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Superior Court: Insurer's Reasonable Reliance on UIPA Regs Cannot Support Bad Faith Claim as Matter of Law

By Brian Harris

On May 24, in Jones v. Nationwide, a panel of the Pennsylvania Superior Court unanimously affirmed preliminary objections granting a demurrer in favor of Nationwide Property and Casualty Insurance Co., dismissing a class action complaint against them, which, in part, claimed that Nationwide committed bad faith by prorating deductible reimbursements under its auto policies. The plaintiffs claimed that such a practice, though Nationwide contended it relied on regulations promulgated under the Unfair Insurance Practices Act, constituted a breach of contract, bad faith conversion and unjust enrichment, and also sought an injunction to stop the practice.

In affirming dismissal of the complaint at the trial court level, the Superior Court relied on Harnick v. State Mutual Insurance Company, the 2009 U.S. District Court for the Eastern District of Pennsylvania case, also involving the practice of prorating deductible reimbursements. The Harnick court found that the insured defendant did not commit bad faith in acting in reasonable reliance on valid state insurance regulations. The court found the reasoning in Harnick to be persuasive. The panel in Jones therefore adopted Harnick?s reasoning as sound and affirmed the trial court?s order granting the demure in favor of Nationwide.

This is not to say that an insurer cannot still be incorrect, or liable for breach of contract if enforcement or reliance on the regulations is inconsistent or violative of the insurance policy at issue. But being wrong, even being negligent, has never been sufficient evidence of bad faith in Pennsylvania, and the breach of contract and bad faith remedies in the state have always been distinct. (See, e.g., Smith v. Westfield Ins. Co., 2007) (Westfield did a thorough investigation and made a reasonable finding. That the determination may turn out to be incorrect does not mean that it had a dishonest purpose or was made with reckless disregard for the truth).

The ruling in Jones makes sense, as a sort of ?pre-emption with boundaries? defense, and offers protection to insurers who act in reasonable reliance on valid state insurance regulations. Inasmuch as one of the chief inquiries in bad faith litigation is the conduct of an insurer viewed objectively, i.e., whether an insurer acts reasonably, an insurer?s practice in following regulations enacted under unfair insurance practice statutes would seem to be a good stake in solid ground, and therefore a good ground to provide protection to those insurers electing to proceed down such a path. Judged from such a perspective, Jones appears to be in agreement with Harnick, and to articulate a fair boundary line for bad faith claims.

Charles Haddick
Dickie McCamey & Chilcote
http://www.dmclaw.com

I welcome feedback from readers, along with any suggestions for topics you would like to see discussed in this space.  Please e-mail me at chaddick@dmclaw.com.

Full post as published by The Legal Intelligencer Blog on September 23, 2010 (boomark / email).