In Delaware Valley Home Evaluations, Inc. v. Housemaster of America, Inc., plaintiff franchisee brought a breach of contract and bad faith claim in the United States District Court for the Eastern District of Pennsylvania against franchisor. There were four separate franchise agreements in effect between plaintiff, and the franchisor. A lawsuit arose, alleging that the plaintiff’s home inspection failed to inform the homeowners’ that their property had private instead of public sewage. Notice of this suit was provided by plaintiff to the franchisor. The franchisor contacted its insurance carrier and engaged a law firm to defend the claim. However the lawyers withdrew because the franchise agreement with plaintiff for that county allegedly expired prior to this incident. Therefore plaintiff was not a franchisee of defendant at the time of the alleged injury. In response the homeowners’ filed an amended complaint voluntarily dismissing defendant from the suit.
Plaintiff claims that this letter from the law firm was deceptive. Plaintiff claims defendant breached the franchise agreements by making a false assertion that there was no franchise in effect, and also by failing to defend plaintiff in the lawsuit. In addition, plaintiff alleges that the law firm’s letter was an act of bad faith. Defendant argued for summary judgment because plaintiff had not shown a breach of contract and defendant is not an insurer with whom plaintiff has an insurance policy.
For the breach of contract claim, plaintiff failed to identify any clause of the franchise agreements prohibiting defendant’s actions. There is nothing in the franchise agreements prohibiting defendant from sending the letter, and its contents were true. Furthermore, no provision of the franchise agreements obligated defendant to either indemnify plaintiff or pay for its legal defense; and in fact the agreements stated the opposite. Defendants had no duty to defend because franchise agreements are not insurance policies. The court held that there was no breach of contract, and granted summary judgment on this matter.
For the bad faith claim, the franchisor argued that it cannot be liable for bad faith because it is neither an insurance company, nor has it ever issued a policy of insurance to plaintiff. Plaintiff failed to produce any evidence to the contrary; and franchise agreements are not insurance policies. The franchise agreements themselves contain no provision requiring the franchisor to assume the risk of liability, and they require franchisees to obtain and maintain liability insurance. Therefore, since the franchisor is not an insurer, and the franchise agreements are not insurance policies, the court granted the motion for summary judgment.
Date of Decision: June 4, 2008