Negligence Standard Applies, Says Judge

In a significant victory for plaintiffs, a federal judge has ruled that a negligence standard applies in 'excess verdict bad faith' suits against insurance companies whose refusal to settle a claim results in a verdict in excess of the policy limits.

The ruling in Schubert v. American Independent Insurance Co. is a victory for attorneys Joseph F. Roda and Eric L. Keepers of Roda & Nast in Lancaster, PA. Their client is the bankruptcy trustee for a man who was hit with a $2.6 million verdict in an auto accident case after his insurer rejected an offer to settle for $15,000. Early in the case, Roda and Keepers asked Senior U.S. District Judge Clarence C. Newcomer for a ruling on the standard of care in excess verdict bad faith cases. In their brief, the plaintiff's lawyers argued that while the concept of filing such suits has been recognized for nearly half a century, the state and federal courts 'have not always been consistent' in describing the standard to be applied. Nonetheless, they said, a clear theme emerged from the case law that pointed to a simple answer: negligence.

In some cases, they said, the insurer's duty is described as an obligation to act 'in good faith and with due care.' Other cases say the insurer is liable if it 'negligently investigates the claim or unreasonably refuses an offer of settlement.' A later case said the insurer's decision not to settle a claim must be 'intelligent and objective.' Roda and Keepers urged Newcomer to read the same simple message in all of the cases ' that plaintiffs are entitled to compensatory damages equal to the amount of the judgment entered against them if a jury finds that the insurer acted negligently in failing to settle the claim within policy limits.

Newcomer agreed, saying, 'Negligence is sufficient to support an allegation of bad faith.' In a four-page order, Newcomer traced the law on excess verdict bad faith cases to the Pennsylvania Supreme Court's 1957 decision in Cowden v. Aetna. Over the years, Newcomer found, Pennsylvania courts held that an insurer's obligation to defend is a fiduciary duty that requires the insurer to act in good faith and with due care. And in the context of an excess verdict bad faith case, Newcomer said, the Pennsylvania courts have said 'due care' is defined by a reasonableness standard.

The 3rd U.S. Circuit Court of Appeals also weighed in, Newcomer found, with a decision that clarified the meaning of 'due care' in an excess verdict bad faith case, holding that the decision not to settle must be 'honest, intelligent and objective.'

American Independent's lawyer, R. Bruce Morrison of Marshall Dennehey Warner Coleman & Goggin, argued that 'bad faith, and bad faith alone,' is the standard for an excess verdict bad faith case, according to court papers. Newcomer disagreed, saying, 'Defendant has failed to provide this court with any persuasive support or arguments to contradict existing case law holding that negligence can evidence bad faith. Moreover, the defendant has not convinced this court that an insurer's decision whether to litigate is subject to any standard of care other than a reasonableness standard.' Morrison had conceded the point, Newcomer found, by arguing for a finding of bad faith only if the insurer had 'no reasonable basis' for its decision to try the underlying claim.

Quoting 'Black's Law Dictionary,' Newcomer said, 'The law of negligence is founded on reasonable conduct.'

The insurance dispute in Schubert v. American Independent stems from an auto accident case in Lancaster County, PA, captioned Kubala v. Alicea. According to court papers, On March 11, 1997, John and Catrina Kubala were involved in an auto accident with David Alicea, who admitted to police that he had caused the crash. The worst injuries were suffered by Catrina Kubala, who lost the functional use of her right upper arm and developed a clawlike abnormality in her right hand. By February 1998, Kubala's medical bills were more than $40,000, only $5,000 of which was covered by her medical insurance.

Under the law, Alicea would be liable for not only medical bills, but also for Kubala's lost earnings, pain and suffering, disfigurement and her husband's loss of consortium. But Alicea had a $15,000 limit on his liability coverage. Early on, Kubala's lawyer made a demand for the $15,000 policy limits to settle the entire case. American Independent rejected it. The case went to trial before Lancaster County Judge David Ashworth, who awarded the Kubalas $2.6 million.

Alicea was unable to satisfy the judgment and filed for bankruptcy, according to court papers. The bankruptcy trustee, Christine Schubert, filed the excess verdict bad faith suit against American Independent. In the suit, Schubert argued that the Kubalas' original offer to settle the case for just $15,000 'made eminent sense' for both Alicea and American Independent. The $15,000 offer was on the table for more than 6 months, the suit said, but the insurer stuck to its position that it was offering nothing to settle.

'The choice was thus clear for [American Independent]: Offer its $15,000 in liability limits and settle the claim, thereby protecting Mr. Alicea against the very real risk of an excess judgment, or refuse to pay the $15,000 and subject Mr. Alicea to the overwhelming likelihood of a verdict well in excess of his liability insurance limits,' Roda and Keepers wrote.

Shannon P. Duffy is the U.S. Courthouse Correspondent for The Legal Intelligencer.

In a significant victory for plaintiffs, a federal judge has ruled that a negligence standard applies in 'excess verdict bad faith' suits against insurance companies whose refusal to settle a claim results in a verdict in excess of the policy limits.

The ruling in Schubert v. American Independent Insurance Co. is a victory for attorneys Joseph F. Roda and Eric L. Keepers of Roda & Nast in Lancaster, PA. Their client is the bankruptcy trustee for a man who was hit with a $2.6 million verdict in an auto accident case after his insurer rejected an offer to settle for $15,000. Early in the case, Roda and Keepers asked Senior U.S. District Judge Clarence C. Newcomer for a ruling on the standard of care in excess verdict bad faith cases. In their brief, the plaintiff's lawyers argued that while the concept of filing such suits has been recognized for nearly half a century, the state and federal courts 'have not always been consistent' in describing the standard to be applied. Nonetheless, they said, a clear theme emerged from the case law that pointed to a simple answer: negligence.

In some cases, they said, the insurer's duty is described as an obligation to act 'in good faith and with due care.' Other cases say the insurer is liable if it 'negligently investigates the claim or unreasonably refuses an offer of settlement.' A later case said the insurer's decision not to settle a claim must be 'intelligent and objective.' Roda and Keepers urged Newcomer to read the same simple message in all of the cases ' that plaintiffs are entitled to compensatory damages equal to the amount of the judgment entered against them if a jury finds that the insurer acted negligently in failing to settle the claim within policy limits.

Newcomer agreed, saying, 'Negligence is sufficient to support an allegation of bad faith.' In a four-page order, Newcomer traced the law on excess verdict bad faith cases to the Pennsylvania Supreme Court's 1957 decision in Cowden v. Aetna. Over the years, Newcomer found, Pennsylvania courts held that an insurer's obligation to defend is a fiduciary duty that requires the insurer to act in good faith and with due care. And in the context of an excess verdict bad faith case, Newcomer said, the Pennsylvania courts have said 'due care' is defined by a reasonableness standard.

The 3rd U.S. Circuit Court of Appeals also weighed in, Newcomer found, with a decision that clarified the meaning of 'due care' in an excess verdict bad faith case, holding that the decision not to settle must be 'honest, intelligent and objective.'

American Independent's lawyer, R. Bruce Morrison of Marshall Dennehey Warner Coleman & Goggin, argued that 'bad faith, and bad faith alone,' is the standard for an excess verdict bad faith case, according to court papers. Newcomer disagreed, saying, 'Defendant has failed to provide this court with any persuasive support or arguments to contradict existing case law holding that negligence can evidence bad faith. Moreover, the defendant has not convinced this court that an insurer's decision whether to litigate is subject to any standard of care other than a reasonableness standard.' Morrison had conceded the point, Newcomer found, by arguing for a finding of bad faith only if the insurer had 'no reasonable basis' for its decision to try the underlying claim.

Quoting 'Black's Law Dictionary,' Newcomer said, 'The law of negligence is founded on reasonable conduct.'

The insurance dispute in Schubert v. American Independent stems from an auto accident case in Lancaster County, PA, captioned Kubala v. Alicea. According to court papers, On March 11, 1997, John and Catrina Kubala were involved in an auto accident with David Alicea, who admitted to police that he had caused the crash. The worst injuries were suffered by Catrina Kubala, who lost the functional use of her right upper arm and developed a clawlike abnormality in her right hand. By February 1998, Kubala's medical bills were more than $40,000, only $5,000 of which was covered by her medical insurance.

Under the law, Alicea would be liable for not only medical bills, but also for Kubala's lost earnings, pain and suffering, disfigurement and her husband's loss of consortium. But Alicea had a $15,000 limit on his liability coverage. Early on, Kubala's lawyer made a demand for the $15,000 policy limits to settle the entire case. American Independent rejected it. The case went to trial before Lancaster County Judge David Ashworth, who awarded the Kubalas $2.6 million.

Alicea was unable to satisfy the judgment and filed for bankruptcy, according to court papers. The bankruptcy trustee, Christine Schubert, filed the excess verdict bad faith suit against American Independent. In the suit, Schubert argued that the Kubalas' original offer to settle the case for just $15,000 'made eminent sense' for both Alicea and American Independent. The $15,000 offer was on the table for more than 6 months, the suit said, but the insurer stuck to its position that it was offering nothing to settle.

'The choice was thus clear for [American Independent]: Offer its $15,000 in liability limits and settle the claim, thereby protecting Mr. Alicea against the very real risk of an excess judgment, or refuse to pay the $15,000 and subject Mr. Alicea to the overwhelming likelihood of a verdict well in excess of his liability insurance limits,' Roda and Keepers wrote.

Shannon P. Duffy is the U.S. Courthouse Correspondent for The Legal Intelligencer.