JULY 2018 BAD FAITH CASES: WHEN INSURER FOLLOWS RELEVANT CASE LAW ON EXCLUSIONS, BAD FAITH CLAIM IS MERITLESS (Philadelphia Federal)
To complete a cable installation, Comcast contracted with FTS, and FTS contracted with CVRS, “which hired Jeremy Hays”—who brought a workers’ compensation complaint against CVRS and Comcast, in Tennessee. Subsequently, “Comcast filed a Third-party Complaint  against FTS seeking express indemnity for Hays’s claim for workers’ compensation against Comcast.” FTS (insured) had a Commercial General Liability Policy (the “CGL Policy”) with Zurich American Insurance Company (Zurich-insurer), and a Workers’ Compensation Policy with American Zurich Insurance Company (AZIC-insurer). FTS sought coverage from Zurich and filed a Third-Party Complaint against AZIC to cover the workers’ compensation.
“The CGL Policy contained a contractual liability exclusion, excluding certain damages FTS assumes in a contract or agreement, but the exclusion does not apply to an ‘insured contract.’” Moreover, “the indemnity agreement between Comcast and FTS is an “insured contract” if the underlying workers’ compensation claim constitutes tort liability.
Zurich-insurer sought a declaratory judgment alleging “it owes no coverage to FTS under the CGL Policy,” and AZIC filed an Answer and Counterclaim against FTS arguing, “its first party workers’ compensation coverage was not implicated by Comcast’s claim for express contractual indemnity from FTS.” Finally, the insured counterclaimed with a bad faith claim against insurers.
THE CGL POLICY:
The CGL Policy does not apply to contractual liability, “unless the insured would have such liability on the absence of a contract or agreement or the insured assumes such contractual liability in an ‘insured contract.’” In reviewing Tennessee law, where Hays raised the workers’ compensation claim, this court concluded workers’ compensation law does not fall within “tort liability” because Tennessee law “immunizes entities that are liable for Tennessee workers’ compensation benefits from tort liability.”
THE WORKERS’ COMPENSATION POLICY:
The Workers’ Compensation Policy excludes coverage of “liability assumed under a contract.” In Pennsylvania, the obligation of an insurer’s duty to defend is based solely on the allegations in the complaint. The third party complaint in this matter alleged “FTS has an express contractual duty to indemnify.” This contractual obligation addressed in the complaint “triggers the exclusion for liability assumed in a contract.” Thus, the workers’ compensation does not protect FTS.
The BAD FAITH CLAIM IS MERITLESS:
The insurer argued that the statutory bad faith claim was “meritless because [the insurer’s] coverage positon was reasonable and consistent with the decisions that have decided the issue.” The insured “argues that the [insurer’s] decision to deny benefits under the CGL Policy was in bad faith because it was not reasonable for Zurich to ignore the definition of ‘tort liability’ in the CGL Policy.” Additionally, the insured argued that the insurer made contradictory arguments when the insurer identified the insured as an employer of Hays, and denied coverage under the Workers’ Compensation Policy.
The court determined, “[the insurer] had a reasonable basis to deny coverage under the CGL Policy, evidenced by the fact that its position was consistent with case law on the issue.” Additionally, the court concluded the insurer did not make contradictory coverage conclusions because “Zurich did not deny coverage under the CGL Policy because it believed FTS was Hays’s employer, but rather because it believed Hays’s claim for workers’ compensation benefits did not implicate a tort liability.” Thus, the bad faith claim was meritless.