NOVEMBER 2013 BAD FAITH CASES: COURT DISMISSES BANK’S CLAIM AGAINST TITLE INSURER FOR FAILURE TO STATE A CLAIM AND COMPLAINT DID NOT SET OUT BAD FAITH AND DID NOT SET OUT THE KIND OF CLAIM THAT COULD ALLOW FOR BAD FAITH EVEN WHERE THERE WAS NO COVERAGE OBLIGATION (Middle District)
Plaintiff brought suit against the insurer alleging breach of contract and bad faith for its failure to pay plaintiff’s claim under its title insurance after an error was discovered in the title. The title in question was created when defendant landowners took out a mortgage for the purchase of two tracts of land. The second of the two tracts was landlocked, and inaccessible except through the first tract. When it provided the loan, the mortgage company failed to include a legal description of the property in the mortgage documents. Instead, the mortgage company listed only the address of the second tract of land on the mortgage, excluding the first tract from the mortgage documents entirely.
The insurer provided the mortgage company with a title insurance policy, securing a first priority mortgage interest in the combined parcels. When defendant landowners ultimately defaulted on the mortgage, the mortgage company repossessed it and auctioned it at a sheriff’s sale. Plaintiff purchased what it thought was both parcels, but in actuality, only received the title to the landlocked parcel. Upon learning of the mistake, plaintiff notified the insurer of its intent to make a claim.
The insurer denied coverage on the grounds the claim was premature, and encouraged plaintiff to pursue a foreclosure action against the combined parcels before submitting its claim. The parties continued to negotiate the claim, but were unable to reach a resolution.
Plaintiff ultimately brought suit against the insurer, alleging it acted in bad faith by denying the claim, failing to pay plaintiff for its loss within a reasonable time after the loss was suffered, failing to investigate and adjust the loss suffered, breaching its fiduciary duty, and by failing to act fairly and honestly toward plaintiff.
The court found plaintiff’s assertions were mere legal conclusions, and failed to satisfy the federal pleading standards imposed by Twombly. However, the court also found the other claims throughout the complaint, including the breach of contract claim, were insufficient to establish that the insurer acted unreasonably in denying plaintiff’s claim. Therefore, plaintiff’s failure to establish that it suffered a covered loss for which it should have been indemnified essentially precluded it from establishing a bad faith claim.
While the Third Circuit does allow insurers to be held liable for bad faith even in circumstances where no duty to provide coverage existed, the circumstances in the instant case were not sufficiently egregious to establish such a case. The record showed the insurer fully investigated the foreclosure action, adopted the position the claim was premature, and advised plaintiff how to protect its claim. Furthermore, the parties mere disagreement as to whether a covered loss had occurred did not give rise to a bad faith claim. Accordingly, the court granted the insurer’s motion to dismiss.