AUGUST 2011 BAD FAITH CASES NO BAD FAITH (1) WHERE DEFENSE NOT PROVIDED PENDING DECISION TO MEDIATE; (2) FOR BRING DECLARATORY JUDGMENT; OR (3) FOR RESERVING RIGHTS (Philadelphia Federal)

In MP III Holdings, Inc. v. The Hartford Casualty Insurance Company, the Eastern court granted Hartford’s motion for summary judgment with respect to the insured’s statutory claim of bad faith, finding that the insurer’s position with respect to indemnifying the insured from underlying lawsuits was reasonable.

The insured sought such indemnification when it became the subject of three separate legal actions.

The court’s opinion specifically focused on one of these actions, in which the insurer initially agreed to provide for the insured’s defense. However, the plaintiff in the underlying action soon agreed to voluntarily dismiss the claims against the insured as long those claims could be brought to mediation.

Once the parties in the underlying action came to this agreement, the insurer informed the insured that it would no longer be providing a defense because, in the opinion of the insurance company, there were no longer any claims pending against the insured to which the insurance policy was applicable. At this time, the insurer pursued a declaratory action to vindicate its position. The Hartford did note, however, that if the plaintiff did pursue mediation as stipulated in the settlement agreement, the insurer would reconsider its position in terms of indemnifying the insured. Ultimately, the plaintiff in the underlying action did pursue mediation, and the insurer provided for the insured’s defense.

The insured, nevertheless, pursued a bad faith cause of action against the insurer, alleging that the insurer’s termination of its defense and its subsequent declaratory judgment action constituted bad faith. The court disagreed and validated the insurer’s interpretation of its indemnification duty, observing that it was “obvious and logical that external factors such as…agreements between parties affecting the vitality and operability of the legal claims may be considered in determining the endurance of a particular duty to defend.” The court also declined to take any issue with the insurer’s decision to seek a declaration of its rights, citing a proposition widely held in courts across the state that the Declaratory Judgments Actions may be invoked to interpret the obligations of the parties under an insurance contract.

Finally the court found that the insurer had not acted in bad faith by misrepresenting its coverage position because it never unequivocally terminated coverage, as noted by the fact that it provided for the insured’s defense during mediation. The court noted that mere communication as to the potential bases for the denial of coverage does not constitute bad faith.

Date of Decision: June 30, 2011

MP III Holdings, Inc. v. The Hartford Cas. Ins. Co., Civil Action No. 08-CV-4958, United States District Court for the Eastern District of Pennsylvania, 2011 U.S. Dist. LEXIS 72370 (June 30, 2011) (Davis, J.)