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In Bodnar v. Nationwide Mutual Insurance Company, the insured had a commercial general liability policy. While the insured and a man he hired were digging a trench, the trench collapsed, killing the man. The deceased’s wife for herself and her husband’s estate brought tort claims against the insured, the insurer defended under a reservation of rights, and the insurer brought a declaratory judgment action. The declaratory judgment action centered on the deceased’s employment status in relation to the insured, under the policy.

The insured settled the case at policy limits, $1,000,000, and assigned his interests in the policy to the wife and the estate.  The insurer later paid the $1,000,000, and discontinued the declaratory judgment action. However, the insured pursued claims for bad faith and breach of the contractual duty of good faith and fair dealing against the insurer based upon claims handling.

The court observed that a “delay in payment of a third party claim, if of inordinate and unreasonable length, effectively becomes a denial of the claim as assuredly as if the denial was swiftly and unequivocally communicated to the insured.” Thus, even if the insurer ultimately paid the full policy limits, if it engaged “in bad faith conduct under the circumstances … it could still be held liable in this case.”

The court first looked at an issue it had raised in a prior opinion:  if there is no coverage objectively due under the terms of a policy applied to the circumstances of the case, even if the insurer did not rely upon that reason in providing coverage, can the insurer still be liable for bad faith?  As in the prior case, the court did not have to answer this question, but believed there was a split in the Circuit’s courts on the issue, with most courts finding an absent of coverage automatically precludes bad faith.

The court rejected the insured’s argument that the claims handler’s early reference to the deceased as an “employee” established the carrier’s position and knowledge, which it later contradicted in bringing the declaratory judgment action and delaying payment.  However, the court recognized the word employee was being used generally, and not to establish a legal conclusion. Thus, “loose language is not itself a sign of bad faith, unless it is coupled with some other kind of dishonesty motivated by ill motives.”  In this case, the insurer did continue a diligent investigation into the “employee’s” actual status, which remained unclear.  The court went into a detailed analysis of the steps in the investigation, first stating the insured’s position that the insurer was patently unreasonable, and then drilling down into the insurer’s actual steps, finding itself unable to agree with the insured.  This included an interesting discussion of the role advice of counsel may have played, and area that was not explored in discovery.

The court also observed that “a decision to seek a judicial determination on whether coverage existed is not indicative of bad faith or breach of contract, especially when, as here, the implications of the background facts at issue are legally ambiguous.”

In summary, the court stated that:  “It is easy to focus on the details of … claims handling. But we must keep in mind the larger picture. [The insurer] received a claim that required it to determine the working relationship of two men who had only worked together for a few weeks before one’s untimely death, kept their dealings ‘under the table,’ and reduced nothing to writing. The claims file reflects information that indicates that [the deceased worker] variously could have been an employee, a temporary worker, or independent contractor. Nonetheless, [the insurer] still paid for [the insured’s] defense in the underlying lawsuit. Faced with ambiguous facts, it also submitted the case separately to court for a declaration of [the deceased’s] legal status. Then, before such a declaration was ever issued, [the insurer] discontinued its action and paid [the insured’s] designee the full limits of his insurance policy.”

The court it could not agree the insurer’s documented actions were unreasonable, and the record did not suggest “any other treatment than that which [the insured] was owed as a policyholder.”  The insurer “investigated the issue, determined that it did not owe … coverage, and then ultimately decided to pay the policy limits to [the] Estate anyway. Plaintiffs may not like how the claim was handled, but it cannot be said that [the insurer] breached any duty under these facts.”

Date of Decision: September 15, 2015

Bodnar v. Nationwide Mut. Ins. Co., 3:12-CV-01337, 2015 U.S. Dist. LEXIS 124504 (M.D. Pa. September 15, 2015) (Mariani, J.)