JULY 2006 BAD FAITH CASES INSURER’S UNSUCCESSFUL FRAUD COUNTERCLAIMIN BAD FAITH ACTION WAS NOT CONSIDERED AN ABUSE OF PROCESS IN LATER SUIT BY INSURED (Third Circuit)

In Finney v. Royal Sunalliance Insurance Company, a carrier denied coverage when a fire destroyed the insured’s house.  Coverage was denied because the insured was an arson suspect, and failed to disclose that another property he owned was set ablaze by an arsonist just four years earlier.  In the underlying breach of contract suit, the carrier was found to have breached the contract but not to have acted in bad faith.  The carrier filed a counterclaim for fraud, based on the alleged failure to disclose the earlier arson, an issue decided in the insured’s favor. 

Subsequently, the insured sued the carrier and its lawyers in the U.S. District Court for the Western District of Pennsylvania, for wrongful use of civil process and abuse of process, claiming  that the company and its lawyer acted without probable cause and with improper purpose in bringing the “fraud” counterclaim.  The Third Circuit Court of Appeals affirmed the trial judge’s granting summary judgment to both defendants.  The Appellate Court first held that this action was not an attempt to re-litigate the bad faith action, because bad faith concerns the circumstances surrounding the denial of the claim, whereas these claims concern actions surrounding the bringing of a counterclaim.  The Court then affirmed the judgments, reasoning that while the carrier ultimately lost on the counterclaim, its propriety was never in question.  The Court agreed with the observation of the trial Court that this “is not the stuff of which ‘wrongful use of civil proceedings’ actions are made.”

Date of Decision: June 28, 2006

Finney v. Royal Sunalliance Ins. Co. (In re Finney), United States Court of Appeals for the Third Circuit, No. 05-cv-4426, 2006 U.S. App. LEXIS 16369 (3d Cir. June 28, 2006) (Rendell, J.)