JULY 2012 BAD FAITH CASES: NO BAD FAITH WHERE PRIOR ACTS POLICY DID NOT COVER INSURED’S ACTIONS BEFORE RETROACTIVE DATE IN POLICY; REASONABLE EXPECTATIONS DOCTRINE NOT APPLICABLE TO COMMERCIAL INSURED (Philadelphia Federal)
In A.P. Pino & Assocs. v. Utica Mut. Ins. Co., the court heard a carrier’s motion for summary judgment filed in response to an insured’s claims for declaratory judgment, reformation of its policy and bad faith in connection with its carrier’s handling of coverage under an errors and omissions (“E&O”) policy.
The insured is in the business of selling life insurance policies and sought to purchase E&O policies for several new employees, as the company was expanding. The insured’s prior carrier only insured individuals, which was fine until 2010, when the insured began to hire other employees. As such, the insured purchased E&O insurance for its new brokers.
Part of the reason that the insured purchased a policy from the carrier was because of the availability of “prior acts” coverage. However, the carrier’s policies only covered prior acts of businesses that have previously been insured. As the insured had previously held a policy only for its sole insurance broker, and was now adding new brokers, the carrier treated the insured as a “new business entity” because it was insuring new employees. The effect of this classification was that the insured’s policy contained a retroactive date of October 15, 2009, a date later in time than the insured desired because of its assumption that it was not being treated as a new business.
In November 2010, an individual claimant sued the insured for professional negligence that allegedly occurred in May 2009, prior to the retroactive date in the insured’s policy. As such, the carrier denied the insured’s claim for indemnification and defense under the policy because the underlying complaint alleged negligent acts that occurred prior to October 15, 2009.
First, the court addressed the parties’ competing interpretation of insured’s E&O policy. The court reasoned that the language in the policy is unambiguous and that the retroactive date was readily apparent in multiple places. However, the owner of the insured business claimed that he did not read the policy and that even if he did, he would not understand its contents. The court rejected these claims, finding that the policy is “readily comprehensible” and that the insured would not be able to avoid its clear language.
Second, the court addressed the insured’s contention that the policy should be reformed on the basis of its reasonable expectations. However, the court held, this doctrine only applies to “unsophisticated non-commercial insureds.” Moreover, the carrier did not mistakenly treat the insured as a “new business entity,” resulting in the insured’s ineligibility for prior acts coverage. In fact, the insured knew that it would have to be continuously insured to qualify for that coverage. Because it was expanding and hiring new employees, it could not be deemed to have been continuously insured.
Lastly, the court denied the insured’s bad faith claim. Because it was found that the carrier had a reasonable basis for denying coverage, it did not breach its contract with the insured and subsequently cannot be liable for bad faith.