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
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.
