DECEMBER 2010 BAD FAITH CASES BAD FAITH CANNOT EXIST WHEN INSURER DENIES COVERAGE AFTER EXPLICITLY RESERVING ITS RIGHTS TO EXCLUDE COVERAGE BASED ON A POLICY EXCEPTION (Western District)
In Western World Insurance Company v. Delta Property Management, the insured owned and managed apartment buildings. One of the tenants at one of the insured’s properties stabbed another tenant to death. The insured promptly notified its general liability insurer. The insurer responded with a letter to the insured, highlighting an exclusion in the policy for assault and battery that prevented the insurer from having to defend or indemnify the insured in any claim arising out of an assault and/or battery or any act or failure to act to prevent an assault and/or battery. This initial letter informed the insured that there was a strong possibility that no coverage would be provided should any claim arise against the insured.
Some time after the incident occurred, the estate of the stabbing victim filed a wrongful death and survivor action against the insured, and the insured promptly notified the insurer of the lawsuit. The insurer initially provided a defense and agreed to select its own counsel, but a few months later the insurer sent another letter to the insured, this time notifying the insured that it was declining coverage for all claims in the wrongful death suit, although it would continue to provide a defense until the Court ruled on a complaint for a declaratory judgment that it intended to file.
The insured responded with a claim against the insurer, asserting that because the insurer sent an initial letter stating its intention to represent the insured after the lawsuit originated, it waived its right to assert the exclusion for assault and battery at a later date. It also alleged that the insurer acted in bad faith in denying coverage and a defense.
Concerning the assault and battery exclusion, the Court determined that because the insurer’s initial letter right after the incident “explicitly and unambiguously reserved its rights” under the exclusion, it did not waive its right at a later date to deny coverage based on that exclusion. The actions and words of the insurer between this initial letter and the denial of coverage may have indicated that it intended to provide some form of coverage.
The court stated, however, that at best, those words and actions only “suppl[ied] some meager support for an implied waiver” of the policy. By no stretch of the imagination could a jury ever rule that the insurer actually waived its rights to deny coverage. Because the insurer never breached any agreement in denying coverage and therefore properly handled the claim, the Court also ruled that the insurer could not have acted in bad faith. Therefore, the insurer was granted summary judgment on its declaratory judgment action, and it was relieved from any obligation to further defend the insured.