In Charter Oak Insurance Company v. Maglio Fresh Foods, a primary and excess carrier sought declaratory judgments that they owed the insured no coverage duty under their policies. The insured counterclaimed for bad faith. The parties agreed to let the court decided the coverage issues before ruling on the bad faith issue. The court found that neither insured owed any coverage duty. However, this, in itself, did not end the bad faith inquiry.
The insured subsequently amended its counterclaims for bad faith against each insurer. It alleged that the primary carrier acted in bad faith (1) by failing to acknowledge a conflict of interest between the insurer and insured; (2) by failing to advise the insured of its right to independent counsel as a result of that alleged conflict, and to provide that independent counsel; (3) by failing to intervene in the underlying litigation in a timely manner in order to submit jury interrogatories as means of clarifying whether the jury found against the insured based on a theory of liability that the insurance policies would cover or on an uncovered theory; and finally (4) by failing to consider settlement offers and attempt to settle the underlying lawsuit in good faith.
The insured alleged that the excess carrier acted in bad faith by (1) failing to conduct a reasonable investigation before disclaiming coverage and (2) failing to provide a defense to the insured and refusing to post an appeal bond upon the exhaustion of the primary carrier’s policy limits.
Opinion 1. Winning coverage issue did no eliminate bad faith claims automatically and court found material issues of fact that would place these claims before a jury.
The carriers attempted to win the day on the argument that because they won on coverage, they must by necessity win on bad faith. In rejecting that argument, the court first observed that the duty to defend was broader than the duty to indemnify.
Next, the court observed that defending under a reservation of rights does not eliminate the possibility of bad faith. “As the Superior Court of Pennsylvania recently observed, ‘[t]his is not to say that, when an insured accepts the insurer’s defense, the insurer’s conduct of the litigation is subject to no further scrutiny.” Babcock & Wilcox Co. v. Am. Nuclear Insurers. “Rather, the insurer remains bound by its fiduciary obligation to represent the insured’s interests, and to settle the case when appropriate, in keeping with its obligation of good faith.’”
Then, on the issue of alleged bad faith by the primary insurer in not seeking to intervene in the litigation to request jury instructions that would determine whether the jury found against the insured on a covered or non-covered claim, the court appeared to place this in the context of a duty to settle. The argument appears to be that doing so may have been advantageous to the insured at a time when itfaced potential liability based on certain claims, some of which were not covered by the policy and some of which may have been. That the court later determined there was no coverage was not the relevant question; rather, it looked to the point in time when the decision could have been made to do so, and at which time the issue of coverage was “by no means certain”. The court framed the issue: “In order to determine whether [the insurer] acted in bad faith, the factfinder must evaluate [its] conduct vis-a-vis the factual landscape that existed at the time of the conduct in question, not based on this Court’s later determinations.”
Addressing this last issue on the facts, the court stated that: “To the extent that a trial involved potentially covered theories of liability, [the insured] had an interest, and indeed a right, to have [the primary carrier] take appropriate steps so that the jury could be instructed on, and if the evidence warranted under the law, return a verdict of liability on the [the potentially covered] claim.” The facts showed that by the time to case got to the jury, potentially covered claims were still on the table. That being said, the court came very close to ruling in the insurer’s favor on this issue. The insurer had retained coverage counsel as well as defense counsel at the time of trial, and coverage counsel had recommended submitting special interrogatories, which the insurer wanted to do. However, the final decision was left up to defense counsel who did not do so, but who was given full leeway on this issue without the carrier’s making the call. Because there was some remaining question on why he so chose, the court allowed the matter to go to trial; and further, because it would not be granting the motion for summary judgment in full for the carrier in any event. Importantly, the court did find that there was no issue about defense counsel’s independence; and defense counsel’s decision not to submit the special interrogatories when the carrier wanted him to, evidenced his independence.
The court further found that there were issues concerning an alleged bad faith failure to settle. There were two products at issue in the underlying unfair competition case. One went to verdict in the original action, and the other was subject to a mistrial. The first resulted in an excess verdict for the primary carrier, but there was no bad faith as the case had been consistently evaluated as worth less than policy limits. As to the second, there were factual disputes about whether that case could then settle before retrial. It did not settle, and on retrial, the second verdict was for less than policy limits ($1 Million), but was still a substantial $660,000. The court found on the record various factual issues concerning whether the cases could have settled.
As to the excess carrier, the time period at issue was likewise that period between verdicts, and then even after the verdict. The court framed the issue as whether the excess carrier met “its potential defense obligations to [the insured]?” Because the primary carrier tendered policy limits during this period, potential defense issues arose for the excess carrier, even though the primary still provided a defense for a time before the post-verdict settlement. The insured argued that the excess carrier needed to reevaluate the case to meet its fiduciary responsibilities, and to pay towards defense and an appeal bond. The court found issues remained open, and would not grant summary judgment.
Finally, the court rejected the argument that bad faith could not exist because there was no objective basis to find that the excess carrier’s position on coverage was unreasonable. However, the court again focused on the claim as relating to the duty to defend, adding that even though the court found there was no duty to indemnify, “it did so because the underlying trial record was not sufficiently clear such that [the insured] would be able to meet its burden to show that the jury awarded … damages based on a covered, as opposed to a non-covered, claim.” Thus, the question remained as to whether the excess carrier’s refusal to participate in the “defense was reasonable in light of (1) the principle that an insurer has a duty to defend the insured until it can confine the claim to a recovery excluded from the policy, and (2) the existence of a possible [covered] claim … in the [second] trial.”
After this decision, the insured and the primary carrier settled, but the case against the excess carrier went to trial 10 days after the decision. The court issued factual findings on August 8, which will be the basis for its ultimate decision, not rendered as of this date.
Opinion 2. Motions in limine on experts.
In between these two rulings, the court ruled on all three parties’ motions in limine concerning experts.
First, although finding that the insureds expert was qualified on insurance issues, the court had already found that the primary insurer “did not, as a matter of law, breach its duty to [the insured] or any provision of its insurance policy by appointing [defense counsel] to represent [the insured]….” Thus, there was no factual issue for a trial on this matter, and the expert would “not be allowed to give any opinion that [the primary carrier] breached its policy by not appointing counsel in addition, or as an alternative, to [the defense counsel it had appointed].”
Second, on the jury interrogatory issue, the insured’s expert report did not “adequately address this issue nor raise relevant facts with respect to it.” Instead, the analysis on this point was all premised on there being a failure to appoint different or additional counsel, which argument the court had already rejected. Moreover, “even assuming that, following [appointed defense] counsel’s offer of proof at the beginning of trial, as required in the Court’s opinion on summary judgment motions, the interrogatory issue remains for the jury’s consideration, [the insured’s expert’s] opinion does not ‘fit’ with the issues in this case, and therefore, he will not be allowed to testify on this issue.”
Third, on the settlement issue, the insured’s expert did address that issue in his report. Thus, subject to any rulings that the Court makes on interpreting the policy or concerning Pennsylvania law, [the expert] will be allowed to testify as to this issue.”
Next, the court addressed the insured’s motion to exclude the primary insurer’s expert. This motion was denied. This expert would be allowed to testify about the factors leading up to defense counsel’s decision not to submit jury interrogatories, if that were to be before the jury. He could also testify “as to the issue of whether [the primary insurer] acted in bad faith with respect to settlement of the underlying litigation, subject to any forthcoming rulings from the Court.”Lastly, as to the insured’s motion to preclude the expert testimony of the excess carrier’s expert, this was also denied. He was qualified and his opinions related to the excess carrier’s duty to defend in the underlying litigation, which were relevant to key issues at trial and could potentially assist the jury in its consideration of those issues. Thus, his proposed testimony, subject to any rulings the Court makes in interpreting the contract or under Pennsylvania law, would be admitted.
Date of Decision: July 18, 2014 (on legal issues)
Date of Decision: July 21, 2014 (motions in limine)
Dated of Decision: August 8, 2014 (factual findings in insured v. excess carrier)
Charter Oak Ins. Co. v. Maglio Fresh Food, CIVIL CASE NO. 12-3967, 2014 U.S. Dist. LEXIS 97795 (E.D. Pa. July 18, 2014) (Baylson, J.)
Charter Oak Ins. Co. v. Maglio Fresh Food, CIVIL CASE NO. 12-3967, 2014 U.S. Dist. LEXIS 98445 (E.D.Pa. July 21, 2014) (Baylson, J.) (motions in limine)
Charter Oak Ins. Co. v. Maglio Fresh Food, CIVIL CASE NO. 12-3967, 2014 U.S. Dist. LEXIS 109576 (E.D. Pa. August 8, 2014) (Baylson, J.) (factual findings)