JULY 2013 BAD FAITH CASES: INSURER’S DELAY IN SETTLING THIRD PARTY CLAIM CONSTITUTES A DENIAL OF BENEFITS AND CAN CREATE A CAUSE OF ACTION FOR COMMON LAW AND STATUTORY BAD FAITH DESPITE PAYMENT OF POLICY LIMITS AND LACK OF EXCESS VERDICT (Middle District)

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Plaintiff brought suit against his insurer (“the carrier”) claiming its failure to settle an underlying case against plaintiff in a more timely fashion constituted a bad faith  under Pennsylvania’s bad faith statute. In the underlying case, the carrier initially denied the claims based on the policy’s employee exclusion, excluding coverage for injuries suffered by employees arising out of or in the course of their employment.

Plaintiff informed the carrier the underlying plaintiff was not his employee at the time of the accident, but the carrier proceeded with two separate declaratory judgment actions in the case to have its obligations under the policy determined by the court. Ultimately the case was settled within approximately two and a half years, with the carrier tendering the full amount of the policy limits.

Included in the settlement was a hold-harmless clause, in which the underlying plaintiff agreed to indemnify the plaintiff in this case, and save him harmless for any and all further liability, loss, damage, claims or expenses arising out of the underlying plaintiff’s death, as well as any and all liability, loss, damage or claims arising out of the hold-harmless clause including satisfying any judgment on his behalf.

Two months prior to entering the settlement agreement, plaintiff filed this suit alleging statutory bad faith and common law breach of the contract bad faith for failure to indemnify.

Plaintiff alleges that the carrier’s refusal to settle the case more promptly was “callous, unjustified and unreasonable” and caused plaintiff to suffer emotional distress, anxiety, depression and psychological harm. Plaintiff also claimed damages for the effect the underlying lawsuit had on his business, and attorney fees he incurred in the defense of the underlying action.

The carrier filed a Motion for Summary Judgment alleging that because it paid the policy limits prior to a finding of liability against plaintiff, there can be no common law bad faith claim because the possibility of an excess verdict was eliminated. The carrier further asserted there can be no claim for statutory bad faith without an excess verdict against the plaintiff, which did not occur here as the case settled prior to any finding of liability.

On the former point, the Court cited numerous cases, including the seminal Birth Center case, which makes abundantly clear that common law contractual bad faith cannot be precluded per say on the basis that the carrier ultimately paid the policy limits, in the context of a third party claim.  Via this decision, Pennsylvania’s Supreme Court opened the door for an insured to seek compensatory damages other than pure failure to pay under the policy.

This later question has not been presented to the Pennsylvania Supreme Court, however similar issues have been handled in other Pennsylvania federal cases.

In 2006, the Eastern District of Pennsylvania found in Fuss Builders-Contractors, Inc. v. Assurance Co. of North Am. that “there is no recognized cause of action against an insurer for delaying settlement of a third party claim” and refused to “create a cause of action not yet recognized by Pennsylvania law.”  Two years later, the Western District of Pennsylvania issued its opinion in Gideon v. Nationwide Mutual Fire Ins. Co., disagreeing with the analysis in Fuss, and found an insurer’s declaratory judgment action against its insured could be interpreted as a denial of benefits and therefore the basis of a cause of action for bad faith.

Following its ruling in Gideon, the Western District in Standard Steel, LLC v. Nautilus Ins. Co. refused to find an excess verdict was a condition precedent to a statutory bad faith claim failure to settle a third party claim because no Pennsylvania case law had imposed such a requirement.

Ultimately, the court followed the Standard Steel ruling, finding the carrier could not avoid further inquiry into its conduct simply by asserting its payment of the policy limit as a complete defense entitling it to summary judgment as a matter of law. Furthermore, the court found “a delay in payment of a third party claim, if of inordinate and unreasonable length, effectively becomes a denial of the claim.”

Such a denial of benefits creates the basis for a claim of bad faith against the insurer, even if the insurer pays the policy limits prior to the entry of a verdict. The carrier’s motion for summary judgment was denied.

Date of Decision: May 16, 2013

Bodnar v. Nationwide Mut. Ins. Co., Civil Action No. 3:12-CV-1337, 2013 U.S. Dist. LEXIS 70144 (M.D. Pa. May 16, 2013) (Mariani, J.).

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