APRIL 2012 BAD FAITH CASES: COURT GRANTS CARRIER’S MOTION FOR SUMMARY JUDGMENT BECAUSE ISSUE PRECLUSION BLOCKED ASSIGNEES’ UNDERLYING BREACH OF CONTRACT CLAIM AND THERE WAS NO BREACH OF COMMON LAW DUTY OF GOOD FAITH AND FAIR DEALING (Philadelphia Federal)

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The court granted the carrier’s motion for summary judgment stemming from a breach of contract, breach of duty of good faith and fair dealing and fraud claims assigned by the putative insureds to the underlying plaintiff.

The original suit arose from a sexual assault that occurred in 2000. The carrier represented two brothers in a civil action brought in the Court of Common Pleas of Philadelphia. The brothers claimed insured status under their parents’ homeowners’ policy. The carrier defended them under a reservation of rights.

In 2003, the carrier was awarded a declaratory judgment by default in Federal District Court, which stated that the insurer did not have to defend or indemnify the brothers, under the policy at issue. However, the carrier did continue to defend the brothers in the civil action against them, while denying any duty to indemnify. After a trial in 2005, the insureds were found not liable by the jury.

The case was appealed and reversed by the Pennsylvania Supreme Court on the issue of affirmative defenses, and remanded to the trial court. At that point, in 2008, the carrier refused to provide a defense, and the carrier refused a $100,000 settlement demand from the underlying plaintiff, whose demand letter characterized a refusal of the demand to constitute bad faith. The carrier relied on the declaratory judgment in refusing to defend or settle, the matter went to arbitration and plaintiff was awarded $2,000,000. The brothers assigned their claims against the carrier to settle the matter with the plaintiff.

First, the assignees claimed that the carrier breached its contract to defend and indemnify the insureds in the sexual assault litigation. However, the District Court’s prior judgment precluded the assertion of this breach of contract claim because that decision adjudicated the precise question of the carrier’s contractual duties.

Second, the court turned to the assignees’ common law bad faith claims, which contained three specific allegations. The court ruled that, absent a contractual duty to the defendants in the sexual assault litigation, the carrier could not be liable for a bad faith failure to defend the insureds. The court also ruled that the carrier did not act in bad faith by controlling the underlying litigation.

The carrier advised its insureds to obtain independent counsel, but the parties did not oblige, leaving the carrier to conduct the litigation on their behalf, which it chose to do. The court also refused to find that the carrier acted in bad faith pursuant to the assignees’ estoppel theory. Essentially, the carrier was not prevented from claiming that damages fell outside of the insureds’ policy because it submitted three reservation of rights letters to the insureds after choosing to act in their defense.

Third, the court rejected the assignees’ claim that the carrier acted fraudulently. The sole evidence of fraud was a self-serving affidavit that failed to establish anything other than a conclusory allegation of fraudulent conduct. As such, the court also denied this claim.

Date of Decision: March 2, 2012

Grant v. State Farm Fire & Casualty Company, No. 11-6283, U.S. District Court for the Eastern District of Pennsylvania, 2012 U.S. Dist. LEXIS 28695 (E.D. Pa. Mar. 2, 2012) (Schiller, J.)

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