JUNE 2013 BAD FAITH CASES: DECLARATORY JUDGMENT ACTION DOES NOT CONSTITUTE BAD FAITH WHERE CARRIER WAS ALLEVIATED OF ANY DUTY; LENDER DOES NOT HAVE STANDING TO BRING BAD FAITH CLAIM WHERE MORTGAGE SERVICE COMPANY SUBMITTED INITIAL CLAIM TO INSURER (Philadelphia Federal)

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Allied Mortgage Group (“bank one”) provided a mortgage to a client for a real property purchase. The bank also purchased a title insurance policy from First American Title Insurance Company (“the carrier”) in connection with the mortgage, securing bank one’s mortgage as a first lien on the client’s property. The carrier issued the policy, and then hired a settlement service to handle the duties of closing and recording the mortgage.

The settlement service, however, failed to promptly follow through on its duties, and by the time it attempted to record the mortgage, two intervening mortgages had already been recorded on the property. When bank one’s mortgage service company learned of the error, it put the carrier on notice of the problem. The carrier assured the mortgage service company it would stand by its policy as issued and indemnify the insured should it suffer any losses.

Bank one subsequently bundled the mortgage and its policy, and sold the mortgage to a second bank (“bank two”). Bank two then sold the bundle to a third bank, plaintiff. Four months after selling the bundle to plaintiff, bank two merged with a larger bank (“the financial advisor”). When the client defaulted on his loans, one of the intervening mortgage providers obtained a foreclosure judgment against the property.

The property was sold at a sheriff’s sale, discharging plaintiff’s mortgage against the property. The mortgage service company filed a claim with the carrier on June 29, 2006, requesting the carrier take all necessary actions to remediate the situation resulting from the sheriff’s sale. The carrier responded on July 27, 2006, and informed the mortgage service company it would investigate the matter and contact the mortgage service company when the facts had been ascertained.

On March 23, 2007, the carrier then mistakenly brought a declaratory judgment action against the financial advisor, not realizing the mortgage in question was sold in the bundle prior to the merger. Three years after the commencement of the action, the mistake was discovered, and the financial advisor attempted to substitute plaintiff as defendant in the action, however that motion was denied. Summary judgment was found in favor of the carrier, finding it owed no responsibilities to the financial advisor.

Plaintiff then brought suit against the carrier for breach of contract and bad faith. Specifically, plaintiff alleged the carrier had acted in bad faith through (1) a lack of a good faith investigation into the facts of the case; (2) a failure to communicate with plaintiff; and (3) prolonging the litigation through the unnecessary declaratory judgment action against the financial advisor.

To recover for bad faith, plaintiff must demonstrate by clear and convincing evidence that the insurer (1) did not have a reasonable basis for denying benefits under the policy and (2) knew or recklessly disregarded its lack of reasonable basis in denying the claim.

However, in this case, plaintiff made a claim itself, and defendant never denied it benefits until the lawsuit was filed. Thus, there was no genuine issue of material fact to create the basis for a claim of bad faith.

Although an insurer may be found to have acted in bad faith for employing legal tactics to increase the cost of litigation, such a finding requires something to suggest that the conduct was intended to evade the insurer’s obligations under the insurance contract.

In the instant case, the time lapse between the initial claim and denial of benefits was in part due to plaintiff’s mortgage servicer failing to pursue the claim, and in part due to defendant’s pursuit of a declaratory judgment against a separate party, which was ultimately decided in its favor, supporting the assertion it was not a mechanism for evading obligations under the policy. With no genuine issue of material fact in play, the court granted judgment in favor of defendant as to the bad faith claim.

Date of Decision: May 7, 2013

U.S. Bank, N.A. v. First Am. Title Ins. Co., Civil Action No. 10-cv-5201, 2013 U.S. Dist. LEXIS 65751 (E.D. Pa. May 7, 2013).

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