WATSON et al v. NATIONWIDE MUTUAL INSURANCE COMPANY

Filing 8

MEMORANDUM. SIGNED BY HONORABLE R. BARCLAY SURRICK ON 10/12/11. 10/13/11 ENTERED AND COPIES E-MAILED.(mas, )

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA

CALVIN WATSON ET AL.
CIVIL ACTION

v.

N0.11-1762
NATIONWIDE MUTUAL INSURANCE
COMPANY

?011
MiCHI\cllc I:UNZ. Clerk
By
. ~Dep. Clerk

OCTOBER

SURRICK.J.

#- ,2011

MEMORANDUM
Presently before the Court is Defendant's Motion to Dismiss Pursuant to Rule 12(b)(6)
and Strike Pursuant to Rule 12(1). (ECF No.3.) For the following reasons, the Motion will be
granted in part and denied in part.

I.

BACKGROUND
On November 23, 2008, Plaintiff Blanche Watson was injured when an automobile struck

her vehicle from behind. At the time of the accident, Plaintiff had an automobile insurance
policy issued by Defendant Nationwide. Plaintiff alleges that under the policy, Defendant was
required to provide first-party medical benefits and uninsured motorist beneiits. (Compl. 'i[ 9,
ECF No. 1.) As a result of her injuries, Plaintiff sought medical treatment from numerous

physicians. (!d.

at~

12.)

Defendant contracted with several peer review organizations ("PROs") to determine
whether the treatment Plaintiffreceived was medically reasonable and necessary. (Id. at~~ 1719, 32.) Based on the findings of the PRO:s, Defendant denied Plaintiffs variolts requests for
payment of her medical bills. (!d.

at~~~

18, 27 .) Plaintiff alleges that she provided Defendant

with all of her medical documentation and that Defendant had no reasonable basis for submitting

/

the medical bills to a PRO. (Jd. at~~ 19, 28.) She further alleges that Defendant recklessly relied
upon defective peer review reports that failed to identify specific reasons to deny coverage. (Id.
at~

27.) Plaintiff alleges that Defendant engaged in a "sham peer review process" by contracting

with PROs that did not conduct fair and objective reviews of the medical records. (!d.

at~

55.)

PlaintiiT filed a Complaint in the Court of Common Pleas of Lancaster Cotmty alleging
breach of contract (Count!) and statutory bad faith (Count II). On March 10,2011, Defendant
removed the action to this Court based upon diversity. Thereafter Defendant filed the instant
Motion to partially dismiss and strike.

II.

LEGAL STANDARD
Federal Rule of Civil Procedure 12(b)(6) provides that a complaint may be dismissed for

''failure to state a claim upon which relief can be granted." "To survive a motion to dismiss, a
complaint must contain sufficient factual matter, accepted as true, to 'state a claim to rcliefthat is
plausible on its face."' Ashcroji v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (quoting Bell At/. Corp. v.

Twombly, 550 U.S. 544, 570 (2007)). A complaint that merely alleges entitlement to relief,
without alleging facts that show entitlement, must be dismissed. See Fowler v. UPMC

Shadyside, 578 F.3d 203,211 (3d Cir. 2009). This "'does not impose a probability requirement
at the pleading stage,' but instead 'simply calls for enough facts to raise a reasonable expectation
that discovery will reveal evidence of' the necessary elements." Phillips v. County ~fAllegheny,
515 F.3d 224,234 (3d Cir. 2008) (quoting Twombly, 550 U.S. at 556).
Federal Rule of Civil Procedure 12(i) gives district courts discretion to strike from a
pleading any immaterial or impertinent matter. Motions to strike are disfavored. Mcinerney v.

Moyer Lumber & Hardware, Inc., 244 F. Supp. 2d 393,402 (E.D. Pa. 2002). The standard is
2

"strict," and "only allegations that are so unrelated to plaintiffs' claims as to be unworthy of any
consideration should be stricken." Johnson v. Anhorn, 334 F. Supp. 2d 802, 809 (E.D. Pa. 2004)
(citations omitted). An allegation is immaterial if it has "no essential or important relationship to
the claim for relief." Del. Health Care, Inc. v. MCD Holding Co., 893 F. Supp. 1279, 1291-92
(D. Del. 1995) (citations omitted). An allegation is impertinent if it "consists of statements that
do not pertain, and are not necessary, to the issues in question." Jd at 1292.

III.

DISCUSSION
Defendant raises four arguments in its Motion. (Def.'s Br. 1, ECF No.4.) Defendant

argues that (1) Plaintiffs bad faith claim is preempted, (2) punitive damages are not recoverable
for a breach of contract, (3) emotional distress damages are not recoverable under the bad faith
statute, and (4) violations of the Unfair Insurance Practices Act are immaterial to Plaintiffs bad
faith claim.
A.

Bad Faith and Preemption

In Count IT of the Complaint, PlaintiiT contends that Defendant violated 42 Pa. Cons. Stat.
Arm.§ 8371, Pennsylvania's bad faith statute. Defendant argues that to the extent Plaintiffs
claim is based on Defendant's usc of PROs to deny Plaintiffs first-party medical benefits, the
claim must be dismissed because Pennsylvania's Motor Vehicle Financial Responsibility Law
("MVFRL"), 75 Pa. Cons. Stat. Ann. § 1797(b), preempts the bad faith statute. (De£'s Br. 9.)
Section 8371 provides that if a court finds that an insurer has acted in bad faith toward an
insured, the court may award interest on the amount of the claim, award punitive damages
against the insurer, and assess costs against the insurer. The specific provisions of§ 1797(b)
have been deemed an exception to the general remedy for bad faith found in

3

§ 8371. See Schwartz v. State Farm Ins. Co., No. 96-160, 1996 WL 189839, at '4 (E.D. Pa. Apr.
18, 1996). The statutory scheme in§ 1797(b), which governs the use of PROs, allows an insured

seeking first-party medical benefits to recover benefits plus 12% interest, costs and attorneys'
tees, if the court finds that the treatment was medically necessary.
It is well settled that a claim for statutory bad faith under§ 8371, is preempted by§
1797(b), where the claim is based on an insurer's wrongful denial of first-party benefits. See,

e.g., Gemini Phy>'ical Therapy & Rehab., Inc. v. State Farm Mut. Auto. Ins. Co., 40 F.3d 63,67
(3d Cir. 1994 ); Harris v. Lumberman's Mut. Cas. Co., 409 F. Supp. 2d 618, 620-21 (E.D. Pa.
2006); Seas or v. Liberty Mut. Ins. Co., 941 F. Supp. 488, 493 (E.D. Pa. 1996); Bennett v. State

Farm Fire & Cas. Ins. Co., 890 F. Supp. 440, 443 (E.D. Pa. 1995). P1aintiffmay not pursue a
bad faith claim under§ 8371 based upon the assertion that the PROs selected by Defendant

improperly denied first-party benefits.
Courts have held, however, that plaintiffs may pursue a bad faith claim under§ 8371 to
the extent that the claim is based on the insurer "not having properly followed or invoked the
statutory procedure" governing PROs, namely,§ 1797. Panameno v. Stale Farm Mut. Auto. Ins.

Co., No. 99-1490, 1999 WL 320916, at 'I (E.D. Pa. May 19, 1999) (quoting Schwartz, 1996 WL
189839, at '4); see Harris, 409 F. Supp. 2d at 621 n.4; Champlost Family Med Practice v. Stale

Farm Ins., No. 02-3607,2002 WL 31424398, at '2 (E.IJ. Pa. Oct. 29, 2002). In other words, a
§ 8371 claim is not barred if the insurance company's alleged bad faith conduct went beyond the
scope of§ 1797. For example, a plaintiff may allege that there was an abuse of the peer review
process itself. Schwartz, 1996 WL 189839, at *4.
In the instant case, Plaintiff does not merely bring a cause of action for denial of benefits

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under § 1797. She also alleges that Defendant improperly used a "sham peer review process and
PRO reports that are based upon relatedness and causation to the accident." (Compl.

~

55(r).)

Moreover, Plaintiti alleges that Defendant failed to employ PROs that had fair and impartial
physicians authoring the reports. (Id.

at~

55( d), (n).) Although Plaintiff does not offer detailed

allegations supporting the deficiency of the peer review process, she has alleged sufficient facts
to withstand a motion to dismiss. See Bacstrom v. State J<Qrm Ins. Co., No. 97-219, 1998 WL
1108423, a1 *6 (Pa. Com. Pl. Jau 26, 1998) (denying preliminary objections where plaintiff
alleged that PRO was a sham and a captive reviewer with a financial interest in providing biased
reviews); Schwartz, 1996 WL 189839, at "'4 (denying motion to dismiss where plaintiff alleged
that PRO was improperly opining on causation, rather than the appropriateness of treatment).
We will, therefore, permit Plaintiff to proceed with her bad faith claim in Count II to the extent
that she alleges an abuse or misuse of the peer review process.

B.

Punitive Damages

Defendant argues that Plaintiffs claim for punitive damages in Count I, which is entitled
"Contract," must be dismissed because punitive damages are not recoverable in an action for
breach of contract. Count I does not specifically allege punitive damages. Defendant raises this
issue because Count I incorporates earlier paragraphs in the Complaint that do allege punitive
damages. (See Compl.

~~53-54.)

As a general rule, under Pennsylvania law, a plaintiff may not recover punitive damages
for a breach of contract. See McShea v. City of Philadelphia, 995 A.2d 334, 340 n.5 (Pa. 2010).
Even though Count I of Plaintiff's Complaint is entitled "Contract," the Court does not assert a
common law contract claim. Rather Plaintiff requests relief based upon§ 1797(b), which is the
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statutory framework regulating the use of PROs. (Campi.

~

15.) Section 1797(b) specilically

identifies the nature of damages a court may impose against an insurer. Section 1797(b) does not
authorize punitive damages. Plaintiff concedes in her Response that she cannot recover punitive
damages under§ 1797(b). (Pl.'s Resp. 10, ECF No.7.) Rather, she argues that§ 1797(h)
permits a court to award treble damages. Defendant's Motion does not seck dismissal of a claim

for treble damages.

C.

Emotional Stress Damages

Plaintiff alleges that she suffered serious emotional distress because her bills were not
paid by Defendant. (Compl. 'jj21.) Plaintiff does not seek recovery for either negligent or
intentional infliction of emotional distress as a separate cause of action. (Pl.'s Resp. 10-11.)

However, Count II of the Complaint, which asserts the statutory bad faith claim under§ 8371,
incorporates by reference all of the preceding paragraphs. Defendant argues that Plaintiff's
§ 8371 claim must be dismissed to the extent that it seeks to recover emotional distress damages.
We agree with Defendant that the express terms of the statute bar a recovery for Plaintiff's
emotional distress. See DuffY v. Nalionwide Mut. Ins. Co., No. 93-1474, 1993 U.S. Dist. LEXIS
16197, at '9-10 (E.D. Pa. Nov. 10, 1993) (linding that emotional distress damages are not

recoverable under § 8371 ). The statute explicitly lists four remedies for bad faith. Plaintiff may
recover interest, punitive damages, costs, and attorneys' fees. 1 Accordingly, Plaintiff may not

1

Section 8371 provides in full:

In an action arising under an insurance policy, if the court finds that the insurer has
acted in bad faith toward the insured, the court may take all of the following actions:
{I) Award interest on the amount of the claim from the date the claim
was made by the insured in an amount equal to the prime rate of
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recover emotional distress damages under§ 8371.

D.

Unfair Insurance Practices Act

Plaintiff cites the Pennsylvania Unfair Insurance Practices Act (''UIPA"), 40 Pa. Cons.
Stat. § 117I.l et seq., in Count 11 ofthe Complaint. (Compl. ~ 67.) Plaintiffs prayer for reliefin
Count 11, however, relies only on Pennsylvania's bad faith statute, 42 Pa. Cons. Stat. Ann.
§ 8371. Defendant argues that Paragraph 67 should be stricken because violations of the UIPA
are irrelevant to the bad fuith inquiry. (Det: 's Br. 13-14.) Plainti!T responds that UIP A violations
are material in defining bad faith. (Pl.'s Resp. 11-12.)
The UIPA does not provide a private right of action. 1t can only be enforced by the state
insurance commissioner. Leach v. Northwestern Mut. Ins. Co., 262 F. App'x 455, 459 (3d Cir.
2008). There exists a split in the caselaw as to whether courts may consider alleged violations of
the UIPA as part of the bad faith analysis under§ 8371. To prevail on a bad faith claim under
§ 8371, a plaintiff must show (1) that the insurer lacked a reasonable basis for denying benelits,

and (2) that the insurer knew or recklessly disregarded its lack of reasonable basis. Klinger v.
State Farm Mut. Autu.lns. Co., 115 F.3d 230,233 (3d Cir. 1997) (recognizing that Terletsky v.
Prudential Property & Casualty Insurance Co., 649 A.2d 680 (Pa. Super. Ct. 1994), established
the test for§ 8371 causes of action). Notwithstanding this two-pronged test, the Superior Court
has determined that it is appropriate to consider the UIPA when evaluating an insurer's bad faith.
See. e.g., Brickman Grp., Ltd. v. CGU Ins. Co., 865 A.2d 918,930 (Pa. Super. Ct. 2004);

interest plus 3%.
(2) Award punitive damages against the insurer.
(3) Assess court costs and attorney fees against the insurer.

7

O'Donnell ex rei. Mitro v. Allstate Ins. Co., 734 A.2d 901,906 (Pa. Super. Ct. 1999); Romano v.
Nationwide Mut. Fire Ins. Co., 646 A.2d 1228, 1233 (Pa. Super. Ct. 1994). The justification for

this is that it is permissible to look to other statutes when attempting to determine the meaning of
"bad faith" because§ 837lleaves the term undefined. See Romano, 646 A.2d at 1232-33. As of

this time, the Supreme Court of Pennsylvania has not addressed the question of whether conduct
that violates the UIPA qualifies as bad faith for purposes of a § 8371 claim.

Sin{.;e Terletsky, courts in the circuit have not followed the Superior Court and have
refused to consider UIPA violations as evidence of bad faith. See Leach, 262 F. App'x at 459
("[T]nsofar as Leach's claim for bad faith was based upon an alleged violation of the UIPA, it
failed as a matter oflaw."); UPMC Health Sys. v. Metro. Life Ins. Co., 391 F.3d 497, 505-06 (3d

Cir. 2004) (applying Terletsky and finding that "UPMC cannot rest its bad faith claim on the
violations of the UIPA"); Dinner v. United Servs. Auto. Ass'n Cas. Ins. Co., 29 F. App'x 823,
827 (3d Cir. 2002) (finding that UIPA violations are irrelevant when evaluating claims under
§ 8371 ); Moss Signs, Inc. v. State Auto. Mut. Ins. Co., No. 08-164, 2008 WL 892032, al '5-6

(W .D. Pa. Apr. 2, 2008) (striking paragraphs that reference UIPA violations from the complaint);
Oehlmann v. Metro. Life Ins. Co., 644 F. Supp. 2d 521, 529-30 (M.D. Pa. 2007) (noting that

UIPA violation docs not establish bad faith per se); Connolly v. Reliastar Life Ins. Co., No. 035444,2006 WL 3355184, at '9 (E.D. Pa. Nov. 13, 2006) (finding that U!PA violations do not

have relevance to the question of whether insurer had reasonable basis for denying benefits). 2

2

The federal cases that did consider UIPA violations in defining bad faith under§ 8371
all predated Terletsky, which was decided in 1994. MacFarland v. U.S. Fid. & Guar. Co., 818 F.
Supp. 108, 110 (E. D. Pa. 1993); Rottmund v. Cont'l Assurance Co., 813 F. Supp. 1104, 1109
(E.D. Pa. 1992); Coyne v. Allstate Ins. Co., 771 F. Supp. 673,678 (E.D. Pa. 1991).
8

In Oehlmann, the Court provided three reasons for refusing to recognize alleged
violations of the UIPA as a basis for finding bad faith. See 644 F. Supp. 2d at 531. First, the
standard for evaluating bad faith is found in the definitive two-part test announced in Terletsky.
!d. Second, the UlPA is designed to be enforced by the insurance commissioner, and "it is not
our province to usurp the Commissioner's power in this regard by de facto regulation of the
insurance industry under the guise of section 8371." !d. Third, the UIPA regulates violations
that are sy:-)temic in the insurance industry. !d. The court found that regulations "designed for an
industry are inapposite to evaluating an individual episode of alleged bad faith." !d.
Wt: agree with Oehlmann and the federal courts that have rejected the argument that
UIPA violations can support a bad faith claim under§ 8371. Accordingly, the bad faith claim in
Count II of the Complaint based upon UIPA is dismissed.

IV.

CONCLUSION
For the foregoing reasons, Defendant's Motion will be granted in part and denied in part.
An appropriate Order follows.

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