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James H. Cole

Director, Professional Liability Department

Chair, First Party Property Practice

Co-Chair, Fraud/Special Investigation Practice

JHCole@mdwcg.com

Portrait of James H. Cole

Defense Digest

A Royal Assignment [of Benefits]: Ramifications for Insurers in the First-Party Property Context

Defense Digest, Vol. 28, No. 12, December 2022

December 1, 2022

by James H. Cole

Key Points:

  • This summer, a federal court in Pennsylvania, on two separate occasions, permitted an insured to assign a bad faith claim to a vendor seeking payment for services on their property.

  • Until now, Pennsylvania courts had not previously permitted the assignment of extra-contractual tort claims, such as bad faith, in the first-party property context.

  • These recent decisions may have costly ramifications for insurers and have the potential to profoundly change the first-party property landscape in Pennsylvania.

With recent decisions in the U.S. District Court for the Eastern District of Pennsylvania, insurers must be braced for bad faith claims brought by their insured’s vendors. For the past 25 years, with the enactment of 42 Pa. C.S. § 8371, Pennsylvania’s bad faith statute has allowed insureds to bring lawsuits against their insurance companies for improper first-party claims handling, with the primary purpose being to hold insurers accountable for good faith and fair dealing towards their insureds. See, generally, 42 Pa. C.S. § 8371; see also Charter Oak Insurance Co. v. Maglio Fresh Food, 45 F.Supp.3d 461 (E.D. Pa. 2014).

Prior to the enactment of 42 Pa. C.S. § 8371, bad faith actions existed only under common law, and only in the third-party context, wherein an insured could sue their liability carrier for a bad faith refusal to settle a lawsuit against the insured within the policy limits, exposing him to an excess verdict. In the third-party/excess verdict context, courts have held assignments of bad faith claims, post-judgment, to be valid. See, e.g., Gray v. Nationwide Mutual Insurance Co., 223 A.2d 8 (Pa. 1966); Allstate Property & Casualty Insurance Co. v. Wolfe, 105 A.3d 1181, 1188 (Pa. 2014) (carving out scenarios in which bad faith claims may be assigned by insureds).

A concept rooted in contract law, an assignment is the signing over of a claim by one party to the contract to a non-party. This has been found acceptable in the first-party insurance context when an insured assigns benefits for services rendered, such as to a physician in a PIP claim or to a mitigation vendor in a property claim, but courts stopped short of extending this concept to the assignment of extra-contractual tort claims such as bad faith.

Some states, such as Florida, have allowed vendors to secure post-loss assignments, not only for services rendered, but for extra-contractual damages such as attorney’s fees and bad faith in the first-party context, leading to what may be described as an insurance crisis. It has been widely reasoned that lawsuits involving the assignment of benefits have increased between 2004–2018. See Bethan Moorcraft, AOB Abuse in Florida Rises 70% in 15 Years, Insurance Business Mag., Mar. 28, 2019, https://www.insurancebusinessmag.com/us/news/breaking-news/aob-abuse-in-florida-rises-70-in-15-years-163448.asp. Mostly due to the assignment of benefits, Florida is responsible for 76% of lawsuits filed against insurance companies in the United States, although the state itself only accounts for 8% of the population. David Altmaier, Florida OIR Report, Insurance Journal, Apr. 2, 2021, https://www.insurancejournal.com/app/ uploads/2021/04/Florida-OIR-Report.pdf.

In Pennsylvania, however, courts had not allowed the assignment of a bad faith claim outside the narrow third-party/excess verdict context. For example, in a case in which a disbarred attorney sought assignment of his client’s underinsured motorist-turned-bad faith claim, the Third Circuit specifically held that under 42 Pa. C.S. § 8371, bad faith claims can only be assigned to an injured plaintiff and judgment creditor. See Feingold v. Palmer & Barr, 831 F. App'x 608, 609 (3d Cir. 2020) (holding that bad faith claims may be assigned by statutory permission, but are not “freely assignable”). Feingold reaffirmed Wolfe’s interpretation that, in the first-party property context, an insured may assign his bad faith claim only to a judgment creditor who has been injured.

On June 29, 2022, the U.S. District Court for the Eastern District of Pennsylvania issued an opinion which royally changes the Commonwealth’s interpretation of first-party property bad faith claims. In Royal Water Damage Restoration, Inc. a/a/o 1133 Columbia LLC v. State Farm Fire & Casualty Co., WL 2345740 (E.D. Pa. June 29, 2022), the court decided that an insured’s water mitigation vendor has standing to bring a bad faith claim against the insurer—not on behalf of the insured, but directly as an injured party. Simply stated, the court has ruled, contrary to the precedent set in Wolfe and reconfirmed in Feingold, that an insured’s vendor—who is not a party to the insurance contract between the carrier and its insured—may pursue an extra-contractual claim under the Pennsylvania bad faith statute against the carrier.

On July 28, 2022, in another case involving Royal Water Damage Restoration, the Eastern District of Pennsylvania again permitted a third party’s standing to pursue a bad faith claim against an insurer. See Royal Water Damage Restoration, Inc. a/a/o Janet Thorn v. Allstate Vehicle and Property Insurance Co., WL 2985637 (E.D. Pa. July 28, 2022). More pointedly, in this case, the court based its finding on the mere potential that a vendor “could potentially be” a judgment creditor, even if the property owner/named insured is the only party actually injured. It can be argued, however, that the Federal Rules of Civil Procedure, which govern who is permitted to bring a lawsuit, have not and were not meant to be bent for the sake of convenience. A plethora of case law since the enactment of the Federal Rules has held that a plaintiff must establish standing in order to bring any claim in suit, bad faith or otherwise. Allowing a party who has not sustained any actual injury to bring a claim for bad faith may circumvent the purpose of the federal rule on standing.

More concernedly, allowing insureds to assign their bad faith claims to vendors seeking payment for services on their property could open a floodgate of litigation directly against carriers who issue insurance policies with the specific understanding that the named insureds are the only parties to whom they owe any duties or obligations. A vendor that performs repair work on the insured property is neither an injured party nor a judgment creditor, particularly if no judgment has been rendered by a court. Widening the class of first-party bad faith plaintiffs to include vendors of insureds has the potential to significantly increase premiums.

Allowing any repair contractor—who is not a party to the contract and who was not considered in the underwriting process—to pursue a bad faith claim has the potential to profoundly change the first party property landscape in Pennsylvania. With the recent Royal Water decisions contorting Pennsylvania’s understanding of the bad faith statute, insurers should wait with bated breath for a case to reach the Third Circuit or Pennsylvania appellate courts to decide whether Pennsylvania will follow Florida down the assignment-of-benefits rabbit hole.

Firm Highlights

Thought Leadership

The Tolling Trap: Filing Alone Will Not Toll the Statute Without Good-Faith Service

The Eastern District of Pennsylvania recently reinforced a critical limitation on bad faith claims, holding that a timely filing alone will not preserve a cause of action absent a good-faith effort to serve the original process. The plaintiff had presented a claim for underinsured motorist benefits to his auto insurer. The insurer evaluated the claim and determined that the plaintiff’s accident-related damages did not exceed the bodily injury liability insurance limits of the at-fault driver and denied his claim. Among other claims, the plaintiff sought to present a claim for insurance bad faith under 42 Pa. C.S.A. § 8371, to which a two year statute of limitation applies. He first filed a praecipe for writ of summons before the expiration of the statute of limitation. However, the plaintiff did not attempt to serve the praecipe or writ until after the statute of limitations had expired. Additionally, the service failed as the plaintiff had mailed the original process to an incorrect address. Despite receipt of the Postal Service’s failure to deliver the original process, the plaintiff did not attempt to re-serve the writ. Two months later, the plaintiff filed a complaint and then successfully served that complaint. The insurer sought to dismiss the plaintiff’s bad faith claim as time-barred by the statute of limitations. The district court agreed. Though the plaintiff had filed a praecipe for a writ of summons prior to the expiration of the statute of limitations, the statute is only tolled if there is a good faith effort to serve that original process. In this case, the court determined that the plaintiff had failed to perform a “good faith effort to serve the original process”. Additionally, though the filing and service of a complaint can serve as alternative original process when the lawsuit is commenced by the filing of a praecipe for a writ of summons, the plaintiff filed his complaint after the statute of limitations had expired. The plaintiff’s bad faith claim was therefore determined to be barred by the statute of limitations and dismissed by the court, with prejudice. A key takeaway for the defense is not to assume that the statute of limitations has been successfully tolled by a plaintiff merely because a praecipe for a writ of summons or complaint has been filed prior to the expiration of the statute. A filed complaint or writ is only part of the equation. The defense should carefully review the docket and filings to confirm that the plaintiff also performed the requisite good faith effort to serve that original process. A thorough review of the docket may reveal that the plaintiff failed to make the good-faith service efforts necessary to toll the statute of limitations.

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Thought Leadership

Commonwealth Court Reaffirms the Constitutionality of Act 111's IRE Provisions

In this case, the claimant sustained a work injury of January 6, 1994, which was acknowledged by Notice of Compensation Payable (NCP). After the claimant’s receipt of 104 weeks of temporary total disability benefits, the employer filed a Request for an Impairment Rating Examination (IRE). The IRE was performed in May 2023 and the IRE physician found that the claimant had a 5% whole person impairment, under the AMA Guides. The employer filed a Petition based on the IRE results, and the Petition was granted by the WCJ. During litigation, the claimant argued that the IRE provisions of Act 111 (Section 306(a.3) of the Act) were not applicable to her injury, since it predated June 24, 1996, the date Act 57 went into effect, and that the IRE provisions were unconstitutional. The Workers’ Compensation Judge (WCJ)) granted the Petition and the Board affirmed. On appeal to the Commonwealth Court, the claimant argued that Act 111 violated the nondelegation doctrine and that its retroactive application to the claimant’s injury was unconstitutional. The court rejected the arguments on the basis that they had already found the same arguments without merit in multiple, prior cases. The court also addressed an argument made by the claimant that Act 111 was procedurally defective under the Pennsylvania Constitution because it was only considered on two days in each House after having undergone amendments and reassignments. The court noted that the Pennsylvania Constitution requires every bill to be considered on three different days in each House. The claimant maintained that, according to the legislative history, the bill did not receive three separate days of consideration from each House when it was assigned a new bill number. The court pointed out, however, that the bill number, H.B. 1840 remained constant and was considered on three occasions by the House. Further, the court concluded that minor amendments to the bill were germane to its original subject, which was to modify the Act’s IRE process, in accordance with Protz II.

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Event

CLM 2026 Focus Conference

Allison joins three insurance industry leaders to discuss how cyber coverage disputes, the growing impact of social inflation on bodily injury claim valuation, and the use of artificial intelligence are reshaping the bad faith landscape. The panel will examine emerging sources of extra-contractual exposure, including evolving cyber insurance coverage issues and the challenges of accurately valuing bodily injury claims. Practical approaches to claim evaluation using AI, along with defense strategies designed to help prevent or successfully defend against bad faith litigation, will also be addressed. 

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Thought Leadership

Florida Supreme Court Rules Florida Statute §627.70152 Does not Apply Retroactively

In a decision that resolves years of appellate uncertainty and confirms that insurers and insureds alike can rely on the legal framework in place when a policy is issued, the Supreme Court of Florida last week found that Florida Statute §627.70152, which involves an insured’s requirement to provide an insurer with pre-suit notice before filing a suit, cannot be applied retroactively. In Universal Property & Casualty Insurance Company v. Hughes, the Court was presented with the issue of whether the statutory pre-suit notice requirement applied retroactively and whether it would apply to a breach of contract of an insurance policy that was issued before the statute went into effect. Before the Court was an appeal from a homeowner, Ms. Hughes, who sued her insurance carrier, Universal Property & Casualty Insurance Company (Universal) for breach of contract under an insurance policy that was in effect from April 24, 2019 through April 24, 2020. During the policy period, Ms. Hughes suffered a loss and, on May 29, 2019, made a claim for water damage. The carrier investigated the loss and issued payment; Ms. Hughes disputed the payment, finding the amount insufficient for repairs. On July 1, 2021, Florida Statute §627.70152 went into effect, which required insureds to provide notice of intent to initiate litigation against the carrier prior to filing a lawsuit; if an insured filed the lawsuit without complying with §627.70152, a court must dismiss the case without prejudice. On August 4, 2021, Ms. Hughes filed her lawsuit against Universal for breach of contract. Universal moved to dismiss based on her failure to comply with §627.70152. Ms. Hughes contended the notice requirement could not be applied retroactively. The trial court disagreed and dismissed the lawsuit without prejudice, and Ms. Hughes appealed. During the appeal, the Fourth District Court of Appeal, in Cole v. Universal Property & Casualty, 363 So. 3d 1089 (Fla. 4th DCA 2023), ruled that Florida Statute §627.70152 did apply retroactively to policies issued before the effective date of §627.70152. However, the Sixth District Court agreed with Ms. Hughes and overturned the trial court’s ruling, finding the statute could not retroactively apply to policies issued prior to the statute effective date. Thereafter, the other district courts weighed in, with the Third District Court agreeing with the Fourth District Court, and the First, Second and Fifth District Courts agreeing with the Sixth District Court. In resolving the conflict amongst the district courts, the Supreme Court advised “as a general rule, ‘the statute in effect at the time an insurance contract is executed governs substantive issues arising in connection with that contract.’ Hassen v. State Farm Mut. Auto. Ins. Co., 674 So. 2d 106, 108 (Fla. 1996). The Court applied the two-step test when deciding whether a statute has retroactive application: “First, the Court must ascertain whether the Legislature intended for the statute to apply retroactively. Second, if such an intent is clearly expressed, the Court must determine whether retroactive application would violate any constitutional principles.” Menendez v. Progressive Exp. Ins. Co., 35 So. 3d 873, 877 (Fla. 2010). In analyzing the Legislature’s intent, the Court must determine whether the Legislature has manifested a clear command for retroactivity in the statutory text.  In review of the statutory text, the Court found nothing in the language of the statute to indicate that the phrase “all suits” was serving another purpose of expanding its reach to suits based on policies that both predate and postdate the enactment of the statute. Buis v. Universal Prop. & Cas. Ins. Co., 394 So. 3d 738, 741 (Fla. 2d DCA 2024). Further, the Court noted the statute has an effective date, which has long been considered to be evidence against retroactive application of a statute. The Court concluded that, on its face, no provision of §627.70152 speaks to application of the statute to insurance policies issued before the statute’s effective date and therefore, the Legislature did not clearly command retroactivity of the statute to include insurance policies issued prior to the enactment of the statute. The Court briefly reviewed Universal’s argument that the presuit notice requirement was procedural, not substantive, and therefore should be applied retroactively; however, the Court agreed with the Sixth District Court’s finding that, in its entirety, §627.70152 transformed an insured’s ability to sue an insurance company under a property insurance policy and an insurer’s obligations to respond to and pay insurance claims, thus making the requirement a substantive change. The Court thereby upheld the decision of the Sixth District and disapproved the decision of the Fourth District in Cole.