BAD FAITH REQUIRES DENIAL OF A BENEFIT, EXCEPT IN LIMITED CIRCUMSTANCES; NO SEPARATE BREACH OF GOOD FAITH ACTION (Philadelphia federal)

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To paraphrase from the summary below: Though courts have extended the concept of bad faith beyond an insured’s denial of a claim in several limited areas, the essence of a bad faith claim must be the unreasonable and intentional or reckless denial of benefits.

A dispute between the insured and insurer settled for $237,000. During the post-settlement drafting process, the insurer included a term in the settlement agreement making the insured’s mortgagee a payee on the settlement check. The insured objected, but the carrier responded the policy required it to include the payee. It refused to issue the settlement check without the mortgagee and the parties were at loggerheads.

The insured filed a new action against the carrier, seeking to enforce the settlement agreement without the mortgagee’s inclusion. The insured brought a breach of contract claim, as well as a separate breach of the duty of good faith and fair dealing in connection with the settlement agreement. The carrier moved to dismiss the good faith and fair dealing count.

The court dismissed that count, following the principle a breach of the covenant of good faith and fair dealing is subsumed within the contract claim, and cannot state a distinct cause of action. “Such subsuming occurs when ‘the actions forming the basis of the breach of contract claim are essentially the same as the actions forming the basis of the bad faith claim.’” Here, both counts arose out of the refusal to remove the mortgagee from the settlement payment.

The court also noted there was no separate tort claim for bad faith in Pennsylvania.

Finally, the court rejected the notion that the good faith count could survive if treated as a statutory bad faith claim. It observed that the case arose from an alleged breach of a settlement agreement, not a violation of the insurance policy. The issue here was the insurer’s including the mortgagee on the payment check, not the denial of a benefit, i.e., the carrier was ready and willing to make a payment under the policy.

As the court states:

Critically, while Plaintiff does claim that [the carrier] “refus[ed] to make payment of a settlement amount within 60 days as required by the policy of insurance,” it is clear from Plaintiff’s own recitation of the facts that what Plaintiff means by “refus[al] to make payment” amounts to Plaintiff’s refusal to accept a settlement check naming the mortgagee as a payee, rather than a denial of benefits under the policy. Though “Courts have extended the concept of ‘bad faith’ beyond an insured’s denial of a claim in several limited areas,” … “the essence of a bad faith claim must be the unreasonable and intentional (or reckless) denial of benefits….” [Emphasis in original] As such, Section 8371 “do[es] not apply to [mere] disputes over contract terms.” … Tellingly, Plaintiff identifies no case in which a Pennsylvania court or a court interpreting Pennsylvania law has found that Section 8371 encompasses the type of settlement dispute at issue here. Count II of Plaintiff’s Amended Complaint is therefore dismissed for failure to state a claim.

Date of Decision: November 18, 2019

Purvi, LLC v. Nat’l Fire & Marine Insurance Co., U. S. District Court Eastern District of Pennsylvania CIVIL ACTION NO. 19-4250, 2019 U.S. Dist. LEXIS 199469 (E.D. Pa. Nov. 18, 2019) (Beetlestone, J.)

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