SEPTEMBER 2011 BAD FAITH CASES COURT REJECTS EFFORT TO BIND EMPLOYER’S CARRIER TO COVER EMPLOYEE’S OTHERWISE UNCOVERED ACTS UNDER RESPONDEAT SUPERIOR THEORY (THIRD CIRCUIT)

In Kelly v. National Liability & Fire Insurance Company, the Third Circuit was faced with an appeal from the district court’s grant of summary judgment to the carrier.  In 2005, the claimant was involved in a car accident with a physical therapist employed by a home care company.  The employee was driving a personally owned car at the time of the accident.  In 2007, the claimant filed suit in state court, where the employee’s personal insurer defended him on the claim.  Although the home care employer was not a party to the action, the employee’s counsel alerted the employer to the suit and inquired about coverage under its own insurance policy.

The employer’s carrier determined that that the employee was not covered because he was driving his own vehicle at the time of the accident.  However, the carrier informed the employer that it could be covered if it had been sued under a respondeat superior theory.  Any claim against the employer was beyond the statute of limitations, however. The underlying plaintiff joined the employer via an amended complaint, but subsequently stipulated to the employer’s dismissal while the employer’s summary judgment motion was pending.

The employee and the complainant then entered arbitration, which resulted in an award of $375,000.  Through a settlement, the employee agreed to pay $100,000 and allowed the complainant to act as an assignee against his employer’s carrier.

In 2009, the complainant commenced this action for breach of contract and bad faith, which the employer’s carrier removed to federal court.  The carrier filed a counter-claim seeking a declaratory judgment that it was not obligated to insure the employee and sought summary judgment.  The court granted summary judgment to the carrier on the complaint, and awarded a declaratory judgment in favor of the carrier.

With respect to the breach of contract claim, the district court ruled that the employee was excluded from his employer’s policy because he was driving a personally owned vehicle.  On appeal, the assignee accepted this rationale and argued that the employer’s policy covered the employee under a theory of respondeat superior

Relying on Mamalis v. Atlas Van Lines, Inc., the assignee argued that the employer and employee were “indivisible and inseparable” parties, rendering the employer’s carrier responsible.  However, the appellate court rejected this theory on grounds that the complainant misconstrued relevant precedent.

The Circuit Court held that, contrary to the assignee’s claim, “vicarious liability” deals with compensating the victim of an injury “caused by the act of a single tortfeasor.”  Respondeat superior, however, meets the need of compensating victims by providing “two funds from which a plaintiff may recover.”  Any such claim was extinguished when the employer was dismissed from the action in 2009.

Lastly, the Court rejected the bad faith claim because the carrier had no duty to defend the employer based upon the terms of its policy.

Date of Decision: September 14, 2011

Kelly v. National Liability & Fire Insurance Company, No. 10-3307, U.S. Court of Appeals for the Third Circuit, 2011 U.S. App. LEXIS 19025 (3d Cir. Sept. 14, 2011) (Sloviter, J.)