JANUARY 2014 BAD FAITH CASES: ARBITRATION CLAUSE APPLIES TO BAD FAITH CLAIM AS IT ARISES OUT OF UNDERLYING ARBITRABLE BREACH OF CONTRACT CLAIM (Philadelphia Federal)

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Plaintiff brought suit against its insurer alleging the insurer was liable for business losses incurred by the plaintiff when a ruptured pipeline delayed shipments of crude oil to plaintiff’s refining facilities. The insurer provided plaintiffs with an “all-risk” policy, as well as providing “contingent business income coverage” and “contingent extra expense coverage.”

Plaintiff filed a claim under both of these clauses of the policy. After hiring independent appraisers to evaluate and analyze plaintiff’s losses and claims, the insurer denied the claims on the basis that the losses were incurred within a 45 day waiting period, and therefore, were not covered.

Plaintiff filed suit alleging breach of contract, intentional interference, and bad faith claims against the insurer and the appraisers. The insurer then filed a motion to dismiss arguing, among other things, that plaintiff’s claims were subject to an arbitration clause in the insurance policy. The relevant portion of the arbitration policy provided for arbitration if “the Insured and the Company fail to agree in whole or in part on the liability of the insured or on the amount of loss or damage…”

Plaintiff first argued the arbitration clause only applied to disagreements about the liability of the insured, and not the insurer. Based on precedent that interpreted an identical arbitration clause, the court found that argument without merit. Plaintiff also argued the arbitration clause only applied to contract disputes between the parties and not tort claims.

However, similar cases provided precedent that all claims arising out of the facts concerning the breach of contract claim will also fall within the arbitration clause. Since a bad faith claim, by its very nature, arises out of the underlying breach of contract claim, the court found the bad faith count to be arbitrable.

Date of Opinion: Dec. 12, 2013

United Ref. Co. v. Nat’l Union Fire Ins. Co., Civil Action No. 2:13-CV-909, 2013 U.S. Dist. LEXIS 175814 (E.D. Pa. Dec. 13, 2013) (Jones II, J.).

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