January 2017 Bad Faith Cases: Court Refused to Dismiss Bad Faith Claim at Pleading Stage on the Basis of Coverage and Late Notice Arguments (Western District)

This case involved claims arising out of construction work. The carrier argued it was not required to defend or indemnify on late notice grounds, as well as a defense that coverage was not due under the policy language. The insured brought breach of contract and bad faith claims, and the carrier moved to dismiss.

Reading the complaint in the light most favorable to the plaintiff insured, the court denied motions to dismiss the contract and bad faith claims. As to the bad faith claim, the court stated the complaint was sufficient to overcome a late notice defense. The court found it relevant that plaintiff alleged the carrier had “refused to provide coverage in the underlying cases without any legal or contractual justification despite the fact that [it] was aware of the [underlying] cases and had set aside a litigation budget for them, and that [the insurer] continued in its refusal after both [the insured] and a mediator informed [the insurer] of its purported obligation.” Thus, the insurer’s “unsupported assertion that it was correct in its refusal to provide coverage is not sufficient for the dismissal of … well-pled claims of insurance bad faith without the opportunity for discovery.”

As to the governing law, the court stated that “a claim of insurance bad faith arises where an insurer refuses—without good cause—to defend or indemnify where the policy provides for coverage. Frog, Switch & Mfg. Co. v. Travelers Ins. Co., 193 F.3d 742, 750-51, n.9 (3d Cir. 1999). Such a claim may be supported by allegations showing a frivolous or unfounded refusal to pay, a lack of investigation into the facts, or a failure to communicate with the insured. … Mere negligence or bad judgment does not constitute bad faith, but actual knowledge or reckless disregard of a lack of a basis for the denial of coverage may.”

Date of Decision: November 28, 2016

NVR, Inc. v. Motorist Mut. Ins. Co., No. 2:16-cv-00722, 2016 U.S. Dist. LEXIS 163351 (W.D. Pa. Nov. 28, 2016) (Hornak, J.)