United States District Court, D. New Jersey
April 1, 2004.
PAUL REVERE LIFE INSURANCE CO., Plaintiff/Counter-Defendant,
RAMPRASAD PATNIAK, Defendant/Cross-Claimant, v. UNUM PROVIDENT CORPORATION, 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
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
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
2. Which State has the Greater Interest in the Application of its
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
(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
IT IS HEREBY ORDERED on this 1st day of April, 2004 that
Defendant/Cross-Claimant Ramprasad Patniak's motion  is DENIED, and
Plaintiff/Counter-Defendant Paul Revere Life Insurance Company and
Defendant UNUM Provident Corporation's motion  is GRANTED.