Source: https://thelegalintelligencer.typepad.com/tli/bad-faith/
Timestamp: 2019-04-22 05:22:21+00:00

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It is very common in bad faith litigation for the aggrieved insured to seek discovery of the reserve history in order to track the amount reserved by the defendant insurer in the underlying case. This is presumably done in an attempt to establish that the insurer recognized the claim had a high value, but was trying to take advantage of (or “low-ball”) the insured with an offer at a substantial discount to reserves. In upcoming posts, we will discuss why such a use is a misuse, and how such a use misconstrues the statutory and legal bases for the requirement of insurance reserves under Pennsylvania law. We will also take a brief look at why requiring insurers to disclose reserves may create a dangerous disincentive on the part of insurers to adequately reserve claims, defeating the very purpose of setting aside reserves for insurance claims in the first place.
Insurers are statutorily required to set reserves upon notice of losses potentially covered by policies. The statute says nothing whatever about reserving only for those claims which are probable, or even likely. One court has written, of reserving: "This requirement guarantees that insurance companies have the funds to pay claims as they become due. This requirement enables the insurance department to monitor the financial condition of insurance companies to protect consumers and hopefully maintain solvency despite unliquidated pending claims." (See Executive Risk Indemnity Inc. v. Cigna Corporation, Philadelphia Court of Common Pleas, 2006). (See also, Oak Lane Printing & Letter Service Inc. v. Atlantic Mutual Insurance Co., District Court for the Eastern District of Pennsylvania, 2007).
Thus, we see, even from this brief review, that reserves are required by legislation, regulation and common law as a fiscal and accounting safeguard, not a proxy for measuring the merits of given insurance claims, as bad faith plaintiffs’ discovery sometimes suggests.
Bad faith discovery aimed at unearthing reserve information could bear the cloak of legitimacy if, in the industry, there were testimony from insurance professionals that reserving practices were undertaken with a view toward rendering an opinion toward the merits of a claim. However, their testimony in the writers’ experience is consistent with the purpose of reserving set out in the legislation and case law: Reserving is not a barometer reflecting analysis of the merits of an insurance claim.
As an accounting device, reserving is focused on liquidity and thus always views a claim from “worst case scenario” perspective. Claims representatives will often undertake separate analyses and make separate assessments of claims’ “current values,” “actual and factual values,” or “settlement values.” Such other measures provide a far more accurate picture of an underlying claim’s current value based on known facts from the current claims information.
I welcome feedback from readers, along with any suggestions for topics you would like to see discussed in this space. Please e-mail me at chaddick@dmclaw.com.
On May 24, in Jones v. Nationwide, a panel of the Pennsylvania Superior Court unanimously affirmed preliminary objections granting a demurrer in favor of Nationwide Property and Casualty Insurance Co., dismissing a class action complaint against them, which, in part, claimed that Nationwide committed bad faith by prorating deductible reimbursements under its auto policies. The plaintiffs claimed that such a practice, though Nationwide contended it relied on regulations promulgated under the Unfair Insurance Practices Act, constituted a breach of contract, bad faith conversion and unjust enrichment, and also sought an injunction to stop the practice.
In affirming dismissal of the complaint at the trial court level, the Superior Court relied on Harnick v. State Mutual Insurance Company, the 2009 U.S. District Court for the Eastern District of Pennsylvania case, also involving the practice of prorating deductible reimbursements. The Harnick court found that the insured defendant did not commit bad faith in acting in reasonable reliance on valid state insurance regulations. The court found the reasoning in Harnick to be persuasive. The panel in Jones therefore adopted Harnick’s reasoning as sound and affirmed the trial court’s order granting the demure in favor of Nationwide.
This is not to say that an insurer cannot still be incorrect, or liable for breach of contract if enforcement or reliance on the regulations is inconsistent or violative of the insurance policy at issue. But being wrong, even being negligent, has never been sufficient evidence of bad faith in Pennsylvania, and the breach of contract and bad faith remedies in the state have always been distinct. (See, e.g., Smith v. Westfield Ins. Co., 2007) (Westfield did a thorough investigation and made a reasonable finding. That the determination may turn out to be incorrect does not mean that it had a dishonest purpose or was made with reckless disregard for the truth).
The ruling in Jones makes sense, as a sort of “pre-emption with boundaries” defense, and offers protection to insurers who act in reasonable reliance on valid state insurance regulations. Inasmuch as one of the chief inquiries in bad faith litigation is the conduct of an insurer viewed objectively, i.e., whether an insurer acts reasonably, an insurer’s practice in following regulations enacted under unfair insurance practice statutes would seem to be a good stake in solid ground, and therefore a good ground to provide protection to those insurers electing to proceed down such a path. Judged from such a perspective, Jones appears to be in agreement with Harnick, and to articulate a fair boundary line for bad faith claims.
On Aug. 2nd Judge Albert Masland of the Cumberland County Court of Common Pleas in ECSM Utility Contractors, Inc. v. Selective Insurance Group, Inc., et. al. granted in part the defendant’s motion to bifurcate and stay the plaintiff’s bad faith claims in a combined coverage and bad faith case.
I believe that Masland has delivered in a few short lines a relatively simple mechanism for dealing with the oftentimes thorny problem of combined breach of contract and faith cases.
Severance and stay are, it seems, simple mechanisms that are often requested in combined cases like ECSM, but are all too often denied for fear of somehow bogging down the case. Masland seems to have resolved that issue effectively by imposing upon the defendants the duty to file a dispositive motion on the coverage issue within a brief amount of time. Thus, the approach taken by Masland would also, it seems, impose upon defendant insurers seeking to avail themselves of the benefit of bifurcation and stay, the obligation not to request bifurcation and stay until such time as they are ready to seek a dispositive ruling on a breach of contract/coverage issue by way of motion such as motion for summary judgment.

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