Monthly Archive for August, 2013

AUGUST 2013 BAD FAITH CASES: COMPLAINT’S “AND/OR” LANGUAGE CREATES DUTY TO DEFEND; FAILURE TO PROPERLY INTERPRET COMPLAINT NOT BAD FAITH (Philadelphia Commerce Court)

In CDL, Inc. v. Certain Underwriters at Lloyd’s, plaintiff brought suit alleging breach of contract and bad faith for the insurer’s failure to provide plaintiff with a defense against a claim of negligence. Plaintiff’s business consisted of leasing commercial truck drivers to its clients on a temporary basis. Plaintiff obtained a commercial general liability (“CGL”) policy from the insurer, which included auto and professional liability exclusions. The auto exclusion excluded coverage wherever bodily injury or property damage arose “out of the ownership, maintenance, use or entrustment to others of any… “auto”… owned or operated by or rented or loaned to any Insured.” The policy auto exclusion applied even in cases of claims against any Insured alleging “negligence or other wrongdoing in the supervision, hiring, employment, training or monitoring of others by that Insured, if the “occurrence”…. involved the ownership, maintenance, use or entrustment to others of any… “auto”… that is owned or operated by or rented or loaned to any Insured.” The professional liability exclusion excluded coverage where liability arose “out of the rendering of or failure to render professional services, or any error or omission, malpractice or mistake of a professional nature committed by or on behalf of the “Insured” in the conduct of any of the “Insured’s” business activities.”

In January 2007, plaintiff leased a driver to a client who was involved in an automobile accident. The opposing driver brought suit against plaintiff, the individual driver, the client, and the company which provided the truck that was involved in the accident. In the complaint, the opposing driver alleged the driver was the “agent, servant, workman and/or employee of Defendants [client], [plaintiff], [truck leasing company] and/or [truck leasing company trade name].” The complaint also alleged plaintiff was negligent in its hiring and training practices.

Plaintiff turned the claims over to the insurer, who denied coverage and a defense based on the auto and professional liability exclusions in the CGL policy. Plaintiff successfully provided its own defense, was found not liable, and then renewed its demand to the carrier, requesting $73,130.24 in defense costs. The carrier again denied the request, causing plaintiff to file an action alleging breach of the CGL policy and bad faith.

The court found the carrier’s denial was proper insofar as it was based on the auto exclusion language excluding coverage where the auto involved in the accident was “owned or operated by or rented or loaned to” plaintiff or its employee. However, the complaint also contained claims arising from the driver’s employment status as an employee of plaintiff, plaintiff’s client, “and/or” the truck leasing company. Based on the “and/or” language, the court found it possible to read the complaint as alleging a situation in which the driver was not plaintiff’s employee, but instead the employee of another defendant. This would mean the truck was not “operated by” the plaintiff, making the auto exclusion inapplicable, and the carrier responsible for defending plaintiff under the policy with respect to the claims that plaintiff negligently placed the driver with its client.

The carrier denied coverage for the negligent placement claims under the professional liability exclusion. The court, however, found “the leasing and placement of truck drivers is not the “rendering of or failure to render a professional service” as set forth in the exclusion.” The policy did not define ‘professional service,’ leading the court to use a case-law based definition recognizing professional as “distinguished by specialized training or education, state licenses, and legal liability for professional negligence or malpractice.” Since the placement services did not fit within the professional liability exclusion, the carrier should have provided a defense for those claims.

Since the carrier did breach the CGL contract, the court next turned to whether the refusal to provide a defense was made in bad faith. The court found “no showing that [the carrier] was motivated by self-interest in denying coverage for the defense” of the claims. While the court found the insurer may have been “negligent or exercised bad judgment in finding the Auto and Professional Liability Exclusions applicable to the [underlying plaintiff’s] claims” there was “no evidence that they acted with malice in misreading the claims.” Furthermore, the insurer’s decision not to renew plaintiff’s CGL policy after it filed suit was not done in bad faith because the evidence supported the insurer’s claims it was a business decision.

Date of Decision:  May 29, 2013

CDL, Inc. v. Certain Underwriters at Lloyd’s, July Term 2009, No. 758, 2013 Phila. Ct. Com. Pl. LEXIS 135 (C. C.P. Phila.  May 29, 2013) (Snite, J.).

AUGUST 2013 BAD FAITH CASES: PROPERTY OWNER CANNOT RECOVER UNDER CGL POLICY FOR SUBCONTRACTOR’S NEGLIGENT WORKMANSHIP (Philadelphia Commerce Court)

 In 525 Lancaster Ave Apts., L.P. v. Pa. Nat’l Mut. Ins. Co., plaintiff brought suit against a subcontractor’s insurance company seeking coverage for damage caused by the subcontractor’s work on its apartment building. Plaintiff hired a general contractor to oversee the renovation of its apartment building. The contractor then entered into a subcontract with a plumbing company to install a complete plumbing system in the apartment building. Pursuant to the subcontract, the plumbing company purchased and maintained insurance that named the contractor and plaintiff as additional insureds.

Following the completion of the plumbing work, a leak developed in the plumbing system which caused damage to the apartment building and delayed completion of the renovation project. Specifically, plaintiff alleged the damage was caused by a leak resulting from the plumbing company’s misapplication of pipe fitting glue at the supply line junction. Plaintiff submitted a claim to the insurer for the property damage, but the insurer denied the claim. Plaintiff then brought suit against the insurer seeking declaratory judgment and alleging breach of contract and bad faith.

Under the policy, the insurer was responsible for paying “those sums that the insured becomes legally obligated to pay as damages for property damage.” The policy applied only where property damage was caused by an occurrence. The policy defined occurrence as “an accident, including continuous or repeated exposures to substantially the same general harmful condition,” but accident was not defined. Relying on case law, the court found the property damage caused by the leak did not constitute an occurrence because “the definition of “accident” required to establish an “occurrence” under the policy [could not] be satisfied by claims based on faulty workmanship.”  Furthermore, the court found coverage was precluded by a policy exclusion specifying the insurance did not apply to “that particular part of any property that must be restored, repaired or re-placed because “your work” was incorrectly performed on it.” The policy used “you” to refer to the named insured, the plumbing company. 

Based on the definition of ‘occurrence’ and the policy exclusion, the court granted the insurer’s Motion for Judgment on the Pleadings and denied plaintiff’s Cross Motion for Summary Judgment.

Date of Decision:  April 23, 2012

525 Lancaster Ave Apts., L.P. v. Pa. Nat’l Mut. Ins. Co., Sept. Term. 2012, No. 341, 2013 Phila. Ct. Com. Pl. LEXIS 125 (C.C.P. Phila.  April 23, 2013 2013) (Snite, J.).

AUGUST 2013 BAD FAITH CASES: NO COVERAGE FOR PLAINTIFF-ADDITIONAL INSURED WHERE POLICY WAS RESCINDED AS TO NAMED INSURED, BUT CARRIER DID OWE ADDITIONAL INSURED A DEFENSE (Philadelphia Federal)

In Toll Bros., Inc. v. Century Sur. Co., plaintiff construction company brought suit against its surety company alleging, amongst other claims, breach of contract and breach of good faith and fair dealing.  Plaintiff is a luxury homebuilder that builds communities throughout Pennsylvania. Local ordinances sometimes require new homes be equipped with fire suppression systems, such as sprinklers, so in those communities plaintiff hires a subcontractor to install those systems. In the Philadelphia area, plaintiff hired H.A.S. Protection, Inc. (“the subcontractor”) to install those systems. As a part of the contract with the subcontractor, plaintiff required the subcontractor to indemnify and defend plaintiff for any claim or demand arising out of or relating to the subcontractor’s work. The contract also required the subcontractor to name plaintiff as an additional insured on its general liability insurance policy. The subcontractor hired defendant to provide the commercial general liability policy, and a policy was provided with effective dates between June 26, 2003 and June 26, 2004. The subcontractor then renewed the policy, with effective dates of June 26, 2004 to June 26, 2005. The subcontractor provided plaintiff with a copy of the certificate of insurance identifying plaintiff as an additional insured, under the original policy, however, defendant maintains plaintiff was not an additional insured under the renewed policy. Plaintiff maintains it was an additional insured on both policies.

Shortly after construction concluded on the homes, plaintiff began receiving warranty and reimbursement claims for damage caused by the fire suppression systems. The complaints began in 2003 and continued for years after. While defendant provided a defense for the subcontractor in the litigation of these claims, it refused to do so for plaintiff. As a result, plaintiff was forced to obtain counsel at its own cost, as well as pay the settlement amounts.

Following the suits brought by homeowners, defendant filed a declaratory judgment action seeking a declaration from the Court that the insurance policies issued to the subcontractor were null and void because the subcontractor failed to disclose several pending suits at the time the policy was issued. The District Court found in favor of defendant, despite Plaintiff’s attempt to intervene. Plaintiff separately filed an action alleging breach of contract, breach of good faith and fair dealing for failing to defend and indemnify plaintiff in the litigation that arose from the contractor’s installation of the sprinklers. The insurer filed a motion for summary judgment arguing the claim was barred by res judicata from the declaratory judgment action. The District Court granted the motion, but the Third Circuit reversed, finding no privity between the subcontractor and plaintiff for purposes of determining the preclusive effect of defendant’s default summary judgment against the subcontractor. 

On remand, the District Court was faced with determining whether the subcontractor’s policy was properly rescinded, eliminating the carrier’s responsibility for providing a defense. The carrier argued the subcontractor had failed to disclose a set of pending claims stemming from the installation of a specific type of sprinkler system at the time the policy was issued, and had the carrier known of the risks associated with the sprinkler system in that case, it would have refused to provide insurance to the contractor or increased the premium. In response to the carrier’s first argument, plaintiff argued the carrier provided no evidence of how it actually would have acted if it had knowledge of the lawsuit at the time the policy was issued. The District Court applied Pennsylvania’s three element test requiring “(1) the insured made a false representation; (2) the insured knew the representation was false when it was made or the insured made the representation in bad faith; and (3) the representation was material to the risk being insured” to determine whether rescission was proper. Under this test, the Court found the subcontractor had blatantly lied regarding the pending suit in his application, satisfying the first element, the second element was met because the subcontractor was aware of the claims, and based on the number of claims that actually materialized from the sprinkler system, the third element was met. Therefore, no reasonable jury could find that the carrier unreasonably sought the rescission of the policies.   

The Third Circuit also allowed plaintiff to challenge whether the policy permitted coverage for an additional insured notwithstanding the rescission of the subcontractor’s coverage. The carrier argued the additional insured was not entitled to more coverage than that afforded to the named insured, based on a portion of the policy stating: “It is further agreed that where no coverage shall apply herein for the Named Insured, no coverage nor defense shall be afforded to the above-identified additional insured.” In response, plaintiff argued the language was ambiguous because the policy failed to define ‘coverage’, that a severability clause allowed plaintiff to continue to receive coverage even if the subcontractor was not covered, and that Pennsylvania law does not preclude recovery by an innocent additional insured as a matter of law. The District Court rejected all of plaintiff’s arguments, finding the additional insured endorsement specifically limited its coverage to “coverage that is not greater than the coverage available to [the subcontractor].”

The Court did, however, find that the carrier should have provided a defense to plaintiff, given that the duty to defend under an insurance policy is broader than the duty to indemnify. The causes of action against the subcontractor and plaintiff were identical, thereby acknowledging the claims potentially fell within the policy, but neglected to provide a defense to plaintiff.

Date of Decision:  June 17, 2013

Toll Bros. v. Century Sur. Co., Civil Action No. 07-1296, 2013 U.S. Dist. LEXIS 85101 (E.D. Pa. June 17, 2013) (Tucker, J.).