To Merge or Not To Merge?

At least for now, two of PA's big health insurers, Pittsburgh's Highmark Inc. and Philadephia's Independence Blue Cross, have decided to call off their planned merger due to their dissatisfaction with proposed restrictions from state regulators. Apparently due to anti-trust concerns, they would have been required to give up their "Blue Cross" and "Blue Shield" trademarks as a condition of the merger, something neither was willing to do.

10 Worst Insurance Companies in America?

Earlier this year, the American Association for Justice issued its report naming the "10 Worst Insurance Companies in America." The authors of the report describe the process undertaken to compile this list as follows:

To identify the worst insurance companies for consumers, researchers at the American Association for Justice (AAJ) undertook a comprehensive investigation of thousands of court documents, SEC and FBI records, state insurance department investigations and complaints, news accounts from across the country, and the testimony and depositions of former insurance agents and adjusters. Our final list includes companies across a range of different insurance fields, including homeowners and auto insurers, health insurers, life insurers, and disability insurers.

The report is an interesting read and provides some insight into what some policyholders encounter when making claims with their insurers. Of course, different policyholders may have different experiences and your mileage may vary. Rest assured, however, that insurers are not always looking out for the best interest of their insureds.

At a minimum, the report is worth reviewing if you are in the market for a new policy or making a claim with your insurer. It may even cause you to rethink the placement of your current coverage and assess whether you current policies are really in good and trustworthy hands.

Great Source of Information for Policyholders

If you have an insurance claim or are interested in insurance law, call me ... or ignore that shameless plug and take a look at the United Policyholders website, which is loaded with helpful information. As explained on their site, their mission is to educate the public on insurance issues and consumer rights.

Declaratory Judgment Action Stayed; Claim Potentially Covered

When a liability policyholder is sued and tenders the lawsuit to its insurer demanding that the insurer provide a defense in an underlying suit, if there is any doubt about whether the claims set forth in the suit are covered under the policy, an insurer may provide a defense to the policyholder under a reservation of rights and simultaneously seek a declaratory judgment that the insurer is not required to defend. As I discussed here, when an insurer succeeds in such an action, it may also attempt to seek reimbursement of defense costs paid under its reservation of rights (though the insurer will probably be unsuccessful if the policy does not provide for such reimbursement.)

However, what happens when the insurer files the declaratory judgment insurance coverage action and, instead of engaging in the substantive coverage dispute, the policyholder asks the Court to stay or suspend the declaratory judgment action? This scenario raises some interesting issues and implications, including the prospect of using a Motion to Stay as a weapon against an insurer defending under a reservation of rights. Could such a motion be used to prolong the insurer's defense?

In Allstate Ins. Co. v. Cooper, 07-00974 (W.D. Pa., May 7, 2008), Judge Nora Barry Fischer addressed a Motion to Stay under similar circumstances and stayed the action after determining that the underlying claims were potentially covered. Her Memorandum Order is typically well written and worth a read. If you have a PACER or CM/ECF account, you can access the opinion here for free.

Checks Are Not "Tangible Property"

In R&L Zook v. Pacific Indem., No. 07-03774 (May 1, 2008), the U.S. District Court for the Eastern District of PA determined that checks that were allegedly improperly cashed by an insured check cashing company did not trigger coverage under that company's liability policy and did not require an insurer to defend the check cashing company in an underlying lawsuit in which the company was being sued for its alleged improper check cashing.

In Zook, the check cashing company raised a creative argument that, because it had been sued for negligent cashing of checks drawn on a third party's account, it was being accused of "property damage" (i.e. damage to the checks) such that its liability insurance was triggered and its insurer was required to defend the check cashing company in the underlying lawsuit. Addressing this issue, the Court and the parties looked to the liability policy's definition of "Property Damage":

Property Damage means: physical injury to tangible property, including resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the occurrence that caused it. Tangible property does not include any software, damage or other information that is in electronic form.

The insurer argued that the checks were not "tangible property" and, thus, any damage to them could not be covered. The check cashing company countered by arguing that the phrase "tangible property" was ambiguous and reasonably susceptible to differing interpretations and, as such, must be construed against the insurer in accordance with PA law.

Because "tangible property" was not separately defined in the liability policy, the Court, following the guidance of Madison Constr. Co. v. Harleysville Mut. Ins. Co., 735 A.2d 100, 108 (Pa. 1999), looked to common definitions of tangible and intangible property in both Black's Law Dictionary and Merriam-Webster’s Dictionary of Law, as well to other PA cases. Each of these sources effectively defined the phrase to include only property that, in and of itself, has some intrinsic value. Consequently, the Court concluded that the phrase "tangible property" was not ambiguous and that, because checks are merely representative of value (as are stock certificates, bonds, and promissory notes), but have no intrinsic value, the alleged damage to the checks at issue was not Property Damage triggering any duty to defend under the liability policy.

As is often the case, the holding here may be limited to these specific facts. Indeed, I suspect that a court could rule differently if, for example, Hello Kitty checks are at issue and my 8 year old daughter is called to testify as an expert on their intrinsic value. (Just kidding, of course.)

PA Superior Court Denies Insurer Reimbursement of Defense Costs

The PA Superior Court has held that, in cases where the insurance policy at issue does not provide for reimbursement of defense costs paid by the insurer, an insurer is not entitled to such reimbursement despite the insurer's reservation of rights letter specifically addressing the issue and a later finding of no coverage under the policy.

In American and Foreign Insurance Company, et al. v. Jerry's Sports Center, Inc., et al., No. 1098 MDA 2006, 2008 PA Super 94, the Court addressed the issue of whether an implied contract exists between the insurer and its insured entitling the insurer to recoup costs expended in defending a disputed claim prior to a final judgment on the coverage issue where the relationship between the parties was governed by a written insurance policy that did not grant the insurer the right to recover defense costs. While the insurer argued that: (1) an implied contract for reimbursement was created by its reservation of rights letter in which the insurer expressly reserved the right to seek reimbursement of all defense fees advanced in the event the insurer was determined to have no duty to defend; and (2) that the insured was unjustly enriched, the Court disagreed.

Noting that the issue presented was one of first impression in Pennsylvania courts, the Superior Court examined the law in other jurisdictions and courts, citing with approval the Third Circuit's opinion Terra Nova Ins. Co. Ltd. v. 900 Bar, Inc., 887 F.2d 1213 (3d Cir. 1989), rejecting an insurer's claim for reimbursement. The Court further examined principles of Pennsylvania law concerning an insurer's duty to defend its insured, concluding that "the duty to defend [i]s triggered when a potentially covered claim became apparent to the insurer, as opposed to being triggered later, as when a court determined actual coverage in a subsequent declaratory judgment action" and that "[c]oncluding any differently would eviscerate the longstanding common law rule that the duty to defend is triggered whenever a claim is not just actually covered, but also potentially covered."

The Court also examined the relevant policy language and noted that the insurer not only had a "duty" to defend under the policy, but a "right" to defend as well. Examining the record, the Court determined that the insurer "was preparing for the possibility that a court would later determine there was coverage and, given that the claims may be potentially covered, [the insurer] was exercising its right to defend under the policy." Thus, the insurer's duty to defend was triggered when it was faced with potentially covered claims and when it activated its right to defend under the insurance contract by taking actions such as hiring counsel.

Finally, the Court noted that an insurer benefits from tendering the defense in such cases because it maintains control over the defense and can mitigate any potential future indemnification burdens.

Given these factors, the Court held that a reservation of rights letter does not create an implied contract for reimbursement, that the insured was not unjustly enriched, and that, if the insurer wanted to seek reimbursement of attorneys fees under the circumstances presented, it could have included such a provision in the insurance contract along with its "duty and right to defend."

It also is worth noting that the Superior Court cited with approval the case of LA Weight Loss Ctrs., Inc. v. Lexington Ins. Co., 2006 WL 689109 (Phila. Co. 2006), going so far as to adopt the Common Pleas Court's reasoning.

Thanks to my partner Beth A. Slagle for bringing this case to my attention.

Third Circuit Discusses Reasonable Expectations Doctrine

In West v. Lincoln Benefit Life Company, the U.S. Court of Appeals for the Third Circuit reviewed and summarized PA's reasonable expectations doctrine in ruling that a former policyholder did not have a reasonable expectation that a life insurance policy would be reinstated.

In West, the Third Circuit faced the question of whether a policy should have been deemed reinstated despite the fact that the insured failed to submit a premium payment during a 61-day grace period. More specfically, the insured decedent had failed to pay premiums and was notified that the policy was in a 61-day grace period during which he could pay and apply for reinstatement. However, his reinstatement would be subject to the underwriting approval and not guaranteed. Ultimately, the premium check was submitted, but the decedent died while the underwriting review was pending.

Looking both to statutory requirements set forth in 40 Pa.C.S.A. § 510 and to the reasonable expectations doctrine as it has developed and evolved in PA, the Third Circuit held that the insurer was correct in denying coverage both because it had complied with statutory requirements and because the insured did not have a reasonable expectation that coverage would be reinstated. Briefly stated, the Court determined that the reinstatement requirements were clearly stated by the insurer and nothing provided to the insured created a reasonable expecation of coverage. Further, the fact that the insured failed to read the reinstatement guidelines in their entirety could not be the basis for such a reasonable expectation.

As I have said here before, it is important that policyholders do their best to read and understand their policies and communications from their insurers. This case empahsizes the importance of this point. Please read your policies or, at least, have someone read and explain them to you.

Additionally, if you are looking for a nice history and summary of the reasonable expectations doctrine, this case is certainly a good place to start.

Surety Bonds Not Subject to Bad Faith Statute

A recent case from the U.S. District Court for the Middle District of PA provides further support for those arguing that surety bonds are not insurance policies for purposes of PA's bad faith statute, 42 Pa.C.S.A. § 8371.

In reaching this conclusion, the court in Intercon Construction, Inc. v. Williamsport Municipal Water Auth., No. 4:07-CV-1360, 2008 U.S. Dist. LEXIS 6022, (M.D. Pa. 2008), first noted that "there does not appear to be any Third Circuit, Pennsylvania Supreme Court, or Pennsylvania Superior Court case law on the issue," but that there are other "Pennsylvania state court decisions on the issue which appear to have reached opposite conclusions." Looking at those decisions, the court determined that there were "numerous differences between surety bonds and insurance policies." These differences include that:

1. "insurance is an agreement by which one undertakes for a consideration to pay money to another on the death, destruction, loss, or injury of someone or something, while a contract of suretyship is one to answer for the debt, default, or miscarriage of another"; and
2. the insurer and insured share a direct contractual relationship and there exists the idea of prompt compensation for loss or damage upon proof of a claim, but a surety does not have a direct contractual relationship with a third-party and has simply agreed to answer for another party's debts to the extent that party fails to answer for them itself.

Based upon these distinctions, the District Court concluded that the PA legislature did not intend to include issuers of surety bonds within the scope of the bad faith statute and dismissed the bad faith claim at issue.

Supreme Court Clarifies Sackett and Stacking

Bringing to a close, at least for now, the Sackett saga discussed in my prior notes here and here, the PA Supreme Court issued two decisions (Sackett v. Nationwide Mutual Insurance Co., No. 8 WAP 2006 (Pa. Dec. 27, 2007) (Justice Castille's opinion for the dissent) and Everhart v. PMA Insurance Group, No. 13 WAP 2007 (Pa. Dec. 27, 2007)(Justice Baldwin's dissenting opinion) addressing questions regarding the Pennsylvania Motor Vehicle Financial Responsibility Law's provisions for stacking uninsured/underinsured motorist coverage.

Pennsylvania Law Weekly has a very good article discussing and explaining the decisions.

Baumhammers Decided

Following up on my post from a few months ago, the PA Supreme Court has issued its opinion(s) in the Baumhammers case addressing the number of occurrences issue. You can read the majority opinion here and the two concurring and dissenting opinions here and here.

In short, the Court adopted the cause of the loss test, but it does not appear to be that simple.

More on this later.