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The Insurance Coverage Law Information Center
KEEPING THE BAD FAITH
February 21, 2017
Michael H. Sampson
Insurance companies often will try anything to avoid, or delay, a policyholder’s claim(s) for bad-faith claims-handling.
One trick an insurer may try at the outset of an action is to seek to bifurcate a policyholder’s bad-faith claim(s) from its
breach-of-contract claim(s) and to postpone discovery on the bad-faith claim(s) until the breach-of-contract claim(s) has
been resolved.
Eizen Fineburg & McCarthy, P.C. v. Ironshore Specialty Insurance Company
As the U.S. District Court for the Eastern District of Pennsylvania explained recently in a well-reasoned opinion, such
contrived attempts by insurers to avoid responsibility and liability for bad-faith conduct should not be countenanced. In
Eizen Fineburg & McCarthy, P.C. v. Ironshore Specialty Insurance Company,[1] the policyholder asserted clams for breach
of contract, statutory bad faith, and common-law bad faith. In turn, the insurer filed a motion to bifurcate and stay the
bad-faith claims. Seeking bifurcation for purposes of both discovery and trial, the insurer argued “[i]n essence … that the
crux of this dispute is contractual, and that the bad faith claims will fail if [the insurer] is successful in defending itself on
the breach of contract claim.” Therefore, the insurer contended that “it would be wasteful and unnecessary to conduct
discovery on the bad faith claims” at the outset of the action.
Applying Pennsylvania law, the U.S. District Court for the Eastern District of Pennsylvania rightfully denied the insurer’s
motion. First, the court explained that “‘the concept of bad faith’ can extend ‘beyond an insured’s denial of a claim ….’”
Indeed, as a Pennsylvania state trial court explained in a decision the federal district court did not cite, insurer bad-faith
conduct may, in addition to an unreasonable refusal to pay benefits, “include, inter alia, (1) unreasonable delay in handling
claims; (2) inadequate investigation; (3) or failure to make reasonable offer of settlement.”[2]
In Eizen Fineburg & McCarthy, the court focused on an insurer’s failure “to conduct a reasonable investigation,” observing
that it may involve “conduct separate from the breach of contract claim.” “Accordingly,” the court concluded, “a verdict
in [the insurer’s] favor on the breach of contract claim may not obviate the need to try [the policyholder’s] bad faith claims.
Contrary to [the insurer’s] assertions, it would be more convenient to try the breach of contract and bad faith claims
together.”[3]
Additionally, the federal district court found that it would be the policyholder – not the insurer – that would be prejudiced
by bifurcation. The court observed, for example, that “discovery relating to the bad faith claims will not extend ‘well
beyond’ discovery required for the contractual claim” (emphasis added). To the contrary, “[t]he same discovery will be
pertinent to many issues in this case.” The court also found that bifurcation would not result in judicial economy. Rather, it
explained, bifurcation would “subject [the policyholder] to the time and expense of having to participate in two separate
round of discovery, two cycles of motion practice, and two separate jury trials.”
A Useful Roadmap for Policyholders Opposing Bifurcation
Thus, Eizen Fineburg & McCarthy provides a useful roadmap, especially in Pennsylvania, to policyholders opposing
bifurcation. Faced with a motion to bifurcate discovery and/or trial, a policyholder will want to argue, at a minimum, that
the breach-of-contract and bad-faith claims involve many of the same facts, issues, and witnesses. A policyholder will also
want to point out the additional costs and time that will be required if the action is bifurcated. And, the policyholder will
also want to make clear that a decision on the breach-of-contract claims will not necessarily (or even likely) resolve the
bad-faith claims.
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Although, in Eizen Fineburg & McCarthy, the court observed that the bad-faith claims could survive the breach-of-contract
claims, it did state that “[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.” It is
important to note, though, that other Pennsylvania federal and state courts have held it is not necessary for a policyholder
to prevail on its breach-of-contract claim(s) to succeed on its bad-faith claim(s).[4]
Policyholders thus will want to rely on these cases, as well as Eizen Fineburg & McCarthy, in opposing bifurcation of a
bad-faith claim(s) from a breach-of-contract claim(s).
Notes
[1] No. 16-2461, 2017 WL 194226 (E.D. Pa. Jan. 18, 2017).
[2] Hollock v. Erie Ins. Exch., 54 Pa. D. & C.4th 449, 507 (Pa. Com. Pl. 2002).
[3] Footnote omitted.
[4]See, e.g., Ritter v. Nationwide Mut. Ins. Co., No. 97-5564, 1998 WL 401707, at *5 (E.D. Pa. June 30, 1998) (“[I]t is
clear that the Pennsylvania courts interpret [the Pennsylvania bad-faith statute, 42 Pa. C.S.A. § 8371 (‘Section 8371’)]
to provide a remedy that is not dependent on the resolution of a contract dispute - that is, § 8371 contemplates
situations in which the insurer, though performing in accordance with the contract’s terms, performs in bad faith.”);
Nealy v. State Farm Mut. Auto. Ins. Co., 695 A.2d 790, 793 (Pa. Super. Ct. 1997) (Section “8371 provides an
independent cause of action to an insured that is not dependent upon success on the merits, or trial at all, of the
contract claim.”); March v. Paradise Mut. Ins. Co., 646 A.2d 1254, 1256 (Pa. Super. Ct. 1994) (“As this court has found
that claims under section 8371 are separate and distinct causes of action and as the language of section 8371 does
not indicate that success on the contract claim is a prerequisite to success on the bad faith claim, we find that an
insured’s claim for bad faith brought pursuant to section 8371 is independent of the resolution of the underlying
contract claim.”) (footnote omitted).
About the Author
Michael H. Sampson is a partner in Reed Smith LLP’s Insurance Recovery Group focusing his practice on
representing corporate policyholders in complicated coverage disputes with their insurers. Mr. Sampson may be
reached at [email protected].
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