A Bad Faith Claim in a Vacuum is not Actionable.

Moses Taylor Foundation on behalf of Moses Taylor Hospital (“Moses Taylor”), to recover damages for the alleged breach of contract by Defendants, Coverys and Proselect Insurance Company (“Coverys”) for failure to negotiate a desirable settlement in a previous lawsuit (“the underlying suit”). In Moses Taylor Foundation O/B/A Moses Taylor Hospital v. Coverys and Proselect Insurance Company, CIVIL No. 3:20-CV-00990, United States District Court, M.D. Pennsylvania (November 22, 2021) the USDC was faced with a claim that the damages alleged by the plaintiff was speculative because it had not been damaged. The court allowed the plaintiffs one chance to amend and then ruled on the motion to dismiss the amended complaint.

FACTS

According to its amended complaint, Moses Taylor Hospital is a hospital in Lackawanna County, Pennsylvania and the Moses Taylor Foundation is a not-for-profit corporation with the authority to represent Moses Taylor Hospital. Defendant Coverys is a medical professional liability insurance provider. Proselect Insurance Company is an underwriting company for Coverys which supplies insurance protection to healthcare facilities. Moses Taylor maintained a medical professional liability insurance policy with Coverys.

The Pennsylvania Trust Company, as guardian ad litem for a minor plaintiff, filed a professional negligence action against Moses Taylor after the minor plaintiff allegedly sustained “severe, permanent, disabling birth injuries” while receiving treatment at the hospital. Coverys, as the insurer for Moses Taylor, “provided a defense and legal representation” for this lawsuit, during which Coverys “directed, controlled, monitored, over[saw], funded, [and] strategized” about the action, “including making, participating in and/or advising and counseling [Moses Taylor Hospital] about whether . . . to settle the action prior to the verdict.”

In February 2019, the minor plaintiff made a demand for the policy limits of the insurance coverage that Coverys provided to Moses Taylor. A few days after the demand, Moses Taylor claims that it informed Coverys of the need to settle the case within its policy limits at the scheduled March 1, 2019 pre-trial conference. Moses Taylor alleges that it persuaded Coverys to engage in a high-low arbitration after Moses Taylor agreed to contribute $500,000 of its own funds. The “low” limit was set at $2,500,000 and the “high” limit was set at $7,750,000.

After Coverys’ presentation at the arbitration, the minor plaintiff made a final demand for $6,000,000 to settle the case in full. Moses Taylor asserts that it directed Coverys to settle, or attempt to settle, the controversy for such amount. Moses Taylor claims that Coverys once again failed to settle the case or reasonably engage in settlement discussions. The arbitrator awarded the minor plaintiff “a substantial verdict, grossly in excess of the settlement figures, and well . . . in excess of the agreed upon ‘high’ limit.” Coverys’ paid the $7,750,000.

Moses Taylor claims that this settlement left it with $1,750,000 less in its available insurance coverage than if Coverys had settled the suit for the minor plaintiff’s $6,000,000 demand as directed by Moses TaylorSpecifically, Moses Taylor asserts that if the settlement had been for $6,000,000, then it would have $2,250,000 remaining in coverage as opposed to the $500,000 currently remaining available to settle other cases.

Moses Taylor sued. It claimed the insurer breached the contract, in bad faith, and sought damages of $1,750,000. After losing Moses Taylor, with the court’s permission, and Moses Taylor filed an amended complaint.

The amended complaint is nearly identical to the originally filed complaint. Separately docketed is a stipulation between the parties agreeing that the State Action has settled within policy limits.  Coverys filed a second to motion to dismiss on identical grounds to the first.

DISCUSSION

In this case, Coverys argues that the amended complaint should be dismissed for these reasons:

Moses Taylor’s claim for breach of contract should be dismissed for failure to allege non-speculative damages as required by Pennsylvania law;
in the event that the court dismisses Moses Taylor’s claim for breach of contract, its claim for bad faith should also be dismissed because a bad faith claim under 42 Pa. Con. Stat. § 8371 requires a predicate cause of action which disappears if the court dismisses the breach of contract claim;
Moses Taylor’s claim for vicarious liability should likewise be dismissed because vicarious liability cannot be brought as a stand-alone claim for relief under Pennsylvania law; and
if the court declines to accept the stipulation, the motion to dismiss should be converted to a motion for summary judgment.

Moses Taylor’s Claim For Breach Of Contract Must Be Dismissed.

Coverys moves to dismiss Moses Taylor’s claim for breach of contract because Coverys asserts that Moses Taylor has failed to assert cognizable non-speculative damages. Moses Taylor seeks damages based on the depletion in available insurance coverage “for the settlement of additional existing and/or future cases” that would have been available if Coverys had settled the underlying suit at Moses Taylor’s request.

Coverys argues that these damages are speculative because Moses Taylor has not yet had to pay out of pocket for any settlement because of the insurance coverage that was depleted.

Under Pennsylvania law, a breach of contract claim includes three elements:

the existence of a contract, including its essential terms,
a breach of a duty imposed by the contract, and
resultant damages.

The only new information Moses Taylor provides in the amended complaint is related to the State Action. According to the stipulation provided by the parties and signed by the court, the State Action “has settled within the per claim and aggregate coverage limits” of the policy. Because it is established that the State Action settled within policy limits, there is no damage to Moses Taylor.

Beyond the State Action, the amended complaint only alleges that the depleted coverage may affect additional existing and/or future cases. This is not a proper pleading of cognizable damages. While Moses Taylor discusses the ten-year statute of limitations which could expose Moses Taylor to liability from other plaintiffs, it is possible that such potential plaintiffs may never file suit. As a result, any damages are speculative because there are no pending suits or damages suffered.

Moses Taylor’s Claim For Bad Faith MustBe Dismissed.

Coverys argued that if Moses Taylor has failed to properly plead a breach of contract claim, then there is no predicate cause of action for the bad faith claim. There must be a predicate contract claim for a statutory bad faith claim to proceed. A breach of contract claim can serve as one such predicate action.

While Moses Taylor has alleged a breach of contract claim along with its  bad faith claim, the court’s dismissal of the breach of contract claim removes the predicate cause of action otherwise required to proceed on the bad faith claim. A bad faith claim in a vacuum is not actionable.

Moses Taylor’s Claim For Vicarious Liability Must Be Dismissed.

Under Pennsylvania law, a claim for vicarious liability requires a separate claim for which liability is asserted. Vicarious liability allows a principal to be held liable for the actions of its agent. A principal/agent relationship can be established through employment where the employee is the agent and the employer the principal and the act was committed within the course and scope of employment.

Since the court dismissed the breach of contract claim and the bad faith claim, there is no predicate cause of action for which the principal, Coverys, may be liable. Given the lack of a predicate action, Moses Taylor’s claim for vicarious liability will be dismissed.

The Amended Complaint Must Be Dismissed With Prejudice.

Moses Taylor’s amended complaint will be dismissed with prejudice because it would be futile to allow another amendment when no damages have been suffered, and Plaintiffs have already had an opportunity to amend.

The court found that Moses Taylor has failed to rectify the defects specified with respect to the initial complaint, and has continued to plead speculative damages. The court further found that the claims for bad faith and vicarious liability required a valid predicate cause of action, and without a valid breach of contract claim they are not actionable. Therefore, the court will grant the motion to dismiss the amended complaint with prejudice.

Almost every liability policy, including those covering a hospital’s alleged malpractice, provides control of the payment of claims or the settlement of law suits to the insurer regardless of the demands made by the insured. The insurer, in this case, refused to settle, agreed to participate in a high/low arbitration and when the arbitrator entered an award higher than the high limit it paid the high limit agreed which was less than the available limits in its policy for Moses Taylor. Since Moses Taylor suffered no loss – claiming it might have a loss in the future because of the depletion of the policy limits, is speculative since it might never be sued. There was, therefore no harm and no damage to the insured.

© 2021 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

Subscribe to Excellence in Claims Handling at https://barryzalma.substack.com/welcome.

He is available at http://www.zalma.com and zalma@zalma.com. Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to training available at https://claimschool.com; articles at https://zalma.substack.com,  the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

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