NOVEMBER 2006 BAD FAITH CASES INSURED HELD TO HAVE DUTY OF GOOD FAITH AND FAIR DEALING TO INSURER (Western District)

In Kvaerner U.S. Inc. v. Kemper Environmental Limited, the United States District Court for the Western District of Pennsylvania considered Plaintiff’s Motion to Dismiss Defendant insurers’ counterclaim alleging Plaintiff’s breach of a duty of good faith and fair dealing.  The claims arose from a steel mill construction project that turned into a disaster, with delays and significant cost overruns, which led to claims against Kvaerner, among others pieces of litigation, for tens of millions of dollars.  Kvaerner had two policies from different carriers (a project-specific policy and a professional insurance policy), and additional excess insurers on a Kvaerner brought suit against these insurers.  It brought suit against the carriers, with the particular issues in this case involving the excess carriers.

In their counterclaims, these carriers allege that Kvaerner entered into a collusive settlement with the underlying plaintiff, failed to properly notify the carriers of the scope of the claims, failed to properly manage litigation costs incurred by Plaintiff’s counsel, and wrongfully demanded excess insurance coverage even though the original policy had not been exhausted.  Kvaerner filed a motion to dismiss the counterclaims, arguing that insureds, unlike insurers, have no duty of good faith and fair dealing pursuant to an insurance contract.  However, the Court recognized that the majority rule in Pennsylvania is that all contracts impose an implied duty of good faith and fair dealing on each party.  The Court looked to numerous district court cases that have specifically held that insurers may sue insureds for a breach of their duty of good faith.  The Court remarked that it could find “no cogent reason why such an implied contractual duty should not be reciprocal.”  Accordingly, the Court denied Plaintiff’s motion to dismiss Defendants’ counterclaim.

Date of Decision:  October 26, 2006

Kvaerner U.S. Inc. v. Kemper Envtl. Ltd., United States District Court for the Western District of Pennsylvania, No. 2:06-cv-403, 2006 U.S. Dist. LEXIS 78005 (W. D. Pa. October 26, 2006) (McVerry, J.)