October 19, 2009

Gunn Fight
at the
Koken Corral

By Kevin L. Connors

Several months ago, the Pennsylvania Superior Court issued a Decision, in Gunn v. Hartford, 971 A.2d 505 (Pa. Super. 2009) of critical importance to the approach to and resolution of first party claims for uninsured and underinsured motorist’s benefits.

Propping up the Pennsylvania Supreme Court’s 2005 Decision in Koken, actually captioned as Insurance Federation of Pennsylvania v. Department of Insurance, 889 A.2d 550 (Pa. 2005), as authority for its ultimate ruling, the end result in Gunn could allow Plaintiffs to piggyback bad faith claims on the trial of claims for “U” coverage.

Koken essentially eviscerated the requirement of arbitrating “U” claims.

Before Koken, “U” claims were almost invariably always litigated through an arbitration process, with “U” coverages directing that disputes over “U” claims had to be arbitrated. Koken essentially eviscerated the requirement of arbitrating “U” claims, as the Supreme Court ruled in Koken that the right to a jury trial was inviolate, compelling carriers to revise their insurance policies, to make arbitrations elective, as opposed to mandatory.

After Koken, “U” practitioners, to include the Plaintiffs’ bar, defense counsel, carriers, and trial courts, were slow to embrace Koken’s significance, in terms of seeking to try “U” cases before juries, as every “U” stakeholder could now demand under Koken.

In Koken’s wake, speculation ran deep that “U” arbitrations would be the exception, rather than the norm, although, in actuality, both sides, policyholders and carriers, continue to follow pre-Koken procedures, litigating the vast majority of “U” claims through arbitrations, conducted before experienced and savvy “U” arbitrators.

As all of us are aware, those same “U” arbitration panels have no power or jurisdiction over claims that might be ancillary to the “U” claims, such as a policyholder claim of bad faith against the “U” carrier, as that claim is procedurally required to be filed in State or Federal Court, after the “U” claim is arbitrated to an award.

The Gunn Court suggests that the policyholder can try the claim for “U” coverage with the statutory claim of the carrier’s bad faith in evaluating and administering the claim.

With Koken opening a door perhaps best left closed, Gunn will fan Koken’s flames, as the Gunn Court suggests that the policyholder can try both the claim for “U” coverage, which, in the absence of coverage defenses, is usually an assessment of the policyholder’s damages, with the statutory claim of a carrier’s bad faith in evaluating and administering the claim.

Under Gunn, both claims can conceivably be tried before the jury, an outcome neither envisioned nor sought by the Insurance Federation, when seeking to preserve a right to a jury trial for “U” claims, presumably fueled by the debacle in Luzerne County over “U” arbitrations allegedly being “fixed.”

Gunn involved the Plaintiff, the policyholder, filing a two-count Complaint against Hartford, with the first count being a breach of contract claim for failure to pay underinsured motorist benefits, and the second count being a bad faith claim, alleging that Hartford had failed to act in good faith in administering the Plaintiff’s UIM claim, allegedly in violation of 42 P.S. § 8371.

Hartford filed a Motion with the Trial Court to sever the bad faith claim, with the Trial Court denying Hartford’s Motion to Sever. Hartford appealed the Trial Court’s denial to the Superior Court.

The underlying UIM claim involved the Plaintiff being injured in a car accident while operating a vehicle insured by Hartford, with $100,000 in UIM coverage. The other vehicle involved in the accident carried a $100,000 automobile liability policy, with the other driver’s carrier settling the liability claim for $88,000, after the Plaintiff filed suit against the other driver.

Of course, Hartford would be entitled to credit the entire limits ($100,000.00) of the other driver’s liability coverage, against the UIM claim being made by its policyholder, the Plaintiff.

After the liability claim settled, Hartford offered $30,000 to settle the UIM claim, with the Plaintiff rejecting Hartford’s offer, and filing her two-Count Complaint, for UIM benefits and bad faith, against Hartford, in the Allegheny County Court of Common Pleas.

Under Hartford’s Motion to Sever, Hartford sought to sever and stay the bad faith claim, until the UIM claim for damages was tried and decided, at which point the bad faith claim would either be moot, if the Plaintiff’s verdict was not in excess of $200,000, combining Hartford’s $100,000 credit for the other driver’s policy with Hartford’s $100,000 in UIM coverage, or the Plaintiff’s bad faith claim would ripen, in the event of the Plaintiff securing a damages verdict in excess of $200,000.

Hartford sought to sever the bad faith claim, to avoid being subject to bad faith discovery which, as we all know, is much broader than discovery might otherwise be in general liability matters.

Confronted with the claim of bad faith, before there was any determination as to the Plaintiff’s entitlement to UIM benefits, Hartford sought to sever the bad faith claim, to avoid being subject to bad faith discovery which, as we all know, is much broader than discovery might otherwise be in general liability matters, that is, the scope and thrust of bad faith discovery is, in fact, the very thing sought to be protected in liability claims, being mental impressions and work product.

Hartford also argued that the Plaintiff’s bad faith claim was prematurely piggybacked on the UIM claim, as the outcome of the UIM claim would dictate the life cycle of the bad faith claim.

Denying Hartford’s Motion to Sever the bad faith claim and to stay bad faith discovery, the Trial Court noted:

“There is almost no Pennsylvania case law on this issue because through regulation of the Pennsylvania Insurance Department, all insurance policies were required to provide for mandatory binding arbitration of UM and UIM coverage disputes. In December 2005, in what is commonly referred to as the Koken case (Insurance Federation of Pennsylvania, Inc. v. Department of Ins.), 889 A.2d 550, the Pennsylvania Supreme Court ruled that the Insurance Department did not have authority to require mandatory binding arbitration for UM and UIM claims. Insurance policies containing the mandatory arbitration provisions are being phased out and replaced with policies that do not mandate arbitration. Consequently, the Trial Courts of Pennsylvania will begin to frequently encounter Complaints which raise both UIM and bad faith claims.”

Appealing to the Superior Court, the Superior Court denied and quashed Hartford’s appeal, without ruling on its merits, as the Superior Court determined that the order being appealed was not a final order, as required under Pennsylvania Rule of Appellate Procedure No. 313. The Superior Court, in the Opinion authored by Justice Allen, reasoned that every argument advanced by Hartford, in support of its appeal to reverse the Trial Court, namely arguing prejudice, judicial economy, excessive and wasteful expense, were arguments of pure speculation, unsupported by either the record before the Court, or any accepted public policy.

The Gunn Court agreed with the Allegheny Trial Court that Hartford could seek a protective order to address salacious discovery issues, if necessary.

The Gunn Court also found that Hartford’s claim that bad faith discovery would lead to the disclosure of information otherwise protected by privileged and confidentiality, to be mere speculation, in the absence of evidence of prejudice, with the Gunn Court agreeing with the Allegheny Trial Court, that Hartford could seek a protective order, to address salacious discovery issues, if necessary.

Although the Gunn Court ultimately concludes that it did not have jurisdiction over Hartford’s appeal, by virtue of the Trial Court order not being a final appealable order, the majority opinion is nevertheless a matter of some concern for carriers faced with the two-headed “U” claim for both coverage and bad faith, as the Plaintiffs’ bar will cite to Gunn, and the underlying Trial Court rulings denying Hartford’s Motion to Sever and Stay, as greenlighting the coverage claim being filed “hand-in-hand” with the bad faith claim, as policyholders and their counsel leverage bad faith allegations against carriers unwilling to tender their limits when contesting policy demands.

The plot thickens in the dissent, authored by Justice Lally Green, as the dissent would conclude that the Trial Court’s order was appealable, as it implicated a right “too important to be denied review”, and it presented “a question where the claim will be irreparably lost if review is postponed until final judgment in the case.”

The dissent concludes that the Trial Court’s denial of the Motion to Sever and stay could trigger the not insignificant risk of premature disclosure.

Further concluding that “bad faith actions explore the process by which the insurer handles the underlying claim” (sound familiar?), the dissent also notes that the same process “commonly include reliance on privileged and otherwise-confidential information.” The dissent further concludes that the Trial Court’s denial of the Motion to Sever and Stay could trigger the not insignificant risk of premature disclosure, prior to there being any adverse ruling, upon which the bad faith claim would be dependent.

Citing to a Wisconsin Court of Appeals decision, in Dahman v. American Family Central Ins. Co. 635 N. W. A2d 1 (Wis. Ct. App. 2001), Justice Lally Green adopted the following thought:

“In litigating a claim of bad faith, the insured will be entitled to discovery of the insurer’s work product and attorney/client material containing information relevant as to how the insured’s claim was handled. This information would include the insured’s internal determination to deny benefits, its evaluation as to how a jury may value the insured’s claim and its approach to settlement. This information would not be available to the insured if they were proceeding solely on a claim for UIM benefits.”

No less importantly, the dissent expressed concern that the premature piggybacking of a bad faith claim on an “as-yet-undecided” carrier, might force carriers into unfair settlements in UIM claims, in avoidance of the Armageddon-like offense associated with the prosecution of a bad faith claim.

Instead, the dissent would sever and stay the bad faith claim, until disposition of the underlying UIM claim, seemingly a procedure resulting in zero prejudice to either party.

Looking forward, it is fully anticipated that trial and appellate courts will be pressed, with greater frequency and heightened intensity, to deal with hybrid “U” hybrid claims piggybacking coverage with bad faith, spawned by the unholy union of Koken and Gunn.

The offspring of Koken and Gunn will challenge carriers to find new ways to be both tough but fair, in the evaluation and assessment of “U” claims for uninsured and underinsured motorist’s benefits.

Without question, the offspring of Koken and Gunn will challenge carriers to find new ways to be both tough but fair, in the evaluation and assessment of “U” claims for uninsured and underinsured motorist’s benefits. Against this Jackson Pollockian canvas, carriers have always struggled, at least in terms of what we have heard, to understand why “U” claims seemingly end up being arbitrated into awards which oftentimes seem collusive on some levels, as though the “U” world is an alternative universe into which the “U” value seems more dependent on policy limits, that neither reason nor fairness adequately explain, in the absence of a clearly life-altering or catastrophic injury, all of which fuels both carrier resistance and frustration to the court of "U" claims.

Questions

Questions concerning this article can be directed to Kevin L. Connors.