JULY 2010 BAD FAITH CASES NO BAD FAITH WHEN THE INSURER CORRECTLY INTERPRETS A BUSINESS AUTO POLICY TO EXCLUDE AN EMPLOYEE FROM COVERAGE (Philadelphia Federal)

In Kelly v. National Liability & Fire Insurance Company, an employee of the insured company and another person were involved in an auto accident.  The employee was traveling in his personal vehicle in the scope of his employment, and he was insured at the time by an insurance company separate from the defendant insurer in this case.  The woman filed a suit against the employee, and the employee placed the insured employer on notice of the action four months later.  The employer proceeded to notify its insurer, the defendant in the current case.

After a lengthy review of possible coverage under the business auto policy issued to the employer, the insurer determined that no coverage was available for the employee under the policy, and that while coverage would be available for the employer if it were added as a defendant in the pending litigation, the statute of limitations had expired so the employer could no longer be added.  The other person, an injured assignee of the employee as to any claims against the carrier, was eventually awarded $375,000 in a binding ADR proceeding.  The injured assignee commenced the current action against the insurer for breach of contract and bad faith in denying coverage to the employee who owed her money as a result of the accident and award.

The Business Auto Coverage Form provided that the employer, and not its employees, was the only covered entity under the policy.  The court in a prior federal court case had determined that an employee of the insured company who owns his/her own covered automobile is excluded from the definition of an insured with respect to the business auto coverage, and the court here followed that precedent.

Because the employee was not an “insured” under the policy, the insurer owed no duty to provide him coverage in the action against him, and therefore the court granted the insurer’s motion to dismiss the breach of contract claim.  It also granted the motion to dismiss the bad faith claim for the same reason, as it is impossible for an insurer exhibit bad faith when correctly denying coverage under a policy.

Date of Decision:  July 9, 2010

Kelly v. Nat’l Liab. & Fire Ins. Co., Civil Action No. 09-1641, United States District Court for the Eastern District of Pennsylvania, 2010 U.S. Dist. LEXIS 68959 (E.D. Pa. July 9, 2010) (Ludwig, J.).