SEPTEMBER 2006 BAD FAITH CASES NO INSURER BAD FAITH PERMITTED WHEN THE INSURED ENTITY WAS DEEMED RESPONSIBLE FOR FALSE REPRESENTATIONS ON INSURANCE APPLICATION (Philadelphia Federal)

In American Home Assurance Company v. Church of Bible Understanding, American Home brought a declaratory judgment action against Defendant and one of its missionaries.  The carrier sought a declaration that the missionary (1) was not Defendant’s employee at the time of an accident and (2) made material misrepresentations, and thus was not entitled to coverage under a worker’s compensation policy.  The Church counterclaimed that American Home’s attempt to rescind the policy constituted bad faith in violation of Pennsylvania’s Bad Faith Statute.  The United States District Court for the Eastern District of Pennsylvania stated that an insurer may rescind an insurance policy if (1) the application contained a false representation; (2) material to the insured risk; and (3) the insured knew the representation was false, or made the representation in bad faith.  The court found that the Church failed to review and correct information which fell in the false representation/bad faith category on the relevant insurance applications.  Thus, American Home had the right under Pennsylvania law to rescind.  Since the court found in favor of American Home on its rescission claim, Defendants could not demonstrate by clear and convincing evidence that American Home did not have a reasonable basis for bringing that claim, thus finding no bad faith on the part of the insurer.

Date of Decision:  September 6, 2006

American Home Assurance Company v. Church of Bible Understanding, United States District Court for the Eastern District of Pennsylvania, Civil Action No. 03-6052, 2006 U.S. Dist. LEXIS 63859 (E.D. Pa. Sept. 6, 2006) (Kauffman, J.)