AUGUST 2012 BAD FAITH CASES: THIRD CIRCUIT AFFIRMS DENIAL OF BAD FAITH DAMAGES, DESPITE UPHOLDING BREACH OF CONTRACT AWARD, BECAUSE THE CARRIER’S INVESTIGATION AND SUBSEQUENT DENIAL OF COVERAGE WERE REASONABLE (Third Circuit)

In Post v. St. Paul Travelers Ins. Co., the court heard cross-appeals stemming from the District Court’s partial grant of summary judgment in which it denied the insured’s bad faith claim, but simultaneously awarded the insured damages for breach of contract. The facts of this case are complex and discussed comprehensively in the Third Circuit’s sixty-eight-page opinion. The details have been condensed for the purposes of this blog.
The appeal arises from a medical malpractice action against a client of the insured attorney. During that litigation, the insured allegedly mishandled certain discovery. As a result, the client threatened a legal malpractice action against an attorney, who was insured under his firm’s malpractice policy. The insured therefore alerted its carrier of the potential malpractice action and sought indemnification and defense under its policy.
During this time in late 2005, the plaintiff in the underlying medical malpractice action filed a sanctions petition against the insured attorney. The insured also advised its carrier of the petition and requested payment for defense costs and indemnity. The carrier retained outside counsel to the review the matter and later denied coverage. In February of 2006, the insured’s client, now plaintiff in the legal malpractice action, sought to join the sanctions proceedings in order to “participate in the search, review and production of documents,” that relate to its own malpractice suit. The insured again sought indemnification and defense.
The carrier responded by agreeing to reimburse the insured for some portion of his defense costs related to the sanctions proceedings because of an overlap between the sanctions proceedings and the threatened malpractice suit. However, the carrier offered to the insured only $35,000 out of a total of $400,000. Eventually the sanctions petition was withdrawn.
In October 2006, the insured filed a suit for bad faith and breach of contract against its carrier and the parties filed cross-motions for summary judgment. The District Court granted the carrier’s motion with respect to the bad faith claim, but granted the insured’s motion on the breach of contract count, finding that he was covered under the policy and awarding reimbursement in the amount of $921,862.38. The parties filed cross-appeals.
On appeal, the insured argued that the carrier owed a duty to defend under the policy and the carrier argued that its policy expressly excludes coverage for sanctions. The insured also claimed that the carrier acted in bad faith by failing to investigate, providing defense to his firm but not him individually, and ignoring the insured’s notifications about the potential legal malpractice suit.
The Third Circuit first addressed the contractual damages award. It reasoned that the District Court failed to properly distinguish between “claim” and “suit” under the policy. Specifically, the word “claim” meant that the carrier’s duty to defend could be triggered by something less than the filing of a complaint, such as the former client’s threat of malpractice suit.
The court held that “it would be fantasy to believe . . . that [the former client] would not be seeking damages” for legal malpractice. Moreover, the sanctions petition was covered because it sought attorney’s fees from the insured, triggering the policy. The only action that was not covered was the insured’s suit against its former client. Had the insured initiated this action as a counterclaim, it might be covered as “intertwined” with the covered action. The Third Circuit revised only this aspect of the District Court’s opinion.
With respect to insured’s appeal of the District Court’s grant of summary judgment to the carrier on the bad faith count, the Third Circuit affirmed. Despite the insured’s claims, the court reasoned that the carrier’s handling of the investigation and its coverage decisions were “largely benign,” albeit “not ideal.” There was simply no evidence that the carrier acted with ill will or dishonest purpose.
Therefore, the court affirmed the District Court’s ruling, except that the insured’s claim against its former client was not covered under the policy
Date of Decision: July 31, 2012
Post v. St. Paul Travelers Ins. Co., Nos. 10-3088 & 10-3300, 691 F.3d 500, U.S. Court of Appeals for the Third Circuit (3d Cir. Pa. July 31, 2012) (Ambro J.)