SEPTEMBER 2012 BAD FAITH CASES: IN THE CONTEXT OF A THIRD-PARTY NEGLIGENCE SUIT, STATUTORY BAD FAITH CLAIMS MUST BE PREDICATED UPON CARRIER’S DUTY TO DEFEND OR INDEMNIFY (Western District)

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In Norco v. Allstate Ins. Co., the court heard a dispute over insurance coverage under an automobile policy provided by the carrier to an insured whose negligent driving caused the third-party insured in this action to sustain severe injuries. The third-party insured is the infant minor son of the allegedly negligent driver, who brought this claim through his guardians ad litem.

After notifying the carrier about the accident, the parties entered settlement negotiations. The carrier notified the guardians that, because they had selected a limited tort option, any recovery was limited. As such, the carrier told the guardians that if they did not accept an offer of settlement, they would receive nothing. In mid-2011, the carrier presented to the Orphans Court of Lawrence County a petition to approve settlement of the minor’s claim. The judge refused to approve the settlement and advised the guardians to have the agreement and release reviewed by independent counsel. They followed this advice.

The guardians thereafter brought nine causes of action against the carrier, including in relevant part: (1) a negligence claim against the driver; (2) a demand for the policy limits of the applicable policy; (3) a common law bad faith claim; (4) a statutory bad faith claim; and (5) a claim for the wrongful use of civil proceedings. After claims against the driver were settled, the carrier removed to federal court and filed this motion to dismiss.

With respect to the guardians’ coverage claim, the magistrate judge recommended dismissal because, at the time of this action, the carrier had already paid the full policy limits with respect to available first-party medical benefits.

Turning to the guardians’ common law bad faith claim, the court examined Pennsylvania Supreme Court precedent and recommended dismissing the claim. Specifically, the guardians’ claimed that Dercoli v. Nat’l Mut. Cas. Ins. Co. recognized a cause of action for common law bad faith where a carrier undertakes to act as a legal advisor to its insured, giving rise to a fiduciary-like relationship. In such a situation, a carrier voluntarily transforms itself into a legal advisor and owes a duty to the insured parties.

In this case, the guardians were initially discouraged from hiring independent counsel. However, they did not suffer any harm prior to their retention of independent counsel. Because they rejected the carrier’s settlement offer and did not lose or waive any rights under the insurance policy, the court reasoned, a common law bad faith claim was improper due to the lack of cognizable harm.

The court then examined the guardians’ statutory bad faith claim and recommended granting the carrier’s motion to dismiss. The court initially agreed with the guardians that there is no distinction between first-party and third-party claimants in the bad faith context.

However, a statutory bad faith claim must “arise under an insurance policy,” meaning that, in the context of a third-party negligence claim, such a claim must arise from the carrier’s duty to defend and/or indemnify its insured. In this case, the guardians’ statutory bad faith claim could not be predicated upon the carrier’s duty to defend and/or indemnify the injured minor child because no such duty existed under the policy. The court also recommended the dismissal of a separate statutory bad faith claim brought by the guardians in their own capacity. The court recommended dismissal because the guardians lacked standing to bring such a claim as guardians ad litem.

While the court recommended dismissal of all counts, it recommended denial of the carrier’s motion to dismiss the guardians’ wrongful use of civil proceedings claim. The court reasoned that the carrier knew it did not have cause to initiate the Orphan’s Court settlement proceedings because the guardians had rejected all offers to settle.

The District Court for the Western District of Pennsylvania thereafter adopted the magistrate’s Report and Recommendation in full.

Date of Decision: July 17, 2012

Norco v. Allstate Ins. Co., No. 2:11-cv-1453, 2012 U.S. Dist. LEXIS 128343, U.S. District Court for the Western District of Pennsylvania (W.D. Pa. July 17, 2012) (Lenihan, M.J.)
Date of Decision: September 10, 2012
Norco v. Allstate Ins. Co., No. 11-1453, 2012 U.S. Dist. LEXIS 128567, U.S. District Court for the Western District of Pennsylvania (W.D. Pa. Sept. 10, 2012) (Lancaster, C.J.)

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