Jesse Dowhower, et al, and Angela Otto, et al, v. Erie Insurance Company

Jesse Dowhower, et al, and Angela Otto, et al, v. Erie Insurance Company

Civil Action-Law-Insurance Contract-Homeowner’s Policy-Hail Damage-Failure to Pay-Cancellation of Policy-Bad Faith-Violation of Unfair Trade Practices Consumer Protection Law-Preliminary Objections-Demurrer-Misfeasance-Nonfeasance

Jesse Dowhower and Angela Otto (“Plaintiffs”) filed an Amended Complaint in Breach of Contract, Bad Faith and the Unfair Trade Practices Consumer Protection Law (“UTPCPL”) asserting that Erie Insurance Company (“Defendant”) failed to pay damages upon their property caused by hail after Plaintiffs had provided weather documentation verifying the presence of one and one-half (1 ½) inch hail and cancelled their policy.  Defendant filed Preliminary Objections seeking dismissal of the counts for Bad Faith and violation of the UTPCPL. 

1.  Preliminary objections in the nature of a demurrer may be sustained only where the complaint clearly is insufficient to establish a pleader’s right to relief. 

2.  Any doubt that exists should be resolved in the favor of overruling the demurrer.

3.  In an action arising under an insurance policy, if the court finds that the insurer has acted in bad faith, the court may award interest on the amount of the claim and punitive damages and/or assess court costs and attorney’s fees against the insurer.

4.  To succeed in a bad faith claim, the insured must present clear and convincing evidence that the insurer did not have a reasonable basis for denying benefits under the policy and the insurer knew of or recklessly disregarded its lack of a reasonable basis for denying the claim.

5.  Where Plaintiffs allege that Defendant denied their claim for hail damage and cancelled their policy less than a year later because Plaintiffs did not repair the damage, the denial of the claim coupled with the cancellation of the policy based upon the existence of a covered loss could rise to the level implicating bad faith. 

6. For an insurance claim to be actionable under the UTPCPL, the conduct of the insurer must rise to the level of misfeasance as opposed to mere nonfeasance.

7.  Misfeasance requires unscrupulous, unfair or deceptive practices.

8.   Nonfeasance involves refusal to pay a claim or to fail to investigate a claim.

9.  The Amended Complaint in this case involves inappropriate handling of the claim, which generally does not implicate the UTPCPL.

10.  Since the Amended Complaint fails clearly to articulate a theory tied to the insurance policy cancellation that could be construed as misfeasance, Plaintiffs will be granted leave to file an additional amendment to their complaint to set forth a claim under the UTPCPL based upon the cancellation of the policy.

L.C.C.C.P. No. 2023-00718, Opinion by Bradford H. Charles, Judge, September 20, 2023.

IN THE COURT OF COMMON PLEAS OF LEBANON COUNTY

PENNSYLVANIA

CIVIL ACTION – LAW

JESSE DOWHOWER, ET AL                               :           NO. 2023-00718

ANGELA OTTO, ET AL                            :

Plaintiffs                                                         :

                                                                        :

                        v.                                                         :                      

                                                                                    :

ERIE INSURANCE COMPANY               :       

Defendant                                                     :   

                                                            ORDER OF COURT

            AND NOW, this 20^th day of September, 2023, in accordance with the following Opinion, the Order of this Court is as follows:

1. The Defendant’s Preliminary Objection to Count 3 is SUSTAINED.  Leave is granted for Plaintiffs to file an Amended Complaint seeking to set forth a cause of action under Pennsylvania’s Unfair Trade Practices and Consumer Protection Law.  Said Amended Complaint is to be filed within thirty (30) days from today’s date.
2. If an Amended Complaint is filed, and if Preliminary Objections are again filed, a copy of the Amended Complaint and the Preliminary Objections are to be forwarded directly to this jurist immediately after filing. 
3. In all other respects, the Preliminary Objections filed by Defendant are DENIED. 
4. A Case Management Scheduling Conference is to be conducted on the 16^th day of November, 2023, at 3:30pm in Courtroom #3.  The parties may participate in person or via teleconference.  Any party wishing to participate via teleconference is to notify the Judicial Assistant of the undersigned of the telephone number at which he/she can be reached on the date scheduled for the conference.

                                                                        BY THE COURT,

                                                                        ______________________________, J.

                                                                        BRADFORD H. CHARLES

BHC/pmd

cc:        Court Administration

            Cory A. Leshner, Esq.// 100 North 10^th Street, Harrisburg PA 17101

Rolf Krall, Esq.// 214 Senate Avenue, Suite 402 Camp Hill PA  17011

IN THE COURT OF COMMON PLEAS OF LEBANON COUNTY

PENNSYLVANIA

CIVIL ACTION – LAW

JESSE DOWHOWER, ET AL                               :           NO. 2023-00718

ANGELA OTTO, ET AL                            :

Plaintiffs                                                         :

                                                                        :

                        v.                                                         :                      

                                                                                    :

ERIE INSURANCE COMPANY               :       

Defendant                                                     :   

APPEARANCES:

CORY A. LESHNER, ESQUIRE   FOR PLAINTIFFS

ROLF KRALL, ESQUIRE                                      FOR DEFENDANT

Opinion, Charles, J., September 20, 2023

            Before us are Preliminary Objections to a Complaint seeking damages for Breach of Contract, Insurance Bad Faith and a violation of Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (CPL).  For reasons we will articulate in greater detail below, we will permit Plaintiff’s claims for Breach of Contract and Bad Faith to proceed further.  However, we will grant the Preliminary Objection of Erie Insurance Exchange (hereafter ERIE) related to the current iteration of PLAINTIFFS’ CPL claim.

I.          FACTS

             On March 17, 2023, Plaintiffs Jesse Dowhower and Angela Otto (hereafter PLAINTIFFS) filed a Civil Complaint against ERIE.  Preliminary Objections were promptly filed.  After legal maneuvering, an Amended Complaint was filed by PLAINTIFFS on June 29, 2023.  This Complaint set forth three counts.  Count 1 alleged Breach of Contract.  Count 2 alleged Insurance Bad Faith.  Count 3 sought damages under the CPL. 

            The Complaint alleged that PLAINTIFFS owned real estate that was damaged by hail.  PLAINTIFFS asserted that they submitted three (3) claims for damages stemming from the hail.  The first was submitted on May 21, 2021, the second on September 7, 2021, and the third on May 23, 2022.  According to the Complaint, ERIE denied PLAINTIFFS’ claims on June 13, 2022.  (Paragraphs 15-21 of Complaint).  According to PLAINTIFFS, the claims were denied “solely” as a result of “weather data” that ERIE had accessed online.  (Paragraph 22 of Complaint).  PLAINTIFFS asserted that they had provided weather documentation verifying the presence of 1.5” hail as well as videotape evidence of hailstorms at their residence. (Paragraph 25 of Complaint). 

            Following the dispute about coverage pertaining to hail, PLAINTIFFS allege that ERIE cancelled their insurance policy.  According to PLAINTIFFS, ERIE cited PLAINTIFFS’ failure to repair hail damage as a reason for cancelling the policy. (Paragraphs 29-30 of Complaint). 

            On July 19, 2023, ERIE filed Preliminary Objections.  The Preliminary Objections sought dismissal of the Bad Faith count and the CPL count.  The parties have filed briefs in support of their respective positions.  The issues raised by ERIE’s Preliminary Objections are now before this Court for disposition.

II.        STANDARD FOR PRELIMINARY OBJECTIONS

The Defendant raises a Preliminary Objection in the nature of a demurrer under Pa.R.C.P. § 1028(a)(4) (“legal insufficient specificity of a pleading.”). A demurrer can be sustained only where the complaint is “clearly insufficient” to establish a pleader’s right of relief.  Lumax Industries, Inc. v. Aultman, 669 A.2d 893 (Pa. 1995).  Stated differently, a demurrer should be sustained only in cases where the Plaintiff has clearly failed to state a claim on which relief can be granted.  Pittsburgh National Bank v. Perr, 637 A.2d 334 (Pa. Super. 1994).  Any doubt that exists should be resolved in favor of overruling the demurrer.  Hunter v. Port Authority of Allegheny County, 419 A.2d 631, 637 (Pa. Super. 1980).

“If a preliminary objection on the ground of legal insufficiency in the nature of a demurrer is sustained, as a general rule, the court has a duty to allow the pleader, against whom the objection was sustained, the opportunity to file an amended pleading.”  5 Standard Pennsylvania Practice 2d § 25:78 Amendment of pleading.  As a general rule, no trial court should refuse an opportunity to amend unless there is no apparent possibility that a pleader would be able to set forth a legally sufficient amendment.  See Steinhardt v. Russian Orthodox Catholic Mut. Aid Soc. Of U.S., 77 A.2d 393 (Pa. 1951); 5 Standard Pennsylvania Practice 2d § 25:30.   

III.       DISCUSSION

ERIE seeks to dismiss Counts 2 and 3.  Because the elements of the causes of action alleged in those Counts are different, we will separately address the viability of each Count.

1. Count 2 – Bad Faith

A bad faith cause of action is statutory in nature.  Section 8371 of Pennsylvania’s Judiciary Code states:

“In an action arising under an insurance policy, if the court finds that the insurer has acted in bad faith toward the insured, the court may take all of the following actions:

• Award interest on the amount of the claim from the date was made by the insured in an amount equal to the prime rate of interest plus three percent.
• Award punitive damages against the insurer. 
• Assess court costs and attorney’s fees against the insurer.”

42 Pa.C.S.A. § 8371.

The term “bad faith” is not defined in the Statute.  Therefore, we must look to decisional precedent in order to discern when an insurance company can be found guilty of bad faith. 

            We will start with some general legal precepts.  Mere negligence or poor judgment in handling a claim will not be sufficient to establish bad faith.  See, Mohney v. American General Life Insurance Company, 116 A.3d 1123 (Pa. Super. 2015).  To support a finding of bad faith, the insurer’s conduct must “import a dishonest purpose”.  Brown v. Progressive Insurance Company, 860 A.2d 493 (Pa. Super. 2004).  “To succeed in a bad faith claim, the insured must present clear and convincing evidence to satisfy a two part test: (1) the insurer did not have a reasonable basis for denying benefits under the policy, and (2) the insurer knew of or recklessly disregarded its lack of reasonable basis in denying the claim.” Mohney, supra at page 1131.

            Bad faith claims are by definition fact specific and dependent upon the conduct of the insured.  Rhodes v. USAA Casualty Insurance Company, 21 A.3d 1253 (Pa. Super. 2011).  When an insurer has no “reasonable basis” for denying benefits and does so nevertheless, bad faith can exist.  O’Donnell v. Allstate Insurance Company, 734 A.2d 901 (Pa. Super. 1999).  If an insurer is motivated by a dishonest purpose, such as self-interest of ill will, that can also trigger bad faith.  Terletsky v. Prudential Property and Casualty Insurance Company, 649 A.2d 680 (Pa. Super. 1994).  In some cases, bad faith conduct can include “lack of good faith investigation into facts, and failure to communicate with the claimant.” Romano v. Nationwide Mutual Fire Insurance Company, 646 A.2d 1228, 1232 (Pa. Super. 1994).

In this case, PLAINTIFFS have alleged that ERIE’s handling of their claim constituted bad faith.  Had PLAINTIFFS’ contained nothing more than allegations about the mistakes made by ERIE in the adjustment and denial of a claim, we would have a tendency to agree that such allegations do not rise to the level of bad faith.  However, we cannot ignore the fact that PLAINTIFFS have alleged that ERIE denied their claim for hail damage and then less than a year later cancelled the insurance policy because PLAINTIFFS neglected to repair hail damage.  Accepting those allegations as true, ERIE’s cancellation constituted a de facto admission that hail damage had occurred at PLAINTIFFS’ structure.  In other words, by cancelling an insurance policy because of hail damage, ERIE effectively acknowledged that hail damage existed.  Because hail damage is a covered loss, ERIE’s denial of the hail damage claim coupled with its admission in the policy cancellation process that a covered loss existed could rise to the level of implicating bad faith.  For this reason, we will deny ERIE’s Preliminary Objection regarding bad faith.

2. Count 3 – CPL

It is well settled that for an insurance claim to be actionable under the CPL, the conduct of the insurer must rise to the level of misfeasance, as opposed to mere nonfeasance.  Nordi v. Keystone Health Plan West, 989 A.2d 376 (Pa. Super. 2010), citing Gordon v. Pennsylvania Blue Shield, 548 A.2d 600 (Pa. Super. 1988).  Refusal to pay a claim, or failure to investigate that claim, is nonfeasance.  Nordi at page 385. Misfeasance requires unscrupulous, unfair or deceptive practices.  Gordon at pages 603-604.  In Smith v. Nationwide Mutual Fire Insurance Company, 935 F.Supp. 616 (W.D.Pa. 1996), the Court determined that mere failure to investigate a claim is unactionable nonfeasance, but conducting a patently non-objective post-loss investigation could rise to the level of violating the CPL.  On the other hand, in Wank v. State Farm Fire and Casualty Company, 228 A.3d 540 (Pa. Super. 2020), the trial court determined that the CPL should not be applied “to claims which are, in substance, principally assertions of inappropriate claims handling…”. Id at page 550.  The Superior Court affirmed the trial judge’s decision. 

One case that attempted to navigate the whirlpool that often develops at the confluence of misfeasance and nonfeasance is Holovich v. Progressive Specialty Insurance Company, 600 F.Supp. 3d 572 (E.D.Pa. 2022). In Holovich, an insured made a claim under an automobile insurance policy.  The claim implicated questions regarding purchase of the insurance policy and adjustment of claims thereafter.  The Federal Court for the Eastern District of Pennsylvania conducted a survey of decisional precedent regarding the CPL.  The Court bluntly concluded: “The [CPL] applies to the sale of an insurance policy, it does not apply to the handling of insurance claims…”.  In Holovich, the Court dismissed the Plaintiff’s effort to rely upon the CPL as it related to the handling of the insurance claim.  However, the Court afforded the Plaintiff with leave to amend its Complaint in order to assert a claim based upon the sale of the policy. 

As we reviewed the Complaint filed in this case, we came to the conclusion that there are two components to the PLAINTIFFS’ Complaint:

• Inappropriate claims handling; and
• Cancellation of coverage.

We agree with the Court in Holovich that the former will not generally implicate the CPL.  Denial of an insurance claim based upon improper reading of weather information could be a breach of contract, and it could even rise to the level of bad faith.  However, denial of a claim based upon weather data is clearly nonfeasance, and not misfeasance. 

            What gives this Court pause is the fact that ERIE is alleged to have cancelled PLAINTIFFS’ insurance policy because the same hail damage for which it failed to provide coverage was not repaired.  Such conduct could be construed as malfeasance so as to implicate the CPL. 

            The problem is that PLAINTIFFS’ Amended Complaint does not clearly articulate a theory that is tied to the insurance cancellation.  Although the facts related to the cancellation are incorporated by reference, the two provisions in Count 3 that attempt to justify an award of damages both reference claims handling and not policy cancellation:

• At Paragraph 51, PLAINTIFFS allege: “ERIE’s deceptive practices includes its impermissible exclusion of a covered loss”; and
• At Paragraph 52, PLAINTIFFS allege that ERIE should be liable for “failure to adjust their denial when provided with direct notice that its denial was contrary to law and fact.”

As it is currently plead, we perceive that PLAINTIFFS’ CPL claim is focused upon ERIE’s improper handling of PLAINTIFFS’ hail damage claim.  It is not tied to the cancellation of the insurance policy based upon the same hail damage for which an insurance claim was denied.  In its current form, we will not permit PLAINTIFFS’ CPL claim to proceed.

Because it is conceivable that misfeasance based upon ERIE’s reliance upon PLAINTIFFS’ failure to repair hail damage could be properly plead, we will err on the side of caution by affording PLAINTIFFS with one additional chance to amend their Complaint.  More direct allegations of misfeasance will have to be alleged in order for PLAINTIFFS’ CPL claim to survive.^[1] 

IV.    CONCLUSION

            If PLAINTIFFS amend their Complaint a second time, and if ERIE files additional Preliminary Objections, we anticipate that we will resolve that future issue via a Court Order and not an Opinion.  Because of this, we will take this opportunity to advise both parties that as this case moves forward, we will bifurcate discovery relating to bad faith.  While both parties will clearly be able to conduct discovery designed to disclose how ERIE investigated and handled PLAINTIFFS’ claim, we will not permit PLAINTIFFS to conduct discovery designed to elicit information regarding ERIE’s proprietary claims handling policies, nor will we permit PLAINTIFFS to request and receive documentation relative to ERIE’s net worth.  Before we would permit this type of information to be discoverable, PLAINTIFFS’ claim of bad faith against ERIE will have to survive a Motion for Summary Judgment.  Once discovery is complete with respect to how, what and why ERIE acted as it did relative to PLAINTIFFS’ claim, we will examine the record created and determine whether a bad faith claim can be pursued at trial.  If we answer that question in the affirmative, we will re-open discovery in order to allow PLAINTIFFS to obtain additional information that would be relevant to a bad faith claim at trial.  

            At this point, we will send this case back to counsel.  PLAINTIFFS’ counsel will have to decide whether to amend the Complaint in order to set forth more detailed information to support a CPL claim or whether PLAINTIFFS will move forward pursuing only claims of breach of contract and bad faith.  Whether or not PLAINTIFFS decide to amend, this case will be moving forward to the discovery phase of litigation. 

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[1] We stop short of declaring that misfeasance must be based upon the insurance cancellation anomaly chronicled above.  However, based only upon the facts that are now apparent on the record, we cannot identify any information unrelated to cancellation that would support a CPL claim.