JANUARY 2012 BAD FAITH CASES: NAMED INSURER NOT PROPER PARTY BECAUSE DID NOT UNDERWRITE POLICY; FAULTY WORKMANSHIP IS NOT AN “OCCURRENCE” SUFFICIENT TO TRIGGER COVERAGE (Middle District)

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In L.R. Costanzo Company v. American Fire and Casualty Insurance Company, the court heard a defendant’s motion for summary judgment on the issue of whether it was a proper party to the suit. The suit commenced after the insured was sued for property damage upon conclusion of a project.  The insured sued the carrier for a defense against the original suit. The insured allegedly possessed a commercial general liability policy with the carrier. Under the policy, the carrier’s duty to defend would be triggered by an “occurrence,” which means “an accident, including continuous exposure to substantially the same general harmful conditions.”

The carrier, Ohio Casualty Insurance Company (“OCIC”) moved to dismiss, arguing that it did not issue the insurance policy in question, meaning that there was no contract between itself and the insured, but the Court denied the motion. After discovery, the carrier filed motions for summary judgment, seeking resolution upon the insured’s breach of contract and bad faith claims.

There were three primary issues before the court: 1) whether OCIC, the alleged carrier, is a proper defendant, 2) whether the carrier breached a duty to defend the insured in the underlying case, and 3) if so, whether the carrier acted in bad faith by not defending the insured.

First, the court found that American Fire (“AFCC”) issued the policy, not OCIC. Discovery had revealed that AFCC underwrote the policy – the insured’s insurance agent testified that AFCC underwrote the policy, while OCIC underwrote the umbrella policy. Much of the confusion also comes from the similarity of its name to Ohio Casualty Group (“OCG”). OCG is the parent company of AFCC, OCIC, and ten other insurance companies, and it is the trademark umbrella under which these subsidiary companies operate.

Moreover, OCG’s letterhead says “Ohio Casualty,” “Ohio Casualty Group,” or “Ohio Casualty™.” The insured does not provide any evidence to dispute these findings. The only evidence that suggests OCIC is the underwriter is the initial denial of coverage letter that stated, “We have investigated this claim and have determined that the allegations fall outside of the coverage provided by your liability policy carried with Ohio Casualty Insurance Company.”

Second, the court held that there was no “occurrence” under the policy to trigger the carrier’s duty to defend. In the underlying complaint, the insured alleged that faulty workmanship was the basis for its claims. As such, the carrier’s duty to defend depends upon whether the faulty workmanship qualified as an “occurrence,” or “an accident, including continuous exposure to substantially the same general harmful conditions” under the policy.

Relying on relevant precedent, the court ruled that faulty workmanship is not an occurrence, meaning that the carrier had no duty to defend.

Lastly, the court ruled that the carrier did not act in bad faith. First, the court held, because there was no “occurrence” under the policy, the carrier did not act in bad faith in denying a defense to Plaintiff in the underlying case.

The insured’s main argument for bad faith was that the carrier conducted an inadequate investigation before declining to defend the insured in the underlying suit, which the court rejected.  The court recognized the record showed the carrier engaged in a thorough inquiry before determining there was no duty to defend.

As such, the court granted summary judgment to the carrier.

Date of Decision: January 6, 2012

L.R. Costanzo Co. v. Am. Fire & Cas. Ins. Co., No. 3:10-CV-774, 2012 U.S. Dist. LEXIS 1655 (M.D. Pa. Jan. 6, 2012) (Mariani, J.)

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