AUGUST 2006 BAD FAITH CASES NO BAD FAITH AGAINST INSURER FOR DELAYING SETTLEMENT OF A THIRD PARTY CLAIM EVEN IF THAT DELAY HARMS THE INSURED, SO LONG AS CLAIM IS SETTLED (Philadelphia Federal)
The Federal Court addressed a novel issue of law: Can an insurance company which settles a third party claim against its insured be liable for bad faith if the carrier unduly delays in reaching that settlement, resulting in harm to the insured? At least for now, the answer appears to be no.
In addressing a motion to dismiss filed by the insurer, the United States District Court for the Eastern District of Pennsylvania considered the novel issue of whether Pennsylvania law recognizes a bad faith cause of action against an insurer which vigorously litigates a third party claim where liability is clear and its insured wants to settle; delays settlement through negotiations; but ultimately settles within the policy limits before trial. In early 1999 Mitchell Morgan retained Fuss Builders-Contractors to build an addition to the basement of his residence.
Prior to 1999, Morgan had used Fuss Builders frequently to perform construction work on several of his investment properties. In August 1999, as result of Fuss Builder’s failure to build a sufficient berm to retain excess water runoff, heavy rains flooded Morgan’s basement and caused $168,000 in property damage. Fuss Builders notified Defendant insurer that its negligence resulted in a claim by Morgan that was covered under its policy.
In response to Morgan’s claim, Defendant insurer made a settlement offer of $70,000. After negotiations failed, Morgan filed suit against Fuss Builders and Defendant insurer retained counsel to represent Fuss Builders. Allegedly without the Fuss Builders’ knowledge, and despite Fuss Builders’ own admission of negligence and its pleas that the carrier settle the case, counsel answered the complaint, denying all claims of liability.
In addition, during the course of the litigation between Morgan and Fuss Builders, Fuss Builders’ counsel allegedly employed delay tactics, failed to update Fuss Builders and continued to deny Fuss Builders’ liability. The conduct of Fuss Builders’ counsel even led to a court order directing Fuss Builders to: answer discovery requests without objection; appear for depositions in the case; and pay a $750 fine.
Counsel’s purported conduct also led to the exclusion of an expert report which counsel had served untimely; and the denial of a motion for summary judgment which counsel had also filed untimely. Shortly before trial, Defendant insurer settled the case for $156,240.
Fuss Builders subsequently filed suit against its own insurer, arguing that due to the protracted litigation before settlement, its business relationship with the original plaintiff, Morgan, was undermined. Morgan never resumed business with Fuss Builders, which consequently lost substantial revenue. Fuss Builders argued that its insurer’s conduct was in violation of Pennsylvania’s Bad Faith Statute.
The carrier moved to dismiss Fuss Builders’ claims. In granting the motion to dismiss, the District Court observed that while the record “paints a disturbing picture of improper conduct” and while the Pennsylvania Superior Court has interpreted the bad faith statute to include delay of payment by an insurer of first party claims, Pennsylvania Courts have not yet recognized a cause of action for an insurer’s delay of payment in the context of a third party claim brought under either the bad faith statute or a contractual bad faith claim. Nor would he do so in this case.
