In United States ex rel. SimplexGrinnell, LP v. Aegis Insurance Company, the court dismissed a bad faith claim regarding failure to pay a surety bond because a surety bond is not an insurance policy, so it can not be the basis for a claim under the bad faith statute.

In this case, a subcontractor was never paid by the contractor for work completed so it applied for payment to the surety who had issued a bond.  When the surety denied payment, the subcontractor filed suit against the contractor and the surety and added a bad faith claim against the surety.  The court granted the surety’s motion to dismiss the bad faith claim. 

The court held that, although the statute does not define “an action arising under an insurance policy,” it is generally understood that suretyship is not insurance.  It cited case law and legal treatises that explain the differences between a surety and an insurer (e.g., the instrument generated is for financial credit instead of indemnity and there is greater commercial sophistication of the parties involved in suretyship).  The court focused on how there is an indirect relationship between a surety and the party owed the money but there is a direct relationship between an insurer and its insured.  It also agreed with a prior court that allowing a bad faith claim against a surety would result in the surety having greater liability than its principal because the bad faith action could be brought against it but not against the principal (the contractor, in this case). 

The court disagreed with two cases from the Eastern District of Pennsylvania because it felt they had accepted application of the statute to suretyship without analysis.  It, instead, agreed with other courts that addressed the legislative intent of the bad faith statute and found that the differences between surety bonds and insurance policies did not merit expanding the statute to include surety bonds.

Date of Decision:  January 14, 2009

United States ex rel. SimplexGrinnell, LP v. Aegis Ins. Co., No. 1:08-CV-01728, 2009 U.S. Dist. LEXIS 2381 (M.D. Pa. Jan. 14, 2009)(Rambo, J.)

In Post v. St. Paul Travelers Insurance Company, the court denied the insurer’s motion for summary judgment on all counts, including the bad faith count, after it determined that the insurer had a duty to defend because the sanctions exclusion in the policy did not apply under the circumstances. 

The insured attorney had filed for bad faith, among other counts, because his professional liability carrier denied him defense in a sanctions case.  That case had been joined by the insured’s former client who had previously notified him of the intention to file a malpractice case against him.  The insurer asserted it owed him no duty because his policy specifically excluded sanctions. 

The court determined that the insurer did owe a duty to defend, based upon several factors. 

First, a claim was established once the insurer received written notice of the former client’s intention to file for malpractice. 

Second, the duty to defend was established because the malpractice claim was potentially covered under the policy. 

Third, the duty to defend extended to the sanctions petition once the former client joined it because the petition then became “involved” in the claim under the policy language, and, as it was based on the same alleged facts as the malpractice, it created the potential for collateral estoppel (a judgment on issues in one legal action is binding on those same issues in any subsequent legal actions). 

Fourth, even if it weren’t “involved,” defense of the sanctions petition would have been covered because: “sanctions” was not defined so it must be construed in favor of the insured; sanctions are understood to be brought by opposing counsel; former clients typically file for malpractice, not sanctions; the court must consider the alleged facts instead of the action pled when determining coverage; and the damages the former client was seeking under the sanctions petition were actually malpractice damages, which are covered under the policy.

Once the court established the insurer had a duty, the issue arose of whether the denial of coverage had been done in bad faith.  The court found there to be a genuine issue of material fact so it denied the insurer’s motion for summary judgment on the bad faith claim but without prejudice, allowing it to be raised later.  

Conversely, the court also granted two parts of the insured’s partial motion for summary judgment: on breach of the insurance contract and for a declaratory judgment.

Date of Decision:  January 7, 2009

Post v. St. Paul Travelers Ins. Co., No. 06-CV-4587, 2009 U.S. Dist. LEXIS 641, 593 F. Supp. 2d 766 (E.D. Pa. Jan. 7, 2009)(Brody, J.)

In Aquila v. Nationwide Mutual Insurance Company, the court granted the insurer’s motions to preclude testimony at trial by two of the insured’s expert witnesses because the witnesses did not have any knowledge or experience relevant to the sole remaining issue of bad faith.

The witnesses had provided reports on how the motor vehicle in this case might have been stolen.  The court acknowledged that the witnesses might have the specialized knowledge required of expert witnesses but found their reports lacked the required reliability and relevancy to the bad faith claim, which is the sole remaining claim.

Date of Decision:  January 9, 2009

Aquila v. Nationwide Mut. Ins. Co., CIVIL ACTION No. 07-2696, 2009 U.S. Dist. LEXIS 1746 (E.D. Pa. Jan. 9, 2009)(Strawbridge, M.J.)

This case is also discussed on two March 8, 2009 blogs, http://pabadfaithlaw.com/day_blogs.cfm?d=30&m=1&y=2009 .