NOVEMBER 2015 BAD FAITH CASES: COURT AFFIRMS JUDGMENTS FOR EXCESS INSURER: (1) PLAIN LANGUAGE OF POLICY MADE CLEAR THAT NEITHER EXCESS NOR UMBRELLA COVERAGE APPLIED; (2) DEFENSE PROVISION OF POLICY WAS NEVER TRIGGERED; AND (3) DECISION NOT TO PAY FOR APPEAL BOND WAS NOT BAD FAITH (Third Circuit - Pennsylvania)

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In Charter Oak Insurance Company v. Maglio Fresh Foods, the Court affirmed a 2013 summary judgment in favor of the excess and umbrella insurer, and a 2014 non-jury verdict on the remaining claims. Among other things, the appellate court found that the insured failed to show that the excess and umbrella insurer “acted in bad faith or breached its contract with the insured because the defense provision of the policy was never triggered because the limit of the primary insurer’s policy was never exhausted by the payment of covered claims.”

The insured was originally sued by one of its competitors, and sought defense and indemnity from its primary insurer and its excess/umbrella insurer. The primary policy had a limit of $1,000,000, and covered claims for advertising injury but specifically excluded coverage for advertising injury “arising out of oral or written publication of material, if done by or at the direction of the insured with knowledge of its falsity.”

The excess policy at issue had a limit of $25,000,000, and provided excess coverage with the same terms and conditions as the underlying insurance, as well as umbrella coverage pursuant to its own terms. The primary policy included a duty to defend provision stating the duty would end once it had used up the limits of insurance for the payment of judgments or settlements, while the excess policy provided a duty to defend “when the applicable limit of underlying insurance has been exhausted by payment of claims for which coverage is afforded under this policy.”

The primary insurer agreed to defend the insured pursuant to a reservation of rights, and the excess and umbrella insurer determined that the case was unlikely to reach the excess layer of coverage. The primary insurer subsequently sought a declaratory judgment that the claims against the insured were not covered under the policy, and the excess and umbrella insurer brought a cross claim seeking a similar declaratory judgment.

There were counter and cross claims for breach of contract and bad faith against the insurers. The District Court ruled in favor of the insurers. The insured argued that the lower court erred in determining that the excess insurer “was not obligated to indemnify it for the underlying verdicts and erred in rejecting its claims for bad faith and breach of contract.”

On appeal, the Third Circuit found that the plain language of the excess policy was clear that “neither its excess nor its umbrella coverage applied to the damages at issue.” Accordingly, the Court determined that the excess insurer could not have acted in bad faith by failing to defend the insured, especially since the primary insurer provided the insured with a defense throughout the underlying litigation.

Finally, the Court found that the only real issue was whether the excess insurer acted in bad faith by failing to post, or contribute to the posting, of an appeal bond. The Court held that the insurer had a reasonable basis for its conduct, as the limits of the primary policy were never exhausted and the defense provision of the excess policy was never triggered. The Court further stated that the excess insurer acted reasonably in assessing the insured’s claim, “investigating the claim, continuing to monitor the events of the underlying action, and hiring counsel to provide guidance as to its obligations.” As such, the insured failed to show that the insurer acted in bad faith.

The Court stated: “As we have elsewhere observed, however, it is a ‘rare’ case in which an insurer is liable for bad faith when there is no duty to provide coverage, … and, because [the excess insurer] had a reasonable basis for its conduct with respect to [the insured], this is not one of those rare cases.”

Date of Decision:  November 4, 2015

Charter Oak Ins. Co. v. Maglio Fresh Foods, CIVIL ACTION NO. 14-4094, 2015 U.S. App. LEXIS 19268 (3d Cir. November 4, 2015) (Barry, Fuentes, Smith JJ.)

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