Breach of contract, bad faith claims against State Farm Insurance Company dismissed

By Nicholas Malfitano | May 20, 2016

State Farm Insurance Company  

ALLENTOWN – A Danielsville couple’s claims of breach of contract and bad faith against State Farm Insurance Company have been dismissed from the U.S. District Court for the Eastern District of Pennsylvania.

Judge Jeffrey L. Schmehl ruled Monday that Steve and Kathy Kiss’ lawsuit against State Farm had not alleged plausibility of both their claims, and their complaint would thus be dismissed from federal court.

Originally filed in the Northampton County Court of Common Pleas, the plaintiffs’ lawsuit against State Farm was removed to the District Court based upon diversity of citizenship, with the insurance company being based in Bloomington, Ill.

The plaintiffs stated they were a client of State Farm, under a policy which provided up to $100,000 in underinsured motorist benefits and insured five vehicles. On Dec. 28, 2006, Steve Kiss was involved in a serious motor vehicle accident where he sustained personal injuries which left him unable to work.

“Plaintiff requested and defendant has paid medical bills from the date of the accident to the date the suit was filed,” Schmehl said. “By letter dated Nov. 9, 2007, defendant agreed to waive its subrogation rights to a settlement reached between plaintiffs and the underinsured tortfeasor for the tortfeasor’s policy limits of $25,000.00.”

The plaintiffs’ complaint alleges a State Farm agent represented to them that the maximum monetary value of their underinsured motorist coverage was $100,000 – but the plaintiffs claimed “stacking provisions” in the policy multiplied that amount five-fold, to $500,000.

“Defendant attempted to get husband plaintiff to sign a release for the amount of $70,000.00 in underinsured benefits, claiming that would be the most he would actually recover after retaining the services of an attorney. Husband plaintiff refused to sign the release and defendant issued a check in the amount of $70,000.00,” Schmehl said.

“Defendant’s agent allegedly told plaintiff that this amount was only for plaintiff’s shoulder injuries and did not represent payment for any of plaintiff’s other injuries. Plaintiffs allege that defendant’s agent took the position that by receiving and accepting the aforesaid check for $70,000.00, husband plaintiff has waived any and all other claims for underinsured motorist coverage,” Schmehl added.

Per the plaintiffs’ complaint, State Farm supposedly failed to evaluate their claim for underinsured motorist insurance and on the contrary, defended against that claim through underinsured motorist arbitration.

In contrast, State Farm motioned to dismiss the case, arguing the plaintiffs did not inform the Court “both parties arbitrated the matter before three arbitrators, the arbitrators rendered an award, and that defendant paid the [underinsured motorist] arbitration award.”

It is this arbitration process which Schmehl said caused the plaintiffs’ first count for breach of contract in failing to fairly evaluate and pay their claim, to fail as a matter of law.

As for the plaintiffs’ bad faith claim, brought under similar causes to the breach of contract claim, Schmehl explained that too would fail.

“To establish bad faith under 42 Pa.C.S. Section 8371, a plaintiff must demonstrate that the insurer (1) lacked a reasonable basis for denying benefits and (2) knew or recklessly disregarded its lack of a reasonable basis,” Schmehl said. “In the insurance context, bad faith denotes a ‘frivolous or unfounded’ refusal to pay policy proceeds, which imports a dishonest purpose and a breach of a known duty, such as good faith and fair dealing. While mere negligence or bad judgment are insufficient, a showing of reckless disregard will suffice to establish bad faith.”

Schmehl outlined the plaintiffs’ allegations, in explaining the plaintiffs were insured by defendant for underinsured motorist coverage; Steve Kiss was involved in a motor vehicle accident; the plaintiffs submitted medical records to State Farm; the plaintiffs made a demand for payment of the underinsured motorist limits; and the plaintiffs did not agree with State Farm’s valuation of the claim.

“Plaintiffs’ boilerplate allegations assert that defendant lacked a reasonable basis for denying plaintiffs’ claim for benefits, but do not provide any factual allegations from which the Court could make a plausible inference that defendant knew or recklessly disregarded its lack of a reasonable basis for denying benefits,” Schmehl said. “Indeed, it is undisputed that the defendant in this case actually paid the underinsured motorist benefits pursuant to an arbitration award.”

In justifying the complaint's dismissal, Schmehl indicated while the plaintiffs’ allegations amount to a possible claim for bad faith, they do not amount to a plausible non-speculative inference of bad faith.

The plaintiffs are represented by Carl B. Williamson, in New Tripoli.

The defendant is represented by Lee E. Ullman of Forry Ullman, in Reading.

U.S. District Court for the Eastern District of Pennsylvania case 5:15-cv-06572

From the Pennsylvania Record: Reach Courts Reporter Nicholas Malfitano at

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