August 2008 Bad Faith Cases Insurer Did Not Act In Bad Faith Merely By Initiating A Declaratory Judgment Action With Regard To A Legitimate Coverage Issue (Philadelphia Federal)

In Victoria Insurance Company v. Li He Ren  the insurer brought a motion to dismiss in the United States District Court for the Eastern District of Pennsylvania after bad faith crossclaims were brought against it for seeking a declaratory judgment that it had no duty to defend or indemnify the insured in a tort action filed against the insured.  The underlying state action involved an injury to an ironworker on a construction site.  The injured worker was not the insured’s employee, but was an employee of an independent contractor retained by one of the insureds.  The insurer retained counsel to defend, yet at the same time instituted a declaratory judgment asserting that it had no duty to defend or indemnify.  The insurer relied on endorsements in the policy, one which excluded coverage for bodily injury to an employee or independent contractor of the insured, and another which asserts that there is no policy coverage in this situation to the additional insured part.

The insured filed an answer to this declaratory judgment,  and alleged bad faith for filing the declaratory judgment action which allegedly raised inaccurate and baseless  coverage defenses. Specifically,  the insured argued that  reliance on the coverage exclusion for claims involving injury to an independent contractor was unreasonable.  The insurer filed a motions to dismiss because it is not bad faith to litigate legitimate coverage issues.

The court stated that an insurer does not act in bad faith merely by initiating a declaratory judgment action.  The insurer did not act in bad faith by investigating and litigating issues of coverage.  In addition, the court  found that  reliance on the exclusion in the policy relating to injuries to an independent contractor was reasonable.  Therefore, the court found that the insureds failed to state a bad faith claim and  granted the insurer’s motion to dismiss the bad faith counterclaims.

Date of Decision: June 9, 2008

Victoria Ins. Co. v. Li He Ren, 2008 U.S. Dist. LEXIS 44674 (E.D. Pa. June 9, 2008)(Padova, J.)

J.M.A.