MARCH 2017 BAD FAITH CLAIMS: COURT LEFT OPEN POSSIBILITY OF BAD FAITH CLAIM ON THEORY THAT INSURER DID NOT FOLLOW THE “MAKE WHOLE” RULE BEFORE SEEKING SUBROGATION (Western District)

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The insured’s claim for coverage had three aspects: (1) claims that were covered and paid; (2) claims that were not covered; and (3) disputed coverage claims as to which no payment was yet made. Despite the fact that the insured and insurer were trying to iron out the third category, the insurer made clear it intended to pursue its subrogation rights as to the part of the claim that had been paid.

The insured alleged this was impermissible under the “make whole” rule; and further constituted bad faith, as the insurer cannot pursue subrogation before it makes the insurer whole. The carrier argued it could pursue subrogation “contending that the ‘make whole rule, whatever it may mean, is limited to those circumstances in which the underlying tortfeasor does not have enough money to pay the balance of what it owes to the insured,” and SEC filings showed the instant tortfeasor had more than enough funds to pay any claims.

The court found that at the complaint/motion to dismiss stage there were open issues on the tortfeasor’s wherewithal and coverage. It also stated that: “the Pennsylvania Superior Court did not limit the reach of the ‘make whole’ rule to those circumstances in which the underlying tortfeasor had insufficient assets to cover both the subrogation claim and the claim by the tort victim for excess/uncovered losses. In reality, it stated both that the ‘make whole’ rule was the law of the Commonwealth, and that it had no such limitation.” In light of these factors, the court refused to dismiss the declaratory judgment claim, and stated that it was “not in a position to conclude that as a matter of law, the ‘bad faith’ claim is wholly lacking in merit….”

Date of Decision: January 13, 2017

Gillis v. State Auto. Mut. Ins. Co., No. 16-1285, 2017 U.S. Dist. LEXIS 5214 (W.D. Pa. Jan. 13, 2017) (Hornak, J.)

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