Audrey’s Crafts vs. PA National Insurance Co. No. 2013-00511

Civil Action – Contract Claim Against Insurer – Bad Faith Claim – Severance – Discovery – Dunkleberger v. Erie Insurance Exchange – Motions to Sever and Stay Discovery.

1. Because the issues pertaining to bad faith and UIM coverage are profoundly different, so too is the discovery that typically accompanies each type of claim. UIM discovery typically requests information such as police reports, witness statements, recorded interviews with the insured, ambulance reports, hospital reports and medical records, while bad faith discovery typically also includes a request for an insurer’s underwriting file, claims file and reserve analysis. Sometimes, a Plaintiff in bad faith litigation also requests the insurance company’s practices and procedures manual in an effort to learn whether the company acted in accordance with that.

2. Within the context of a UIM claim, if the Court were to allow the Plaintiff’s lawyer to obtain and examine the insurance company’s claims file, that could give the Plaintiff’s attorney insight into the insurer’s subjective thoughts and analysis with respect to witnesses, its own insured, and the value of the claim. The advantage this would give a Plaintiff in UIM litigation cannot be understated.

3. In the case of Dunkleberger vs. Erie Insurance Exchange, this Court held that when a UIM claim is accompanied in Lebanon County with a bad faith count, its standard practice will be to sever the bad faith count from the underlying UIM claim. Further, if there is a disagreement as to how and when to proceed with bad faith discovery, the Court’s decision will require a severance of the two claims. The resulting effect of this severance will be to preclude any bad faith discovery until after the underlying UIM claim is fully litigated.

4. Because the underlying principles serving as the foundation for Dunkelberger are equally applicable to the instant case, the Court ordered that Plaintiffs’ claim be severed from the Plaintiffs’ bad faith claim and that all discovery regarding Plaintiffs’ bad faith claim be stayed pending the resolution of the contract claim.

Defendants’ Motion to Sever and Defendants’ Motion to Stay Discovery. C.P. of Lebanon County, Civil Action-Law, No. 2013-00511.

J. Dwight Yoder, Esquire, for Plaintiffs

Peter J. Speaker, Esquire, for Defendants

IN THE COURT OF COMMON PLEAS OF LEBANON COUNTY

PENNSYLVANIA

CIVIL ACTION – LAW NO. 2013-00511

AUDREY’S CRAFTS AND HOME DÉCOR, INC. and AUDREY M. MULL, Plaintiffs

v.

PENNSYLVANIA NATIONAL INSURANCE, PENN NATIONAL MUTUAL CASUALTY INSURANCE, COMPANY and PENN NATIONAL SECURITY INSURANCE COMPANY, Defendants

ORDER OF COURT

AND NOW, to wit, this 28^th day of March, 2014, upon consideration of the arguments proffered by the parties and in accordance with the attached Opinion, the Order of this Court is as follows:

1. Defendants’ Motion to Sever Plaintiffs’ contract claim and their Bad Faith claim is GRANTED.

2. Defendants’ Motion to Stay Discovery regarding Plaintiffs’ bad faith claim is GRANTED.

BY THE COURT,

, J.

BRADFORD H. CHARLES

APPEARANCES:

J. Dwight Yoder, Esquire, For Plaintiffs

GIBBLE, KRAYBILL & HESS, LLP

Peter J. Speaker, Esquire, For Defendants

THOMAS, THOMAS & HAFER, LLP

Opinion, Charles, J., March 28, 2014

Three years ago, this Court issued an Opinion in the case of Dunkelberger v. Erie Insurance Exchange, 21 Pa. D&C 5^th 52 (Leb.Co. 2011). In that Opinion, we stated that the “standard” practice in Lebanon County will be to sever insurance bad faith claims from the underling contract litigation upon which they are based. In this case, the Plaintiffs wish to proceed ahead simultaneously with both its contract and bad faith causes of action. The Defendants have filed a Motion to Sever the two causes of action. Based upon Dunkleberger, we will grant the Defendants’ Motion for Severance.

I. FACTS

On September 5, 2013, Plaintiffs filed a Civil Complaint against the Defendants. Count I of the Complaint alleged that the Defendants breached insurance contract with Plaintiffs by failing to defend and indemnify Plaintiffs with respect to a copyright infringement lawsuit filed against it. Count II was entitled “Contract Bad Faith” and Count III set forth a claim under Pennsylvania’s bad faith statute.

According to the Complaint, Plaintiffs allege the following:

In response, the Defendants argue that it had no duty to either defend or indemnify the Plaintiffs under the applicable contract of insurance. Specifically, the Defendants argue that copyright infringement claims are simply not covered by its general liability insurance policy.

Following closure of the pleadings, the parties began to embark upon discovery. Plaintiffs submitted Interrogatories and a Request for Documents that were designed to address Plaintiffs’ bad faith claim. The Defendants responded by filing a Motion to Stay Discovery and a Motion to Sever Claims. Both parties requested oral argument regarding the Defendants’ Motion to Sever and Stay.

We conducted oral argument on February 28, 2014. At oral argument, we learned that the Plaintiffs settled the copyright infringement lawsuit that had been filed against it for $49,000.00. Because of this settlement, Plaintiffs’ counsel attempted to distinguish the above-referenced case from Dunkleberger. In response to this argument, we specifically asked Plaintiffs’ counsel if his client would forego the right to request any discovery documents pertaining to claims analysis, reserve allocation, legal advice, profit and loss statements and other documentation relative to the bad faith claim. Not to our surprise, Plaintiffs’ counsel stated that he wanted those documents. We then asked Plaintiffs’ counsel if he would object to a request by defense counsel for his internal research and analysis of the claim and for copies of letters that he sent to his clients. Also not to our surprise, Plaintiffs’ counsel indicated that he would resist any effort by defense counsel to obtain said documents.

Both parties have submitted Briefs in support of their respective positions. We now author this Opinion to follow the precedent we established in Dunkelberger and thereby sever the Plaintiffs’ bad faith claim from its underlying contract cause of action.

II. DISCUSSION

In the case of Dunkelberger v. Erie Insurance Exchange, supra, we were asked to decide whether or to what extent bad faith discovery should be delayed while an underlying underinsurance motorist contract (UIM) claim was litigated. In addition to undertaking a survey of applicable legal principles, we also addressed the practical dilemmas that arise when contract and bad faith claims intersect. In determining that bad faith discovery should await completion of the parties’ underlying contract dispute, we stated:

Id. at 59.

The Plaintiffs’ attempt to distinguish Dunkelberger by pointing out that the above-referenced case does not involve a UIM dispute. We reject this argument.

In Dunkleberger, the Plaintiff initiated a lawsuit directly against their own insurance carrier. The same thing occurred in this case. In Dunkelberger, breach of contract was the primary cause of action set forth in the Complaint. That is also true in this case. In Dunkelberger, a finding in favor of the Plaintiff regarding the breach of contract claim was a predicate to recovering bad faith damages. That is also true in this case. More important, the perils of permitting bad faith discovery during the pendency of the underlying contract claim are as applicable in this case as they were in Dunkelberger. At oral argument, Plaintiffs’ counsel emphatically affirmed that he would aggressively pursue discovery designed to reveal the insurance company’s legal analysis and subjective evaluation of Plaintiffs’ contract claim. As we emphasized in Dunkelberger, premature disclosure of this information would stack the decks of this litigation against the Defendants in a way that would be unduly prejudicial.

In Dunkelberger, we concluded our Opinion by stating:

Id. at 66. As the underlying principles serving as the foundation for Dunkelberger are equally applicable to this dispute, so too will our decision be. We will therefore sever the Plaintiffs’ bad faith claim from the existing contract dispute. Until or unless the Plaintiffs’ contract dispute is resolved in Plaintiffs’ favor, no discovery or other proceedings will be permitted to progress with respect to Plaintiffs’ bad faith cause of action. An Order to effectuate this decision will be entered today’s date.