In Mountainside Holdings, LLC v. American Dynasty Surplus Lines Ins. Co., the defendant insurers were excess directors and officers liability insurance carriers at the tertiary level, with primary coverage and the first layer of excess coverage providing $10,000,000 in coverage. The dispute arose out of underlying claims against the insureds in a qui tam action. They raised bad faith and breach of contract claims against the insurers.
The court observed that bad faith claims can include more than the pure denial of the claim. “An action for bad faith may extend to the insurer’s investigative practices. Bad faith conduct also includes lack of good faith investigation into facts, and failure to communicate with the claimant.” The court then cited an online dictionary definition: “To investigate is ‘to observe or study by dose examination and systematic inquiry.’”
Further, bad faith plaintiffs can attempt to prove bad faith by demonstrating that the insurer violated provisions of Pennsylvania’s insurance statutes or regulations, “even if those provisions do not provide for private rights of action.”
The first legal issue was whether the bad faith claims were time barred, and what acts caused the statute of limitations to begin running. Plaintiffs attempted to argue that the statute couldn’t begin to run until the $10,000,000 had been paid by the first two lawyers of coverage, and the carrier refused to pay on the third layer, i.e., denied that benefit. The court looked to the wider definition of bad faith cited above, and the plaintiffs’ own complaint which alleged various failures to investigate, a failure to communicate, interference with plaintiffs’ defense in the qui tam action, as well as a denial. The court found that these acts triggered the statute of limitations, and these claims were time barred.
As to the remaining bad faith claims which were not time-barred, the court applied the same reasoning, i.e., that pure denial is not the sole source of bad faith, to reject the insurers’ summary judgment motion as to some of the bad faith claims. First the court agreed that plaintiffs’ claims of interference with the defense in the qui tam case and interference with the other two layers of insurance carriers were attempts to circumvent the court’s prior ruling dismissing their tortious interference claims. However, on the claims of an “alleged failure to promptly acknowledge and investigate” and alleged wrongful denial of coverage on the basis of a failure to cooperate, issues of fact remained. Going back to the dictionary definition cited that investigate means “to observe or study by close examination and systematic inquiry,” the court found that: “It remains unanswered whether Defendants’ request for more information was a systematic inquiry, or if more was required.”
Date of Decision: June 30, 2014
Mountainside Holdings, LLC v. Am. Dynasty Surplus Lines Ins. Co., No. 2003-127, COMMON PLEAS COURT OF CENTRE COUNTY, 2014 Pa. Dist. & Cnty. Dec. LEXIS 73 (C.C.P. Centre County June 30, 2014) (Grine, J.)