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The insured was sued for personal injury damages arising out of a motor vehicle accident.  The carrier declined coverage.  The insured and personal injury plaintiff reached a settlement agreement involving a consent judgment, and assignment of the insured’s claims for breach of contract and bad faith.

The assignee/personal injury plaintiff brought breach of contract and bad faith claims, and the insurer moved to compel arbitration, per an arbitration agreement in the underlying insurance contract.  The court ruled for the insurer, and granted the motion to compel arbitration of the assignee’s claims.

During the course of his analysis, Middle District Judge Mannion made this observation regarding the bad faith claim:

Likewise, [the] Pennsylvania claim for bad faith …  involves a determination of coverage. “In order to show bad faith [under Pennsylvania law], a claimant must ultimately establish by clear and convincing evidence both that: 1) the insurer lacked a reasonable basis for denying benefits; and 2) the insurer knew or recklessly disregarded its lack of reasonable basis.” Padilla v. State Farm Mut. Auto. Ins. Co., 31 F.Supp.3d 671, 675 (E.D. Pa. 2014) (citations omitted). The Third Circuit has held that a bad faith claim “necessarily fails” if the insurance company “correctly concluded that there was no potential coverage under the policy.” USX Corp. v. Liberty Mut. Ins. Co., 444 F.3d 192, 202 (3d Cir. 2006) (citing The Frog, Switch & Mfg. Co. v. Travelers Ins. Co., 193 F.3d 742, 751 n. 9 (3d Cir. 1999) (affirming district court which held that, under Pennsylvania law, “bad faith claims cannot survive a determination that there was no duty to defend, because the court’s determination that there was no potential coverage means that the insurer had good cause to refuse to defend”).

Date of Decision:  January 20, 2022

Ciotola v. RSA Insurance Group, PLC, U.S. District Court Middle District of Pennsylvania No. 3:21-1020, 2022 WL 188183 (M.D. Pa. Jan. 20, 2022) (Mannion, J.)