EMPIRE FIRE MARINE INSURANCE COMPANY v. JONES

Mr. Drumheiser's attorney defined this relationship as follows: "Most of the time there would be no problem between Kalman, Drumheiser, and Jones because each agreed to the arrangement and understood that Drumheiser worked primarily for Kalman and that Drumheiser would be loaned to Jones as Kalman's needs permitted and as Jones needs suggested." Mr. Drumheiser's attorney argues that Mr. Drumheiser only worked for Mr. Jones when Mr. Kalman permitted. (Doc. 40, p. 18).

for him (Jones). (Doc. 40, p. 23).

On the day of accident, Mr. Drumheiser called Mr. Kalman and told him that he made arrangements to work for Mr. Jones in the morning and that he would work for Mr. Kalman in the afternoon. (Doc. 32, Mr. Kalman Dep., p. 26). On that day, Mr. Jones picked up Mr. Drumheiser at Drumheiser's home at around 6:15AM. (Doc. 32, Drumheiser Dep., p. 114). The two began hauling trash at 7AM, and the accident occurred at around 11AM. (Doc. 32, Drumheiser Dep., pp. 115-16).

The parties dispute whether Mr. Kalman "loaned" Mr. Drumheiser to Mr. Jones for the purpose of assisting Mr. Jones with his trash hauling service for the days Drumheiser worked for Jones. In Mr. Mr. Kalman's deposition, he stated:

"Well, Jonesy (Mr. Jones) said to me, look, I'm strapped for a helper because I know that's the way Jonesy was sort of doing it, it just seemed like he couldn't hold a helper. And then he said to me, he was really disgusted, I said listen, I'll loan you Buttons but I want him back. I mean it was just a figure of speech. I mean I had no control over Buttons but I just said I'll loan you Buttons but I want him back but like in a kidding way and Buttons came every day."

(Doc. 32, Kalman Dep., p. 37) (emphasis added).

While Mr. Kalman admitted that he was Mr. Drumheiser's primary employer (Doc. 32, Mr. Kalman Dep., p. 13), he also admitted that he had no "right or authority to prevent him (Drumheiser) from working with anyone." (Doc. 32, Mr. Kalman Dep., p. 13).

We consider the above facts in discussing whether the Court should grant Empire's Motion for Summary Judgment or whether the Court should grant Mr. Drumheiser's cross-Motion for Summary Judgment.

Summary judgment is appropriate when: (1) there are no material facts in dispute; and (2) one party is entitled to judgment as a matter of law. See Int'l Union, United Mine Workers of Am. v. Racho Trucking Co., 897 F.2d 1248, 1252 (3d Cir. 1990) (citing Fed.R.Civ.Pro. 56(c)). A district court may properly grant a motion for summary judgment when "the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). An issue is genuine "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). "Material facts" are those which might affect the outcome of the suit. Id.; Justofin v. Metropolitan Life Ins. Co., 372 F.3d 51 7, 521 (3d Cir. 2004).

Regardless of who bears the burden of persuasion at trial, the party moving for summary judgment has the burden to show an absence of genuine issues of material fact. Aman v. Cort Furniture Rental Corp., 85 F.3d 1074, 1080 (3d Cir. 1996) (citations omitted). To meet this burden when the moving party does not bear the burden of persuasion at trial, the moving party must show "`that the evidentiary materials of record, if reduced to admissible evidence, would be insufficient to carry the nonmovant's burden of proof at trial.'" Jalil v. Avdel Corp., 873 F.2d 701, 706 (3d Cir. 1989) (quoting Chippolini v. Spencer Gifts, Inc., 814 F.2d 893, 896 (3d. Cir. 1987)); see Celotex Corp. v. Catrett, 477 U.S. 31 7, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Thus, a party moving for summary judgment who does not bear the burden of persuasion at trial is not required to negate the nonmovant's claim, but only point out a lack of evidence sufficient to support the nonmovant's claim. Country Floors, Inc. v. Partnership Composed of Gepner and Ford, 930 F.2d 1056, 1061 (3d Cir. 1991).

Once the moving party meets its burden of showing an absence of genuine issues of material fact, the nonmoving party must provide some evidence that an issue of material fact remains. Matushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). The nonmoving party, however, cannot do so by merely offering general denials, vague allegations, or conclusory statements; rather, the party must point to specific evidence in the record that creates a genuine issue as to a material fact. Celotex, 477 U.S. at 32; Ridgewood Bd. of Educ. v. N.E. ex rel. M.E., 172 F.3d 238, 252 (3d Cir. 1999).

1. Declaratory Judgment

As stated, this action was filed by Empire against Jones and Drumheiser under the federal Declaratory Judgment Act, 28 U.S.C. § 2201, et seq., in order to decide a question in actual controversy between the parties, namely whether Empire's policy provides liability coverage to Drumheiser. The Declaratory Judgment Act provides this Court with the discretionary authority to grant declaratory relief. See State Auto Ins. Co. v. Summy, 234 F.3d 131, 133 (3d Cir. 2000). As Empire states (Doc. 29, p. 9), this Court has diversity jurisdiction pursuant to 28 U.S.C. § 1332.

In making an insurance policy coverage determination, the court must initially decide the scope of the insurance coverage and then review the allegations raised in the pleading to see if they would fall within the scope of the policy if proven. See Britamco Underwriters, Inc. v. Grzeskiewicz, 433 Pa. Super. 55, 59, 639 A. 2d 1208 (1994) (citation omitted). Further, under Pennsylvania law, the interpretation of an insurance contract is a question of law for the court to decide. See Reliance Ins. Co. v. Moessner, 121 F.3d 895, 900 (3d Cir. 1997) (citation omitted).

The Court in USX Corp. stated:

[I]n Pennsylvania a court construes ambiguities in an insurance policy strictly against the insurer. See, e.g., Seiko v. Home Ins. Co., 139 F.3d 145, 152 n. 3 (3d Cir. 1998) ( citing Standard Venetian Blind Co. v. Am. Empire Ins. Co., 503 Pa. 300, 469 A.2d 563, 566 (Pa. 1983)). Nevertheless, in Pennsylvania, and no doubt elsewhere, "[c]lear policy language . . . is to be given effect, and courts should not torture the language to create ambiguities but should read the policy provisions to avoid it." Selko, 139 F.3d at 152 n. 3 (internal citations and quotation marks omitted). In construing policy language, courts should consider any special usage "[w]here terms are used in a contract which are known and understood by a particular class of persons in a certain special or peculiar sense [.]" Sunbeam Corp. v. Liberty Mut. Ins. Co., 566 Pa. 494, 781 A.2d 1189, 1193 (Pa. 2001)."

In Hollingsworth v. State Farm Fire Cas. Co., 2005 WL 543414 (E.D. Pa.), the Court stated as follows:

Under Pennsylvania law, interpretation of a policy exclusion is a question of law for the court. Allstate Ins. Co. v. Davis, 977 F.Supp. 705, 711 (E.D. Pa. 1997), and "the goal . . . is to ascertain the intent of the parties as manifested by the language of the written instrument." Standard Venetian Blind Co. v. Am. Empire Ins. Co., 503 Pa. 300, 469 A.2d 563, 566 (Pa. 1983). A court is required to give effect to a policy exclusion if the exclusion is clearly worded and conspicuously displayed in the policy. Giangreco v. United States Life Ins. Co., 168 F. Supp.2d 41 7, 421 (E.D. Pa 2001). However, ambiguous policy exclusions are "always strictly construed against the insurer and in favor of the insured." Nationwide Mut. Ins. Co. v. Cosenza, 258 F.3d 197, 206-07 (3d Cir. 2001) (citing Selko v. Home Ins. Co., 139 F.3d 146, 152 n. 3 (3d Cir. 1998)). A policy exclusion is ambiguous if "reasonably intelligent [persons] on considering it in the context of the entire policy would honestly differ as to its meaning, and if more precise language could have eliminated the ambiguity." Corgis Ins. Co. v. Larocca, 80 F.Supp.2d 452, 455 (E.D. Pa. 1999) (internal citations omitted). The insurer bears the burden of establishing the applicability of an exclusion under an insurance policy. Cosenza, 258 F.3d at 206.

The initial burden of establishing coverage under an insurance policy rests with the insured. Id. at n. 1 (citation omitted).

As discussed above, the parties do not dispute that Mr. Drumheiser falls under the "Employee exclusion" of the Empire policy if his status does not fit the policy's "Temporary worker" definition. Thus, the issue here iswhether Mr. Drumheiser constitutes a "Temporary worker" under the policy, or at least, whether the policy's "Temporary worker" definition is sufficiently ambiguous for the Court to render declaratory judgment in favor of Mr. Drumheiser pursuant to Pennsylvania contract law. See Coppola v. Insurance Placement Facility of Pennsylvania, 563 A.2d 134, 136 (Pa. Super. 1989) ("While any ambiguities in an insurance contract will be resolved in favor of the insured, a court is required to give effect to clear unambiguous language"). If the Court finds that Drumheiser fits the "Temporary worker" definition, then the insurance policy's liability coverage applies to Mr. Jones in the event that Mr. Drumheiser sues Jones for damages. If the Court finds that the "Temporary worker" definition of the policy is unambiguous, and that Mr. Drumheiser

does not fit the definition, then the insurance policy's liability coverage does not apply to Mr. Jones in the event that Drumheiser sues Jones for damages.

We begin our analysis by looking at the definition of "Temporary worker" under Empire's insurance policy. The policy states:

O. "Temporary worker" means a person who is furnished to you to substitute for a permanent "employee" on leave or to meet seasonal or short-term workload conditions.

(Doc. 28, Ex. A, p. 47).

An insurance company bears the burden of proving the applicability of an exclusion to its coverage. See Erie Exchange v. Muff, 851 A.2d 919 (Pa. Super. 2004) ("An insurer who disclaims its duty to defend based on a policy exclusion bears the burden of proving the applicability of the exclusion." quoting Board of Public Education of School District of Pittsburgh v. National Union Fire Ins. Co. of Pittsburgh, 709 A.2d 910, 913 (Pa.Super. 1998) appeal denied, 556 Pa. 669, 727 A.2d (PA. 1998) (internal citations omitted). In an insurance contract, an exclusion provision's applicability depends on whether the provision's language is ambiguous. See Coppola v. Insurance Placement Facility of Pa., 563 A.2d 134,136 (Pa.Super. 1989). Where language is ambiguous, such provisions are to be interpreted in the insured's favor. Id. However, where an exclusion's language is clear and unambiguous, courts are required to give effect to such provisions "irrespective of whether the insured read the limitations or understood their import." Pacific Indem. Co. v. Linn, 766 F.2d 754, 760 (3d Cir. 1985) citing Standard Venetian Blind Co. v. Am. Empire Ins. Co., 469 A.2d 563, 557 (Pa. 1983).

Whether an insurance contract's provision is ambiguous is a question of law. See Aetna Cas. and Sur. Co. v. Roe, 650 A.2d 94, 98 (1994). As such, it may be resolved in a declaratory judgment action. Id. The Court in Neuhard v. Traveler's Ins. Co., 831 A.2d 602, 605 (Pa. Super. 2003), outlined considerations courts should employ in determining whether an insurance contract's provision is ambiguous. See Neuhard, 831 A.2d at 602. The Neuhard Court stated:

Contractual language is ambiguous if it is reasonably susceptible of different constructions and capable of being understood in more than one sense. This is not a question to be resolved in a vacuum. Rather, contractual terms are ambiguous if they are subject to more than one reasonable interpretation when applied to a particular set of facts. We will not, however, distort the meaning of the language or resort to a strained contrivance in order to find an ambiguity. The polestar of our inquiry, therefore, is the language of the insurance policy.

Additionally, an ambiguity does not exist simply because the parties disagree on the proper construction to be given a particular policy provision. Tyler v. Motorists Mutual Ins. Co. 779 A.2d 528, 531 (Pa. Super. 2001). "Courts should read policy provisions to avoid ambiguity if possible." Id.

Lastly, "[e]ven if a term is not defined in an insurance policy, a term is not ambiguous where it possesses a clear legal or common meaning that may be supplied by the court." Nautilus Insurance Co. v. Gardner, 2005 WL 664358 (E.D. Pa.) citing City of Erie v. Guar. Nat'l Co., 109 F.3d 156, 163 (3d. Cir. 1997).

Applying the above rules, we must consider whether the "Temporary worker" definition under Empire's policy is sufficiently ambiguous to construe the provision in Mr. Drumheiser's favor. See Coppola 563 A.2d at 136. More specifically, we must determine if it is ambiguous whether Mr. Drumheiser was "furnished to [Mr. Jones] to substitute for a permanent employee on leave or to meet seasonal or short-term workload conditions." (Doc. 28, Ex. A, p. 47).

In this case, there is no evidence that Mr. Drumheiser was a "substitute for a permanent `employee' on leave." Therefore, we find no ambiguity as to whether Mr. Drumheiser fits the "substitute" portion of the exclusion provision. Accordingly, we must determine if an ambiguity exists as to whether Mr. Drumheiser was "furnished [to Mr. Jones] to meet seasonal or short-term workload conditions." While we find it arguable that Mr. Drumheiser worked only to satisfy "short-term workload conditions," as he served Mr. Jones only on days when workload conditions were heavy, we cannot conclude that ambiguity exists as to whether Mr. Kalman "furnished" Drumheiser to Mr. Jones. As such, we will recommend that Empire's Motion for Summary Judgment be granted and that Mr. Drumheiser's cross-Motion for Summary Judgment be denied.

Though the Pennsylvania state courts have yet to speak on whether "furnish" in the present context is an ambiguous term, we agree with the District Court in Nautilus Ins. Co. v. Gardner, 2005 WL 664358 (E.D. Pa.), and predict that the Pennsylvania Supreme Court would hold that "furnish" is not an ambiguous term as it pertains to the "Temporary worker" definition in Empire's policy. See Nautilus Ins. Co., 2005 WL 664358 (E.D. Pa) ("[We] predict that the Pennsylvania Supreme Court would hold that the term `furnished to you' in the instant insurance policy is not ambiguous under Pennsylvania law."). The District Court in Nautilus Ins. Co., had to interpret a liability coverage policy similar to the one presented in this case. In Nautilus, the employer, William Gardner who operated a Halloween spook house during October, had liability insurance. As in our case, "Bodily injury" to an "employee" was excluded from coverage. A female employee of Gardner's sued Gardner and sought to indemnify Nautilus after being sexually assaulted by another one of Gardner's employees. Under Gardner's policy, which the Nautilus Insurance Company provided, an employee, as in our case, was defined to include a "leased worker" but it excluded a "temporary worker." The "Temporary worker" definition at issue in Nautilus is the same definition at issue in our case, namely, "a person who is furnished to you to substitute for a permanent `employee' on leave or to meet seasonal or short term workload conditions." The issue in Nautilus, like the issue here, was whether the female employee constituted a "Temporary worker" under the Nautilus policy. More specifically, the Court was asked whether the term "furnished to you" was ambiguous to construe in favor of the insured, Gardner. In holding that the term "furnished to you" was not ambiguous, the Court stated:

It is clear that to be "furnished," something or someone must be supplied, provided, or equipped to another entity or person. Thus, the phrase `furnished to you,' when read together with the entire sentence, refers to a person supplied, provided, or equipped to the insured to substitute for a permanent employee or to engage in seasonal or short term work.

Because the female employee in Nautilus was not supplied to Gardner, the Courtfound that she did not constitute a "Temporary worker."

Furthermore, Black's Law Dictionary defines "furnish" as "to supply, provide, or equip, for accomplishment of a particular purpose." In Gradler v. Prudential Prop. Cas. Ins. Co., 464 F.Supp. 575, the District Court in Western District of Pennsylvania applied the Black's Law Dictionary definition of "furnish" when it held that a vehicle was furnished to plaintiff for purposes of liability coverage. See Gradler, 464 F.Supp. at 578-79. Thus, based on the above discussion, we find that "to furnish" requires that someone or something be supplied or provided to accomplish a specific purpose.

Applying the above discussed rationale to Drumheiser's status, we find that Drumheiser was not "furnished" to Mr. Jones. We also find that there exists no ambiguity on the question of whether Drumheiser was "furnished" to Mr. Jones by Mr. Kalman. While Mr. Kalman admits that he was Drumheiser's "primary employer," and that he recommended Drumheiser to work for Mr. Jones, it does not follow that Mr. Kalman supplied or provided Drumheiser to Mr. Jones.

Mr. Drumheiser's counsel asserts that Mr. Kalman "furnished" Drumheiser to Mr. Jones because Drumheiser would, from time to time, call and inform Mr. Kalman on the days that he would work for Jones. (See Doc. 32, Ex. 3, Mr. Kalman Dep., p. 21). Mr. Drumheiser's counsel contends that because Drumheiser would call Mr. Kalman, it follows that Drumheiser had to ask Kalman for permission before working for Mr. Jones. Thus, Mr. Drumheiser's counsel argues that Mr. Kalman had the discretion to decide when and for whom Mr. Drumheiser worked. Therefore, Drumehesier's counsel asserts that Mr. Kalman supplied or furnished Mr. Drumheiser to Mr. Jones.

We disagree with the reasoning of Mr. Drumheiser's counsel. We find that, according to the evidence, Mr. Kalman felt he had first priority to Drumheiser's services because Drumheiser had been working for Kalman prior to working for Mr. Jones. As Mr. Kalman's deposition indicates, he (Mr. Kalman) was "primarily concerned about [Drumheiser] not being available to help [him, Mr. Kalman] and that's why [Mr. Kalman] was concerned about [Drumheiser] working for other people." (Doc. 32, Ex. 3, Mr. Kalman Dep., p. 25). We find that the other people for whom Drumheiser also worked understood and acknowledged Mr. Kalman's feeling that he had first priority to Drumheiser's services, which is why Mr. Jones would only use Drumheiser a few times per week and only in the mornings so as not to conflict with Kalman's schedule. Based on his own admission, Mr. Kalman had no authority and control with respect to when and for whom Mr. Drumheiser worked. Specifically, Mr. Kalman testified as follows:

Q. Mr. Kalman, did you — you mentioned you had no written contract with Mr. Drumheiser; is that correct?

A. No, I never had a written contract.

Q. Okay. So he could have worked for anybody he wanted to; right?

A. Yes.

Q. You didn't have any right or authority to prevent him from working with anyone; did you?

A. No, I didn't have any right or authority but he — I think it was an honesty basis because I did give him the majority of the work, so as a result I said to him, you know, I just want you to stay with me, yeah.

Q. Yeah. You feel he had some allegiance to you?

A. I felt that loyalty, yeah.

Q. But certainly no — you had no right to withhold work from him?

A. No, I had no right, no.

Q. And if he wanted to work for Mr. Jones he could do so and he did often; right?

A. Yes.

Q. And when he wanted to work for some of the other people that you mentioned, you said that he worked with a number of people, he could do that?

A. Well, I said that wrong, he worked for a few people and it was just — he was faithful to them as far as grass cutting was concerned, that's as much as I know about that, and he could do that without —.

Q. Without interfering with your work?

A. Right.

Q. You were primarily concerned about him not being available to help you and that's why you were concerned about him working for other people?

A. Yes.

Q. Okay. Did you talk to other people — did you make arrangements with other people for Mr. Drumheiser to work for them or is that something Mr. Drumheiser worked out himself with other people?

A. No, that's just something he did on his own.

Q. Okay. So he would occasionally call you and say I'm going to work for so and so, is that okay?

A. No, he never called me and told me. I just knew that he did that. He would mention that to me in conversation. I didn't job him out to those other people, he did that on his own.

Q. Well, you said that he would call you, did I misunderstand you, he would call you and say he was going to work for somebody today — that Mr. Drumheiser would call you and say I'm going to work for Mr. Jones today, is that okay? Is that what he would do?

A. No, he called me that — the day that he was injured, after this conversation with Jones and said he's going to be working for Jones that day because we had brush scheduled.

Q. Yes.

A. He wouldn't call me every day, but he called me that day and told me that. And I did make it clear to Jones that, you know, you can use him but when I need him I need him, you know, and I didn't have anything in writing to that effect, no.

Q. Okay. So Mr. Drumheiser called you the day of the accident and told you he was going to work for Mr. Jones and you said that was okay?

A. Yes.

Q. But on days before that day he wouldn't necessarily call you and tell you he was going to be working for somebody else; did he?

A. No.

Q. He would just go to work for whomever and then whenever — would he call you and tell you he was available or —?

A. No, he would just show up — he would just show up for work. He showed up for work even every day when he was working with Mr. Jones.

Q. Okay. How about the other people, did he show for work when he would work for other people?

(Doc. 32, Ex. 3, Mr. Kalman Depo., pp. 23-27).

Thus, we find that Mr. Kalman did not supply or furnish Drumheiser to Mr. Jones. Mr. Kalman merely recommended Drumheiser to Jones with the understanding that Drumheiser would, in good faith, continue to do work for Kalman, and that Jones would not interfere with this relationship. Again, this is precisely why Drumheiser would only work for Jones a couple of hours in the morning, one or two days per week. (Doc. 32, Ex. 1, Drumheiser Dep., pp. 27-28).

Accordingly, we find no ambiguity concerning the question of whether Mr. Drumheiser fits the "Temporary worker" definition under Empire's policy. We find that Drumheiser clearly was not a "temporary worker" under the policy. Thus, we find that Mr. Drumheiser was an "employee" of Mr. Jones as defined in Empire's policy, and that his accident is excluded from Empire's liability coverage owed to Mr. Jones. We will recommend that Empire's Motion for Summary Judgment (Doc. 28) be granted and that Mr. Drumheiser's cross-Motion for Summary Judgment (Doc. 38) be denied.

2. Breach of Contract

Mr. Drumheiser also claims that Empire is in breach of contract for its failure to provide liability coverage to him following the August 19, 2008 accident. (Doc. 10, p. 9). Under Pennsylvania law, a breach of contract action requires: 1) the existence of a contract; 2) a breach of a duty imposed by the contract; and 3) damages. See Sullivan v. Chartwell Inv. Partners, LP, 873 A.2d, 710, 716 (Pa.Super. 2005) citing J.F. Walker Co. v. Excalibur Oil Group, Inc., 792 A.2d 1269 (Pa. Super. 2002). As discussed above, Mr. Drumheiser is not a party to the insurance contract between Mr. Jones and Empire. Because Mr. Drumheiser is not a party to the contract, there is no contract between Drumheiser and Empire. As such, Drumheiser may not sue Empire for breach of contract because the first stated element, i.e., the "existence of a contract," is not satisfied. See Sullivan, 873 A.2d at 716.

Drumheiser argues that he is entitled to "liability coverage benefits" under Empire's contract with Mr. Jones. He asserts that he is an "insured" pursuant to the Empire insurance policy. We find that Mr. Drumheiser confuses what it means to be an "insured" with "liability coverage benefits." We find that the policy provides that Drumheiser would be an "insured" if he were sued for injuring a person or property while he was working for Mr. Jones. We do not find that the policy provides that Drumheiser is entitled to recover from Empire in the event he is injured while working for Mr. Jones. In order for Mr. Drumheiser to establish that he is entitled to coverage under the Empire policy, he must first succeed with respect to third party tort liability against Mr. Jones. Mr. Drumheiser has not yet succeeded with such tort liability against Mr. Jones. Thus, we find that Mr. Drumheiser has no contract claim against Empire.

Accordingly, we will recommend that Empire's Motion for Summary Judgment with respect to Mr. Drumheiser's breach of contract claim be granted.

3. Bad Faith Claim

Mr. Drumheiser asserts a Pennsylvania bad faith claim against Empire under 42 Pa. C.S.A. § 8371. First, Mr. Drumheiser contends that Empire is liable for bad faith under § 8371 for its refusal to pay first party benefits to him. Second, Mr. Drumheiser contends that Empire violated the § 8371 bad faith provision when it denied him "liability coverage benefits" without adequately investigating whether he was a "Temporary worker" under the Empire policy.

In the case of Krisa v. Equitable Life, 113 F. Supp. 2d 694, 702-703 (M.D. Pa. 2000), the Court discussed a bad faith claim under Pennsylvania law. The Krisa Court stated as follows:

The standard for assessing insurer bad faith under §§ 8371 was recently restated in Keefe v. Prudential Property and Casualty Ins. Co., 203 F.3d 218, 225 (3d Cir. 2000): [T]he term bad faith includes `any frivolous or unfounded refusal to pay proceeds of a policy.' `For purposes of an action against an insurer for failure to pay a claim, such conduct imparts a dishonest purpose and means a breach of a known duty ( i.e., good faith and fair dealing), through some motive of self interest or ill will; mere negligence or bad judgment is not bad faith.' Therefore, in order to recover under a bad faith claim, a plaintiff must show (1) that the defendant did not have a reasonable basis for denying benefits under the policy; and (2) that the defendant knew or recklessly disregarded its lack of reasonable basis in denying the claim. These two elements — absence of a reasonable basis for denying a claim under the policy and knowledge or reckless disregard of the lack of such reasonable basis — must be proven by clear and convincing evidence. Klinger v. State Farm Mut. Auto. Ins. Co., 115 F.3d 230, 233 (3d Cir. 1997). Because "the determination of whether a given factual dispute requires submission to a jury must be guided by the substantive evidentiary standards that apply to the case," Anderson, 477 U.S. at 254-55, 106 S.Ct. 2505, a proponent of a bad faith claim "must present sufficient evidence such that, if believed, a jury could find bad faith under the clear and convincing standard." Greco v. The Paul Revere Life Ins. Co., No. Civ.A. 97-6317, 1999 WL 95717, *3, (E.D.Pa., Feb. 12, 1999).

In Pennsylvania, the good faith standard requires the insurance company to evaluate the case in an "honest, intelligent and objective" manner. U.S. Fire Ins. Co. v. Royal Ins. Co., 759 F. 2d 306, 311 (3d Cir. 1985) (citation omitted). In Krisa, 113 F. Supp. 2d 704, the Court noted that "the case law uniformly assesses bad faith in the context of the terms of the insurance policies and the nature of the investigation undertaken by the insurance company. Thus, even where a court has concluded that an insurance company was obligated under its contract to pay benefits, summary judgment has been entered in favor of the insured on a bad faith claim. See, e.g., Kearns v. Minnesota Mutual Life Ins. Co., 75 F.Supp.2d 413, 421 (E.D.Pa. 1999); Lieberson v. Chubb Life Ins. Co., No. Civ.A. 97-5716, 1998 WL 404537, *2 (E.D.Pa., July 14, 1998)."

The Krisa Court quoted Cantor v. Equitable Life Assurance Soc'y, 1999 WL 219786, *3 (E.D. Pa. 1999), which stated that "for an insurance company to show that it had a reasonable basis, an insurance company is not required to demonstrate its investigation yielded the correct conclusion or even that its conclusion more likely than not was accurate. The insurance company also is not required to show the process by which it reached its conclusion was flawless or that the investigatory methods it employed eliminated possibilities at odds with its conclusion. Rather an insurance company simply must show it conducted a review or investigation sufficiently thorough to yield a reasonable foundation for its action. Id. (Emphasis added).

In NIA Learning Center, Inc. v. Empire Fire and Marine Ins. Companies, 2009 WL 3245424, * 11 (E.D.Pa.), the Court stated:

Federal courts in Pennsylvania generally recognize that a contractual bad faith claim and a statutory bad faith claim are entirely separate causes of action. See DeWalt v. Ohio Cas. Ins. Co., 513 F.Supp.2d 287, 291 (E.D.Pa. 2007) ("Bad faith by an insurance company can give rise to two separate causes of action under Pennsylvania law: a breach of contract action for violation of an insurance contract's implied duty of good faith and a statutory action under the terms of Pennsylvania's bad faith law, 42 Pa.C.S. § 8371."); Schubert v. Am. Indep. Ins. Co., 2003 WL 21466915, at *4 (E.D.Pa. 2003) ("[T]here is a consensus among both federal and state Courts that § 8371 creates an independent cause of action.").

The Court in Collins v. Allstate Ins. Co., 2010 WL 2510376, *6 (E.D. Pa.), recently decided a similar case to ours, and found that Courts have defined Pennsylvania's bad faith statute, 42 Pa. C. S.A. § 8371, as "any frivolous or unfounded refusal to pay the proceeds of a policy." Terletsky v. Prudential Prop. Cas. Ins. Co., 437 Pa. Super. 108, 649 A.2d 680, 688 (Pa. Super. Ct. 1994) (quoting Black's Law Dictionary 139 (6th ed. 1990). The Collins Court stated:

To succeed on a claim of bad faith, a plaintiff must present "clear and convincing evidence that `the insurer did not have a reasonable basis for denying benefits under the policy and that the insurer knew of or recklessly disregarded its lack of reasonable basis in denying the claim.'" O'Donnell v. Allstate Ins. Co., 734 A.2d 901, 906 (Pa.Super.Ct. 1999) (quoting MGA Ins. Co. v. Bakos, 699 A.2d 751, 754 (Pa.Super.Ct. 1997)) (emphasis added). It is a two-pronged test. Where a reasonable basis to deny the claim exists, the insurer will not be held to have acted in bad faith. Horowitz v. Federal Kemper Life Assurance Co., 57 F.3d 300, 307-308 (3d Cir. 1995) (Pennsylvania law). An insurer will be held to have acted in bad faith, however, if it fails to "`accord the interest of its insured the same faithful consideration it gives its own interest.'" [citations omitted]

Further, the Court in DeWalt v. Ohio Cas. Ins. Co., 513 F. Supp.2d 287, 296-97 (E.D. Pa. 2007), stated:

Under Cowden, an insurer "must accord its insured the same faithful consideration it gives its own interest." Id., 134 A.2d at 228 . . . Cowden is unclear whether negligence on the part of an insurer is enough to create a bad faith claim, or whether a higher showing of recklessness or intentionality is required. There are several suggestions in the opinion that negligence can constitute bad faith . . . In addition, in its review of other jurisdictions' decisions on bad faith, the Cowden court noted that "almost all the authorities are agreed that an insured may recover from his insurer, regardless of policy limitations, on the ground of negligence, bad faith or fraud in the insurer's conduct in respect of its responsibility." Id. at 237. Elsewhere in the opinion, however, the Cowden court appears to say that "bad faith" requires something more than mere negligence, stating that "bad faith and bad faith alone was the requisite to render the defendant liable" and that "bad judgment, if alleged, would not have been actionable." Id. at 229 (emphasis in original).

Given the distinction Cowden makes between actionable "bad faith" and mere "bad judgment," Cowden appears to be requiring something more than negligence for a finding of bad faith. Subsequent Pennsylvania Supreme Court decisions, however, have stated in dicta that negligence or unreasonableness in investigating a claim or refusing an offer of settlement can constitute bad faith. See Gedeon v. State Farm Mut. Auto. Ins. Co., 410 Pa. 55, 188 A.2d 320, 322 (1963) (An insurer undertaking the defense of an insured must act "with due care in representing the interests of the insured" and if it "is derelict in this duty, as where it negligently investigates the claim or unreasonably refuses an offer of settlement, it may be liable regardless of the limits of the policy for the entire amount of the judgment secured against the insured."); Gray, 223 A.2d at 9-10 (same).

The United States Court of Appeals for the Third Circuit has also described the bad faith standard under Cowden as negligence: "Pennsylvania law makes clear that an insurer may be liable [for bad faith] . . . if it unreasonably refuses an offer of settlement." Haugh, 322 F.3d at 237 (internal quotations and citations omitted); see also Schubert, 2003 WL 21466915 at *4 (denying summary judgment on a bad faith contract claim where the evidence permitted a jury to find that the insurance company had acted unreasonably in declining a settlementoffer); Clark v. Interstate National Corp., 486 F.Supp. 145, 146-49 (E.D.Pa. 1980) (finding no error in a jury charge permitting the imposition of bad faith liability if the jury found negligence), aff'd without op., 636 F.2d 1207 (3d Cir. 1980). Given the Haugh decision, the Court concludes that the controlling interpretation of Cowden in this circuit is that a contract claim for bad faith requires evidence that an insurer acted negligently or unreasonably in handling the potential settlement of claims against its insured.

We find that in this case, the evidence shows that Empire has not acted in bad faith under 42 Pa. C.S.A. § 8371. First, contrary to the assertions in Drumheiser's Complaint, Empire promptly addressed Mr. Drumheiser's claim for first party benefits and paid the full amount of medical benefits available under the policy. The fact that Empire paid the full medical benefits to Mr. Drumheiser is supported by Sam Person's Affidavit (Doc. 28, Ex. B) and is not refuted by Drumheiser's via his own evidence. Based on the evidence, we find that Empire did not violate Pennsylvania's bad faith statute.

Furthermore, we find that Empire did not act in bad faith by failing to conduct an adequate investigation into whether Mr. Drumheiser constituted a "Temporary worker" under Empire's policy. The main inquiry for bad faith liability is whether there exists a "reasonable basis for denying benefits under the policy." Keefe, 203 F.3d at 225 (emphasis added). As stated, Mr. Drumheiser was entitled to benefits under Empire's policy only in the event that he is sued for injuring some person or property while working for Mr. Jones. As discussed, Mr. Drumheiser is not entitled to recover on his liability claim under the policy. Though Mr. Drumheiser argues that "Empire has repudiated its obligation to provide the agreed upon benefits under the Policy by abjectly refusing to conduct any investigation" (Doc. 39, p. 13), he again incorrectly construes the insurance policy's liability coverage. Mr. Drumheiser contends that he is entitled to money otherwise available to Mr. Jones under Jones' liability coverage with Empire. As such, Mr. Drumheiser is acting as a third party claimant, not as an insured. However, under Pennsylvania law, a third party claimant cannot have a cause of action for bad faith. See Allen v. General Accident Ins. Co., 2004 WL 323664 (Pa. Com. Pl. 2004) ("Under Pennsylvania law, a third party may not maintain a bad faith action against Because Mr. Drumheiser is bringing his bad faith claim as a third party claimant, we will recommend that Empire's Motion for Summary Judgment regarding Mr. Drumheiser's bad faith claim be granted.

Based on the foregoing, it is respectfully recommended that Empire's Motion for Summary Judgment (Doc. 28) be granted in its entirety, and that Mr. Drumheiser's Cross Motion for Summary Judgment (Doc. 38) be denied. It is also recommended that Judgment be entered in favor of Empire and against Mr. Drumheiser.

NOTICE IS HEREBY GIVEN that the undersigned has entered the foregoing Report and Recommendation dated August 19, 2010.

Any party may obtain a review of the Report and Recommendation pursuant to Rule 72.3, which provides:

Any party may object to a magistrate judge's proposed findings, recommendations or report addressing a motion or matter described in 28 U.S.C. § 636(b)(1)(B) or making a recommendation for the disposition of a prisoner case or a habeas corpus petition within fourteen (14) days after being served with a copy thereof. Such party shall file with the clerk of court, and serve on the magistrate judge and all parties, written objections which shall specifically identify the portions of the proposed findings, recommendations or report to which objection is made and the basis for such objections. The briefing requirements set forth in Local Rule 72.2 shall apply. A judge shall make a de novo determination of those portions of the report or specified proposed findings or recommendations to which objection is made and may accept, reject, or modify, in whole or in part, the findings or recommendations made by the magistrate judge. The judge, however, need conduct a new hearing only in his or her discretion or where required by law, and may consider the record developed before the magistrate judge, making his or her own determination on the basis of that record. The judge may also receive further evidence, recall witnesses or recommit the matter to the magistrate judge with instructions.