June 22, 2009
Written by Attorneys Claudia Drennen McCarron and Kevin J. McCloskey
Note: This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.
In Bukofski v. USAA Casualty Insurance Company, 2009 WL 1609402 (M.D. Pa. June 9, 2009), Judge James M. Munley of the United States District Court for the Middle District of Pennsylvania held that the removal of an arbitration clause from the UIM coverage part of an motor vehicle policy could give rise to a claim under Pennsylvania's bad faith statute, 42 Pa. C.S.A. § 8371. This ruling came down despite the decision by the Pennsylvania Supreme Court in Insurance Federation of Pennsylvania, Inc. v. Koken, that a policy need not contain a binding arbitration clause for uninsured (UM) and underinsured (UIM) motorist coverage disputes.
In Bukofski, the underlying automobile accident occurred on October 11, 2007. Bukofski claimed that USAA unilaterally removed the arbitration provision prior to the policy's renewal in June 2007 without notification to Bukofski of its removal or the existence of an alternative means of recourse, in an attempt to force favorable settlements. Bukofski claimed the lack of an arbitration clause would significantly increase the cost of a UIM claim and the time it would take to adjudicate the claim.
USAA sought dismissal of portions of the Complaint filed by Bukofski, including bad faith allegations stemming from USAA's removal of the arbitration clause from the policy. USAA argued that under the Koken decision, it had the right to remove the arbitration provision. Moreover, under the Pennsylvania Supreme Court's 2007 decision in Toy v. Metropolitan Life Ins. Co., a bad faith claim applies only to actions arising from an insurance policy and must arise from the insurer's contractual obligations or payment of the loss. Since the bad faith allegations arose from the removal of policy language prior to the accident giving rise to the insurance claim, the carrier argued that the conduct complained of was not associated with claims handling and therefore, not cognizable under the bad faith statute.[1]
In denying this portion of USAA's motion to dismiss and permitting the bad faith claim to proceed, Judge Munley reasoned that the presence of an arbitration clause arises from an insurance policy and "deals directly" with the carrier's obligations under the policy. Judge Munley reasoned if Bukofski was correct, and USAA removed the provision without notifying her in order to force favorable settlements, then this conduct might violate the bad faith statute. The Court held that the timing of the removal was irrelevant since without notification, Bukofski would have no way of knowing the clause was removed prior to presenting a claim under the policy.
The Court's opinion assumes that the Plaintiff had no notification of the change. The carrier's brief has attached to it the renewal policy issued in December 2006 which contained notice of "Important Changes" and an amendatory endorsement clearly stating that the arbitration clause had been removed. Perhaps the Court thought it inappropriate to consider this material on a motion to dismiss. This may explain why there is no discussion of an insured's obligation to review the policy terms.
Perhaps in anticipation of a motion for judgment on the pleadings or summary judgment on this notice issue, Plaintiff's motion papers suggest that she is not alleging simply that she was not notified of the removal but rather that when it removed the arbitration clause, USAA failed to tell her what method of recourse she should use in the absence of an arbitration clause. As USAA points out in its brief, this is a nonsensical argument since the means of recourse that remained available to Plaintiff is the very civil suit in which she is making the argument. Plaintiff argues that USAA committed bad faith by restoring the resolution of UIM disputes to the court system like any other breach of contract claim. It appears that if the facts had been reversed, and USAA had inserted an arbitration clause where none previously existed, Plaintiff would attempt to assert that it was bad faith to deprive her of her ability to sue.
It is unknown at this time what further action the carrier may take. Unfortunately, despite various holdings limiting application of Pennsylvania's bad faith statute to actions arising during the handling of an insurance claim, courts continue to expand the statute's applicability. Perhaps equally disturbing was the Court's embracing of Plaintiff's argument that USAA's alleged actions breached a fiduciary relationship between the parties despite no such relationship existing between insurers and insureds beyond the third party context. NLdH will continue to monitor these important developing issues.
[1] The insurer raised additional challenges to the Complaint on which the Court ruled as follows: section 1797 preemption did not apply because to the extent that the complaint asserts mishandling of first party medical benefits, it is alleged that it was done to obtain an advantage in the UIM claim rendering 1797 inapplicable, see 75 Pa. C.S.A. 1797; the count alleging violation of the duty of good faith and fair dealing was duplicative of the Plaintiff's breach of contract count; the count alleging breach of fiduciary duty was duplicative of either the breach of contract count or bad faith count; and the negligence count duplicated the fiduciary duty count and was barred by the gist of the action doctrine. The Court declined to strike specific factual allegations or require a more specific statement. Finally, the defendant requested that the Court certified its decision for immediate appeal. The Court denied the request.
