MARCH 2017 BAD FAITH CASES: WHERE NO DUTY TO COVER PUNITIVE DAMAGES, THERE CAN BE NO BAD FAITH IN REFUSING TO COVER PUNITIVE DAMAGES (Philadelphia Commerce Court)

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In this case, the insured was subject to a wrongful death judgment of over $2,000,000 in compensatory type damages and $5,000,000 in punitive damages. The umbrella insurer had reserved its rights to disclaim coverage for punitive damages, and persisted in that position through settlement, where it refused to contribute toward the punitive damages judgment.

There was no punitive damages exclusion in the policy. Rather, the insurer relied upon Pennsylvania public policy that there could be no insurance for punitive damages. The insured argued the vicarious liability exception to this public policy, but the court found that the punitive damages award was based on direct liability and not vicarious liability. Thus, it held there was no coverage due on the punitive damages settlement.

As to the insured’s bad faith claim, the court stated: “Since this court finds that there is no coverage for punitive damages, there can be no bad faith.” Thus, the bad faith count was dismissed.

This decision was reversed on appeal on the basis there could be coverage if the insured is secondarily liable for the punitive damages awarded.

Date of Decision: January 20, 2017

Bensalem Racing Ass’n v. Ace Prop. & Cas. Ins. Co., Feb. Term 2016, No., 4858, 2017 Phila. Ct. Com. Pl. LEXIS 11 (Phila. C.C.P. Jan. 20, 2017) (Djerassi, J.) (Commerce Program)

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