JANUARY 2011 BAD FAITH CASES
COMPENSATORY DAMAGES NOT AVAILABLE UNDER BAD FAITH STATUTE, BUT STATUTE DOES NOT ALTER ANY RIGHTS TO DAMAGES AVAILABLE UNDER CONTRACT LAW (Western District)

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The insured had a policy with the insurer for multiple forms of business insurance.  The policy included a provision for employee theft crime coverage of up to $1 million The insured discovered that one of its employees had embezzled almost $1 million from the company, and it filed a claim with the insurer to recover under the policy.

The insurer initially refused to pay, based in part on an exclusion pertaining to losses caused by anyone authorized to sign checks for the insured.  The parties agreed that the exclusion was clearly worded and placed in a schedule attached to the policy, and the insurer claimed that because the employee was authorized to sign checks for the insured, it did not have to cover the company’s losses.  It also claimed that the policy was void due to fraud, misrepresentation, or concealment because the employee’s status as an officer of the organization meant that his knowledge of the embezzlement was imputed to the company.

The insurer filed a suit seeking a declaratory judgment that it was not obligated to cover the losses caused by the employee, and the insured responded by filing a counterclaim, which alleged breach of contract and bad faith on the insurer’s part.  The insurer then filed a motion for summary judgment to dismiss the bad faith allegations.

The insured alleged that the insurer acted in bad faith in denying coverage for employee theft, and it requested, in addition to a judgment against the insurer, an award for the costs of suit, including attorneys’ fees, consequential and compensatory damages, net economic loss, excess verdict, and punitive damages.  The insurer only sought to dismiss the small portion of the claim concerning compensatory and other common law contract damages, arguing that they were not available under Pennsylvania’s Bad Faith Statute, Pa. Cons. St. Ann. § 8371.

The court agreed with the insurer that under Pennsylvania law, an insured may not recover compensatory damages based on § 8371 alone.  However, § 8371 does not alter an insured’s common law contract rights, so if compensatory damages are available under another portion of the claim, they remain available if there is a bad faith claim in another section of the complaint.  In this case, not only did the insured also file a breach of contract claim which allows for compensatory damages, but it also explicitly stated that it only sought damages that were “reasonable and permissible” under the circumstances, and that it would not attempt to recover damages that were prohibited by the statutes in question.  The court therefore denied the insurer’s motion to dismiss the portion of the bad faith claim relating to compensatory damages.

Date of Decision:  December 28, 2010

OneBeacon Am. Ins. Co. v. UBICS, Inc., Civil Action No. 10-737, United States District Court for the Western District of Pennsylvania, 2010 U.S. Dist. LEXIS 136801, (Dec. 28, 2010) (Standish, J.)

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COMPENSATORY DAMAGES NOT AVAILABLE UNDER BAD FAITH STATUTE, BUT STATUTE DOES NOT ALTER ANY RIGHTS TO DAMAGES AVAILABLE UNDER CONTRACT LAW (Western District)”


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