Monthly Archive for March, 2008

MARCH 2008 BAD FAITH CASES
NO BAD FAITH IN DENYING COVERAGE PER POLLUTION EXCLUSION AS LAW INTERPRETING THE POLLUTION EXCLUSION WAS STILL UNSETTLED (Philadelphia Federal)

The plaintiffs-insureds were insured under certain primary, excess and/or umbrella comprehensive general liability (“CGL”) insurance policies sold by defendants-insurers.  The insureds received a Potentially Responsible Party Letter (“PRP letter”) from the United States Environmental Protection Agency (“EPA”) for potential liability under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”) in connection with a superfund site.  The superfund site had been the site of a business that distilled and recycled industrial cleaning solvents.  Drums containing residual sludge from the solvent recovery process had been buried at the site, began to leak and caused water and soil contamination.

The business had received drums of used industrial cleaning solvents from insureds.  The insureds notified insurer of the PRP letter and requested coverage and defense for the claims set forth in the letter.  Insurers replied by reserving its rights and requesting more information.  Certain recipients of the PRP letter entered into a consent decree with the EPA and were permitted to file suit against non-settling recipients of the PRP letter, including insureds.

The settling parties and the EPA subsequently initiated lawsuits against the non-settling parties.  The insurers continued their reservation of rights and refused to defend and indemnify insureds.  The insureds initiated a lawsuit against the insurers alleging declaratory judgment, breach of contract, and statutory bad faith.

The insurers’ duty to defend and indemnify turned on the pollution exclusion contained in the CGL policy entered into between the two parties and which is included in all standard CGL policies.  Particularly, the parties disagreed as to the meaning of the term “sudden and accidental” within the terms of the exclusion.  The insurers argued that the term required an abrupt event.

The insureds argued that the term meant “unexpected and unintended,” as used in “occurrence-based” coverage language from which the pollution exclusion grew.

The insurers moved for summary judgment on all counts.  The insureds moved for partial summary judgment to:  1) declare as a matter of law that insurers may not deny coverage to insureds on the basis of the pollution exclusion; 2) declare insurers had a duty to defend; and 3) strike insurers’ affirmative defenses alleging that there is no covered “occurrence” and that the property damage for which insureds are liable was “expected or intended.”

In determining the application of the pollution exclusion, the court noted that it was required to interpret the term “sudden and accidental” pursuant to the decision of the Pennsylvania Supreme Court in Sunbeam v. Liberty Mut. Ins. Co., 781 A.2d 1189 (2001).  In Sunbeam, the Pennsylvania Supreme Court stated that the interpretation of the term “sudden and accidental” is based on a determination of whether the term has a specialized meaning in the insurance industry and whether regulatory estoppel applies based on the insurance industry’s representations to the Pennsylvania Insurance Department of its meaning of the term “sudden and accidental.”

The court concluded that the evidence was insufficient to establish that the term “sudden and accidental” had a trade usage and meant “unexpected and unintended.”  As a result, the court granted insurers’ summary judgment motion as to the counts for declaratory judgment and breach of contract on the issue of trade usage.

However, the court found that a genuine issue of material fact exists as to whether regulatory estoppel should apply and denied insurers’ summary judgment motion as to the counts for declaratory judgment and breach of contract on the issue of regulatory estoppel.

Addressing the insureds’ count alleging statutory bad faith, the court noted that the area of law following the Sunbeam decision is still unclear.  Because the area of law was unclear, insurers had a basis for denying coverage and a right to litigate the issue of coverage.  As a result, the court concluded that the insurer did not act in bad faith and granted insurers’ summary judgment motion as to the count alleging statutory bad faith.

The court additionally denied the insurers’ summary judgment motion as to the insureds, Simon Resources, Inc. and Mid-State Trading Company, based on their standing because an issue of material fact existed.

As to the insureds’ partial summary judgment motion, the court denied the motion also based on the issue of regulatory estoppel.

Date of decision:  January 10, 2008

Simon Wrecking Company, Inc. v. AIU Insurance Company, United States District Court for the Eastern District of Pennsylvania, Civil Action No. 03-CV-3231, 2008 U.S. Dist. LEXIS 1845, (E.D. Pa. Jan. 10, 2008) (Brody, J.).

R.E.M.

MARCH 2008 BAD FAITH CASES
WHERE POLICY EXCLUSION APPLIED INSURER HAD NO DUTY TO DEFEND OR CONTRIBUTE TO SETTLEMENT, AND SO NO BAD FAITH; AND IT WAS NOT UNJUSTLY ENRICHED (Philadelphia Federal)

The plaintiff-insurer brought a claim against defendant-insurer for its failure to contribute to an eventual settlement of their insured.  The insured was in the business of providing safety inspections services to construction companies.  Plaintiff-insurer provided the insured with a professional liability insurance policy, and the defendant-insurer provided the insured with a general liability insurance policy.

The insured was named as a defendant in a personal injury action where personal injury plaintiff was injured when he fell from a ladder at a construction site.  Personal injury plaintiff alleged that the insured had failed to properly inspect the construction site where the accident occurred.

The defendant-insurer denied coverage based on a professional services exclusion and a consulting services endorsement exclusion in the policy, but it provided a defense in light of the personal injury plaintiff’s allegations of general negligence.  Defendant-insurer and plaintiff-insurer allegedly had subsequent communications, via telephone and letter, regarding a joint defense.

The parties in the personal injury action had a settlement conference where the defendant-insurer notified the parties that it would not contribute to the settlement.  The other parties subsequently agreed to settle.

The plaintiff-insurer filed the present lawsuit setting forth four counts:  1) the defendant-insurer must reimburse plaintiff-insurer for some of the settlement amount; 2) the defendant-insurer breached its insurance contract; 3) the defendant-insurer acted in bad faith; and 4) the defendant-insurer was unjustly enriched.

Defendant-insurer filed a motion for summary judgment.  Plaintiff-insurer argued that the parties had entered into an enforceable agreement, via telephone and letter, to share the costs of defending insured.  The court noted that the letter had different terms than those of the phone conversation, and therefore concluded that there was no meeting of the minds or an enforceable agreement.

The defendant-insurer argued that coverage was excluded based on the professional services exclusion and the consulting services endorsement exclusion.  The court disagreed with the defendant-insurer as to the application of the professional services exclusion, but it agreed that the consulting services endorsement exclusion did apply because the insured’s liability in the personal injury action derived from a failure or error in the evaluation and consultation in the safety inspection.

Because the exclusion applied, the defendant-insurer had no contractual duty to defend or contribute to the settlement.  Because there was no duty, the defendant-insurer could not be liable for acting in bad faith nor was it unjustly enriched.  As a result, the court entered summary judgment in favor of the defendant-insurer on all counts.

Date of decision:  January 10, 2008

Scottsdale Indemnity Company v. Hartford Casualty Insurance Company, United States District Court for the Eastern District of Pennsylvania, Civil Action No. 06-5339, 2008 U.S. Dist. LEXIS 2454, (E.D. Pa. Jan. 10, 2008) (Buckwalter, S.J.)

R.E.M.