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Penn-Dion Corp. v. Great American Insurance Company of New York

United States District Court, E.D. Pennsylvania

July 15, 2019



          Slomsky, J.


         Plaintiff Penn-Dion Corporation (“Plaintiff” or “Penn-Dion”) brought this suit against its insurance provider, Great American Insurance Company of New York (“Defendant” or “Great American”) and Great American's insurance adjuster, [1] Engle Martin & Associates, Inc., (“Engle Martin”) (collectively, “Defendants”). This case stems from an insurance coverage dispute that originated from a fire in a commercial building owned by Plaintiff, located in Philadelphia, Pennsylvania. Immediately after the fire, the Philadelphia Department of Licenses and Inspections inspected the damaged building and issued to Plaintiff two notices that collectively contained thirty-six violations of the Philadelphia Building Code (“Code”). Due to the fire damage and Code violations, tenants were not permitted to occupy the building for several weeks, which resulted in loss of business to Penn-Dion.

         After the fire, Penn-Dion made three claims under its commercial insurance policy with Great American. In the first claim, Penn-Dion sought payment for fire damage and the cost of upgrades to cure the Code violations (the “First Claim”). Great American settled this claim with Penn-Dion for $48, 682. The second claim was for loss in value to the undamaged parts of the building as a result of the fire (the “Second Claim”). Great American denied this claim. Penn-Dion's third claim, which Great American also denied, was for business income loss and extra expenses that resulted from the fire damage and Code violations (the “Third Claim”).[2]

         Disagreeing with Great American's interpretation of the insurance policy and its decision on each disputed claim, Penn-Dion filed this lawsuit in the Court of Common Pleas of Montgomery County. The case was removed to this Court based on diversity of citizenship jurisdiction.[3] (Doc. No. 1.)

         In its Third Amended Complaint (“Complaint”), [4] Plaintiff alleged: Fraud against Great American (Count I), Fraud against Engle Martin (Count II), Negligence against Engle Martin (Count III), Breach of Contract against Great American (Count IV), Bad Faith against Great American (Count V), Civil Conspiracy against Great American and Engle Martin (Count VI), and Concerted Action under Section 876 of the Restatement (Second) of Torts against Great American and Engle Martin (Count VII). (See Doc. No. 28.)

         In an Opinion and Order dated January 31, 2019, Counts I, II, III, I V, and VII were dismissed. (Doc. Nos. 33, 34.) Accordingly, the following Counts remain in the case: (1) Bad Faith against Great American, pursuant to 42 Pa.C.S.A. § 8371[5] (Count V) and (2) Civil Conspiracy against Defendants (Count VI).

         The parties are currently engaged in fact discovery. On February 25, 2019, Plaintiff served its Request for Production of Documents on Great American.[6] (Doc. No. 40-2 at 1.) Great American produced 3, 352 pages of documents in response, [7] including three reports that Engle Martin's claims adjuster, Matthew Cericola (“Cericola”), prepared after investigating each of Plaintiff's claims on Great American's behalf. (Doc. No. 41 at 2.) Great American also included a privilege log, showing documents that it had either redacted or withheld from production because they contained information about its “reserve”[8] amount, Cericola's “mental impressions, ” and notes containing “trade secret and/or confidential proprietary information.” (Doc. No. 40-4.)

         The parties dispute whether such redactions and withholdings are proper. Before the Court is Plaintiff's Motion to Compel Production of Documents (Doc. No. 40), and Defendant Great American's Response in Opposition (Doc. No. 41). For the reasons discussed infra, Plaintiff's Motion to Compel (Doc. No. 40) will be granted in part and denied in part.


         Plaintiff argues that (1) an insurance company's reserve information is not protected in a case where bad faith is alleged because such information evidences how a company valued a policyholder's claim, and therefore is relevant in determining whether it acted in bad faith in handling the claim; (2) redactions of Cericola's mental impressions are improper because they are also relevant to determine whether Great American acted in bad faith;[9] and (3) according to Pennsylvania Rule of Civil Procedure 4012, [10] Great American was not permitted to redact trade secrets in its response to the request for production of documents because it did not file the requisite motion or protective order with the Court. (Doc. No. 40-2.)

         Great American opposes turning over to Plaintiff reserve information and Cericola's mental impressions.[11] (Doc. No. 41.) It argues that the mere assertion of a bad faith claim does not warrant production of any of the withheld information. (Id. at 2-5.) Specifically, Great American argues that (1) reserve information is not relevant to the issue presented in Plaintiff's bad faith claim; and (2) Cericola's mental impressions are protected by the work-product privilege codified in Federal Rule of Civil Procedure 26.[12]

         A. Bad Faith Claim

         Plaintiff's argument for production of reserve information and Cericola's “mental impressions” centers on the bad faith claim. Put another way, Plaintiff contends this information is relevant and will lead to the discovery of admissible evidence as to whether Great American acted in bad faith.

         Initially, the Court will focus on what constitutes bad faith under Pennsylvania law in a case such as the instant one. The elements of a bad faith claim under 42 Pa. C.S.A. § 8371, supra at n.5, are discussed in Terletsky v. Prudential Property & Cas. Ins. Co., 649 A.2d 680, 688 (1994).

         There, the Pennsylvania Superior Court noted the following two-part test, both elements of which must be supported with clear and convincing evidence: (1) the insurer lacked a reasonable basis for denying benefits; and (2) the insurer knew or recklessly disregarded its lack of reasonable basis. Id. The Terletsky court also stated that:

“[b]ad faith” on part of insurer is any frivolous or unfounded refusal to pay proceeds of a policy; it is not necessary that such refusal be fraudulent. 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.

Id. (citing Terletsky, 649 A.2d at 688) (citation omitted). In Count V of the Complaint, Plaintiff alleged that the following acts and omissions evidence Great American's bad faith:

a) Providing, on September 10, 2015, an initial estimate that did not include any code upgrade costs.
b) Reviewing the claim with the intent to deny or limit it and without conducting a fair, impartial and complete independent investigation, as evidenced by the email of October 2, 2015, to the Engle Martin adjuster stating: “and as you indicated in our phone conversation, it does not appear the violations relate to the fire” and that “we will need to advise the insured of our coverage concerns in this regard.” c) Plotting, conspiring and working in concert with the Engle Martin adjuster to deny all or a portion of the claim by contending that the code violations did not relate to the fire.
d) Arguing to Plaintiff, on October 2, 2015, that “the code violations are not related to the fire and the reason the artists/tenants have been denied entry is not the fire, but the code issues.”
e) Arguing to Plaintiff, on October 2, 2015, that any lost income would be a direct result of the code violations and not the fire that damaged the one studio.
f) Using, in its revised estimate of February 2, 2016, a 40 percent depreciation rate instead of the 20 percent depreciation rate applied in the first estimate.
g) Using, on February 5, 2016, after Plaintiff's public adjuster pointed out the increased depreciation rate, a 33 percent depreciation rate instead of the 20 percent depreciation rate applied in the first estimate.
h) Refusing to provide Plaintiff with any explanation for applying a higher depreciation rate in subsequent estimates than applied in the initial estimate.
i) Denying coverage, on July 25, 2016, under Ordinance and Law Coverage A - Undamaged Portion, while contending that “as the undamaged parts of your building do not have to be demolished there is no loss in value to the undamaged parts of the building and Ordinance and Law Coverage A will not apply to this claim.”
j) Denying the code upgrade claim, on September 11, 2016, on the ground that “most, if not all of the items relate to requirements needed to secure a Certificate of Occupancy as opposed to the expenses ...

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