Although the caption of the amended complaint lists 1

American International Group, Inc. as a defendant, none of the

counts in the amended complaint are directed against American

International Group, Inc.

 UNITED STATES DISTRICT COURT

FOR THE MIDDLE DISTRICT OF PENNSYLVANIA

NATIONAL RECOVERY AGENCY, INC. : CIVIL NO. 4:05-CV-0033

and DIVERSIFIED BILLING :

SERVICES, INC., :

:

Plaintiffs : (Magistrate Judge Smyser)

:

v. :

:

AIG DOMESTIC CLAIMS, INC., :

and ILLINOIS NATIONAL :

INSURANCE COMPANY, :

:

Defendants :

MEMORANDUM AND ORDER

I. Background and Procedural History.

The plaintiffs, National Recovery Agency, Inc. (NRA)

and Diversified Billing Services, Inc. (DBS), commenced this

action by filing a complaint on January 6, 2005. On September

30, 2005, the plaintiffs filed an amended complaint. The

defendants named in the amended complaint are AIG Technical

Services, Inc. (AIGTS) and Illinois National Insurance Company

(Illinois National).1

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 1 of 35
2

The amended complaint contains three counts. In Count

I, the plaintiffs are seeking a declaratory judgment that,

pursuant to an insurance policy issued by defendant Illinois

National, Illinois National must provide the plaintiffs a

defense in a case filed against them by Forward Thinking, Inc.

(Forward Thinking) in New Jersey Superior Court as well as a

declaratory judgment that defendant Illinois National must

indemnify them for the claims of Forward Thinking. In Count

II, the plaintiffs are seeking damages on a claim that

defendant Illinois National breached the insurance contract by

failing to provide them a defense or indemnification in the

case filed by Forward Thinking. In Count III, the plaintiffs

claim that defendants Illinois National and AIGTS acted in bad

faith in violation of 42 Pa.C.S.A. § 8371 and Pennsylvania

common law by failing to provide them a defense or

indemnification in the case filed by Forward Thinking. 

 The parties consented to proceed before a magistrate

judge pursuant to 28 U.S.C. § 636(c). The case is scheduled

for trial in July of 2006.

On October 20, 2005, the defendants filed an answer to

the amended complaint. 

By an Order dated November 22, 2006, the plaintiffs’

claim in Count I of the amended complaint seeking a declaratory

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 2 of 35
3

judgment that Illinois National must indemnify the plaintiffs

for the claims of Forward Thinking, the plaintiffs’ claim in

Count II for damages against defendant Illinois National for

breach of the insurance contract based on a failure to

indemnify the plaintiffs from the claims of Forward Thinking,

and the plaintiffs’ claim in Count III for damages against

defendants Illinois National and AIGTS for a bad faith failure

to indemnify the plaintiffs in the case filed by Forward

Thinking were dismissed because those claims were not ripe.

By an Order dated February 22, 2006, based on a motion

filed by the plaintiffs and concurred in by the defendants, AIG

Domestic Claims, Inc. (AIGDC) was substituted as a defendant

for AIGTS and the caption of the case was amended accordingly. 

There are currently three motions pending: 1) the

defendants’ motion for leave to amend their answer to the

amended complaint; 2) the defendants’ motion for partial

summary judgment; and 3) the plaintiffs’ motion for partial

summary judgment. 

II. Defendants’ Motion for Leave to Amend their Answer.

On October 20, 2005, the defendants filed an answer to

the amended complaint. On February 24, 2006, the defendants

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 3 of 35
4

filed a motion for leave to amend their answer to the amended

complaint. The defendants are seeking leave to amend their

answer to plead the statute of limitations as a defense to the

plaintiffs’ bad faith claims. 

The statute of limitations is an affirmative defense,

and therefore under Fed.R.Civ.P. 8(c) it should be asserted in

the answer. However, the failure to plead an affirmative

defense in the answer does not automatically result in a

waiver. Eddy v. Virgin Islands Water & Power Auth., 256 F.3d

204, 209 (3d Cir. 2001). Under Fed.R.Civ.P. 15(a), an answer

may be amended at any time by leave of court to include an

affirmative defense. Id. 

Rule 15(a) of the Federal Rules of Civil Procedure

provides that leave to amend a pleading "shall be freely given

when justice so requires." Fed.R.Civ.P. 15(a). “[M]otions to

amend pleadings should be liberally granted,” Long v. Wilson,

393 F.3d 390, 400 (3d Cir. 2004), and “[l]eave to amend must

generally be granted unless equitable considerations render it

otherwise unjust,” Arthur v. Maersk, Inc., 434 F.3d 196, 204

(3d Cir. 2006). “The liberal right to amend extends to an

answer to the complaint.” Long, supra, 393 F.3d at 400. “Among

the factors the may justify denial of leave to amend are undue

delay, bad faith, and futility.” Arthur, supra, 434 F.3d at

204. However, in this Circuit prejudice to the non-moving

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 4 of 35
5

party is the touchstone for denial of leave to amend. Lorenz v.

CSX Corp., 1 F.3d 1406, 1414 (3d Cir. 1993). “Unless the

opposing party will be prejudiced, leave to amend should

generally be allowed.” Charpentier v. Godsil, 937 F.3d 859, 864

(3d Cir. 1991). 

The plaintiffs contend that they will suffer

substantial prejudice if the defendants are granted leave to

amend their answer to raise the statute of limitations defense. 

The plaintiffs assert that they have expended substantial time,

effort, and expense inquiring into the defendants’ alleged bad

faith insurance practices including the expense of obtaining an

expert report. They also assert that they would be

substantially prejudiced if the focus of the litigation were

allowed to shift at this late date to the defendants’ statute

of limitations defense. 

“The passage of time factors into the analysis of

whether a plaintiff has suffered prejudice by a delay in

amending an answer to assert an affirmative defense.” Long,

supra, 393 F.3d at 399. However, “[d]elay alone is not

sufficient to justify denial of leave to amend.” Arthur, supra,

434 F.3d at 204. But at some point “delay will become ‘undue,’

placing an unwarranted burden on the court... [and] an unfair

burden on the opposing party.” Id. The longer the unexplained

delay, the less the plaintiff must show in terms of prejudice.

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 5 of 35
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Long, supra, 393 F.3d at 400. In determining what constitutes

prejudice, the court should consider whether the assertion of

the new defense would: 1) require the plaintiff to expend

significant additional resources to conduct discovery and

prepare for trial; 2) significantly delay the resolution of the

dispute; or 3) prevent the plaintiff from bringing a timely

action in another jurisdiction. Id. 

We conclude that the plaintiffs have not established

that they will be substantially prejudiced if the defendants’

motion for leave to amend is granted. The fact that the

plaintiffs’ bad faith claims may be determined to be barred by

the statute of limitations does not amount to prejudice

sufficient to defeat an amendment. Long, supra, 393 F.3d at 399

(“The frustrated expectation of not having an untimely habeas

petition heard on the merits does not establish prejudice

sufficient to defeat an amendment to an answer.”). Nor is the

time, effort, and money that the plaintiff expended in

litigating their case to this point substantial prejudice. See

Block v. First Blood Associates, 988 F.2d 344, 351 (2 Cir. nd

1993)(holding that district court did not abuse its discretion

in granting defendants leave to amend their answer to raise

statute of limitations defense and concluding that the time,

effort, and money expended by the plaintiffs in litigating the

case did not arise to substantial prejudice). 

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 6 of 35
7

The statute of limitations defense in this case raises

questions of law and questions of application of the law to

facts which are not in dispute. The plaintiffs have not

asserted that they need to conduct additional discovery to

respond to the statute of limitations defense. 

Allowing the defendants to amend their answer to plead

the statute of limitations will not delay the resolution of

this case. The parties have fully briefed the statute of

limitations defense in connection with the defendants’ motion

for partial summary judgment. If the court grants leave to

amend, it can decide the statute of limitations defense without

delaying the trial.

The plaintiffs have not argued that the defendants’

delay in raising the statute of limitations defense has

prevented them from bringing a timely action in another

jurisdiction. The plaintiffs’ bad faith claims would be 

subject to the same statute of limitations if the plaintiff had

brought those claims in state court. 

Although prejudice is the touchstone of the inquiry

whether to allow amendment, other factors such as undue delay,

bad faith, and futility may justify denial of leave to amend. 

Arthur, supra, 434 F.3d at 204.

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 7 of 35
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There is no evidence that the defendants acted in bad

faith or with a dilatory motive in failing to raise the statute

of limitations at an earlier point. It does not appear that

the defendants had any strategic reason to delay raising the

statute of limitations defense in this case. The plaintiff has

not argued that allowing the amendment would be futile. Thus

the only remaining factor to consider is whether leave to amend

should be denied because of undue delay.

The plaintiffs contend that the defendants have unduly

delayed in raising the statute of limitations defense and have

not provided an adequate justification for their delay. The

plaintiffs point out that the defendants knew the dates they

denied the requests for coverage from the beginning of this

case and, thus, they could and should have raised the statute

of limitations defense earlier. 

Although we agree with the plaintiffs that the

defendants should have raised the statute of limitations

defense earlier, we can not conclude that the defendants’ delay

amounted to undue delay justifying denial of leave to amend. 

“There is, of course, no presumptive period in which a

motion for leave to amend is deemed ‘timely’ or in which delay

becomes ‘undue.’” Arthur, supra, 434 F.3d at 205. Whether

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 8 of 35
9

delay is undue depends on the facts and circumstance of the

case. 

The defendants filed their answer to the amended

complaint on October 20, 2005. On February 24, 2006, they

filed their motion for leave to amend their answer. The delay

involved was only about four months. 

Four months does not amount to undue delay in the

absence of prejudice to the other party. See Long, supra, 393

F.3d at (holding that raising statute of limitations defense in

habeas corpus case 14 months after petition filed not a reason

to deny leave to amend the answer). See also Arthur, supra,

434 F.3d at 205 (holding that eleven month delay in amending

complaint not so egregious as to warrant refusal of leave to

amend and noting that its research uncovered only one appellate

case which has approved denial of leave to amend based on a

delay of less than one year).

Even assuming that we should measure the delay from the

date (March 1, 2005) that the defendants filed their answer to

the original complaint, the delay involved was less than a year

and, in the absence of prejudice, does not amount to undue

delay justifying denial of leave to amend. 

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 9 of 35
10

The plaintiffs contend that the defendants have not

proffered an adequate justification for their delay in raising

the statute of limitations. The defendants in explaining their

delay merely state that “[b]ecause defense counsel up to that

time [the time of filing their answer to the amended complaint]

had focused principally on the question of whether coverage for

Plaintiffs’ claims existed and, by extension, Plaintiffs’

breach of contract claims, a statute of limitations defense was

not pleaded with respect to the bad faith claim.” Doc. 74 at 2.

The delay in this case appears to have resulted from the

neglect of defense counsel. 

Although that defendants have not supplied a compelling

reason for their delay, in the absence of prejudice to the

plaintiffs they are not required to do so. Long, supra, 393

F.3d at 401. To require the defendants to supply a compelling

reason for their delay in the absence of prejudice to the

plaintiffs “would certainly run counter to the well-established

rule that amendments should be liberally allowed.” Id. “The

liberality of Rule 15(a) counsels in favor of amendment even

when a party has been less than perfect in the preparation and

presentation of a case.” Arthur, supra, 434 F.3d at 206. “It

allows for misunderstandings and good-faith lapses in judgment,

so long as the party thereafter acts reasonably and

diligently.” Id.

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 10 of 35
11

The defendants most certainly should have exercised

greater diligence in raising the statute of limitations. 

Nevertheless, “[l]awyers - who, like judges, operate under the

pressures of time and demanding schedules - sometimes, however,

fall short of perfection.” Kiser v. General Elec. Corp., 831

F.2d 423, 428 (3d Cir. 1987). “Recognizing this fact of legal

life, Rule 15(a) was enacted to create an uncomplicated method

by which pleadings may be amended without causing serious

injustice.” Id.

Given that there is no evidence of bad faith on the

part of the defendants in failing to plead the statute of

limitations as an affirmative defense in their answer to the

amended complaint, that it would not be futile to allow the

defendants to amend their answer, and, most importantly, that 

the plaintiffs will not be substantially prejudiced by allowing

an amendment, we conclude that the defendants’ delay in raising

the statute of limitations does not justify denying the

defendants leave to amend their answer. Accordingly, the

defendants’ motion for leave to amend will be granted.

III. Motions for Partial Summary Judgment.

Both the defendants and the plaintiffs have filed a

motion for partial summary judgment.

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 11 of 35
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A. Summary Judgment Standard.

Summary judgment is appropriate if the "pleadings,

depositions, answers to interrogatories, and admissions on

file, together with the affidavits, if any, show that there is

no genuine issue as to any material fact and that the moving

party is entitled to judgment as a matter of law." 

Fed.R.Civ.P. 56(c). “The moving party bears the initial burden

of demonstrating the absence of any genuine issue of material

fact, though the non-moving party must make a showing

sufficient to establish the existence of each element of his

case on which he will bear the burden of proof at trial.” Huang

v. BP Amoco Corp., 271 F.3d 560, 564 (3d Cir. 2001); Celotex

Corp. v. Catrett, 477 U.S. 317, 322-23 (1986).

“A factual dispute is material if it bears on an

essential element of the plaintiff’s claim, and is genuine if a

reasonable jury could find in favor of the nonmoving party.” 

Natale v. Camden County Correctional Facility, 318 F.3d 575,

580 (3d Cir. 2003). In determining whether an issue of

material fact exists, the court must consider all evidence in

the light most favorable to the non-moving party. White v.

Westinghouse Electric Co., 862 F.2d 56, 59 (3d Cir. 1988). 

“Our function at the summary judgment stage is not to weigh the

evidence and determine the truth of the matter, but to

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 12 of 35
13

determine whether there is a genuine issue for trial.” Federal

Home Loan Mortgage Corp. v. Scottsdale Ins. Co., 316 F.3d 431,

443 (3d Cir. 2003). 

B. Defendants’ Motion for Partial Summary Judgment.

The defendants are seeking summary judgment on the bad

faith claims in Count III of the amended complaint. The

defendants contend that the statutory bad faith claim is barred

by the statute of limitations, that they should be granted

summary judgment on the bad faith claims because the plaintiffs

have not presented clear and convincing evidence of bad faith,

and that AIGDC should be granted summary judgment on the

statutory bad faith claim because it is not an insurer. 

1. Undisputed Facts.

The following facts are not in dispute. The plaintiffs

are in the debt collection business. Defendants’ Statement of

Material Facts at ¶1 and the Plaintiff’s Opposition to

Defendants’ Statement of Material Facts to Support Defendants’

Motion for Partial Summary Judgment Pursuant to Local Rule of

Civil Procedure 65.1 at ¶1. The plaintiffs purchased an Errors

and Omissions insurance policy from defendant Illinois National

with the Policy Number 2201997 and a Policy Period of November

1, 1999 to November 1, 2000. Id. at ¶2.

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 13 of 35
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Under a section titled Coverage Agreements, the Policy

provides:

A. The Company will pay on behalf of the

“Insured” “Damages” which the

“Insured” shall become legally

obligated to pay for any “Claim”

first made against the “Insured” and

reported to the Company during the

“Policy Period” for “Wrongful Acts”

of the “Insured” or another for whom

the “Insured” is legally responsible

committed solely in the conduct of

the “Insured’s” “Professional

Services”.

B. The Company shall have the right and

duty to defend the “Insured” against

“Claims” for Damages for a covered

“Wrongful Act”, even if the “Claim”

is groundless, false or fraudulent

and pay “Claims Expense”, as defined

herein subject to the policy terms,

conditions and exclusions. The

Company shall have the exclusive

right to designate legal counsel to

represent the “Insured” against such

“Claims”. 

The Company’s duty to defend any “Claim” ends

after the applicable Limit of Liability has

been exhausted by “Claims Expenses”, payment of

judgments, awards, or interest accruing thereon

prior to entry of judgment or issuance of an

award and settlements.

Amended Complaint, Exhibit A.

The Policy defines “Claim” as follows:

1. Any judicial, administrative or

arbitration proceeding initiated

against one or more “Insured”(s) in

which such “Insured”(s) may be

subjected to a binding adjudication

of liability for “Damages”; or

2. Any written demand from a “Client or

Customer” or “Consumer” for money.

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 14 of 35
15

Id.

The Policy defines “Wrongful Act” as follows:

1. Means a negligent act, error or

omission; or

2. Libel, slander, malicious

prosecution, wrongful attachment,

wrongful eviction, wrongful entry,

false arrest, detention and

imprisonment, harassment,

interference with business, invasion,

infringement or interference with the

right of privacy; or

3. A violation of the Federal Fair Debt

Collection Practices Act (FDCPA) or

the Fair Credit Reporting Act (FRCA)

and as further amended, or other

similar state statutes.

Id.

The Policy defines “Professional Services” as follows:

1. Performance as a “Debt Collector”;

2. Dissemination of “Consumer Reports” or

“Credit Information” as a “Credit Bureau”;

or 

3. Performance of “Check

Verification/Recovery Services” as a

“Check Verification/Recovery Office”. 

Id.

The Policy contains an exclusion which provides that

the policy does not apply to claims “[s]eeking the return of

fees or charges for services performed by any “Insured.” Id.

On October 11, 2000, NRA was sued by another debt

collector, Forward Thinking, Inc., with whom NRA had

subcontracted to perform debt collection work. Defendants’

Statement of Material Facts at ¶6 and the Plaintiff’s

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 15 of 35
16

Opposition to Defendants’ Statement of Material Facts to

Support Defendants’ Motion for Partial Summary Judgment

Pursuant to Local Rule of Civil Procedure 65.1 at ¶6. The

Forward Thinking complaint against plaintiff NRA was filed in

the Superior Court of New Jersey. Amended Complaint at ¶26 and

Answer to Amended Complaint at ¶26. By a letter dated October

31, 2000, plaintiff NRA submitted a claim to defendant Illinois

National requesting a defense and indemnification for the

Forward Thinking Complaint. Defendants’ Statement of Material

Facts at ¶9 and the Plaintiff’s Opposition to Defendants’

Statement of Material Facts to Support Defendants’ Motion for

Partial Summary Judgment Pursuant to Local Rule of Civil

Procedure 65.1 at ¶9. By a letter dated November 9, 2000,

defendant Illinois National, through AIGTS, informed plaintiff

NRA that it would neither defend nor indemnify plaintiff NRA in

the matter. Doc. 79, Exhibit H. The basis for that decision

was stated to be that the claim does not fall within the scope

of the definition of “Wrongful Act” and because Exclusion M,

which provides that the policy does not apply to claims seeking

the return of fees or charges for services performed by any

insured, precludes coverage. Id. Plaintiff NRA never responded

to the November 9, 2000 denial letter. Defendants’ Statement of

Material Facts at ¶18 and the Plaintiff’s Opposition to

Defendants’ Statement of Material Facts to Support Defendants’

Motion for Partial Summary Judgment Pursuant to Local Rule of

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 16 of 35
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Civil Procedure 65.1 at ¶18. On September 21, 1002, AIGTS

closed the file on the claim. Id. at ¶20. 

On April 22, 2002, Forward Thinking filed an amended

complaint against plaintiff NRA, plaintiff DBS, Steven Kusic

and Dale Brumbach. Doc. 79, Exhibit K. NRA did not forward

the Amended Complaint to Illinois National or AIGTS until two

years later, by a letter dated April 15, 2004. Defendants’

Statement of Material Facts at ¶25 and the Plaintiff’s

Opposition to Defendants’ Statement of Material Facts to

Support Defendants’ Motion for Partial Summary Judgment

Pursuant to Local Rule of Civil Procedure 65.1 at ¶25. By a

letter dated October 1, 2004, defendant Illinois National,

through AIGTS, informed plaintiff NRA that it would not provide

indemnification in the event of an adverse judgment or award.

Doc. 79, Exhibit M. The basis for the decision was again

stated to be that the claim does not fall within the scope of

the definition of “Wrongful Act” and because Exclusion M

precludes coverage. Id. 

2. Statute of Limitations on Statutory Bad Faith 

 Claim.

The defendants contend that the plaintiffs’ bad faith

claim under 42 Pa.C.S.A. § 8371 is barred by the statute of

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 17 of 35
18

limitations. The plaintiffs contend that the defendants have

waived the statute of limitations defense by failing to plead

the statute of limitations as an affirmative defense in their

answer to the amended complaint. As discussed above, however,

we have concluded that the defendants should be granted leave

to amend their answer to plead the statute of limitations. 

Thus, we conclude that the defendants have not waived the

statute of limitations defense.

A bad faith claim under 42 Pa.C.S.A. § 8371 is governed

by a two-year statute of limitations. See Haugh v. Allstate

Ins. Co., 322 F.3d 227, 235-36 (3d Cir. 2003) (predicting that

the Pennsylvania Supreme Court would apply two-year tort

statute of limitations to statutory bad faith claim). “In

general, the statute of limitations begins to run when a right

to institute and maintain suit arises.” Sikirica v. Nationwide

Ins. Co., 416 F.3d 214, 224-25 (3d Cir. 2005). “A bad faith

claim arises upon a ‘frivolous or unfounded refusal to pay

proceeds of [a] policy.’” Id. at 225. The statute of

limitations for a bad faith claim under § 8371 accrues when the

insurer first provides definite notice of a refusal to

indemnify or defend. Id.

In the instant case, defendant Illinois National

provided clear notice by a letter dated November 9, 2000 that

it would neither defend nor indemnify plaintiff NRA in the

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 18 of 35
 The letter denying coverage is dated November 9, 2

2000. We recognize that plaintiff NRA may not have received the

letter on that date. We need not, however, determine the exact

date that plaintiff NRA received the letter because NRA does not

dispute that it received the letter and the few days possibly at

issue would not make a difference in the outcome with regard to the

statute of limitations.

19

Forward Thinking case. Thus, the statute of limitations began

to run on the § 8371 bad faith claim of NRA on or about

November 9, 2000. The plaintiffs did not commence the instant 2

case until January 6, 2005. Thus, it appears that the

plaintiffs’ statutory bad faith claim is barred by the statute

of limitations. 

The plaintiffs, however, contend that the denial by the

defendants on October 1, 2004 of a defense and coverage for the

claims in Forward Thinking’s amended complaint was a separate

and distinct act of bad faith that is not barred by the statute

of limitations. The plaintiffs point out that the Forward

Thinking amended complaint added new claims. The plaintiffs

also point out that, whereas the original Forward Thinking

complaint named only NRA as a defendant, the amended Forward

Thinking complaint named NRA, DBS, Kusic and Brumbach as

defendants. 

The defendants argue that the denial of coverage and a

defense in 2004 was a denial of the same claim as was denied in

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 19 of 35
20

2000 and that pursuant to Pennsylvania law separate denials of

the same claim by an insurer do not give rise to separate

causes of action for bad faith. 

The defendants cite Adamski v. Allstate Ins. Co., 738

A.2d 1033 (Pa. Super.Ct. 1999). In Adamski, the Pennsylvania

Superior Court held that the statute of limitations for a bad

faith claim under § 8371 accrued when the insurer first

provided definite notice of a refusal to indemnify or defend. 

The Superior Court reasoned that the statute of limitations

begins to run as soon as the right to institute suit arises and

that this is true regardless of whether the full extent of harm

is known when the action arises. Id. at 1042. The plaintiff in

Adamski had contended that the insurer committed numerous

separate and distinct acts of bad faith: refusal to defend or

indemnify, denial of liability protection without first seeking

declaratory judgment, failure to settle, lack of an adequate

basis of denying protection, and failure to conduct a diligent

investigation. Id. at 1038. The Superior Court held that each

of these alleged acts was related to the initial denial of

coverage and that each act does not constitute a separate act

of bad faith. Id. 1039. The court stated that plaintiffs “may

not separate initial and continuing refusals to provide

coverage into distinct acts of bad faith.” Id. at 1042. 

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 20 of 35
21

The defendants also cite Simon Wrecking Co., Inc. v.

AIU Ins. Co., 350 F.Supp.2d 624 (E.D.Pa. 2004). In Simon, the

insured received a Potentially Responsible Party (PRP) letter

from the Environmental Protection Agency notifying it that it

might in the future incur or might already have incurred

liability under the Comprehensive Environmental Response,

Compensation, and Liability Act of 1980 in connection with a

Superfund Site. Id. at 629. The insured sent the PRP letter to

its three insurance companies and requested a defense and

coverage arising from the letter. Id. In 1997, two of the

three insurance companies denied coverage based on a pollution

exclusion in their policies which excluded coverage for damages

caused by a discharge of pollution unless such discharge was

sudden and accidental. Id. The two insurance companies

indicated that the discharge of pollution at the site had not

been sudden and accidental. Id. At 629. The third insurance

company did not deny coverage but sent a reservation of rights

letter and requested more information. Id. at 633. In 2002,

the insured notified the insurance companies that it had been

sued by other potentially responsible parties over the site.

Id. at 630. Applying the reasoning of Adamski, the court in

Simon determined that Simon’s bad faith claim against the

insurance company that had issued the reservation of rights

letter was not barred by the statute of limitations because it

had not yet denied coverage. Id. at 632. On the other hand,

the court in Simon determined that the bad faith claims against

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 21 of 35
22

the other two insurance companies that had previously denied

coverage was barred by the statute of limitations. Id. at 634. 

The plaintiff in Simon had argued that the insurance companies’

refusals to provide coverage for the suit brought by other

potentially responsible parties were acts of bad faith separate

from the denial of coverage based on the PRP letter and,

therefore, not barred by the statute of limitations. Id. at

633. The court rejected that argument and concluded that the

insurance companies’ refusals to provide coverage with respect

to the lawsuit were not separate acts of bad faith but merely

continuing denials of coverage. Id. at 633. 

Based on these cases and others, the defendants assert

that the statute of limitations on the plaintiffs’ statutory

bad faith claim began to run in 2000 when it initially denied

coverage and that its later reaffirmation of that denial does

not amount to a separate act of bad faith. Therefore, the

defendants argue, the plaintiffs’ statutory bad faith claim is

barred by the statute of limitations. 

We agree with the defendants that the statutory bad

faith claim of NRA is barred by the statute of limitations. 

Defendant Illinois National provided clear notice by a letter

dated November 9, 2000 that it would neither defend nor

indemnify plaintiff NRA in the Forward Thinking case. Thus,

the statute of limitations began to run on the bad faith claim

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 22 of 35
23

against NRA on or about November 9, 2000. The defendants’

denial of coverage and a defense to NRA after it was made aware

of the amended complaint filed by Forward Thinking is not,

pursuant to the reasoning of Adamski, a separate act of bad

faith that started the statute of limitations running anew. 

Although the amended complaint filed by Forward Thinking

contained more legal claims than the original complaint, the

amended complaint filed by Forward Thinking contained the same

basic factual allegations against NRA as had the original

complaint. The defendants’ denial of coverage and a defense to

NRA in 2004 was a reaffirmation of its earlier denial in 2000. 

Since plaintiff NRA did not commence the instant case until

January 6, 2005, its statutory bad faith claim against the

defendants is barred by the statute of limitations.

We do not agree, however, that the statutory bad faith

claim of plaintiff DBS is barred by the statute of limitations. 

The original complaint filed by Forward Thinking did not name

DBS as a defendant, and the defendants’ November 9, 2000 denial

of coverage and a defense can not be seen to have been a

definite notice of a refusal to indemnify or defend as to DBS. 

Accordingly, we conclude that plaintiff DBS’ statutory bad

faith claim is not barred by the statute of limitations. 

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 23 of 35
The defendants made this argument as to both of the 3

plaintiffs. However, since we have already determined that

plaintiff NRA’s statutory bad faith claim is barred by the statute

of limitations, we consider the argument only with respect to

plaintiff DBS.

24

We note that the defendants contend that a separate

claim by DBS based on the amended complaint filed by Forward 3

Thinking would not be considered a timely claim under the

policy. The defendants reason that since the policy in this

case is a claims-made policy, since under the policy “coverage

is limited to liability for claims first made against the

insured and reported to the company while the coverage is in

force during the policy period, or extended reporting period,

if any, and provided that all terms, conditions and exclusions

of the policy are met” (Doc. 47, Exhibit A - Claims-Made Form) 

and since the amended complaint filed by Forward Thinking did

not open a new proceeding, the amended complaint did not

constitute a new claim within the meaning of the policy. The

defendants further argue that if the amended complaint filed by

Forward Thinking does constitute a new and separate claim under

the policy, it would not be covered by the policy which only

covers claims made during the policy period - November 1, 1999

to November 1, 2000. The defendants continue that if the

amended complaint filed by Forward thinking is construed as a

new claim under the policy, then that claim, whether construed

as being made on April 15, 2004 (the date the plaintiffs sent

the amended complaint to the defendants) or on April 22, 2002

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 24 of 35
25

(the date the amended complaint was received by the

plaintiffs), would be well outside the coverage period of the

policy. The defendants assert that plaintiff DBS can not have

it both ways - the amended complaint filed by Forward Thinking

can not be a new claim for purposes of its bad faith claim but

not for purposes of its coverage claims. 

The defendant may have a strong argument that DBS’s

claim for coverage and a defense is not covered under the

policy because the claim was made outside the policy period. 

Whether or not DBS’s coverage and defense claim is covered

under the policy is a question that goes to the merits of DBS’s

bad faith claim because if DBS’s claim is not covered under the

policy then it follows that the defendants’ denial of coverage

and defense to DBS can not be seen to have been in bad faith. 

However, whether DBS’s claim is covered under the policy is a

question separate from whether or not DBS’s statutory bad faith

claim is barred by the statute of limitations. 

In summary, we conclude that the statutory bad faith

claim of plaintiff NRA is barred by the statute of limitations

but that the statutory bad faith claim of plaintiff DBS is not

barred by the statute of limitations. 

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 25 of 35
Again we note that that the defendants made this 4

argument as to both of the plaintiffs. However, since we have

already determined that plaintiff NRA’s statutory bad faith claim

is barred by the statute of limitations, we consider the argument

only with respect to plaintiff DBS.

26

3. Merits of Statutory Bad Faith Claim Against 

Plaintiff DBS.

The defendants argue that they are entitled to summary

judgment on the statutory bad faith claim of plaintiff DBS4

because the plaintiff has not presented clear and convincing

evidence of bad faith. 

42 Pa.C.S.A. § 8371 provides:

In an action arising under an insurance

policy, if the court finds that the insurer has

acted in bad faith toward the insured, the

court may take all of the following actions: 

(1) Award interest on the amount of the

claim from the date the claim was made by the

insured in an amount equal to the prime rate of

interest plus 3%.

(2) Award punitive damages against the

insurer. 

(3) Assess court costs and attorney fees

against the insurer.

“Bad faith” is not defined in the statute. The

Pennsylvania Superior Court has defined “bad faith” as “‘any

frivolous or unfounded refusal to pay proceeds of a policy.’”

Terletsky v. Prudential Property and Cas Ins. Co., 649 A.2d

680, 688 (1994)(quoting Black’s Law Dictionary 139 (6 ed. th

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 26 of 35
27

1990)). “To make out a claim of bad faith, a plaintiff must

show by clear and convincing evidence that the insurer (1) did

not have a reasonable basis for denying benefits under the

policy; and (2) knew or recklessly disregarded its lack of

reasonable basis in denying the claim.” W.V. Realty, Inc. V.

Northern Ins. Co., 334 F.3d 306, 312 (3d Cir. 2003). “Although

the insurer’s conduct need not be fraudulent, ‘mere negligence

or bad judgment is not bad faith.’” Northwestern Mut. Life Ins.

Co. v. Babayan, 430 F.3d 121, 137 (3d Cir. 2005)(quoting Brown

v. Progressive Ins. Co., 860 A.2d 493, 501 (Pa.Super.Ct.

2004)). “The insured must ultimately show that ‘the insurer

breached its duty of good faith through some motive of selfinterest or ill will.’” Id. The insured must prove bad faith

by clear and convincing evidence. Babayan, supra, 430 F.3d at

137. “At the summary judgment stage, the insured’s burden in

opposing a summary judgment motion brought by the insurer is

‘commensurately high because the court must view the evidence

presented in light of the substantive evidentiary burden at

trial.’” Id. (quoting Kosierowski v. Allstate Ins. Co., 51

F.Supp.2d 583, 588 (E.D.Pa. 1999)). 

In a Memorandum and Order dated August 26, 2005 and

issued in connection with the defendants’ motions for judgment

on the pleadings, we reviewed the counts of the amended

complaint filed by Forward Thinking and determined that only

Counts 5, 15 and 16 of that complaint are possibly within the

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 27 of 35
28

coverage of the policy. Counts 5, 15 and 16 of the amended

complaint filed by Forward Thinking seek relief against NRA but

not DBS. As we have already determined that none of the counts

in the amended complaint filed by Forward Thinking that seek

relief against DBS are possibly within the coverage of the

policy, it follows that the defendants can not be seen to have

acted in bad faith within the meaning of 42 Pa.C.S.A. § 8371 in

denying a defense to DBS. Accordingly, we will grant summary

judgment to the defendants on plaintiff DBS’s statutory bad

faith claim. 

4. Common Law Bad Faith Claim.

The defendants argue that the plaintiffs’ common law

bad faith claim fails for the same reason that their statutory

bad faith claim fails - they have not proven by clear and

convincing evidence that the defendants lacked a reasonable

basis for their coverage decision. 

To the extent that there is a common law bad faith

cause of action in Pennsylvania, it appears that such a cause

of action is contractual in nature. See Haugh v. Allstate Ins.

Co., 322 F.3d 227, 236-37 (3d Cir. 2003). The parties,

however, have not briefed the common law bad faith claim as a

contractual claim. Accordingly, we will not address the

common law bad faith claim at this point in time.

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 28 of 35
29

C. Plaintiffs’ Motion for Partial Summary Judgment.

The plaintiffs are seeking partial summary judgment on

Counts I and II of their amended complaint. 

The plaintiffs contend that the court should enter a

declaratory judgment stating that defendant Illinois National

had, and continues to have, a duty to defendant NRA, DBS, Kusic

and Brumbach against the claims of Forward Thinking. 

The plaintiff cites to our Memorandum and Order dated

August 26, 2005 in which we addressed the defendants’ motions

for judgment on the pleadings. The plaintiffs assert that in

that Memorandum and Order the court concluded that Illinois

National owes NRA, DBS, Brumbach and Kusic a defense. The

plaintiffs then contend that, pursuant to the law of the case

doctrine, they are entitled to a declaratory judgment that

defendant Illinois National had, and continues to have, a duty

to defend NRA, DBS, Kusic and Brumbach against the claims of

Forward Thinking. 

“[L]aw of the case is an amorphous concept.” Arizona v.

California, 460 U.S. 605, 618 (1983). “As most commonly

defined, the doctrine posits that when a court decides upon a

rule of law, that decision should continue to govern the same

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 29 of 35
30

issues in subsequent stages in the same case.” Id. The law of

the case doctrine expresses the practice of courts generally to

refuse to reopen what has been decided. Messenger v. Anderson,

225 U.S. 436, 444 (1912). “The doctrine is designed to protect

traditional ideals such as finality, judicial economy and

jurisprudential integrity.” In re City of Philadelphia Litig.,

158 F.3d 711, 717-18 (3d Cir. 1998). 

Although generally reluctant to do so, courts in their

discretion retain the power to reconsider questions of law that

have already been decided in the same proceeding. Christianson

v. Colt Industries Operating Corp., 486 U.S. 800, 817 (1988)(“A

court has the power to revisit prior decisions of its own or of

a coordinate court in any circumstance, although as a rule

courts should be loathe to do so in the absence of

extraordinary circumstances such as where the initial decision

was clearly erroneous and would work a manifest injustice."). 

See also Fed.R.Civ.P. 54(b)(providing that until the court

expressly directs entry of a final judgment an order that

resolves fewer than all of the claims among all of the parties

“is subject to revision at any time before the entry of

judgment adjudicating all the claims and the rights and

liabilities of all the parties.). “Law of the case directs a

court’s discretion, it does not limit the tribunal’s power.” 

Arizona, supra, 460 U.S. at 618. Under law of the case rules,

“it is not improper for a court to depart from a prior holding

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 30 of 35
31

if convinced that it is clearly erroneous and would work a

manifest injustice.” Id. at 619. n.8. Although the court may

reconsider its prior rulings, when doing so it must explain on

the record the reasoning behind its decision to reconsider the

prior ruling and it must take appropriate steps so that the

parties are not prejudiced by reliance on the prior ruling.

Williams v. Runyon, 130 F.3d 568, 573 (3d Cir. 1997).

 Although we have no intention of revisiting the

determinations we made in the Memorandum and Order of August

26, 2005, we do not agree with the plaintiffs that based on

that Order they are entitled to entry of a declaratory judgment

stating that defendant Illinois National had, and continues to

have, a duty to defend NRA, DBS, Kusic and Brumbach against the

claims of Forward Thinking. In the Memorandum and Order of

August 26, 2005 we addressed the arguments that the defendants

made in connection with their motions for judgment on the

pleadings. We determined that the defendants were not entitled

to judgment on the pleadings. We did not affirmatively 

determine that the plaintiffs were entitled to a declaratory

judgment. 

In most instances, in the Memorandum and Order of

August 26, 2005 we were careful to couch our determination of

the defendants’ arguments in terms that indicated only that the

defendants were not entitled to judgment on the pleadings. 

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 31 of 35
32

Where we determined that specific counts of Forward Thinking’s

complaint and amended complaint did not fall within the

coverage provisions of the policy we explicitly so held. 

However, as to the remaining counts we did not specifically

hold that the defendants owed the plaintiffs a duty to defend

but only that we could not say that those counts do not come

under the coverage of the policy. For example, we stated: “We

can not say that the claims in Counts 5, 15 and 16 of Forward

Thinking’s amended complaint do not come under the coverage of

the policy, and, accordingly, we can not say that Illinois

National does not have a duty to defend the plaintiffs.” Doc.

44 at 25. 

We did, however, in connection with the discussion of

Count 4 of Forward Thinking’s original complaint state:

“Accordingly, we cannot say that that claim does not come under

the coverage of the policy. Thus, defendant Illinois National

had a duty to defend plaintiff NRA until such time as it were

to have become clear that there was no possibility that Forward

Thinking could recover on that claim.” Doc. 44 at 23. 

Nevertheless, we later discussed the defendants’ arguments

regarding Exclusion M of the policy. Thus, we think it should 

have been clear that prior statement regarding Count 4 was

merely a statement that Count 4 comes under the coverage of the

policy’s terms with respect to the duty to defend but not

necessarily that there could not be other reasons (exclusions)

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 32 of 35
33

why the defendants would not owe NRA a defense. Moreover, we

noted in the Memorandum and Order of August 26, 2005 that the

defendants had argued in a footnote in their brief that

Exclusion G of the policy is applicable but that in connection

with the motion for judgment on the pleadings we would not

address that argument since it was only raised in a footnote. 

Doc. 44 at 29 n.4. We think it clear that in the Memorandum

and Order we were addressing only the arguments raised by the

defendants and that we did not affirmatively determine that the

defendants owed the plaintiffs a defense. 

Absent other arguments (such as other exclusions of the

policy), the logical conclusion of the Memorandum and Order of

August 26, 2005 may be that Illinois National owed plaintiff

NRA a defense. However, based on the law of the case, we can

not conclude that the plaintiffs are entitled to a declaratory

judgment stating that defendant Illinois National had, and

continues to have, a duty to defendant NRA, DBS, Kusic and

Brumbach against the claims of Forward Thinking. 

Based on the Memorandum and Order of August 26, 2005,

the plaintiffs are also seeking partial summary judgment on

Count II of their amended complaint. The plaintiffs are

seeking summary judgment as to liability on their breach of

contract claim with the amount of damages to be determined at

trial. As discussed above, the plaintiffs are not entitled to

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 33 of 35
34

summary judgment based on the Memorandum and Order of August

26, 2006 and the law of the case doctrine. 

We will deny the plaintiffs’ motion for partial summary

judgment. We note, however, that we expect counsel for the

parties to confer in good faith prior to the pretrial

conference in this case to narrow the issues, if any, that are

truly in dispute with regard to Counts I and II of the

plaintiffs’ amended complaint. 

IV. Order.

IT IS ORDERED that the defendants’ motion (doc. 73) for

leave to amend their answer to the amended complaint is GRANTED

and the Clerk of Court is directed to file and docket the

defendants’ amended answer (attached to doc. 73). IT IS

FURTHER ORDERED that the defendants’ motion (doc. 79) for

partial summary judgment is GRANTED IN PART AND DENIED IN PART. 

 The defendants’ motion is granted as to the plaintiffs’

statutory bad faith claim, but the motion is denied as to the

plaintiffs’ common law bad faith claim. IT IS FURTHER ORDERED

that that the plaintiffs’ motion (doc. 81) for partial summary 

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 34 of 35
35

judgment is DENIED. The Clerk of Court is directed to delay

entering judgment until the conclusion of the entire case.

/s/ J. Andrew Smyser

J. Andrew Smyser

Magistrate Judge

Dated: May 9, 2006.

Case 4:05-cv-00033-JAS Document 91 Filed 05/09/06 Page 35 of 35