NO BAD FAITH POSSIBLE WHERE NO DEFENSE OR COVERAGE OBLIGATION OWED (Philadelphia Federal)

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The insurer refused to defend and indemnify a personal injury claim against its additional insured under a commercial general liability policy.  The insured and its own insurer brought declaratory judgment, breach of contract, statutory bad faith, and common law contractual/equitable bad faith claims.  The insured’s own carrier alleged its policy should have been excess to the additional insured carrier’s policy.

The additional insured CGL carrier moved to dismiss, on the basis that coverage was excluded, per an employer’s liability exclusion.

First, Philadelphia Federal Judge Padova held the additional insured carrier had no duty to defend or indemnify in light of the employer’s liability exclusion.

[There is a very interesting discussion of whether the employer’s liability exclusion could apply if there was no additional insured coverage due, based on an argument that the underlying plaintiffs’ injuries did not arise out of the named insured’s conduct.  Judge Padova delved into the concept that this analysis was two-fold: (1) Was the party an additional insured, and then (2) Was there coverage for that additional insured. He found that the party was an additional insured, and any as yet undetermined absence of coverage because the additional insured’s liability did not arise from the named insured’s conduct, was a second level inquiry. Thus, because the party was an additional insured, the employer’s liability exclusion was in effect, and coverage for injury to its employees was excluded as to all insureds.]

On the statutory bad faith claim, Judge Padova first reiterated the employer’s liability exclusion foreclosed coverage. Based upon that predicate fact, he was “thus unable to conclude either that [the insurer] lacked a reasonable basis for denying the claim or that [the insurer’s] refusal to provide coverage was ‘frivolous or unfounded.’”

He cited Judge Savage’s 2012 Neshaminy Constructors, Inc. v. Fed. Ins. Co. opinion, summarized here, for the proposition: “Because there is no coverage under the contract for [the] claim, there can be no bad faith….” Judge Padova adds, “in the absence of coverage, [the insurer] cannot have acted in bad faith insofar as it failed to investigate the uncovered claims.”

Judge Padova also quotes Judge Dalzell’s 2007 Wedemeyer v. U.S. Life Ins. Co., decision, summarized here:  “If a reasonable basis exists for an insurer’s decision, even if the insurer did not rely on that reason, there cannot be bad faith.”

Finally, Judge Padova dismissed the other insurer’s bad faith claim, which purportedly arose out of its rights of equitable subrogation as an excess carrier against a primary carrier.  The insured’s own carrier argued its policy should have been excess to the defendant’s CGL policy, and the additional insured CGL carrier breached a duty of good faith to the excess carrier to save the excess carrier from providing a defense or paying claims the additional insured CGL carrier should have paid as primary insurer.

Judge Padova states

[T]he Third Circuit has held “that Pennsylvania recognizes no direct duty of good faith between a primary and an excess carrier.” … Rather, “‘an excess insurer who has discharged an insured’s liability stands in the shoes of the insured and as subrogee may maintain an action for breach of the primary carrier’s duty to act in good faith.’” … Thus, “[u]nder equitable subrogation the rights of the excess carrier may not rise above those of the insured.” … Because we have concluded that [the additional insured carrier] owed no duty to defend or indemnify [the insured] and [the excess carrier’s] rights may not rise above those of [its insured], which as we have previously concluded was not owed a defense or indemnity, we conclude that [the primary carrier] did not owe [the excess carrier] a duty to shield it from exposure as an excess carrier.

Date of Decision:  August 16, 2021

Westminster American Insurance Company v. Security National Insurance Company, U.S. District Court Eastern District of Pennsylvania No. CV 20-2195, 2021 WL 3630464 (E.D. Pa. Aug. 16, 2021) (Padova, J.)

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