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Ferguson v. USAA General Indemnity Co.

United States District Court, M.D. Pennsylvania

December 5, 2019




         Before the court is a motion (Doc. 11), brought by Defendant USAA General Indemnity Company (“Defendant” or “Insurer”), to stay discovery and sever the breach of contract and bad faith claims brought by Plaintiffs Dale and Georgia Ferguson (“Plaintiffs”). For the reasons stated below, the court will deny the motion.

         I. Background

         This is an insurance coverage dispute. Plaintiffs argue that Dale Ferguson suffered significant injuries covered by their insurance policy, but that Defendant has offered woefully inadequate amounts of money to resolve the underlying claim. Plaintiffs have thus filed breach of contract and bad faith claims, asserting Defendant has failed to carry out its obligations under the policy because of an inadequate investigation into Dale Ferguson's injuries. Plaintiffs originally filed suit in state court, but Defendant removed the case to this court on diversity grounds. (Doc. 1.)

         On October 21, 2019, Defendant filed the instant motion in which it argues Plaintiffs' bad faith and breach of contract claims should be severed to promote efficiency and protect the insurer from undue prejudice. (Doc. 11.) Specifically, it contends that Plaintiffs' bad faith claim is contingent on success of their breach of contract claim, such that resolution of the breach of contract claim first will determine whether the bad faith claim is viable. Further, it argues that litigating the bad faith claim now would entitle Plaintiffs to portions of the insurance file that are arguably work product or privileged materials which would give Plaintiffs an unfair advantage in pursing their breach of contract claim. Finally, Defendant emphasizes that severing is more judicially efficient because resolution of the breach of contract claim may result in settlement of the entire case.[1]

         In response, Plaintiffs primarily argue that this court routinely rejects such requests, instead opting to protect against the disclosure of privileged information by conducting an in camera review of claims files. (Doc. 13.) Defendant has not replied. This issue is thus ripe for disposition.

         II. Standard of Review

         Under Federal Rule of Civil Procedure 42(b), the court is to evaluate a party's motion to sever by considering whether severance will be convenient to the parties, avoid prejudice, and create an efficient method by which the case may be litigated. See Emerick v. U.S. Suzuki Motor Corp., 750 F.2d 19, 22 (3d Cir. 1984). “The moving party bears the burden of establishing the need to bifurcate.” Consugar v. Nationwide Ins. Co. of Am., No. 3:10-cv-2084, 2011 WL 2360208, at *7 (M.D. Pa. June 9, 2011). “[B]ifurcation is wholly within the court's discretion.” Newhouse v. GEICO Cas. Co., No. 4:17-CV-00477, 2017 WL 4122405, at *2 (M.D. Pa. Sept. 18, 2017). “[T]he decision whether to stay discovery is [also] committed to the sound discretion of the district court judge” and may only be reversed if “the court had abused its discretion.” White v. Fraternal Order of Police, 909 F.2d 512, 517 (D.C. Cir. 1990); see also In re Orthopedic Bone Screw Prod. Liab. Litig., 264 F.3d 344, 365 (3d Cir. 2001) (holding the “District Court acted within its discretion” in staying discovery).

         III. Discussion[2]

         The court begins its analysis by examining whether Plaintiffs' bad faith cause of action is truly contingent on the success of their breach of contract claim. This court has previously held that a “plaintiff can maintain a bad faith claim even when her breach of contract claim is unresolved or unsuccessful.” Hyjurick v. Cmwlth. Land Title Ins. Co., No. 3:11-CV-1282, 2012 WL 1463633, at *8 (M.D. Pa. Apr. 27, 2012). But there are cases in the Eastern and Western Districts of Pennsylvania that appear to hold the opposite. See Hampton v. Geico Ins. Co., 759 F.Supp.2d 632, 646 (W.D. Pa. 2010) (“[W]here an insurer prevails on a breach of contract claim, there can be no claim for bad faith.”) (citing Pizzini v. Am. Int'l Specialty Lines Ins. Co., 249 F.Supp.2d 569, 570-71 (E.D. Pa. 2003)); but see Winterberg v. CNA Ins. Co., 868 F.Supp. 713, 722 (E.D. Pa. 1994) (“[C]ourts have held that success on a bad faith claim under § 8371 does not depend on the success of the underlying insurance benefits claim.”). As such, the court now turns to the applicable statute itself and reviews how Pennsylvania state and Third Circuit cases have addressed the issue.

         The Pennsylvania Bad Faith Statute (“Section 8371”) creates a cause of action against an insurance company “if the court finds that the insurer has acted in bad faith toward the insured.” 42 Pa. C.S.A. § 8371. In March v. Paradise Mutual Insurance Company, the Pennsylvania Superior Court directly addressed the question of whether dismissal of a plaintiff's breach of contract claim also warranted dismissal of its bad faith claim. 646 A.2d 1254, 1256 (Pa. Super. Ct. 1994).[3] The court rejected the argument, holding the underlying purpose of the statute is to generally “discourage bad faith practices of insurance companies”; it thus imparts upon insurers a duty to conduct themselves with good faith at every stage of handling an insured's claim. Id. As such, “the language of [S]ection 8371 does not indicate that success on the contract claim is a prerequisite to success on the bad faith claim.” Id. The holding in March is not anomalous; it is well-established Pennsylvania law. See Adamski v. Allstate Ins. Co., 738 A.2d 1033, 1039 n.5 (Pa. Super. Ct. 1999) (“A bad faith action under [S]ection 8371 is neither related to nor dependent on the underlying contract claim against the insurer.”); Gallatin Fuels, Inc. v. Westchester Fire Ins. Co., 244 Fed.Appx. 424, 434 (3d Cir. 2007)[4] (“In interpreting [S]ection 8371, this court has consistently held that claims brought thereunder are distinct from the underlying contractual insurance claims from which the dispute arose.”) (quoting Nealy v. State Farm, 695 A.2d 790, 792-93 (Pa. Super. Ct. 1997)) (emphasis supplied) (internal brackets omitted).

         In Frog, Switch & Manufacturing Company v. Travelers Insurance Company, the Third Circuit, in a footnote, further discussed Section 8371's scope, stating that “[b]ad faith is a frivolous or unfounded refusal to pay, lack of investigation into the facts, or a failure to communicate with the insured.” 193 F.3d 742, 751 n.9 (3d Cir. 1999). For example, an insurer “refusing to pay without reasonable investigation of all available information” would be liable under Section 8371, even if they were ultimately correct in denying coverage. See Id. The court further held that, under the facts in front of it, “where there was no duty to defend, there was good cause to refuse to defend against a suit.” Id.

         Eight years later, the Third Circuit clarified its holding in Frog, explaining that the plaintiff's claim in Frog hinged on its allegation that the insurer had denied coverage in bad faith solely because it lacked a good-faith reading of the insurance policy. See Gallatin Fuels, Inc., 244 Fed.Appx. at 434-35. As such, the court's finding that the insurer's interpretation was correct negated the plaintiff's bad faith theory. See id.; see also Eizen Fineburg & McCarthy, P.C. v. Ironshore Specialty Ins. Co., 319 F.R.D. 209, 212 (E.D. Pa. 2017) (“A bad faith claim based solely on an underlying breach of contract claim generally will fail if a court determines that an insurer did not have a duty to defend the insured based on the contractual agreement.”) (emphasis supplied).

         But “[a] finding that the insured did not ultimately have a duty to cover the plaintiff's claim does not per se make the insured's actions reasonable.” Gallatin Fuels, Inc., 244 Fed.Appx. at 434-35. This is because bad faith includes, beyond baseless denial of a claim, a “lack of investigation into the facts, or a failure to communicate with the insured.” Id. (quoting Frog, 244 Fed.Appx. at 751 n.9) (emphasis in Gallatin). For example, in Gallatin, the insurer's basis for denying coverage-which it developed during the course of litigation-was valid, but the basis it had given to the insured before litigation was not only invalid but, in context, smacked of dishonesty. See Id. The court thus found the insurer “liable for bad faith absent duty of coverage on the grounds that it ‘dragged its feet in the investigation of the claim, hid information from the insured, and continued to shift its basis for denying the claims.'” Muckelman v. Companion Life Ins. Co., No. 4:13-cv-00663, 2014 WL 957425, at *4 (M.D. Pa. Mar. 12, 2014) (quoting Gallatin Fuels, Inc., 244 Fed.Appx. at 435) (further explaining independent bases for a bad faith cause of action outside of denial of ...

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