JULY 2010 BAD FAITH CASES NO BAD FAITH WHEN THE INSURER PROPERLY INTERPRETS EXCESS LIABILITY POLICY IN DENYING COVERAGE IN EXCESS OF APPLICABLE LIMITS (Philadelphia Federal)

In Yellowbird Bus Company, Inc. v. Lexington Insurance Company, the insured bus company was issued an excess automobile liability insurance policy by the insurer.  While the policy was in effect, an automobile accident occurred between one of the insured’s busses and a truck.  The insured had a primary insurance policy which had a coverage limit of $1 million per accident, and the excess policy covered costs in excess of $1 million and had a coverage limit of $4 million.  A section of the excess policy entitled “Limit Exhaustion” stated that the policy “shall cease to apply after the applicable limits of liability have been exhausted by payments of defense costs and/or judgments and/or settlements.”

The insurer denied the insured coverage beyond the $4 million dollar limit with respect to the accident between the bus and truck.  The insured then filed a complaint that asserted claims against the insurer for breach of contract and bad faith in addition to seeking declaratory judgment that the excess policy had no aggregate or occurrence limit with respect to the insured’s liability and defense costs.

In interpreting of the insurance policy, the court determined that the plain language of the policy’s occurrence limit and aggregate limit provisions clearly conveyed that the insurer was correct in its interpretation of the policy by not awarding any money in excess of $4 million, and therefore it denied the insured’s request for declaratory judgment.  It then noted that generally, when an insurer does not have a duty to indemnify under the insurance policy, a claim for bad faith must be dismissed.  Based on the court’s interpretation that the insurer appropriately followed the insurance policy when denying coverage beyond a certain amount, it granted the insurer’s motion to dismiss both the breach of contract and bad faith claims against it.

Date of Decision:  July 12, 2010

Yellowbird Bus Co. v. Lexington Ins. Co., Civil Action No. 09-5835, United States District Court for the Eastern District of Pennsylvania, 2010 U.S. Dist. LEXIS 69554 (E.D. Pa. July 12, 2010) (Robreno, J.)