MAY 2007 BAD FAITH CASES COURT DENIES EXTENDING REQUIREMENT THAT INSURER ESTABLISH PREJUDICE FROM INSUREDS FAILURE TO COMPLY WITH CONSENT TO SETTLE PROVISION (Western District)

In Voest Alpine Industries, Inc. v. Zurich American Insurance Co., the insured filed a motion for summary judgment based on two propositions: (1) that Pennsylvania law requires an insurer to establish prejudice in order to rely on an insured’s failure to comply with a consent-to-settle provision; and (2) that the insurer breached its duty to investigate coverage for a settlement which the insured tendered for indemnification in a separate suit. 

As to the first proposition, the court noted that although the Third Circuit has noted that Pennsylvania Courts have readily applied the prejudice requirement in a variety of insurance settings, applying the prejudice requirement to all insurance policies issued within Pennsylvania had no basis in Pennsylvania law or public policy.  The court noted that the Pennsylvania Supreme Court has “consistently . . . taken a cautionary approach when considering whether to invalidate provisions of a private contract on the ground of public policy.” 

As to the second proposition, the court found that it was premature to rule on the insurer’s duty to investigate the claim promptly before denying the consent to settle.  The court noted that an insurer has an obligation to investigate the reasonableness of a settlement proposed to its insured by a third party.  However, it also noted that a claim for a breach of a failure to investigate before denying the consent to settle cannot create coverage where coverage never existed pursuant to the policy.  The court opined that while the insured’s claim for breach of the duty to investigate coverage for the settlement may “ultimately prove to be germane to its claim for bad faith [denial of coverage], an assessment of this prong of [the insured’s] summary judgment motion cannot conclusively resolve any claim in this litigation at this point in time.”  This was because any potential damages flowing from the failure to investigate the claim before denying the consent to settle is interwoven with the success of the insured’s bad faith claim, for which a jury demand existed.  Therefore, the court denied the insured’s motion for summary judgment.

Date of Decision:  April 20, 2007