OCTOBER 2013 BAD FAITH CASES: INSURER’S DECISION TO PROVIDE A DEFENSE UNDER ONLY ONE AMONG ITS THREE POLICIES, WHERE ONE POLICY APPLIED DEFENSE COSTS AGAINST COVERAGE AMOUNT, AND DISCONTINUE ITS DEFENSE OF INSURED BASED ON EVENTS DURING LITIGATION MAY CONSTITUTE BAD FAITH (Western District)
Plaintiff-insurer provided defendant-insured with three policies; a CGL policy, a Manufacturers Errors and Omissions policy, and an Umbrella policy. The insurer sought a declaratory judgment after the filing of the underlying suit, and the insured counterclaimed for statutory bad faith, among other claims. In response to the insurer’s complaint, the District Court held it “could not rule out the possibility that the underlying complaint pleaded an occurrence, sufficient to trigger the defense obligation” under the CGL policy.
However, as events transpired in the underlying suit, the insurer elected to disclaim coverage under the CGL and Umbrella policies, which provided unlimited defense funds, and continued to defend under the E&O policy which deducted defense costs from the policy limit. Upon discovering the defense was being provided exclusively under the E&O policy, with all defense costs being deducted from the E&O policy limit, the insured demanded the suit be defended under the CGL policy.
The insurer offered to retrospectively and prospectively allocate the defense costs 50/50 between the CGL and E&O policies pending conclusion of the action given that the District Court “had not found that the duty to defend had been conclusively established.”
Following a verdict in the insured’s favor in the underlying suit, the insurer filed a motion for summary judgment on insured’s statutory bad faith claim. The District Court denied the motion, finding a question of fact remained as to whether the insurer had acted in bad faith by failing to provide a defense under the CGL policy between the time the insurer disclaimed coverage and when it offered to begin allocating the costs equally between the two policies.
Primarily, the insurer argued the events that transpired in the underlying suit demonstrated no coverage existed, leading to its decision to disclaim coverage. However, the Court observed that an insurer’s duty to defend is distinct from the coverage duty and is determined solely by the allegations of the complaint; even if the trial established circumstances incongruous with a duty to defend, those facts would have no impact on the insurer’s duty to defend.
The Court also rejected the insurer’s contention that damages were a pre-condition for a statutory bad faith claim, and that the insured’s claim should be thrown out on this ground since it received a defense under the E&O policy. The Court did, however, find “no reasonable jury could conclude that [the insurer] acted in bad faith in… initially disclaiming a defense under the [C]GL policy in November, 2010” or in deciding to allocate defense costs equally between the CGL and E&O policies.