OCTOBER 2011 BAD FAITH CASES THIRD CIRCUIT AFFIRMS DISMISSAL OF BREACH OF CONTRACT AND BAD FAITH ACTION, RELYING UPON POLICY’S EMPLOYEE EXCLUSION CLAUSE (Third Circuit)

In Brewer v. United States Fire Insurance Company, the Third Circuit heard an appeal from the district court’s dismissal of a breach of contract and bad faith action brought by an assignee of the insured.  The original suit stemmed from a 2006 car accident, during which the assignee, an employee of a delivery company, was injured in an automobile accident caused by the insured, an ambulance driver.  The assignee filed suit and obtained a $250,000 judgment against the insured ambulance driver.  In an effort to avoid execution of the judgment, the insured assigned his claims against the carrier to the injured driver.  At the time of the accident, the policy issued by the carrier named the employers of both individuals, though the companies were separate entities.

Invoking its policy’s employee exclusion clause, the carrier denied coverage.  The policy prohibited coverage for “bodily injury to an employee of the insured arising out of and in the course of employment for the insured.”  The exclusion applied “whether the insured may be liable as an employer or in any other capacity.”  The assignee filed suit to its rights against the carrier, seeking $250,000 in compensatory damages.  It also brought a bad faith claim.  The carrier filed a motion to dismiss, which the district court granted, ruling that the exclusion clause was triggered under the plain language of the policy.

On appeal, the assignee argued that the exclusion is not applicable to her because “(1) the injury is to her (2) the insured seeking coverage is [the ambulance driver, acting as the assignor]; and (3) [the assignee] is not the [assignor’s] employee.”

The appellate court upheld the district court’s ruling that the exclusion applied to the assignee because, under the policy, both the assignee’s and assignor’s employers are insured.  The court reasoned that, “if [the assignee] stands in [the assignor’s] stead and [the assignor] in the first instance is precluded from coverage, then so is [the assignee].”  Therefore, under the plain language of the policy, the assignor is an “employee” that is “insured,” by its employer’s policy.  Since the policy excludes him, it also excludes the assignee, who acted as a potential substitute recipient of the policy.

The assignee also argued that the policy would not be provided for bodily injury to “an employee of the insured against whom a claim or suit is brought, but that since she is not an employee of [the assignor],” the exclusion did not apply to her.

The appellate court disagreed, reiterating the district court’s rationale.  It held that, under the facts as pled, the assignee “suffered bodily injury while acting in the course and scope of her employment by a named insured.”  Since one of the named insureds was the assignee’s employer, the policy’s exclusion clause was triggered, preventing the assignee from stating a plausible claim.  The appellate court therefore also concluded that proceeding to discovery was inappropriate.

The assignee also claimed that the district court erred in dismissing her bad faith claim, contending that the carrier “(1) had a duty to provide coverage; and (2) acted with reckless indifference and conscious disregard in disclaiming coverage based on the exclusion discussed above.”  As the district court ruled, the Third Circuit rejected this claim because the pleadings did not state a proper bad faith claim, since the carrier properly denied coverage on the basis of the exclusion clause.

Date of Decision:  October 3, 2011

Brewer v. United States Fire Insurance Company, No. 10-4748, U.S. Court of Appeals for the Third Circuit, 2011 U.S. App. LEXIS 20072 (3d Cir. Oct. 3, 2011) (Greenaway, J.)