United States District Court, M.D. Pennsylvania
DALE L. FERGUSON and GEORGIA A. FERGUSON, Plaintiffs,
USAA GENERAL INDEMNITY COMPANY, Defendant.
H. RAMBO UNITED STATES DISTRICT JUDGE.
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.
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.)
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
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
Standard of Review
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
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
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). 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) (“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).
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.”
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).
“[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 ...