2013 BAD FAITH CASES: COURT GRANTS MOTION FOR SUMMARY JUDGMENT ON COVERAGE ISSUE BASED ON BABCOCK RULING, REJECTING WAIVER AND ESTOPPEL ARGUMENTS ON BASIS OF PROPER RESERVATION OF RIGHTS; BUT UNADJUDICATED BAD FAITH CLAIM ON FAILURE TO SETTLE, RATHER THAN INTERPLEAD POLICY LIMITS, REMAINED OPEN (Philadelphia Federal)

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This case involves a coverage dispute between plaintiff, the primary insurer, the defendant-insured, and the excess and umbrella insurer.  Plaintiff filed a complaint alleging its policy did not provide coverage for the insured’s claim, and listing the excess insurer as a “nominal defendant,” although plaintiff and the excess insurer do not have adverse interests.

Both insurers sought a declaratory judgment holding insured’s claims were not covered by these policies. The insured then filed a counterclaim against plaintiff and cross claim against the excess insurer seeking coverage and alleging bad faith. Both insurers filed motions for summary judgment, which the court granted.

The insured and insurers both advanced arguments disputing coverage and applicability of exclusions in the policy. The insured also advanced an equitable argument, suggesting even if the court found the underlying claims were not covered by the policies, the insurers should still be barred from contesting coverage.

Considering the new case law handed down by the Superior Court in Babcock & Wilcox v. Am. Nuclear Insurers in July of 2013 (THE BABCOCK CASE WAS REVERSED BY THE PENNSYLVANIA SUPREME COURT ON JULY 21, 2015), the court found the insured’s argument without merit. Under Babcock, where an insured accepts a defense from the insurer, the insured is bound to its decision, granting the insurer sole authority to control the defense.

Although the insurer is still required to act in good faith in representing the insured’s interest and settling the case, if the insured has accepted the defense, its sole protection against any injuries arising from the insurer’s conduct of the defense is a claim for bad faith.

The court found the insured failed to present law or facts supporting a finding of waiver due to the plaintiff’s alleged failure to seek a timely intervention or to file a declaratory action while the underlying litigation advanced. Plaintiff had no obligation to intervene or file a declaratory action, nor did either party dispute that plaintiff effectively reserved its right to contest coverage. The insured also alleged plaintiff waived its coverage defense by initiating an interpleader action in state court (prior to the federal action).

The court stated that Charter had moved to deposit the policy limit plus post-judgment interest with the Court of Common Pleas in order to halt the accrual of post-judgment interest and demonstrate a good faith effort to settle.

However, existing case law demonstrates courts do not recognize the tender of funds for settlement purposes as a waiver of coverage contest where the insurer has properly reserved its right to do so.  Plaintiff paid the funds into the account to stop the accrual of post-judgment interest, and did not indicate in any way that it intended to reverse its previous reservation of its rights to contest coverage.

The insured also argued plaintiff should be estopped from asserting its coverage defense due to its unreasonable refusal to settle the underlying claims within the policy limits and its failure to provide the insured with independent counsel when a conflict of interest arose between plaintiff and the insured.

However, under Babcock, the insurer can simultaneously challenge whether a claim is covered under the policy while also assuming the duty to defend. Based on Babcock, plaintiff retained full control of the litigation when the insured accepted its defense, and plaintiff’s decisions with respect to settlement of the claim, or choice of counsel, did not affect its reservation of rights.

Therefore, the court found in the insurers’ favors, and granted the motion for summary judgment of non-coverage.

The bad faith claim was not before the Court, as the parties had submitted only the coverage issues.  The court observed that the insured’s protection for its contention that Charter Oak failed to appropriately settle the case within the policy limits or failed to appoint independent counsel – its sole protection – lies in its claim of bad faith.

Specifically, “Maglio asserts counterclaims against Charter Oak based on Charter Oak’s alleged bad faith in refusing to settle the underlying litigation within the policy limits and failing to appoint independent counsel to defend Maglio. The summary judgment motions presently before this Court do not address Maglio’s counterclaims, pursuant to the parties’ agreement to proceed with coverage issues first. The Court therefore makes no finding with respect to Maglio’s counterclaims at this time.”

Date of Decision: October 24, 2013

Charter Oak Ins. Co. v. Maglio Fresh Food, Civil Case No. 12-3967, 2013 U.S. Dist. LEXIS 152741 (E.D. Pa. Oct. 24, 2013) (Baylson, J.).

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