MARCH 2014 BAD FAITH CASES: THIRD CIRCUIT APPLIES RESTATEMENT TO DETERMINE APPLICABLE STATE’S LAW ON POLICY INTERPRETATION WHERE PENNSYLVANIA AND NEW JERSEY CONFLICTED ON SCOPE OF “EMPLOYER’S EXCLUSION”; NO BAD FAITH WHERE INSURED SUPPLIED INSURER WITH WRONG DOCUMENTS AS BASIS FOR COVERAGE, AND WHERE THERE WAS A DISPUTE OF LAW ON APPLICABILITY OF EMPLOYER’S EXCLUSION AND TRIAL COURT HAD FOUND NEW JERSEY LAW TO REACH A SIMILAR CONCLUSION AS PENNSYLVANIA LAW (Third Circuit)
In Arcelormittal Plate, LLC v. Joule Tech. Servs., the issue involved yet another case on the effect of an employer’s exclusion upon an insured that did not itself employ the injured plaintiff-employee. The injured employee was an employee of a the named insured, who brought a claim against an additional insured.
The case hinged on a choice-of-law analysis as Pennsylvania law would apply the exclusion to all insureds, while New Jersey law would apply it solely to the insured employing the plaintiff-employee, under the policy language at issue. If resolved in favor of New Jersey law on the key exclusion issue, then the court would have to address the arguments of late notice, and that there was no written contract in place at the time of the injury giving the additional insured, additional insured status at the relevant time.
The policy language at issue involved the employee of “the insured” language, as opposed to the employee of “any insured” language. It contained a provision alternately known as an “employer’s liability exclusion,” an “employer’s exclusion,” or an “employee exclusion.” The exclusion stated as follows: “[t]his insurance does not apply to . . . ‘[b]odily injury’ to (1) [a]n ’employee’ of the insured arising out of and in the course of (a) [e]mployment by the insured; or (b) [p]erforming duties related to the conduct of the insured’s business[.]” Insured was defined as “any person or organization qualifying as such under SECTION II [entitled “WHO IS AN INSURED”].”
An endorsement to the policy amended Section II to “include as an insured any person or organization with whom you have agreed to add as an additional insured by written contract.”
The policy also contained a severability clause, sometimes known as a “separation of insureds” clause, stating that “[t]his insurance applies: a. As if each Named Insured were the only Named Insured; and b. Separately to each insured against whom claim is made or ‘suit’ is brought.” The policy provided that Liberty had “the right and duty to defend the insured against any ‘suit’ seeking [bodily injury] damages.”
The court found a conflict of laws, and determined New Jersey law should apply under Pennsylvania’s choice-of-law rules, which followed the Restatement (Second) of Conflicts of Laws. In conducting this analysis, it made clear that: “The authors of the Restatement expressed a preference ‘that only one set of laws govern a given insurance contract, and . . . disapproval of the possibility that the laws of different jurisdictions might apply to different risks under the policy.'”
Applying Pennsylvania choice-of-law rules, the court had to determine which state had the greater interest in the application of its law, which involved weighing the parties’ contacts and relationships with each state on a qualitative scale according to their relation to the policies and interests underlying the particular issue.
The Restatement (Second) of Conflict of Laws, in an official comment, explains that in an insurance dispute, a court should generally give the location of the insured risk “greater weight than any other single contact.” Nonetheless, if the policy covers “a group of risks that are scattered throughout two or more states,” the location of the risk has “less significance” to the choice-of-law determination.
In that case, because the Policy covered all of named insured’s operations, and because the named insured dispatches its employees to several states, the “location of the insured risk” is scattered among jurisdictions.
The court was thus obligated to consider a number of other factors, under Restatement section 188(2): “(1) the place of contracting; (2) the place of negotiation of the contract; (3) the place of performance; (4) the location of the subject matter of the contract; and (5) the domicile, residence, nationality, place of incorporation and place of business of the parties.”
Considering these factors on a “qualitative scale,” the court concluded that New Jersey had a greater interest in the application of its law than Pennsylvania. The contract itself was made in New Jersey, involved a New Jersey primary insured, and covered the diverse risks associated with the activities of that company across several states. This conclusion also renders less likely the possibility that the insurer and the insured will face varying obligations under the same policy depending on the locus of the underlying tort.
Specifically, the place of contracting was New Jersey, which is where the insurance company delivered the insurance contract to the insured.
Second, the insurer did not rebut the additional insured’s assertion that at least some of the negotiations took place in New Jersey.
Third, the place of performance, and fourth, the location of the contract’s subject matter, both extend into the several jurisdictions where the insured sends its employees.
Last, the parties are diverse. The insurer is a Massachusetts corporation with its principal place of business in Massachusetts. The primary insured is a New Jersey corporation with its principal place of business in New Jersey. And the additional insured is subject to several layers of corporate ownership such that its principals are considered citizens of Nova Scotia, Quebec, and Luxembourg.
After finding coverage, the court next considered the bad faith claims under New Jersey law on the basis of there being no contract creating additional insured status, and late notice.
The New Jersey Supreme Court has described the standards applicable to a claim for bad faith denial of insurance benefits as follows: “To show a claim for bad faith, a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim. It is apparent, then, that the tort of bad faith is an intentional one. . . . [I]mplicit in that test is our conclusion that the knowledge of the lack of a reasonable basis may be inferred and imputed to an insurance company where there is a reckless . . . indifference to facts or to proofs submitted by the insured.” A plaintiff must prove that “no debatable reasons existed for denial of the benefits.”
The insurer adduced expert testimony from a claims handling expert, who concluded that under applicable law and industry standards, the insurer had performed an “intelligent, honest, fair and reasonable review and investigation” into the additional insured’s demand for coverage, based on three justifications:
(1) the additional insured’s initial demand letter did not cite the contract that the named the additional insureds, and which the additional insureds eventually acknowledged governed this dispute; but instead asserted coverage based on purchase orders which the insurer reasonably determined did not establish a right to coverage; and the insurer did not get the applicable contract for over a year;
(2) the insurer was justified in denying coverage because that contract did not entitle the additional insured to coverage for bodily injury to the named insured’s employee resulting from the additional insured’s own negligence; and
(3) the insurer was justified in denying coverage because of unduly late notice regarding the underlying lawsuit, which the expert believed irreparably prejudiced the insurer’s ability to defend the claim.
The additional insured claimed that the carrier had the relevant contract in its possession at an earlier date, and suggested that the carrier had “an action plan” to deny coverage on a meritless ground. The court found the “action plan” language innocuous when taken in context, and that it went back to the issue of relying on the wrong documents to make a claim for coverage.
The District Court had dismissed the bad faith claim for two reasons: (1) its finding that the employee exclusion barred the claim and (2) the fact that additional insured initially predicated its claim on the incorrect documents.
The Third Circuit concluded that in light of the District Court’s ruling and the Pennsylvania Supreme Court’s taking a different position than New Jersey courts on the same language, whether the employee exclusion barred the claims presented a legal issue that was at least “fairly debatable.”
Moreover, the additional insured’s misplaced reliance on certain irrelevant documents throughout much of the dispute, including up to and beyond the start of the instant litigation, was uncontested. In sum, because the insurer denied coverage based on factual and legal grounds that were at least plausible at the time of its decision, the insurer was entitled to summary judgment on the bad faith denial of coverage.