SEPTEMBER 2007 BAD FAITH CASES INSURER LIABLE FOR BAD FAITH EVEN AFTER POLICY WAS CANCELLED (Third Circuit)

In Gallatin Fuels, Inc. v. Westchester Fire Insurance Co., the United States Court of Appeals for the Third Circuit affirmed the bad faith decision of the district court, even though reversing the breach of contract claim.  The insurer argued that it denied the insured’s claim because the policy had been cancelled at the time of the incident and, in the alternative, even if it had not been cancelled, the insurer acted reasonably in handling the claim.  The Court found that even though there was no breach of the insurance policy because the policy had been cancelled before the loss, the insurer did not assert the cancellation of the policy as a reason for the denial for more than 6 months, misrepresented the terms of the policy, dragged its feet in the investigation of the claim, hid information from the insured and continued to shift its basis for denial of the claim.  The Court concluded that because the parties believed that a policy existed when the claim was filed and acted accordingly, even though the policy had been cancelled, the insurer, thereafter, acted in bad faith for denying the claim.