MAY 2012 BAD FAITH CASES: BAD FAITH CLAIM CANNOT BE RAISED AGAINST THIRD PARTY ADMINISTRATOR WHICH DID NOT TAKE ON ROLE OF AN INSURER (Philadelphia Federal)

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In McLaren v. AIG Domestic Claims, Inc., the court dismissed an insured’s bad faith and breach of contract claims. The suit arose from an underlying negligence claim against the insured party, a nurse. She was insured by National Union Fire Insurance Company (NUFI). Although insured by NUFI, the claim against her was administered by AIG, a wholly owned subsidiary of NUFI.

AIG appointed her with defense counsel, and communications with NUFI went through AIG. The underlying case proceeded through a four-week trial, which resulted in a mistrial. The case was settled. Prior to settlement, she had signed a consent to settle, which gave AIG authority to settle up to policy limit; but she claimed this consent was coerced and she later withdrew the consent. She notified her personal legal counsel that she would refuse to consent to a settlement and that counsel likewise gave notice that the consent was withdrawn. However, settlement negotiations continued post-trial to at least some degree, and the plaintiffs in the negligence action took the position that they accepted a purported settlement offer from appointed defense counsel, which was later opposed by that counsel as well. The plaintiff moved to enforce and the state court enforced the settlement against the insured.

The insured/plaintiff claimed that the report of the settlement caused her harm, and she brought this suit. It included among other things a bad faith claim against AIG, whom she claimed she always believed to be her insurer. She claimed that AIG acted in bad faith and breached the terms of its policy by agreeing to an unauthorized settlement. She claimed that the act was not in her best interested and that in settling AIG breached its duty of good faith and fair dealing. She also alleged that AIG knew or recklessly disregarded the fact that there was no reasonable basis to settle for her $500,000 policy limits. Moreover, she claims that as a result of the settlement, her professional reputation as a midwife is forever tarnished.

AIG was not her insurer, and she claimed she was still entitled to relief under Pennsylvania’s bad faith statute because AIG was NUFI’s “alter ego”, was its agent and/or was her de factor insurer. However, her only contract was with NUFI as an insurer, and the court rejected all of these arguments. Thus, AIG was not an insurer in this matter and as such could not be subject to a statutory bad faith claim.

Specifically, the court held that AIG, a non-party to the insurance contract who administered the claim, did not meet the criteria for being deemed an insurer. It did not issue an insurance policy or collect premiums, or assume certain risks and contractual obligations in exchange for those premiums. Concomitantly the court found in the absence of a privity of contract there was no basis for a breach of contract claim; and that the agent of a disclosed principal could not be sued for the breach of a contract between that principal and another with whom it had contracted.

Date of Decision: March 30, 201

McLaren v. AIG Domestic Claims, Inc., No. 10-cv-04224, 2012 U.S. Dist. LEXIS 44808, U.S. District Court for the Eastern District of Pennsylvania (E.D. Pa. Mar. 30, 2012)

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