NOVEMBER 2013 BAD FAITH CASES: REVERSING ON BREACH OF CONTRACT CLAIMS IN THE INSURED’S FAVOR, THIRD CIRCUIT STILL AFFIRMS SUMMARY JUDGMENT ON BAD FAITH COUNT FOR FAILURE TO MEET EVIDENTIARY BURDEN OF CLEAR AND CONVINCING EVIDENCE, AND THAT SUGGESTIONS FROM EXPERT REPORTS ALONE ARE NOT SUFFICIENT TO ESTABLISH BAD FAITH CLAIM (Third Circuit)

In U.S. Fire. Ins. Co. v. Kelman Bottles, the insured brought suit against its insurers for breach of contract after its claims for damages resulting from a glass melting furnace blow-up in its factory were denied. Defendant produces glass bottles, requiring it to store approximately 220 tons of molten glass at temperatures of 2300 to 2800 degrees Fahrenheit in a glass melting furnace. In March of 2011, a catastrophic event occurred, spewing the molten glass throughout the factory for several hours. This caused severe damage to the furnace and other equipment in the plant.

The insured had two policies from two different insurers; the first insurer provided an “all risk” policy, and the second insurer provided an “equipment breakdown” policy. After the incident, the insured made claims under both policies. The all-risk insurer denied the claim under an Inherent Vice exclusion, Wear and Tear exclusion, and Design Defect exclusion. It also noted the loss might be excluded under the Maintenance Exclusion or the Mechanical Breakdown exclusion. The equipment breakdown insurer also denied coverage, arguing a “breakdown” did not occur within the definition of the policy. Following its denial, the all-risk insurer filed an action seeking a declaratory judgment that it had no obligation for the damages and losses suffered in the furnace incident. The insured filed cross-claims for breach of contract and bad faith, as well as a joinder complaint asserting a breach of contract claim against the equipment breakdown insurer.

In its bad faith claim, the insured alleged that the all-risk insurer deliberately ignored facts supporting defendant’s claim of coverage, refused to evaluate coverage under the appropriate policy provisions, refused to re-evaluate its position after facts favorable to the insured’s position emerged, and that the all-risk insurer’s conduct during litigation forced defendant to exhaust its financial resources. The district court granted summary judgment in favor of the insurers on both breach of contract claims, as well as the bad faith claim against the all-risk insurer. The insured appealed this ruling.

The appellate court overturned the district court’s grants of summary judgment on the breach of contract claims; however, it affirmed the summary judgment holding on the bad faith count. The appellate court found that the insured failed to present clear and convincing evidence of bad faith on any of its four allegations of bad faith conduct. The insured primarily alleged the all-risk insurer’s experts conceded their studies of the furnace and the blow-up incident suggested the exclusions claimed by the insurer did not apply. Without more, a jury could not find by clear and convincing evidence that the all-risk insurer’s denial was unreasonable, or that it knew or recklessly disregarded its lack of a reasonable basis to deny the claim.

Date of Decision: September 23, 2013

U.S. Fire Ins. Co. v. Kelman Bottles, Civil Action No. 12-2270, 2013 U.S. App. LEXIS 19448 (3d Cir. Sept. 23, 2013) (Roth, J.).