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Mirarchi v Seneca Specialty Ins. Co., No. 13-2129, 2014 WL 1673748 (3d Cir. April 29, 2014).
The Third Circuit affirmed a federal trial court’s order granting summary judgment in favor of a property insurer in a first-party bad-faith case, holding there was insufficient evidence from which a reasonable juror could conclude that the insurer acted in bad faith in connection with its delay in paying the claim. In reaching its decision, the court held that there was no error in the district court’s ruling that information as to the insurer’s loss reserve estimates was irrelevant to the claim and thus not discoverable.
Seneca Specialty Insurance Company insured property located in Philadelphia, Pennsylvania. The property was owned by Ercole Mirarchi, who used the space for his restaurant. The policy’s coverage limit was $600,000, and it directed that valuation on any claim be done according to the actual cash value (“ACV”) of the property.
In May 2008, a fire damaged the property, including the restaurant. Mirarchi notified Seneca and a claim was opened. Mirarchi and Seneca each retained experts to inspect the damage and estimate the cost of repairs. Seneca’s expert estimated the ACV to be $331,777.42, whereas Mirarchi’s expert believed the ACV to be $692,160. Seneca paid the first $100,000 on the claim after Mirarchi submitted a partial proof of loss. Approximately two months later, Mirarchi submitted a proof of loss based on his expert’s full assessment of the ACV. Within a month, Seneca paid the full undisputed portion of the claim (i.e., the amount of its own estimate of ACV). The parties subsequently agreed to enter the appraisal process and each side hired an independent appraiser. Seneca’s appraiser estimated the ACV at $449,550 (i.e., more than $100,000 higher than the insurer’s original estimate). The dispute was submitted to an umpire who concluded that the ACV was $618,338.07. Seneca paid the remaining balance on the $600,000 policy limit. Mirarchi then sued Seneca for bad faith based on Seneca’s delay in paying the claim. The court granted Seneca’s motion for summary judgment.
The court addressed the issue of whether the district court appropriately awarded summary judgment in favor of Seneca. In reaching its decision, the court also considered whether the district court erred in denying the Plaintiff discovery of evidence related to the insurer’s loss reserves.
The court held summary judgment was properly granted in favor of Seneca because Mirarchi failed to provide clear and convincing evidence from which a reasonable juror could conclude Seneca acted in bad faith in connection with its handling of Mirarchi’s claim. Moreover, the court found no error in the district court’s ruling that information as to Seneca’s loss reserve estimates was irrelevant to the bad-faith claim and thus not discoverable.
The district court denied Mirarchi discovery of evidence related to Seneca’s loss reserves and did not consider the loss reserve estimates at summary judgment. On appeal, Mirarchi challenged the district court’s ruling that information as to Seneca’s loss reserve estimates was irrelevant to the claims and thus not discoverable. Mirarchi argued that the evidence is important because Seneca set its loss reserves for Mirarchi’s claim at the $600,000 policy limit, but thereafter never offered more than its original ACV estimate of $331,777.42. Mirarchi argued that the loss reserve information shows that Seneca knew the claim was worth more than what it offered to pay and thus demonstrates bad faith.
The court found there was no error in the district court’s legal analysis concerning the lack of relevance of the loss reserve estimates generally in bad-faith cases. The court noted the district court had explained that a loss reserve is the insurer’s estimate of the amount the insurer “could be required to pay on a given claim.” Although the district court recognized that such information could conceivably be relevant in a bad-faith case, it concluded that in this case, the loss reserve figures did not represent “an evaluation of coverage based upon a thorough factual and legal consideration” and hence the information was irrelevant and not discoverable. The court further noted that Mirarchi failed to show that the loss reserve figures were related to Seneca’s considered estimate of the ACV and thus failed to show how the information could be relevant to his bad-faith claim.
In Pennsylvania, bad faith is defined as “any frivolous or unfounded refusal to pay proceeds of a policy.” Terletski v. Prudential Property & Cas. Ins. Co., 649 A.2d 680, 688 (Pa. 1994). Bad faith must be demonstrated by clear and convincing evidence. Post v. St. Paul Travelers Ins. Co., 691 F.3d 500, 523 (3d Cir. 2012). Because Seneca ultimately paid the full policy limit, Mirarchi’s bad-faith claim was based on the insurer’s delay in paying the claim. For such a claim, the court stated that Mirarchi had to show that (1) the delay was attributable to Seneca, (2) it had no reasonable basis for causing the delay, and (3) it knew or recklessly disregarded the lack of a reasonable basis for the delay.
The Third Circuit rejected Mirarchi’s argument that Seneca acted in bad faith by standing by its adjuster’s initial estimate of ACV pending resolution by the umpire. Seneca had no duty to make an additional partial payment or to make a higher settlement offer, even though its own appraiser had provided Seneca with an estimate that exceeded Seneca’s initial estimate and offer. The court noted that the undisputed evidence showed that Seneca relied on a genuine and considered estimate of the ACV by its first expert, and there was no “clear and convincing” evidence that Seneca acted in bad faith either at arriving at its initial estimate or by standing by that estimate until the appraisal process concluded.