MAY 2011 BAD FAITH CASESCOURT DISMISSES BAD FAITH CLAIM, BUT FOCUSES ON ILL-WILL IN FINDING ABSENCE OF INTENT OR RECKLESSNESS; AND IMPLIES POTENTIAL FOR BAD FAITH WITHOUT DENIAL OF BENEFIT (Philadelphia Federal)

In Treadways LLC v. Travelers Indem. Co., the insured, an LLC, had policies with the insurer for commercial automobile insurance, worker’s compensation insurance, and employer’s liability insurance.  An individual filed a lawsuit against the insured, and pursuant to the policy, the insurer hired attorneys to represent the insured in litigation.  Eventually, however, the insurer determined that it did not have to indemnify insured under the policy for this type of incident, so it denied coverage.
The insured eventually was held to be liable in the underlying lawsuit for $1,000,000, and it requested the insurer to cover that amount under the worker’s compensation policy, but the insurer denied coverage.  The insured then filed a two-count Complaint against the insurer for 1) acting in bad faith, and 2) breaching its duty to indemnify the insured.  The court denied both parties’ motions for summary judgment on the second count, as it concluded that the question of whether the insured relied to its detriment on the insurer’s conduct required an analysis of the disputed facts by a jury.
Concerning the bad faith claim, the insured alleged that the insurer, among other violations, failed to investigate in good faith, failed to communicate regarding coverage issues, failed to issue a reservation of rights letter and failed to investigate the fraud and misrepresentation allegations made against the insured in the underlying suit.
The defendants contended that because the insured never argued that defendants wrongfully denied benefits under the policies, the first prong of the bad faith test could not be satisfied, i.e. the insured could not prove that “insurer did not have a reasonable basis for denying benefits under the policy” since no benefits were denied. The carrier alleged that the insured did not even contend that defendants wrongfully denied coverage under the policies, and therefore defendants had a reasonable basis for denying coverage under the policies and plaintiff’s bad faith claim must fail.
The court in this case did not address that argument one way or the other, because the insured could not meet the second element of the bad faith claim, i.e. that the insurer knew of or recklessly disregarded its lack of reasonable basis in denying the claim.  Although not clear from the opinion, the court apparently chose not to address this issue, which arguably should have been dispositive on its face, on the quoted principle that:
“Courts have clarified that bad faith may be found in circumstances other than an insured’s refusal to pay. As the Third Circuit Court of Appeals explained, “’[b]ad faith is a frivolous or unfounded refusal to pay, lack of investigation into the facts, or a failure to communicate with the insured.’” Gallatin Fuels, Inc. v. Westchester Fire Ins. Co., 244 Fed. Appx. 424, 433 (3d Cir. 2007) (not precedential) (quoting Frog Switch & Mfg. Co., Inc. v. Travelers Ins. Co., 193 F.3d 742, 751 n. 9 (3d Cir. 1999)).”
The court determined that the insured did not satisfy the second prong of the test for bad faith under 42 Pa. Cons. Stat. Ann § 8371, which required the insurer to know of or recklessly disregard its lack of a reasonable basis for denying the claim.  The court relied upon Terletsky in this finding, stating that for bad faith to occur, an insurer must demonstrate “dishonest purpose and means a breach of a known duty . . . through some motive of self-interest or ill will; mere negligence or bad judgment is not bad faith.”  Here, the insured’s allegations contained no evidence of any dishonest purpose on the insurer’s part and did not show that the insurer was motivated by any self-interest or ill will; and equated the absence of that with mere negligence, and thus the plaintiff failed to show knowing intent or reckless disregard and the bad faith case was dismissed.
However, the court made no reference to Greene v. USAA, where the Superior Court later held that self-interest and ill will in themselves were not elements of a bad faith claim, but were evidence as to whether or not there was an intentional or reckless disregard.
Date of Decision:  May 4, 2011
Treadways LLC v. Travelers Indem. Co., Civil Action No. 08-4751, United States District Court for the Eastern District of Pennsylvania, 2011 U.S. Dist. LEXIS 47708, (May 4, 2011) (Rueter, U.S.M.J.)
As to whether there can be bad faith without the denial of a benefit, see this blog entry for one discussion on that issue.