NOVEMBER 2010 BAD FAITH CASES NO BAD FAITH WHEN INSURER PROVIDES NOTICE OF VALID REASONS FOR DENIAL AND IT TAKES THREE MONTHS FOR INSURER TO ISSUE RESERVATION OF RIGHTS LETTER (Third Circuit)

In Scottsdale Insurance Company v. City of Hazleton, a prior lawsuit had resulted in the City of Hazleton being enjoined from enforcing ordinances regulating the employment and housing of aliens who lack lawful immigration status.  In this case, the district court had granted the insurer summary judgment on various insurance coverage claims arising out of the original litigation.

The City of Hazleton had raised a bad faith issue in the original Complaint, and the District Court granted the insurer summary judgment.  It again raised the bad faith argument on appeal.  It alleged in the original Complaint that the insurer acted in bad faith when it failed to timely advise Hazleton of a conflict of interest, claiming that it failed to put the city on notice of the potential grounds for its denial of coverage.  It also alleged that the insurer acted in bad faith when it delayed the issuing of its reservation of rights letter for three months.

The District Dourt had ruled that because the insurer had retained counsel for the city’s defense within days of receiving notice of its claim and a three month delay was not unreasonable, the City of Hazleton had failed to demonstrate clear and convincing evidence of bad faith.  Without further explanation, the Circuit Court panel agreed with the district court’s ruling that the insurer properly put Hazleton on notice of the grounds for its potential denial of coverage through a reservation of rights letter, and that the three-month delay in issuing the letter was not unreasonable as a matter of law.  It therefore affirmed the District Court’s order granting summary judgment to the insurer.

Date of Decision:  November 4, 2010

The District Court opinion is Scottsdale Ins. Co. v. City of Hazleton, 2009 U.S. Dist. LEXIS 44861 (M.D. Pa. May 28, 2009) (Caputo, J.)