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PAUL REVERE LIFE INSURANCE CO. v. PATNIAK

April 1, 2004.

PAUL REVERE LIFE INSURANCE CO., Plaintiff/Counter-Defendant,
v.
RAMPRASAD PATNIAK, Defendant/Cross-Claimant, v. UNUM PROVIDENT CORPORATION, Defendant



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

ORDER

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

BACKGROUND

  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 ...

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