JANUARY 2013 BAD FAITH CASES: COURT REJECTS BAD FAITH CLAIM BECAUSE INSURED WAS NOT ENTITLED TO COVERAGE UNDER POLICY (Western District)

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In K2 Settlement, LLC v. Certain Underwriters at Lloyd’s, the court heard a carrier’s motion for summary judgment filed in response to its insured’s suit for breach of contract and bad faith. The carrier had denied coverage over the insured’s claim for benefits under a Special Mortgage Bankers Bond. The claim was prompted by an employee’s unauthorized use of escrow accounts held by the insured and an affiliated entity the insured owned. The bond covered “direct financial loss” occurring as a result of dishonest acts by any Employee . . . with the manifest intent to obtain and resulted in the receipt of Improper Financial Gain,” but excluded coverage over losses arising out of “the assets or liabilities, acquired by the Assured as a result of consolidation, merger, or purchase of assets.”

The court accepted the insured’s contention that the intent element of the policy was met, but disagreed that the employee had received a financial benefit from her actions. As such, the court found that the insured’s loss was excluded under the policy.

Because the court concluded that the carrier’s summary judgment was appropriate with respect to the breach of contract issue, it also found for the carrier on the insured’s bad faith claim.

Date of Decision: November 30, 2012

K2 Settlement, LLC v. Certain Underwriters at Lloyd’s, No. 11-0191, 2012 U.S. Dist. LEXIS 170832, U.S. District Court for the Western District of Pennsylvania (W.D. Pa. Nov. 30, 2012) (Lancaster, J.)

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