MAY 2016 BAD FAITH CASES: NO BAD FAITH WHERE ALLEGATIONS IN COMPLAINT FALL OUTSIDE SCOPE OF COVERAGE; FAULTY WORK IS NOT AN OCCURRENCE (Philadelphia Federal)

In Lenick Construction, Inc. v. Selective Way Insurance Company, the insured brought breach of contract and bad faith claims against the insurer in connection with an underlying suit involving material construction defects and breaches of warranty. The insured, working as a subcontractor in the construction of a condominium project, was sued by the condominium association after owners found defects in the units which caused water infiltration, leaks, and cracks in the drywall.

The insurer originally denied the insured’s demand for a defense and indemnification in the underlying suit, but eventually agreed to defend the insured subject to a reservation of rights. The insured then filed this action, seeking a declaratory judgment as to the insurer’s duty to defend and indemnify it in the underlying suit. The insurer argued that any liability the insured would face arose from its own faulty workmanship, in breach of its contractual duties.  Therefore, the property damage at issue was not caused by an “occurrence” and was not covered. The insured asserted bad faith in denying benefits.

The insured claimed that the insurer denied benefits under the policy without a reasonable basis, and knew or recklessly disregarded the lack of reasonable basis when denying the claim. The court disagreed. It found no duty to defend because the allegations arose out of faulty workmanship in performance of a contract, which was not an “occurrence” under the policy. Additionally, the court found that the insurer had no duty to indemnify because the claims were not potentially within the scope of the policy’s coverage. As the insurer was under no duty to defend or indemnify, the court determined that the insurer’s interpretation of the underlying pleadings was not made with knowing or reckless disregard of whether the denial of coverage was reasonable, and accordingly did not act in bad faith.

Date of Decision:  March 23, 2016

Lenick Constr., Inc. v. Selective Way Ins. Co., No. 14-2701, 2016 U.S. Dist. LEXIS 38119 (E.D. Pa. Mar. 23, 2016) (Rufe, J.)