Practicing solely in the field of first-party claims and studying, debating, and analyzing with others within Merlin Law Group raises the bar and makes our law firm members better at what we do. We also study other cases to learn winning techniques and what to avoid. Bad faith cases are never easy. But I was somewhat surprised while studying a recent Pennsylvania court’s decision to go out of its way to find delay and underestimating “reasonable.”1 I wonder if the court would have ruled the same way if an insurer stopped his paycheck and prevented him from making rulings for 17 months?

As noted in Supreme Court of Pennsylvania Upholds Bad Faith Standards But Does Not Require a Showing of Malicious Intent, Pennsylvania does not require ill motive by the insurer to prove bad faith:

[W]e hold that, to prevail in a bad faith insurance claim pursuant to Section 8371, a plaintiff must demonstrate, by clear and convincing evidence, (1) that the insurer did not have a reasonable basis for denying benefits under the policy and (2) that the insurer knew or recklessly disregarded its lack of a reasonable basis in denying the claim. We further hold that proof of the insurer’s subjective motive of self-interest or ill-will, while perhaps probative of the second prong of the above test, is not a necessary prerequisite to succeeding in a bad faith claim. Rather, proof of the insurer’s knowledge or reckless disregard for its lack of reasonable basis in denying the claim is sufficient for demonstrating bad faith under the second prong.

Pennsylvania also had codified claims handling standards as noted in Claims Handling Requirements by State – Pennsylvania:

Pennsylvania code provides that a carrier must acknowledge the claim, provide all claims forms, instruction and reasonable assistance to the claimant within 10 working days of receipt of the claim. They must reply to all ‘pertinent’ communications within 10 working days. The insurance carrier must complete its investigation within 30 days of their receipt of the notification of the claim. If they cannot meet that deadline, they must send written notice to the insured as to why additional time is needed within those 30 days and every 45 days thereafter. They must advise of a first party claimant of acceptance or denial of the claim within 15 working days of the receipt of a proof of loss. Finally, the carrier must advise all first party claimants with whom they are negotiating if a statute of limitation may affect their rights at least 30 days before the deadline would expire.

A Pennsylvania federal trial court bad faith decision from earlier this year found:

‘Bad Faith on the part of insurer is any frivolous or unfounded refusal to pay proceeds of a policy; it is not necessary that such refusal be fraudulent.’ Atiyeh v. Nat’l Fire Ins. Co., 742 F. Supp. 2d 591, 598 n.14 (E.D. Pa. 2010) (quoting Terletsky v. Prudential Prop. & Cas. Ins. Co., 649 A.2d 680, 688 (Pa. Super. Ct. 1994)). ‘For purposes of an action against an insurer for failure to pay a claim, such conduct imports a dishonest purpose and means a breach of a known duty (i.e., good faith and fair dealing), through some motive of self-interest or ill will; mere negligence or bad judgment is not bad faith.’”…

In order to succeed on a claim of bad faith pursuant to § 8371, the plaintiff must ‘[D]emonstrate that the insurer (1) lacked a reasonable basis for denying benefits and (2) knew or recklessly disregarded its lack of a reasonable basis.” Id. at 598 (citing Toy v. Metro. Life Ins. Co., 928 A.2d 186, 193 (Pa. 2007). At the same time, ‘[S]ection 8371 is not restricted to an insurer’s bad faith in denying a claim. An action for bad faith may [also] extend to the insurer’s investigative practices.’ Greene v. United Servs. Auto. Ass’n, 936 A.2d 1178, 1187 (Pa. Super. Ct. 2007) (alterations in original) (quoting Condio v. Erie Ins. Exch., 899 A.2d 1136, 1142 (Pa. Super. Ct. 2006)). Indeed, the term bad faith ‘encompasses a wide variety of objectionable conduct,’ including ‘lack of good faith investigation into facts, and failure to communicate with the claimant.’2

The policyholder’s brief noted delays and a number of allegations of bad faith. However, I also noted that there was no mention of the policyholder retaining a claim practice expert to explain how fire claims are supposed to be adjusted and what a “reasonable” adjustment of a fire loss would require. While jurors and judges may think they understand the technicalities of property insurance adjustment, my experience is that they are usually guessing. So, either the insurer has to admit what reasonable investigative steps are, or a claims practice expert has to explain them. It should be noted that the insurance company hired a claims expert, although the court did not rely upon that expert in its finding of no bad faith.

So, how did the court treat this situation? I almost fell out of my seat while reading the court’s analogy and finding:

Like Philadelphia basketball fans, insureds who submit a claim to their insurer are told to ‘trust the process.’ The process should lead to better, more reasonable results: a contending basketball franchise; and reasonable, timely decisions claim resolutions by insurers. If a basketball franchise doesn’t have a good process, it faces an economic consequence because fans will vote with their feet and their pocketbooks. If an insured doesn’t follow a good process in responding to a claim, it faces an economic consequence in the form of liability.

In this case, Washington Street LLC claims that Nationwide Property & Casualty Insurance Company’s process failed it. Nationwide, on the other hand, says that it didn’t do anything unreasonable and that Washington Street didn’t suffer any harm. In effect, ‘no harm, no foul.’ Having reviewed the record, the Court agrees with Nationwide. Its handling of Washington Street’s claim was by no means a model of perfection, but it wasn’t so bad as to constitute bad faith, either under Pennsylvania’s insurance bad faith statute or the common law. The Court will grant Nationwide’s Motion for summary judgment.

Insurance has no comparison to fans purchasing basketball tickets hoping for winning entertainment. The policyholder cannot select a different insurance carrier after the loss occurs. It is entirely beholden to an insurer who is supposed to act promptly and with full payment as soon as possible. For businesses that need a cash infusion, it can mean the difference between remaining in business and being out of business forever. Insurance adjusters understand the seriousness of this because they are taught principles that demand swift activities that provide policy benefits quickly and not a year later. Judges should reflect this in rhetoric rather than trying to provide an amusing opinion that invites insurers to ignore their good faith obligations.

The education of the court regarding the seriousness of insurance claims adjusting and the requirements of good faith are on the policyholder. The two words “bad faith” are often overused without a true understanding of what “good faith” claims handling requires. It is a high calling that insurers are bound to meet. All you have to do is read the textbooks about property insurance adjustment standards—but these were never presented to the Pennsylvania judge in briefing or through an expert opinion regarding these duties.

Thought For The Day

You must take personal responsibility. You cannot change the circumstances, the seasons, or the wind, but you can change yourself. That is something you have charge of.
—Jim Rhone
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1 Washington Street, LLC v. Nationwide Prop. & Cas. Ins. Co., No 2:21-cv-4374 (E.D. Penn. Nov. 18, 2022).
2 Smith v. Allstate Ins. Co., No 2:21-cv-5048 (E.D. Penn. May 9, 2022).