JANUARY 2009 BAD FAITH CASES INSURER GAINS SUMMARY JUDGMENT WHERE IT CONDUCTED ADEQUATE INVESTIGATION AND HAD A REASONABLE BASIS FOR DENYING COVERAGE (Middle District)

In Stacey Smith v. Continental Casualty Company, a bad faith claim arose after the insurer denied coverage for an underlying suit brought against the insured’s agent.

The Smiths brought the underlying complaint against the insured’s agent based on the alleged mishandling of their investments for retirement.  A settlement agreement was reached and the insured’s agent assigned to the Smiths his rights against the insurer. 

The insured’s agent  provided the insurer with notice of the Smith underlying action and requested its coverage position.  The insurer denied coverage to both the insured and the insured’s agent.  The insurer denied coverage to the insured’s agent because it stated that the claim did not fall within the definition of “professional services” in Coverage Part A of the insured’s policy.

The Smiths, as assignees for the insured’s agent, then brought suit for breach of contract and bad faith against the insurer based on the insurer’s denial of coverage for the suit that the Smiths brought against the insured’s agent. The Smiths argue that the insurer’s investigation of the claim was inadequate and amounted to bad faith.  The insured then filed a motion for summary judgment. The insurer argues there was no breach of contract or bad faith in denying coverage because the Smith underlying action brought against the insured’s agent does not fall within the scope of coverage of the insured’s policy and also that it falls under two exclusions in the policy.

The court determined that the insured’s agent’s activities with regard to the Smith claim do not fall within the definition of covered “professional services” under the policy. Therefore, the insurer had a reasonable basis for denying coverage to the insured.   In addition the Smiths did not provide clear and convincing evidence that the investigation of the claim was in bad faith.  Even though the investigation was mainly conducted by outside counsel, the counsel was experienced to evaluate the claim, conducted a sufficient investigation, and the facts do not demonstrate any dishonesty or ill-will in the conduct of the insurer’s investigation of the claims. Also, even though  the insurer failed to contact the insured’s agent prior to denying coverage,  which may be bad judgment, such conduct is not evidence of bad faith.  Therefore, since there was not clear and convincing evidence from which a reasonable jury could find that the insurer denied coverage to the insured’s agent in bad faith, the court granted the insurer’s motion for summary judgment.

Date of Decision: September 30, 2008

Smith v. Cont’l Cas. Co., Civil Action No. 07-CV-1214, 2008 U.S. Dist. LEXIS 76818 (M.D. Pa. Sept. 30, 2008)( Jones, J.)

 

J.M.A