SEPTEMBER 2012 BAD FAITH CASES: COURT RULES THAT EXCESS CARRIER DID NOT ACT IN BAD FAITH BECAUSE IT OWED NO DUTY TO DEFEND AND THE INSURED’S CLAIM WAS EXCLUDED BY THE POLICY (Philadelphia Commerce Court)

In Lexington Ins. Co. v. Charter Oak Fire Ins. Co., the court heard a complex insurance coverage dispute stemming from an underlying personal injury action. In late 2005, the Philadelphia Water Department entered into a contract with the insured, who agreed to provide various engineering and design services for a construction project. The contract contained an indemnification provision that required the insured to defend and indemnify PWD against all liabilities.

The insured first procured a general liability policy and then purchased a professional service liability policy through the named plaintiff in this action. The general liability policy excluded coverage for injuries arising out of its professional services. The insured’s professional liability policy only covered sums in excess of a Self-Insured Retention of $250,000.

Later, a joint venture was formed to complete PWD’s engineering project. The named defendant-carrier in this action insured the joint venture. This policy excluded coverage for bodily injury arising out of professional engineering services. Moreover, the joint venture’s subcontractors obtained a policy that was to be primary over the aforementioned policy. Lastly, the joint venture also purchased an umbrella policy that excluded coverage for damage and injury arising from its professional services.

In 2007, the claimant in the underlying personal injury action was severely injured in a bicycle accident occurring within an area that the one of the subcontractors was performing work. The man died in 2008 from the injuries he sustained and his estate brought a personal injury suit, alleging joint and several liability against all of the parties. The subcontractors and PWD were defended and indemnified by the defendant-carrier in this action. This underlying tort action eventually settled.

However, the insured party (the engineers that entered into the main contract with PWD and later helped form the joint venture) sought coverage from its umbrella carrier. The carrier stated that it had no obligation to defend or indemnify the insured until the limits of its underlying insurance were exhausted. The carrier also denied coverage based on a professional services exclusion that was contained in the policy language.
The insured thereafter filed suit in state court, alleging that the carrier acted in bad faith by failing to tender a defense and indemnification pursuant to the umbrella policy. In 2011, the court granted the insured’s petition to substitute the named carrier-plaintiff in the instant action. The defendant-carrier then filed for summary judgment.

First, the court held that the defendant-carrier did not owe the insured a duty to defend because the limits of the underlying insurance had not been exhausted. As the policy issued by that carrier specifically conditioned its defense upon exhaustion by payment of all underlying insurance, it owed no duty to the insured. Moreover, the applicable policy contained a professional services exclusion that barred coverage for injuries arising out of the insured’s engineering services. As such, the court granted the defendant-carrier’s motion to dismiss, finding that it owed no duty of defense or indemnification.

Second, the court addressed the insured’s bad faith claim. It reasoned that the defendant-carrier’s representatives denied coverage to the insured based on the professional services exclusion in the policy. As such, it was impossible to find that the defendant-carrier lacked a reasonable basis to deny coverage and acted in bad faith. Therefore, the court granted summary judgment on this count as well, disposing of all claims.

Date of Decision: September 6, 2012

Lexington Ins. Co. v. Charter Oak Fire Ins. Co., No. 2142, 2012 Phila. Ct. Com. Pl. LEXIS 255, Common Pleas Court of Philadelphia County (C.C.P. Phila. 2012) (McInerney, J.)