SEPTEMBER 2015 BAD FAITH CLAIMS: SETTLING AN APPARENTLY SIMILAR BUT IN FACT DISTINCT CLAIM, WHILE REFUSING TO DEFEND AND INDEMNIFY, IS NOT THE BASIS FOR A BAD FAITH CLAIM (Western District)

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In Zhuang v. Hanover Insurance Company, the court addressed legal malpractice insurance coverage and a bad faith claim by the injured party against the defendant-lawyer’s insurer.  The lawyer had recommended an investment in a business owned by the lawyer, in which the plaintiff, among others, had invested.  The investment failed and the plaintiff brought action against the lawyer.  The lawyer’s insurer refused to defend or indemnify.

The lawyer’s relationship to the injured plaintiff, who obtained a default judgment against the insurer, was somewhat attenuated.  By contrast, there was another investor who likewise brought a malpractice claim against the lawyer, who had a longer standing lawyer client relationship with the lawyer.  The insurer settled that claim.

The lawyer assigned his rights against his carrier to the injured plaintiff.  The plaintiff brought claims for breach of contract and bad faith.  The bad faith claim focused in large part on this fact that the insurer participated in settlement of the other investor’s case, but refused to defend or indemnify in the case of the plaintiff’s investment.

The court ruled that the insurer did have a duty to defend the lawyer against the plaintiff’s claim, and that the claim was covered under the malpractice policy.  However, this was not enough in itself to establish bad faith: “Otherwise, essentially all situations where an insured’s claims were denied by an insurer may constitute bad faith; there must be something more to recover for bad faith.”  There were no facts “from which the Court can find, let alone find by clear and convincing evidence, that [the insurer] acted with improper purposes.”

The court did not accept the argument that paying the other investor’s claims, but not plaintiff’s, constituted bad faith. “An insurance company is permitted to investigate each claim independently and is not obliged to pay all claims that are submitted.”  The plaintiff has not provided “any evidence that the claim paid … was related to less egregious behavior on [the insured’s] part or any other factor that would obligate [the insurer] to pay both claims or be found to have acted in bad faith.”

Specifically, covering the claim brought by the long-term client rather negated the notion of bad faith “because this factor could reasonably be a basis for [the insurer] to believe that similar actions by [the insured attorney] with respect to an existing long-term client were covered, while a claim by an individual who did not have an existing relationship with the firm was arguably not covered by the Policy.” This claim was also settled before the malpractice claim at issue was filed.  Thus summary judgment was entered for the insurer on the bad faith claim.

Date of Decision:  September 3, 2015

Zhuang v. Hanover Ins. Co., 15cv0481, 2015 U.S. Dist. LEXIS 118047 (W.D. Pa. September 3, 2015) (Schwab, J.)

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