APRIL 2017 BAD FAITH CASES: (1) INSURER INTERPRETS POLICY CORRECTLY, SO NO BAD FAITH; (2) NO BAD FAITH WHERE INSURER AGREED TO DEFEND ONLY COVERED CLAIMS, BECAUSE OF NOVEL ARGUMENT THAT USUAL RULE DID NOT APPLY TO TITLE INSURANCE (Philadelphia Federal)
This dispute arises out of a Title Insurance Company’s initial refusal to defend its insured against a third party claim. The plaintiff in the underlying action proceeded pro se, and filed three different complaints before obtaining counsel. Based on the confusing and unclear language in the complaints, the insurer denied coverage.
It was not until a fourth Complaint was filed that the insurer provided a defense under a reservation of rights. Notably, however, the insurer only agreed to defend the covered claims, and refused to provide a defense for the uncovered claims. The insurer’s position went against well-established Pennsylvania case law requiring insurers to defend against both covered and uncovered claims until all potentially covered claims had been dismissed or resolved.
The insured brought suit alleging that the insurer acted in bad faith by delaying its defense, and by refusing to defend against all claims as required under Pennsylvania law. In determining that there was no bad faith, the Court reviewed the policy and held that the insurer correctly determined that its duty to defend was not triggered until the filing of the fourth Complaint. Because the insurer’s refusal to defend was based on a correct interpretation of the policy, its denial of benefits was not unreasonable, and the plaintiff was unable to satisfy the first element of bad faith.
With regard to insurer’s refusal to defend all claims, the court observed that the general rule that if any claim is covered, then under Pennsylvania law, the insurer must defend all claims, i.e., both covered and uncovered claims. The title insurer argued, however, “that title insurance policies should be construed differently, to extend the duty to defend only to those claims within the contours of the policy.” The title insurer relied upon case law from other jurisdictions and the title policy language; and the insured relied upon Pennsylvania public policy as set forth in case law. The court determined that it should rely upon Pennsylvania precedent, and rejected the title insurer’s argument.
As to bad faith, however, the court held that the insurer’s position was not taken in bad faith for two reasons. First, although unsupported by any Pennsylvania case law, this title insurance exception was an issue of first impression and had apparently never been presented before a Pennsylvania court. Second, the insurer’s position was supported by case law from other jurisdictions that had carved out similar exceptions for Title Insurance Companies.