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United States District Court, D. New Jersey

April 1, 2004.

PAUL REVERE LIFE INSURANCE CO., Plaintiff/Counter-Defendant,

The opinion of the court was delivered by: JOSEPH RODRIGUEZ, Senior District Judge


This matter has come before the Court on the parties' cross-motions to determine choice of law.


  On October 2, 1986, Defendant/Cross-Claimant Ramprasad Patniak, M.D., a general surgeon, purchased a disability insurance policy ("Policy") from Plaintiff/Counter-Defendant Paul Revere Life Insurance Company ("Paul Revere"). The policy was in effect until October 3, 1997, when Patniak failed to pay the premium. On January 18, 1998, Patniak submitted an application to have his Policy reinstated, and Paul Revere approved the reinstatement of the Policy on January 23, 1998.

  On December 26, 1999, Patniak suffered a sustained myocardial infarction while he was performing surgery on one of his patients. As a result, Patniak was unable to perform the duties of his occupation, and he applied to Defendant UNUM Provident ("UNUM"), the ultimate parent corporation of Paul Revere, for his disability benefits under his Policy. For reasons that are in dispute, UNUM has not paid Patniak any benefits pursuant to his Policy.

  On April 26, 2002, Patniak instituted a breach of contract and bad faith action against UNUM in the Court of Common Pleas of Philadelphia County, Commonwealth of Pennsylvania. (Patniak Statement of Facts ¶ 19; Mot. ¶ 16.) On July 18, 2002, UNUM instituted a declaratory judgment action in the United States District Court for the District of New Jersey seeking "an order declaring that it has no liability to Patniak under the policy unless and until Patniak provides adequate written proof of loss pursuant to the terms of the Policy." (UNUM Statement of Facts ¶ 18.) UNUM removed the Pennsylvania state court action to the United States District Court for the Eastern District of Pennsylvania, and then upon UNUM's motion, the action was transferred to this Court, where it was consolidated with the declaratory judgment action.

  The parties now ask the Court to determine whether Pennsylvania law or New Jersey law applies to Patniak's bad faith claim against UNUM. At the time he purchased the policy, Patniak resided in Dresher, Pennsylvania. Some time prior to October 20, 1990, however, Patniak moved his residence from Pennsylvania to Moorestown, New Jersey, where he currently resides. From the inception date of his policy until his claimed disability, Patniak's medical practice was located in Philadelphia, Pennsylvania. DISCUSSION

  A. Choice of Law Rules

  Normally, a federal court sitting in diversity is required to apply the choice of law rules of the forum state. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). When a case is transferred for convenience pursuant to 28 U.S.C. § 1404(a), however, a court "must apply the choice-of-law rules of the state from which the case was transferred." Piper Aircraft Co. v. Reyno, 454 U.S. 235, 244 n.8 (1981) (citing Van Dusen v. Barrack, 376 U.S. 612, 639 (1946)).

  Here, Patniak's claim against UNUM was transferred for convenience pursuant to section 1404(a) from Pennsylvania. Thus, in order to determine what law should be applied to Patniak's claim, Pennsylvania's choice of law rules must be followed.

  Pennsylvania uses a two-part test in its choice of law analysis. LeJeune v. Bliss-Salem, Inc., 85 F.3d 1069, 1071 (3d Cir. 1996). First, it must be determined whether a "false conflict" exists. Id. Then, if there is no false conflict, it is determined which state has the greater interest in the application of its law. Id.

  1. Whether a False Conflict Exists

  A false conflict exists "if the various laws that might be applied to the case do not differ on the relevant issue." Coons v. Lawlor, 804 F.2d 28, 30 (3d Cir. 1986); see also LeJeune, 85 F.3d at 1071; Lucker Mfg. v. Home Ins. Co., 23 F.3d 808, 813 (3d Cir. 1994) ("Where there is no difference between the laws of the forum state and those of the foreign jurisdiction, there is a `false conflict' and the court need not decide the choice of law issue.")

  In addition to common law contract claims, Patniak's action against UNUM asserts a claim for bad faith under a Pennsylvania state statute.*fn1 The statute provides, "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 . . . (1) Award interest on the amount of the claim from the date the claim was made . . . [;] (2) Award punitive damages against the insurer . . . [; and] (3) Assess court costs and attorney fees against the insurer." 42 Pa. Stat. Ann. § 8371. "Bad faith" is not defined in the statute, but it has been defined by Pennsylvania courts as

any frivolous or unfounded refusal to pay proceeds of a policy; it is not necessary that such refusal be fraudulent. For purposes of an action against an insurer for failure to pay a claim, such conduct imports 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.
Terletsky v. Prudential Prop. & Cas. Ins. Co., 649 A.2d 680, 688 (Pa. Super. 1994) (citations omitted). Accordingly, in order for an insured to prevail on a claim under this statute, he must show by clear and convincing evidence that "(1) that the insurer lacked a reasonable basis for denying benefits; and (2) that the insurer knew or recklessly disregarded its lack of reasonable basis." Klinger v. State Farm Mut. Auto. Ins. Co., 115 F.3d 230, 233 (3d Cir. 1997) (citations omitted). New Jersey, in contrast, does not have a similar bad faith statute. Whereas Pennsylvania does not recognize a common law cause of action in tort for breach of the duty of good faith and fair dealing,*fn2 Benevento v. Life USA Holding, Inc., 61 F. Supp.2d 407, 424 (E.D. Pa. 1999), New Jersey courts imply a duty of good faith and fair dealing in all contracts. Pickett v. Lloyds, 621 A.2d 445, 450 (N.J. Super. Ct. App. Div. 1991) (citing Palisades Properties, Inc. v. Brunetti, 207 A.2d 522 (N.J. 1965)). Thus, when a breach of the duty of good faith and fair dealing can be shown, liability may be had in tort as well as in contract under New Jersey common law. See Benevento, 61 F. Supp.2d at 424 (discussing difference between New Jersey and Pennsylvania law and citing Pickett, 621 A.2d at 450).

  Even though Pennsylvania, pursuant to a state statute, and New Jersey, under common law, both recognize bad faith tort claims against insurance companies, the standard for "bad faith" is different in each state. The New Jersey courts expressly rejected Pennsylvania's standard for bad faith, stating that it does not "adequately serve[] the public interest." Pickett, 621 A.2d at 454. Instead, New Jersey applies the "fairly debatable" standard-that is, "[i]f a claim is `fairly debatable,' no liability in tort will rise." Id. (citations omitted).

  Furthermore, in contrast to Pennsylvania's statute which provides for punitive damages, in New Jersey, "absent egregious circumstances, no right to recover for emotional distress or punitive damages exists for an insurer's allegedly wrongful refusal to pay a first-party claim." Pickett, 621 A.2d at 455 (stating that "to sustain a claim for punitive damages, a plaintiff would have to show something other than a breach of the good-faith obligation").

  Consequently, because the standards for whether an insurance company acted in bad faith, and the remedies available to an insured, differ, the conflict between Pennsylvania law and New Jersey law is not false, and the second step in Pennsylvania's choice of law analysis must be considered.

  2. Which State has the Greater Interest in the Application of its Law

  Pennsylvania employs a flexible approach to its choice of law analysis. Under this approach, a court must consider: (1) "the policies and interest underlying the particular issue before the court"; and, (2) "the extent to which one state rather than another has demonstrated, by reason of its policies and their connection and relevance to the matter in dispute, a priority of interest in the application of its rule of law." Carrick v. Zurich-Am. Ins. Group, 14 F.3d 907, 910 (3d Cir. 1994) (citing Griffith v. United Air Lines, Inc., 203 A.2d 796, 805 (Pa. 1964)) (other citations omitted). "[I]n evaluating the interests of one jurisdiction over another, [a court] must view the factors qualitatively as opposed to quantitatively." Id. (1) Policies and interest

  "The Third Circuit has made clear that the protection of insured parties is the primary public policy underlying laws governing duties owed by an insurer to an insured." Kilmer v. Conn. Indem. Co., 189 F. Supp.2d 237, 246 (M.D. Pa. 2002) (citing General Star Nat'l Ins. Co. v. Liberty Mut. Ins. Co., 960 F.2d 377, 378 (3d Cir. 1992)). Specifically, the policy behind Pennsylvania's bad faith statute "is that the Pennsylvania legislature was concerned about protecting its own residents/insured from overreaching insurance companies." Id. (citations omitted). The New Jersey legislature has not implemented a similar statutory protection. See Pickett, 621 A.2d at 451, 454.

  Here, Patniak has been a New Jersey resident since, at least, October, 1990. He was a New Jersey resident when his policy was reinstated in January, 1998 after its lapse in October, 1997, and he was a New Jersey resident when he suffered from a myocardial infarction in December, 1999. The purpose of Pennsylvania's bad faith statute is to protect Pennsylvania residents, not residents from other states, from overreaching insurance companies. Consequently, the policies underlying the bad faith statute weigh against applying it to Patniak's bad faith claim.

  (2) Priority of interest

  Patniak argues that his significant contacts with Pennsylvania demonstrate Pennsylvania's priority of interest in the application of its law. Patniak's connection to Pennsylvania includes the following: 1) where he is licensed; 2) where his medical practice is located; 3) where "his expected occupation and earning are from"; 4) where his disability occurred; 5) where his own treating physicians are located; and 6) where the proofs of Patniak's medical disability and work duty change, and proofs provided by Patniak's medical staff, "which Unum claimed it was investigating," are located. (PL Choice of Law Mot. at 16-17.) Patniak also argues that UNUM, which is licensed to transact business in Pennsylvania, should "expect to be held accountable to Pennsylvania standards of conduct." (Id. at 16.) Finally, Patniak contends that Pennsylvania law should apply because two Paul Revere/UNUM employees stated that they believed Pennsylvania law should apply to the insurance policy. (Id. at 15-16.)

  Patniak's arguments are unpersuasive in demonstrating that Pennsylvania has a priority of interest in having its law applied to Patniak's bad faith claim. First, in evaluating the interests of Pennsylvania over New Jersey, the factors must be viewed qualitatively as opposed to quantitatively. Even though Patniak has significant contacts with Pennsylvania, the fact remains that he is a New Jersey resident whose interests the Pennsylvania Legislature did not seek to protect when implementing the bad faith statute.

  Second, the present choice of law dispute only concerns whether Patniak is able to maintain a separate claim against UNUM for bad faith pursuant to Pennsylvania statute.*fn3 Whether an insurance agent and customer care representative believe that Pennsylvania law applies to the entire insurance contract is not applicable to the resolution of this issue. "[C]onflict of laws principles do not require that all legal issues presented by a single case be decided under the law of a single state. Instead the choice of law decisions can and should be made on an issue-by-issue basis, and thus the law of different states can apply to different issues in the same case." Kilmer v. Conn. Indem. Co., 189 F. Supp.2d 237, 246 (M.D. Pa. 2002). The Third Circuit "recognized that separate analyses to determine which state's law applies to a bad faith claim and to an issue of contract interpretation `would normally be appropriate.'" Id. (citing Robeson Indus. Corp. v. Hartford Accident & Indem. Co., 178 F.3d 160, 168 (3d Cir. 1999)). Accordingly, which law should be applied to the other claims in the consolidated action will be not be determined at this time.

  Considering that the purpose of Pennsylvania's bad faith statute is to protect its residents from overreaching insurance companies, Patniak, a New Jersey resident, has not demonstrated that Pennsylvania has a priority of interest in the application of its law. Consequently, Patniak will be unable to maintain a separate claim against UNUM for bad faith pursuant to Pennsylvania statute. Patniak is not left without an avenue for asserting a bad faith claim against UNUM, however. Pennsylvania's bad faith statute "creates an independent cause of action, separate and distinct from the underlying contractual insurance claims arising from the express terms of the contract of insurance. . . . The bad faith statute therefore simply provides an insured with additional damages remedies not previously allowed in contract actions at common law; it does not preclude a claim for breach of the contractual obligation of good faith with the right to recover whatever common law contract damages may be appropriate." Benevento, 61 F. Supp.2d at 425.


  For the reasons expressed above, New Jersey law will govern Patniak's bad faith claim against UNUM. The Court makes no decision at this time as to which state's law will apply to the other claims in the consolidated action.


  IT IS HEREBY ORDERED on this 1st day of April, 2004 that Defendant/Cross-Claimant Ramprasad Patniak's motion [13] is DENIED, and Plaintiff/Counter-Defendant Paul Revere Life Insurance Company and Defendant UNUM Provident Corporation's motion [17] is GRANTED.

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