Insurance Bad Faith vs. Unfair Trade Practices Act and Consumer Protection Law

Insurance Bad Faith vs. Unfair Trade Practices Act and Consumer Protection Law

Insurance Bad Faith vs. Unfair Trade Practices Act and Consumer Protection Law

Catherine Defuso (“Defuso”) sustained serious injuries when her vehicle, which was stopped at a stop sign, was struck from behind by another vehicle. At this time, Defuso was insured under a policy of insurance issued by the State Farm Mutual Automobile Insurance Company (“State Farm”) which provided stacked underinsured motorist coverage ("UIM") in the amount of $50,000. The at-fault vehicle was insured with Allstate Insurance Company ("Allstate") for $100,000.

On April 11, 2019, Defuso notified State Farm of her UIM claim, and days later, she requested State Farm’s consent to settle the third party action with Allstate. Defuso permitted State Farm to review her first party medical file, and on April 27, 2019, State Farm consented to Defuso’s settlement with Allstate and waived subrogation with regard to the claim against Allstate.

On July 31, 2019, Defuso provided State Farm with her relevant medical records, and demanded the $50,000 policy limit to settle the UIM claim. Thereafter, Defuso encountered a series of State Farm delays in processing her claim. Specifically, on August 20, 2019, State Farm’s representative notified Defuso that resolution of her claim was pending review of the medical records. On October 2, 2019, the same State Farm representative advised Defuso that she was unaware that Defuso had submitted medical records or made a settlement demand. State Farm’s representative assured Defuso that she would submit the claim for settlement authority and follow up in two weeks.

On November 22, 2019, State Farm requested a statement from Defuso. A statement under oath was scheduled for December 12, 2019, but was cancelled by State Farm on December 11, 2019. The statement was rescheduled for January 10, 2020, but again cancelled by State Farm on January 6, 2020.

A statement under oath was conducted on February 21, 2020, and Defuso claims she was told by State Farm that a representative could be reached to discuss settlement that day, but no representative from State Farm representative contacted her until July 24, 2020 when State Farm requested an insurance medical examination ("IME") as part of its investigation. Defuso participated in her IME on September 10, 2020. Thereafter, on December 22, 2020, State Farm responded to Defuso's July 31, 2019 policy limit settlement demand by offering $7,500.

Defuso declined the offer and filed suit on March 22, 2021 in the United States District Court for the Middle District of Pennsylvania, alleging breach of contract (Count I), bad faith (Count II), and violation of the Unfair Trade Practices Act and Consumer Protection Law ("UTPCPL") (Count III). On May 24, 2021, State Farm filed a motion to dismiss Defuso’s bad faith and UTPCPL claims.

Defuso’s bad faith claim is rooted in 42 Pa.C.S.A. §8371, which provides a statutory mechanism to sue insurers for bad faith conduct in investigating, handling and determining insurance claims, allowing courts to award plaintiffs interest, punitive damages, and court costs and attorneys' fees. See Terletsky v. Prudential & Casualty Ins. Co., 649 A.2d 680, 688 (Pa. Super. 1994). "Bad faith" has been defined as "any frivolous or unfounded refusal to pay proceeds of policy." Toy v. Metropolitan Life Ins. Co., 928 A.2d 186, 199 (Pa. 2007). However, mere allegations "negligence or bad judgment" will not suffice to state a claim. Id. Moreover, an insurer does not "act in bad faith by investigating and litigating legitimate issues of coverage." Simon Wrecking Company, Inc. v. AIU Ins. Co., 530 F.Supp.2d 706, 717 (E.D. Pa. 2008). To establish bad faith, a plaintiff must demonstrate by clear and convincing evidence that (1) the insurer lacked a reasonable basis for denying the benefits under the policy and (2) the insurer knew or recklessly disregarded its lack of reasonable basis. Northwestern Mut. Life Ins. Co. v. Babayan, 430 F.3d 121, 137 (3d Cir. 2005).

The UTPCPL is Pennsylvania's consumer protection law, the purpose of which is to prevent unfair or deceptive acts or practices in the conduct of business. Grimes v. Enterprise Leasing Co. of Phila., LLC, 66 A.3d 330, 335 (Pa.Super. 2013). The UTPCPL provides that:

"(a) any person who purchases or leases goods or services primarily for personal, family, or household purposes and thereby suffers any ascertainable loss of money or property, real or personal, as a result of the use or employment by any person of a method, act or practice declared unlawful by section 3 of this act, may bring a private action to recover actual damages or one hundred dollars ($100), whichever is greater."

73 P.S. § 201-9.2.

To bring a claim under the UTPCPL, the plaintiff must "show that [s]he justifiably relied on the defendant's wrongful conduct or representation and that [s]he suffered harm as a result of that reliance." Grimes, 66 A.3d at 335.  An insurer's failure to pay benefits to an insured is nonfeasance, rather than malfeasance, and therefore not actionable under the UTPCPL. Klinger v. State Farm Mut. Auto. Ins. Co., 895 F.Supp. 709, 717 (M.D.Pa. 1995).

Ultimately, the District Court concluded that Defuso had pled sufficient facts to survive State Farm’s motion to dismiss her bad faith claim; however, Defuso’s UTPCPL claim was dismissed. Defuso v. State Farm Mut. Auto. Ins. Co., No. 3:21-CV-507 (M.D. Pa. March 21, 2022). In dismissing the UTPCPL claim, the Court concluded that the true crux of Defuso’s complaint is the allegedly untimely manner in which defendant has handled her claim, which cannot support a claim under the UTPCPL, as it is a claim for nonfeasance.