: “It does not matter that these arguments have been unsuccessful in court so far. ‘[T]o recover under a claim of bad faith, the plaintiff must show that the defendant did not have a reasonable basis for denying benefits under the policy and that defendant knew or recklessly disregarded its lack of reasonable basis in denying the claim,’ which requires some sort of dishonest purpose on the part of the Defendant. …. The record contains no reason to believe that Defendant’s legal arguments have been raised dishonestly. Instead, it simply appears that Defendants have hewn to good faith but unavailing legal theories. This does not qualify as bad faith conduct under the standards set forth above.”

Date of Decision: September 29, 2015

Douglas v. Discover Prop. & Cas. Ins. Co., 3:08-CV-01607, 2015 U.S. Dist. LEXIS 131601 (M.D. Pa. September 29, 2015) (Mariani, J.)