NOVEMBER BAD FAITH CASES
INSURER’S FAILURE TO FOLLOW BEST PRACTICES AND SPEAK WITH INSURED BEFORE DENYING COVERAGE NOT BAD FAITH WHERE NO COVERAGE (Third Circuit)

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In Smith v. Continental Casualty Company, the assignees hired an agent of an insurance broker-dealer to perform financial planning services.  The agent allegedly recommended investments in trusts that in turn invested in an unregistered off-shore entity.  That entity later filed bankruptcy and was alleged to have been a Ponzi scheme.  The assignees sued the agent for breach of contract and bad faith.

The carrier providing insurance for the broker-dealer’s agents denied coverage, and refused to provide a defense to the agent against the assignees’ claims.  The assignees and the agent settled, and the agent assigned its rights against the insurer to the assignees.  The court found that the assignees’ claim was excluded from coverage because the assignees’ investments did not involve approved products, and a policy exclusion precluded coverage for any claim “involving services or products not approved by” the broker-dealer.  The court held that the assignees’ bad faith claim failed because the insurer had a reasonable basis for the denial of coverage.  The court held that although the insurer should have spoken with the agent before denying coverage, a failure to follow best practices did not constitute bad faith.

Date of Decision: October 8, 2009

Smith v. Cont’l Cas. Co., No. 08-4140, U.S. Court of Appeals for the Third Circuit, 2009 U.S. App. LEXIS 22240, (3d Cir. October 8, 2009) (Barry, J.) (not precedential)

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INSURER’S FAILURE TO FOLLOW BEST PRACTICES AND SPEAK WITH INSURED BEFORE DENYING COVERAGE NOT BAD FAITH WHERE NO COVERAGE (Third Circuit)”


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