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A bad faith claim arose from the insurer’s failure to defend and indemnify the insured in connection with a train derailment caused by a faulty railcar axle that the insured had manufactured.  The insured makes wheels and axles for the railway industry. A coal train derailed which caused substantial property damage. The insured subsequently investigated the cause of the derailment, and it concluded that the derailment was caused by the in-service failure of an axle which it improperly manufactured. The insured received a claim against them for damages.

The insured had a commercial general liability policy with the insurer and tendered the claim to the insurer.  The insured provided the insurer with substantial information regarding the derailment, including an internal report provided by an in-house expert.  The insurer informed the insured that it would grant their request with the understanding that the $750,000 Self Insured Retention (SIR) payment to the coal train company was not an admission of liability nor a final resolution of the claim.

Nearly a year after the derailment, the insurer sent the insured a letter acknowledging that the axle was defective, but denying any responsibility for the claim due to insufficient evidence of what role the axle played in the derailment.

After the denial of the claim the insured submitted additional information and asked the carrier to reconsider.  The insurer again denied the claim. After the insurer’s second denial, the insured advised the insurer that it would attempt to resolve the claim directly with the coal train company, reserving the right under the policy to be reimbursed for amounts it paid to resolve the claim. The insurer informed the insured that any payments it made in excess of its SIR would be deemed voluntary payments and not be reimbursed.

The insured filed a three count amended complaint for breach of contract, declaratory judgment, and bad faith.  The insured alleged that the insurer acted in bad faith by unreasonably denying its claim and attempting to leverage for its own benefit the commercial relationship between the insured and the coal train company customer.  The insured sought to recover consequential damages, interest, punitive damages, costs, attorney fees, and expert fees.

The insurer moved to dismiss the bad faith claim.

The insurer argued that there can be no claim for bad faith refusal to settle a third party claim where there is not an excess verdict and the insured settles a claim without the insurer’s consent in violation of the policy.  In the alternative, the insurer moved to dismiss or strike the insured’s demands for consequential damages and expert fees.

The court found that an excess verdict was not a condition precedent to a bad faith claim for failure to settle a third party claim.  There is no Pennsylvania case law or statutory text to support otherwise.  Also a bad faith claim focuses on the acts of the insurer and not the acts of the insured.  Therefore the insured’s allegations stated a viable bad faith claims and the court denied the insurer ’s motion to dismiss.

However the court did grant the insurer’s motion to dismiss or strike the insured’s demands for consequential damages and expert fees because the bad faith statute does not authorize these types of damages and fees to be awarded.  The Pennsylvania bad faith statute authorizes courts which find bad faith to award punitive damages, attorney’s fees, interest, and costs.

Since consequential damages and expert fees are not included, the court granted the insurer’s motion to dismiss or strike the insurer’s claim to recover these fees and damages.

Date of Decision: September 17, 2008

Std. Steel, LLC v. Nautilus Ins. Co., No. 08-195, 2008 U.S. Dist. LEXIS 71487 (W.D. Pa. Sept. 17, 2008) (Mitchell, U.S.M.J.)