Presented by the Insurance Coverage/ Bad Faith Litigation Group

Legal Updates for Coverage and Bad Faith

May 19, 2016

Allison L. Krupp,

Christopher W. Woodward,

David J. Shannon

edited by Allison L. Krupp, Esquire

Motion to Sever and Stay the Bad Faith Claim from the Breach of Contract Claim Denied; The Two Claims Should Proceed to Trial Simultaneously.

By Allison L. Krupp, Harrisburg, PA

Wagner v. Allstate Ins. Co., 2016 U.S. Dist. LEXIS 6364 (E.D. Pa. Jan. 19, 2016)

In Wagner, the plaintiff was involved in a motor vehicle accident and subsequently settled her claim with the alleged tortfeasor for the bodily injury policy limit of $50,000. The plaintiff's insurer, Allstate, consented to the settlement with the alleged tortfeasor. The plaintiff then sought underinsured motorist (UIM) benefits under her own Allstate policy. The plaintiff and Allstate were unable to come to an agreement as to the value of the UIM claim, and the plaintiff sued for breach of contract and statutory bad faith. During the course of the litigation, Allstate filed a motion to sever and stay the plaintiff's bad faith claim. Allstate argued that the only way the dispute could be resolved without prejudicing one of the parties was for the court to stay the bad faith claim until after the breach of contract claim could be resolved. Allstate also argued that the jury's verdict on the breach of contract claim could render the bad faith claim moot.

The court rejected that argument and considered that Allstate could be held liable for bad faith, even if it is successful on the breach of contract claim. The court, therefore, concluded that a verdict in Allstate's favor with respect to the breach of contract claim may not obviate the need to try the bad faith claim. The court also considered that bifurcating the bad faith claim would "essentially double the life of this action, requiring a second discovery period, more dispositive motions, more pretrial motions, and a completely separate second trial." While the court agreed with Allstate that the two claims presented distinct legal issues, the facts pertinent to each claim overlapped in many respects. The court reasoned that whether Allstate's investigation of the claim was done in good faith must be determined by reference to the circumstances surrounding the accident and the nature of the plaintiff's injuries. The court held that the bad faith and breach of contract claims should proceed simultaneously. The court noted that the "sizeable majority" of federal district courts in Pennsylvania have refused to stay bad faith claims until the underlying coverage claims are resolved. While a number of Pennsylvania state courts have stayed bad faith claims, the court considered that there is no right to a jury trial for bad faith in state court, whereas there is a right to a jury trial in federal court. Therefore, in state court, there will always be two separate trials—a jury trial as to the breach of contract claim and a bench trial as to the bad faith claim. The motion to sever and stay was, therefore, denied.

For a copy of the Wagner decision, please contact Allison L. Krupp in our Harrisburg office.

U.S. Court of Appeals for the Fourth Circuit Upholds Decision that Travelers Has Obligation to Defend Data Breach Class Action Litigation.

By Christopher W. Woodward, Harrisburg, PA

Travelers Indem. Co. of Am. v. Portal Healthcare Solutions, LLC, 2016 U.S. App. LEXIS 6554 (4th Cir. April 22, 2016).

The U.S. Court of Appeals for the Fourth Circuit upheld a district court's decision that granted summary judgment in favor of the insureds in a declaratory judgment action regarding coverage under a commercial general liability policy for a data breach class action lawsuit.The insured is a business that specializes in the electronic safekeeping of medical records for medical providers, such as hospitals and clinics. A class action lawsuit was filed against the insured alleging that the medical records of the class members had been available on the internet for about five months and were freely accessible to the public with a simple Google search of a patient's name. Travelers, the insured's carrier, filed a declaratory judgment action arguing that it was not obligated to defend the insured in the class action litigation. To determine the coverage question, the district court utilized Virginia's "Eight Corners Rule," wherein the court looks at the four corners of the underlying complaint and the four corners of the underlying insurance policy. Two of Travelers' commercial general liability policies were at issue; the first policy provided coverage for injuries arising from "electronic publication of material that . . . gives unreasonable publicity to a person's private life," while the second policy provided coverage for injuries arising from "electronic publication of material that . . . discloses information about a person's private life." "Publication" was not defined by the policies. Instead, the court looked to a dictionary definition and determined that, for the purposes of coverage, publication had been sufficiently pled in the underlying litigation: the medical records were placed before the public and exposed to the online searching of a patient's name. Dismissing Travelers' arguments, the court stated that an unintentional publication is still a publication and that affirmative evidence of third-party access is not a requirement of publication. Using the dictionary definitions of "publicity" and "disclosure," the court determined that the public availability of the medical records gave unreasonable publicity to, and disclosed information about, that patient's private life. Having determined that coverage should be extended to the insured for the class action lawsuit, the court denied Travelers' motion for summary judgment and ruled in favor of the insureds. The Fourth Circuit not only upheld the district court's decision, but "commend[ed] the district court for its sound legal analysis."

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Takeaways for Insurers --

By David J. Shannon, Chair, Privacy & Data Security Practice Group, Philadelphia, PA

Insurers should carefully review their policies to determine if the definition of publication in current policies is identical or similar to the definition used in the policy at issue. The Court's decision was based upon the definition of publication. The opinion can be a limited decision depending on the facts and circumstances of other claims that may be brought in the future. Some CGL policies could have exclusions for this type of publication, therefore, insurers and policyholders would benefit from a review of their policy definitions before any future claims arise.

In addition, insurers and policyholders should be aware that the CGL policy at issue only covered defense costs. Vendor costs and other associated notification expenses for a data breach were not covered by the policy pursuant to the Court's ruling.

For a copy of the Travelers decision, please contact Christopher W. Woodward in our Harrisburg office.

_{The material in this law alert has been prepared for our readers by Marshall Dennehey Warner Coleman & Goggin. It is solely intended to provide information on recent legal developments, and is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. We welcome the opportunity to provide such legal assistance as you require on this and other subjects. To be removed from our list of subscribers who receive these complimentary Coverage and Bad Faith updates, please contact alkrupp@mdwcg.com. If however you continue to receive the alerts in error, please send a note to alkrupp@mdwcg.com.}