JANUARY 2014 BAD FAITH CASES: EASTERN DISTRICT DENIES INSURED’S MOTION ON THE PLEADINGS OF INSURER’S BAD FAITH BREACH OF CONTRACT COUNTERCLAIM (Philadelphia Federal)

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Plaintiff brought suit against its insured concerning subrogation of an employee’s personal injury claim. Plaintiff was self-insured up to $1 million per claim under the Pennsylvania Workers’ Compensation Act, after which the insurer provided an excess policy to plaintiff for up to $25 million in excess coverage.

The policy provided the insurer with subrogation rights in the event of a successful recovery of damages from a third party. Specifically, the policy provided that any recovered amounts would first be used to reduce the insurer’s loss, and any remaining balance would be paid to the insured. The policy also required the insured to retain a loss of $1 million.

After a catastrophic work injury, plaintiff provided the one million in a work-related incident, in benefits to the employee. After that point, plaintiff began submitting all remaining pay-outs for reimbursement to the insurer. The insurer ultimately paid out approximately $2.1 million in reimbursements for the employee’s benefits. The employee brought suit against several third parties. In that litigation, he recovered approximately $6.5 million. Under the PWCA, a portion of the recovery was subject to a lien based on the workers’ compensation benefits the employee had already received. That money, $1.5 million, was paid into escrow and both plaintiff and the insurer were notified.

At that point, plaintiff sought reimbursement from the escrow funds. The insurer believed it should receive the funds first, and since the funds were insufficient to fully compensate the reimbursements it paid out to plaintiff, that it should receive all of the funds. Plaintiff filed suit, and the insurer filed three counterclaims, seeking declaratory judgment and alleging bad faith by plaintiff. Summary judgment motions were filed on all claims.

The court ruled in the insurer’s favor on the declaratory judgment issue, as the plain language of the policy clearly required the insurer be reimbursed out of any third party recovery before plaintiff. Furthermore, the policy required plaintiff to retain a million dollar loss to have access to the excess coverage, and if plaintiff were reimbursed before the insurer, that requirement would not be satisfied. The court dismissed plaintiff’s complaint, and allowed the insurer to move forward with its bad faith claim.

Date of Decision: Dec. 12, 2013

Solid Waste Servs. v. New York Marine & Gen. Ins. Co., Civil Action No. 13-1525, 2013 U.S. Dist. LEXIS 173849 (Dec. 12, 2013 E.D. Pa.) (Pratter, J.).

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