AUGUST 2013 BAD FAITH CASES: NO COVERAGE FOR PLAINTIFF-ADDITIONAL INSURED WHERE POLICY WAS RESCINDED AS TO NAMED INSURED, BUT CARRIER DID OWE ADDITIONAL INSURED A DEFENSE (Philadelphia Federal)
Plaintiff construction company brought suit against its surety company alleging, amongst other claims, breach of contract and breach of good faith and fair dealing. Plaintiff is a luxury homebuilder that builds communities throughout Pennsylvania. Local ordinances sometimes require new homes be equipped with fire suppression systems, such as sprinklers, so in those communities plaintiff hires a subcontractor to install those systems. In the Philadelphia area, plaintiff hired H.A.S. Protection, Inc. (“the subcontractor”) to install those systems.
As a part of the contract with the subcontractor, plaintiff required the subcontractor to indemnify and defend plaintiff for any claim or demand arising out of or relating to the subcontractor’s work. The contract also required the subcontractor to name plaintiff as an additional insured on its general liability insurance policy. The subcontractor hired defendant to provide the commercial general liability policy, and a policy was provided with effective dates between June 26, 2003 and June 26, 2004.
The subcontractor then renewed the policy, with effective dates of June 26, 2004 to June 26, 2005. The subcontractor provided plaintiff with a copy of the certificate of insurance identifying plaintiff as an additional insured, under the original policy, however, defendant maintains plaintiff was not an additional insured under the renewed policy. Plaintiff maintains it was an additional insured on both policies.
Shortly after construction concluded on the homes, plaintiff began receiving warranty and reimbursement claims for damage caused by the fire suppression systems. The complaints began in 2003 and continued for years after. While defendant provided a defense for the subcontractor in the litigation of these claims, it refused to do so for plaintiff. As a result, plaintiff was forced to obtain counsel at its own cost, as well as pay the settlement amounts.
Following the suits brought by homeowners, defendant filed a declaratory judgment action seeking a declaration from the Court that the insurance policies issued to the subcontractor were null and void because the subcontractor failed to disclose several pending suits at the time the policy was issued. The District Court found in favor of defendant, despite Plaintiff’s attempt to intervene.
Plaintiff separately filed an action alleging breach of contract, breach of good faith and fair dealing for failing to defend and indemnify plaintiff in the litigation that arose from the contractor’s installation of the sprinklers. The insurer filed a motion for summary judgment arguing the claim was barred by res judicata from the declaratory judgment action.
The District Court granted the motion, but the Third Circuit reversed, finding no privity between the subcontractor and plaintiff for purposes of determining the preclusive effect of defendant’s default summary judgment against the subcontractor.
On remand, the District Court was faced with determining whether the subcontractor’s policy was properly rescinded, eliminating the carrier’s responsibility for providing a defense. The carrier argued the subcontractor had failed to disclose a set of pending claims stemming from the installation of a specific type of sprinkler system at the time the policy was issued, and had the carrier known of the risks associated with the sprinkler system in that case, it would have refused to provide insurance to the contractor or increased the premium. In response to the carrier’s first argument, plaintiff argued the carrier provided no evidence of how it actually would have acted if it had knowledge of the lawsuit at the time the policy was issued.
The District Court applied Pennsylvania’s three element test requiring “(1) the insured made a false representation; (2) the insured knew the representation was false when it was made or the insured made the representation in bad faith; and (3) the representation was material to the risk being insured” to determine whether rescission was proper.
Under this test, the Court found the subcontractor had blatantly lied regarding the pending suit in his application, satisfying the first element, the second element was met because the subcontractor was aware of the claims, and based on the number of claims that actually materialized from the sprinkler system, the third element was met. Therefore, no reasonable jury could find that the carrier unreasonably sought the rescission of the policies.
The Third Circuit also allowed plaintiff to challenge whether the policy permitted coverage for an additional insured notwithstanding the rescission of the subcontractor’s coverage. The carrier argued the additional insured was not entitled to more coverage than that afforded to the named insured, based on a portion of the policy stating: “It is further agreed that where no coverage shall apply herein for the Named Insured, no coverage nor defense shall be afforded to the above-identified additional insured.”
In response, plaintiff argued the language was ambiguous because the policy failed to define ‘coverage’, that a severability clause allowed plaintiff to continue to receive coverage even if the subcontractor was not covered, and that Pennsylvania law does not preclude recovery by an innocent additional insured as a matter of law.
The District Court rejected all of plaintiff’s arguments, finding the additional insured endorsement specifically limited its coverage to “coverage that is not greater than the coverage available to [the subcontractor].”
The Court did, however, find that the carrier should have provided a defense to plaintiff, given that the duty to defend under an insurance policy is broader than the duty to indemnify. The causes of action against the subcontractor and plaintiff were identical, thereby acknowledging the claims potentially fell within the policy, but neglected to provide a defense to plaintiff.