JUNE 2018 BAD FAITH CASES: WHERE THERE IS NO OCCURRENCE THERE IS NO DUTY TO DEFEND OR INDEMNIFY, AND SO NO WAY TO PROVE A KNOWING OR RECKLESS DISREGARD OF A REASONABLE BASIS TO DENY COVERAGE (Third Circuit, Pennsylvania law)

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In May 2016, the trial court granted the insurer summary judgment on coverage because faulty construction work did not constitute an occurrence, ultimately relying on the Pennsylvania Supreme Court’s Kvaerner opinion. Absent any duty to defend or indemnify, the insurer’s policy interpretation could not have been a knowing or reckless disregard of a reasonable basis to provide coverage, and accordingly the trial court held there was no bad faith. The Third Circuit affirmed.

Among other things, the appeals court rejected the argument that damages flowing from faulty workmanship were an occurrence, even if the faulty workmanship was not an occurrence. The court observed there was no Pennsylvania Supreme Court case law to support this limitation on defining occurrence. Moreover, Third Circuit precedent (Specialty Surfaces International v. Continental Casualty) held that reasonably foreseeable damages resulting from faulty workmanship are “not covered, even when such damage occurs to areas outside the work provided by the insured.” The Third Circuit follows the Pennsylvania Superior Court’s reasoning in Millers Capital v. Gambone on this point. (This 2013 post describes the interplay of Kvaerner, Millers Capital and Specialty Surfaces).

The Third Circuit likewise affirmed the bad faith dismissal: “Because the duty to defend is broader than the duty to indemnify, [the insured’s] claim for indemnification also fails. Its argument that [the insurer] acted in bad faith fails because it has presented no evidence that [the insurer] ‘did not have a reasonable basis for denying benefits under the policy and that [it] knew of or recklessly disregarded its lack of reasonable basis.’” The Third Circuit cites the Superior Court’s 2013 Grossi v. Traveler’s decision on this point.

Date of Decision: June 6, 2018

Lenick Construction, Inc. v. Selective Way Insurance Co., U.S. Court of Appeals Third Circuit, No. 16-1891, 2018 U.S. App. LEXIS 15197 (3d Cir. June 6, 2018) (Hardiman, Roth, Smith, JJ.)

 

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