NOVEMBER 2010 BAD FAITH CASES BAD FAITH MAY OCCUR WHEN AN INSURER EXCESSIVELY SPENDS WHEN OPERATING UNDER A “DEFENSE WITHIN LIMITS” PROVISION IN A POLICY (Philadelphia Federal)

In NIC Insurance Company v. PJP Consulting, LLC, the insurer represented a restaurant/bar that was the scene of an altercation in 2006.  The victim was attacked by four intoxicated patrons at a Philadelphia bar.  The patrons beat him, struck him in the head with a bottle, and slashed his face with a knife inside the bar.  The bouncers then failed to contact the police and instead removed the attackers and the victim from the bar.  The victim was then further beaten and stabbed in the chest outside the bar, suffering a collapsed lung among other injuries.

The victim proceeded to file a Complaint against the bar for negligence.  The bar was insured by the insurer, who then filed a declaratory judgment action against the bar.  The insurer’s Complaint alleged that the liability insurance policy contained not only a $1 million per-occurrence limitation on liability, but also an Assault and Battery Limits of Liability Endorsement that limits its liability to $50,000 for any injuries arising out of an assault and battery.  Finally, the policy also contained a “defense within limits” “DWL” provision  that reduced the amount of coverage that was available to indemnify the bar by the expenses the insurer incurred in defending the bar.  It therefore alleged under this provision that once the bar’s legal fees and expenses exhausted the applicable limits of liability, it had no further obligation to defend or indemnify the bar.

The lone bad faith issue arose when the court discussed the legality of the DWL provision in the policy.  The court noted in a footnote that “profligate spending by an insurer operating under a DWL provision could expose the insurer to a claim for bad faith.”  It cited a law review article where the author provided an example where a bad faith claim may arise in this situation:  “If settlement attempts by plaintiff’s counsel meet with rejection or an aggressive stance by the defense, plaintiff faces the prospect of fighting a battle that will reduce the limit below that necessary for settlement or satisfaction of verdict.  In such a situation, plaintiff has every incentive to attempt to manipulate the insurer into a position of having made a bad faith decision by refusing to settle and engaging in expensive defense.”

The court eventually granted the victim’s Motion to Dismiss the insurer’s Complaint because the action presented unsettled issues under Pennsylvania law that could not be decided at the declaratory judgment stage.  The parties did not raise the bad faith issue at this stage of litigation, and the court therefore did not discuss whether bad faith actually may have occurred in this case.

Date of Decision:  October 22, 2010

NIC Ins. Co. v. PJP Consulting, LLC, Civil Action No. 09-0877, United States District Court for the Eastern District of Pennsylvania, 2010 U.S. Dist. LEXIS 113207 (Oct. 22, 2010)