MAY 2016 BAD FAITH CASES: AN INSURER’S CORRECT INTERPRETATION OF AN INSURANCE POLICY IS A VALID DEFENSE AGAINST BAD FAITH
In Darwin National Assurance Company v. Luzerne County Transportation Authority, the Court held that an insurer who correctly denied benefits under an insurance policy did not act in bad faith.
The insured was the former operations manager of the Luzerne County Transportation Authority and had been criminally charged with conspiring to defraud the PA Department of Transportation. The insured submitted a claim for defense and indemnity to the insurer who accepted the claim, but determined that the insured could only collect $100,000 from the policy.
The insured disagreed, arguing that he was entitled to $1 million. The insured later brought a claim for bad faith, alleging that the insurer’s refusal to pay $1 million in policy proceeds was frivolous and unfounded.
In denying the Insured’s bad faith claim, the Court held that because the insurer’s interpretation of the policy was correct, the insured could not make out the first element of a bad faith claim – that the insurer lacked a reasonable basis for denying benefits. The Court emphasized that the insurer did not deny benefits outright, but merely found that coverage was limited to $100,000 and even tendered payments towards the insured’s defense costs.