Shaffer v. State Farm Mut. Auto. Ins. Co., No. 1:13-CV-01837, 2014 WL 5325340 (M.D. Pa. Oct. 20, 2014).

Court grants summary judgment to insurer where lengthy investigation was required to determine causation for UIM claim, despite insurer previously paying first-party benefits.

Barry Shaffer, a 45-year-old veteran who, due to his military service, suffered from a variety of physical ailments, was involved in a head-on automobile crash on September 5, 2008.  The other driver involved in the crash was primarily at fault.  The day after the accident, Shaffer reported the crash to State Farm Mutual Automobile Insurance Company.  Amongst other coverage, State Farm provided medical coverage and “stacked” UIM coverage.

State Farm approved Shaffer’s first-party medical coverage to cover ongoing, conservative medical treatment.  However, after approximately one year, Shaffer advised State Farm that he might require back surgery, and requested that State Farm inform him if he was close to exhausting his medical coverage.  After several more months, counsel for Shaffer and a State Farm claim representative discussed a potential UIM claim, which was the first time the parties discussed such an action. Shaffer’s counsel stated that he would inform State Farm if a UIM claim became necessary.  On December 10, 2010, after several months of silence, State Farm closed Shaffer's medical payments file.

Four months later, Shaffer’s counsel requested State Farm assign an uninsured motorist adjuster to the claim; State Farm then referred Shaffer’s claims to the UIM department.  Shaffer settled his claim against the other driver, and over the next several months, State Farm continued to investigate Shaffer’s medical condition.  The review included medical records both predating and postdating the motor vehicle accident and photographs of Shaffer's injuries.  In addition, State Farm requested additional documentation regarding Shaffer's health, including a vocational report and records to confirm that claimed medical problems were causally related to the accident.  After submitting these records, State Farm requested Shaffer’s statement under oath and more medical records (which Shaffer believed had already been provided).       

After almost another year of communications between the parties and some additional medical evidence, State Farm completed its evaluation of Shaffer’s claim.  The reviewing physician had found that only some of Shaffer’s medical conditions had been caused by the automobile crash.  On May 20, 2013, State Farm offered Shaffer $10,000 as settlement, which Shaffer rejected.  Shaffer procured a report opining that State Farm's delay in investigating and evaluating Shaffer's UIM claim failed to conform to industry standards.  Shaffer and his wife then filed suit in the Dauphin County Court of Common Pleas for bad faith and breach of contract.  The case was removed to the Middle District of Pennsylvania, and State Farm moved for summary judgment on the bad faith claim.

Despite the lengthy delay in investigation, the district court found for State Farm.  Noting that even in bad faith claims involving “a long period of time between demand and settlement,” the delay “does not, on its own, necessarily constitute bad faith.  Rather, a court should look to the degree to which a defendant insurer knew that it had no reason to deny the claim; if the delay is attributable to the need to investigate further or even simple negligence, no bad faith has occurred.” (citations omitted).  Here, the court reasoned, Shaffer failed to show that any delay in State Farm’s investigation and evaluation of Shaffer's UIM claim was motivated by self-interest or ill-will.  On the contrary, State Farm did not know of a possible UIM claim until May 5, 2010, when Shaffer’s counsel expressly discussed a potential UIM claim; even at that time, Shaffer did not definitively know whether such a claim would be necessary.  Further, based on medical evidence available at the time, State Farm reasonably believed that a UIM claim would not be required.  When it became clear that the UIM claim would, in fact, come into play, State Farm opened the file. The Court noted that the two years of investigation of the UIM claim was a long time -- but that “a long period of time does not, on its own, constitute bad faith, and Plaintiffs fail to present evidence suggesting obfuscation, dishonesty, or malice.”

Further, the court did not agree that State Farm acted in bad faith when it questioned the causal relationship between Shaffer’s injuries and the motor vehicle accident, merely because State Farm had not questioned causality in Shaffer's first party medical claim.  Reasoning that “payment of first party benefits does not, in and of itself, constitute an admission of causation,” the court held that that an insurer may deny UIM benefits after issuing payment of first party benefits, and that State Farm was entitled to investigate in the UIM claim whether Shaffer's injuries were caused by the motor vehicle accident even after they had issued payment on Shaffer's first party medical claim.

Finally, the district court noted that while the investigatory process “may not be flawless,” State Farm had proven that it conducted an investigation sufficiently thorough to yield a reasonable foundation for its action.  Indeed, the court noted that if State Farm had not taken the steps of collecting Shaffer's medical records, obtaining Shaffer's statement under oath, or arranging for a review of Shaffer's medical records by an orthopedic surgeon, all of which took time to complete, State Farm would not have had the information it needed to conduct a thorough evaluation of Shaffer's claim -- and would have had a far less defensible position when faced with a claim of bad faith.