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Hudgins v. Travelers Home & Marine Insurance Co.

United States District Court, Third Circuit

July 31, 2013

JEANETTE HUDGINS, Plaintiff,
v.
THE TRAVELERS HOME AND MARINE INSURANCE COMPANY, Defendant.

MEMORANDUM

William H. Yohn Jr., Judge

Plaintiff, Jeanette Hudgins, brings this insurance action against defendant, The Travelers Home and Marine Insurance Company (“Travelers”), alleging breach of contract, bad faith conduct by an insurer under 42 Pa. Cons. Stat. § 8371, and breach of the duty of good faith and fair dealing. Before me is Travelers’s motion for partial summary judgment on the bad faith claims (counts III, IV, and V of the amended complaint) and the claim of breach of the duty of good faith and fair dealing (count VI). For the reasons set forth below, I will grant the motion in part and deny the motion in part.

I. Factual and Procedural Background[1]

On February 2, 2009, Hudgins’s home located at 5428 Oakland Street, Philadelphia, Pennsylvania (“the property”), burned down. It was insured with Travelers under a homeowner’s policy that was in effect from June 27, 2008, through June 27, 2009. Hudgins was the named insured under the policy. (Def’s Statement of Material Facts Not in Dispute (“DSF”) ¶¶ 1, 2; Pl.’s Reply to Def’s Statement of Material Facts Not in Dispute (“PRF”) ¶¶ 1,2.) She lived at the property with her husband and her son, Derrick Morgan. (DSF 22; PRF ¶ 22.) Derrick had a history of mental illness, including paranoid schizophrenia. (Pl.’s Resp. to Def’s Mot. Partial Summ. J. (“Pl.’s Resp.”), Exs. E, G.)

Soon after the notice of loss, Hudgins’s public adjuster that Derrick possibly started the fire at issue. (Def’s Mot. Partial Summ. J. (“Def’s Mot.”) Ex. O at CLM0008.) If Derrick had acted with the intent to cause the fire loss, then Travelers would not have to cover the fire loss claim pursuant to the “Exclusions” section of Hudgins’s insurance policy. (DSF ¶¶ 21-24; PRF ¶¶ 21-24; see also Def’s Mot. Ex. N.) Travelers sent plaintiff a reservation of rights letter on February 4, 2009, along with a $5,000 check as an advance on the policy. (DSF ¶ 25; PRF ¶ 25.)

As part of its ongoing investigation, Travelers requested that Hudgins submit to an examination under oath (“EUO”). It did so pursuant to the “Duties After a Loss” provision of the homeowner’s insurance policy. Hudgins complied and gave her EUO on March 25, 2009. On the same day, Derrick was arrested for arson and criminal charges were filed against him. There was some delay in the criminal proceedings because Derrick was initially adjudged incompetent to stand trial. Eventually, on December 8, 2009, all charges against Derrick were withdrawn. (DSF ¶¶ 31-36; PRF ¶¶ 31-36.)

From February to December, 2009, Travelers sent Hudgins boilerplate letters reserving its rights with respect to coverage and advising her that its investigation was ongoing. (DSF ¶ 37; PRF ¶ 37.) On December 17, 2009, defense counsel emailed Joseph Dennler, Esq., requesting that Derrick submit to an EUO as soon as possible in order to resolve the fire loss claim. (DSF ¶ 38; PRF ¶ 38.) Dennler had previously been retained by Hudgins to assist her with respect to the March 25, 2009 EUO. (Pl.’s Resp. Ex. J ¶ 2.) He was no longer Hudgins’s counsel, and he failed to timely communicate defendant’s request to plaintiff’s current counsel. (DSF ¶¶ 38-39; PRF ¶¶ 38-39.)

On February 5, 2010, Hudgins filed a lawsuit against Travelers in the Court of Common Pleas of Philadelphia County. At this point defense counsel informed plaintiff’s current counsel that its investigation was ongoing and that Travelers required Derrick’s EUO. (DSF ¶ 40; PRF ¶ 40.) Derrick submitted to an EUO on April 26, 2010. Travelers verbally communicated its intent to accept coverage on May 18, 2010, and it formally documented its acceptance on June 24, 2010. (Am. Compl. ¶ 53; Def.’s Mot. Ex. O at CLM0029.)

Because the fire rendered her house uninhabitable, plaintiff was forced to rent an apartment. Once it accepted coverage, Travelers was obligated to pay her rent, as it constituted “additional living expenses” (“ALE”) under the policy. (Def.’s Mot. Ex. N at 21.) Thus, on June 18, 2010, it issued a check to plaintiff in the amount of $11,520 to cover plaintiff’s rent from the date of loss through August 2010. On September 8, 2010, Travelers issued a check for $72,215.96 to plaintiff and her mortgage company, Chase Home Financial, to cover the costs of rebuilding her house. On September 22, 2010, Travelers issued another ALE check in the amount of $2,560 to cover plaintiff’s rent from September 2010 through December 2010. On the same day, it issued a check for $35,981.33 to plaintiff to cover her loss of personal property. Finally, on January 21, 2011, defendant sent plaintiff an ALE check for $1,920 to cover her rent from January 2011 through March 2011. (DSF ¶ 45; PRF ¶ 45.) On March 3, 2011, defense counsel sent a letter to plaintiff’s counsel stating that Travelers would terminate ALE payments effective April 1, 2011. (DSF ¶ 49; PRF ¶ 49.)

In her first action, initiated in state court on February 5, 2010, Hudgins claimed that Travelers had breached the insurance contract and acted in bad faith due to Travelers’s failure to act promptly, failure to conduct a reasonable investigation, failure to timely affirm or deny coverage, and failure to timely investigate and pay claims. (DSF ¶¶ 3-4; PRF ¶¶ 3-4.) On July 30, 2010, Travelers moved for judgment on the pleadings, and on August 10, 2010, the Court of Common Pleas granted the motion. (DSF ¶¶ 5-7; PRF ¶¶ 5-7.)

Judgment was entered against Hudgins because, according to the court, Hudgins had failed to fulfill all her policy obligations prior to filing suit. It concluded that Travelers was entitled under the policy to take Derrick’s EUO, and that the insurance policy “preclude[d] plaintiff from bringing suit against Defendant prior to fulfillment of all [her] obligations under the insurance policy.” Opinion, Hudgins v. Travelers Home and Marine Ins. Co., February Term 2010 No. 0827 (Pa. Ct. Com. Pl. Feb. 11, 2011), at 10 (att. as Ex. C. to Def.’s Mot. to Dismiss, ECF No. 5). On September 7, 2010, Hudgins appealed the order to the Pennsylvania Superior Court. (DSF ¶¶ 7-8; PRF ¶ 7-8.)

On January 25, 2011, while the appeal was still pending, Hudgins filed another complaint against Travelers in the Philadelphia Court of Common Pleas. She again alleged breach of contract in connection with the insurance policy and bad faith conduct. The alleged bad faith conduct included improper investigation, unreasonable interpretation of the insurance policy, and improper handling, processing, and adjusting of Hudgins’s fire loss claim. Hudgins also added a claim that defendant breached its implied duty of good faith and fair dealing. (DSF ¶¶ 9-11; PRF ¶¶ 9-11.) On February 4, 2011, Travelers removed the action to this court. (Notice of Removal, Hudgins v. Travelers Home and Marine Ins. Co., No. 11-882 (E.D. Pa. Feb. 4, 2011), ECF No. 1, at 9.) On July 25, 2011, plaintiff amended her complaint to include additional averments about the parties’ disagreement over the amount of loss, defendant’s interpretation of the policy’s appraisal provision, and defendant’s refusal to continue paying ALE to Hudgins. (DSF ¶ 17; PRF ¶ 17.)

On November 21, 2011, the Superior Court affirmed the August 10, 2010 order of the Court of Common Pleas granting judgment against Hudgins in her first action against Travelers. The Pennsylvania Supreme Court denied leave to appeal on April 4, 2012. (DSF ¶¶ 18-19; PRF ¶¶ 18-19) On April 24, 2012, based on the decision of the Superior Court, I granted partial summary judgment to Travelers on one of Hudgins’s breach of contract claims in this (the second) action. Specifically, because the Court of Common Pleas and Superior Court found that Travelers properly invoked a contractual right to take Derrick’s EUO before resolving plaintiff’s insurance claim, I found that this particular breach of contract claim[2] was precluded under the doctrine of collateral estoppel. (DSF ¶ 20; PRF ¶ 20; Order, Hudgins v. Travelers Home and Marine Ins. Co., No. 11-882 (E.D. Pa. April 24, 2012), ECF No. 49, at 2 n.2.) I also ordered plaintiff to submit a statement of claims to clarify the factual bases for her claims and the damages sought. This was submitted on October 10, 2012. (See Pl.’s Statement of Claims, Dates Covered and Damages Sought (“Pl.’s Statement of Claims”), ECF No. 71.)

Pursuant to my scheduling order of May 5, 2011, bifurcating Hudgins’s breach of contract claims from her bad faith claims, Travelers now moves for summary judgment on the latter.

II. Legal Standard

Summary judgment is appropriate when “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). “Facts that could alter the outcome are ‘material,’ and disputes are ‘genuine’ if evidence exists from which a rational person could conclude that the position of the person with the burden of proof on the disputed issue is correct.” Ideal Dairy Farms, Inc. v. John Labatt, Ltd., 90 F.3d 737, 743 (3d Cir. 1996). “Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no ‘genuine issue for trial.’” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (quoting First Nat’l Bank of Ariz. v. Cities Serv. Co., 391 U.S. 253, 289 (1968)). To establish that there is no genuine dispute as to any material fact, a party may rely on “depositions, documents, electronically stored information, affidavits or declarations (including those made for purposes of the motion only), admissions, interrogatory answers, or other materials . . . .” Fed.R.Civ.P. 56(c). The court must take the evidence, and all reasonable inferences drawn therefrom, in the light most favorable to the nonmoving party. See Small v. Seldows Stationery, 617 F.2d 992, 994 (3d Cir. 1980).

The parties assume that Pennsylvania insurance law applies, and I agree. See Hammersmith v. TIG Ins. Co., 480 F.3d 220, 226 (3d Cir. 2007) (court sitting in diversity looks to choice of law rules of forum state; here, under Pennsylvania law, I must apply the law of the forum with the “most interest in the problem”). Under section 8371, “‘[b]ad faith’ on part of insurer is any frivolous or unfounded refusal to pay proceeds of a policy.” Terletsky v. Prudential Prop. and Cas. Ins. Co., 649 A.2d 680, 688 (Pa. Super. Ct. 1994). It “encompasses a broad range of insurer conduct,” including “unreasonable delay in handling claims”; “failure to communicate with the insured”; and “inadequate investigation or fail[ure] to perform adequate legal research concerning a coverage issue.” Smith v. Allstate Ins. Co., 904 F.Supp.2d 515, 524 (W.D. Pa. 2012) (collecting cases). Bad faith “must be proven by clear and convincing evidence and not merely insinuated.” Terletsky, 649 A.2d at 688. “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.” Nw. Mut. Life Ins. Co. v. Babayan, 430 F.3d 121, 137 (3d Cir. 2005) (internal quotation marks omitted). “Nonetheless, if a reasonable jury could find that [the insurer] did not have a reasonable basis for denying benefits under the policy and knew of or recklessly disregarded this, summary judgment is not appropriate.” Smith, 904 F.Supp.2d at 525.

III. Application

Hudgins asserts the following factual bases for her bad faith claims, as set forth in her statement of claims and response brief. She states that Travelers conducted a bad faith investigation of her fire loss claim by requiring and then unreasonably delaying Derrick’s EUO. She asserts that Travelers processed her fire loss claim in bad faith when it refused to reinstate ALE payments effective April 1, 2011. She claims that Travelers interpreted the insurance policy in bad faith in the following respects: (1) it imposed a requirement that Derrick submit to an EUO; (2) it deducted depreciation from the amount of reimbursement it gave to Hudgins for her loss of personal property; and (3) it imposed a requirement that Hudgins seek an appraisal for disputed property values prior to filing a lawsuit. Hudgins asserts that Travelers engaged in bad faith delay during the litigation of her first action in the Philadelphia Court of Common Pleas. Finally, Hudgins asserts a separate claim that Travelers breached its duty of good faith and fair dealing. (See Pl.’s Statement of Claims, at 1.)

Travelers moves for summary judgment on the claim of breach of the duty of good faith and fair dealing. It argues that Pennsylvania law prohibits Hudgins from maintaining such a claim simultaneously with claims under section 8371. In its reply brief, it adds the argument that a breach of contract claim subsumes any claim for breach of the implied covenant to deal in good faith.

Travelers moves for summary judgement on all the bad faith claims based on the following arguments. First, Travelers argues that a section 8371 claim must be predicated on a denial of coverage. Thus, because Travelers accepted coverage, it cannot be liable for bad faith.

Second, Travelers argues that all the bad faith claims are precluded by res judicata and/or collateral estoppel based on the decisions of the Court of Common Pleas and the Superior Court in Hudgins’s earlier action. Third, Travelers attacks all of Hudgins’s bad faith claims on the ground that there is insufficient evidence for a reasonable jury to find by clear and convincing evidence that the defendant did not have a reasonable basis for denying benefits under the policy and knew of or recklessly disregarded its lack of a reasonable basis.

A. Whether Hudgins can simultaneously bring claims for bad faith under section 8371 and breach of the duty of good faith and fair dealing under the common law

Travelers contends that Pennsylvania law prohibits a plaintiff from bringing a claim that an insurer breached the duty of good faith and fair dealing, which Hudgins asserts in Count VI of the amended complaint, while also bringing a bad faith claim under section 8371. But the Pennsylvania Supreme Court has explained that “an action under § 8371 is distinct from the common law cause of action for breach of the contractual duty of good faith.” Ash v. Continental Ins. Co., 932 A.2d 877, 884 (Pa. 2007). See also Birth Center v. St Paul Cos., Inc., 787 A.2d 376, 409 (“I believe that the law in this Commonwealth establishes that there are two separate ‘bad faith’ claims that an insured can bring against an insurer-a contract claim for breach of the implied contractual duty to act in good faith, and a statutory bad faith tort claim sounding in tort under [42 Pa. Cons. Stat. § 8371].”) (Nigro, J., concurring). As Hudgins points out, a claim of breach of the implied duty to act in good faith is not duplicative of a claim under section 8371 because a plaintiff may seek differing remedies: “[a] cause of action for a breach of the implied covenant of good faith and fair dealing may allow for compensatory damages that go beyond the damages provided by . . . a section 8371 claim.” Zaloga v. Provident Life and Accident Ins. Co. of Am., 671 F.Supp.2d 623, 629 (M.D. Pa. 2009). Thus, the fact that plaintiff has also brought a bad faith claim does not preclude a claim for breach of a duty of good faith and fair dealing.

In its reply brief, Travelers argues that plaintiff is not bringing a common law contract claim, but rather a tortious breach of fiduciary duty claim. Defendant bases this on (1) the language in the complaint; (2) its grouping with the bad faith claims; and (3) the fact that Hudgins seeks punitive damages in connection with the claim. Pennsylvania law does not recognize a claim sounding in tort for breach of the fiduciary duty of good faith and fair dealing in the first-party insurance context. See Zaloga, 671 F.Supp.2d at 630-32 (citing Ash, 932 A.2d at 884).

However, in my order of April 24, 2012, I explicitly dubbed Count VI a “breach-of-contract claim.” Travelers argues that, if this is the case, the claim for breach of the implied covenant of good faith and fair dealing is subsumed by the breach of contract claim in Count I. Defendant is correct. See, e.g., Cummings v. Allstate Ins. Co., 832 F.Supp.2d 469, 473 (E. D. Pa. 2011) (“[A] breach of the covenant of good faith is nothing more than a breach of contract claim and . . . separate causes of action cannot be maintained for each, even in the alternative.” (quoting JHE, Inc. v. Se. Penn. Transp. Auth., No. 1790 Nov. Term 2001, 2002 WL 1018941, at *7 (Pa. Ct. Com. Pl. May 17, 2002))); Zaloga, 671 F.Supp.2d at 631 (“[A] breach of the implied covenant of good faith and fair dealing merges with a breach of contract claim.”).

Thus, regardless of whether Count VI sounds in tort or contract, plaintiff cannot maintain such a claim. I will grant summary ...


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