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A pedestrian was struck as she was crossing a roadway by a third party driver.  The pedestrian died as a result.  The pedestrian’s father possessed an automobile insurance policy (the “policy”).  The policy provided, in pertinent part: “Who Is An Insured  If the Named Insured is designated in the Declarations as: 1.  An individual, then the following are “insureds”:  a.  The Named Insured and any “family members.”  2. A partnership . . . then the following are insureds”: a. Anyone “occupying” a covered “motor vehicle” or temporary substitute for a covered “motor vehicle.”  The covered “motor vehicle” must be out of service because of its breakdown, repair, servicing, “loss” or destruction. b. Anyone for damages he or she is entitled to recover because of “bodily injury” sustained by another insured.”

The policy Declarations designated the insured as a partnership.  However, under a separate heading of “NAMED INSURED,” the partnerships name was listed, as well as the father’s name.  The plaintiff insurer denied coverage under the policy on the ground that the daughter was not an “insured”; the insurer took the position that only the partnership, and not the father, was a named insured.

The father responded by sending a letter informing the insurer that he personally owned one of the vehicles insured under the policy, and that the vehicle had been used for purely personal travel.  However, at his deposition, he admitted that the vehicle had been used to plow the business when it snowed and also to pick up parts for the business, an automobile repair shop.

Six months after the accident, an underwriter sent the insurance agent for the partnership correspondence stating that she would be taking the father and another individual off the policy and leaving only the partnership as a named insured.

The underwriter also informed that the vehicle that the father claimed was owned by him personally would be deleted.  The underwriter responded that he felt that deleting the vehicle and cancelling the policy sent a message to the insured that they did not want exposure for the daughter’s death, which would in turn validate coverage for the death.

However, the plaintiff insurer still chose to cancel the policy as to the individuals.  The plaintiff insurer filed a declaratory judgment action, and the parents filed a counterclaim asserting bad faith denial of insurance benefits pursuant to 42 Pa. Cons. Stat. Ann. § 8371.

The plaintiff insurer filed a motion for summary judgment on the declaratory judgment direct claim and the bad faith counterclaim.  The defendant parents and estate filed a cross-motion for summary judgment on the declaratory judgment claim only.

As to the declaratory judgment action, the court found that ambiguity existed and therefore the defendants were entitled to coverage.

As to the defendants’ bad faith counterclaim, the court noted that “an insurer’s denial of a claim does not constitute bad faith if it is based on a reasonable legal position in an unsettled area of the law.”  While the defendants contended that the plaintiff insurer had no reasonable basis for denying underinsured motorist benefits under the policy, the court disagreed, even though it had ultimately ruled against the insurer on coverage because of ambiguity.

The defendants also argued that the correspondence between the insurer and the agent evidenced bad faith.  However, the court stated that the proposed deletion or cancellation could arguably be viewed as a change in the terms of the policy or a clarification as to what those terms had always been.

The court stated that to prove a violation of the bad faith statute, “defendants must do more than show that plaintiff acted to clarify its perceived limits to the scope of coverage after being presented with a seemingly questionable UIM claim.”  The court therefore granted the insurer summary judgment on the bad faith counterclaim.

One of the court’s key findings was that the plaintiff does not have to prove ill-will or self-interest as elements of a bad faith claim, in addition to objectively unreasonable behavior and conscious or reckless disregard thereof.

Rather, the presence or absence of ill-will or self-interest goes to the issue of whether, if there is objective unreasonableness, the insurer’s consciously chose to act that way or recklessly disregarded that it was doing so.

Date of Decision:  February 28, 2007

Employers Mutual Casualty Co. v. Loos, U. S. District Court Western District of Pennsylvania, 476 F. Supp. 2d 478 (W.D. Pa. Feb. 28, 2007) (Conti, J.)