JULY 2008 BAD FAITH CASES
THIRD CIRCUIT VACATES SUMMARY JUDGMENT: LOWER COURT DID NOT GIVE PARTIES NOTICE AND ARGUMENT, & GENUINE ISSUE AS TO ENTITLEMENT TO A DEFENSE EXISTED (Third Circuit)

The insured brought a bad faith claim based on the insurer’s refusal to provide a defense. The insured attorney had filed a products liability action on behalf of a client. The matter settled, and the client sought to enforce the settlement. A state appellate court reversed a denial of relief from the settlement, finding prima facie evidence that the client or the attorney committed fraud in the inducement by proffering false discovery responses in order to effect the settlement.

The attorney notified the insurer of the state appellate court’s decision, and also stated that he was informed that the other party in the product liability suit intended to hold him liable for the full share of the settlement if they were unsuccessful in the remand proceedings.

However, the insurer declined to provide a defense. The insurer took the position that it was not obligated to defend because there were not pleadings or proceedings directed specifically against the insured or his firm.

The Insured filed an action in the Court of Common Pleas for breach of contract and bad faith. Insurer Westport removed this action to the District Court, and then filed a motion to dismiss. The insurer asserted that a potential claim or threat of a claim did not trigger its duty to defend. The District Court granted the insurer’s motion for summary judgment and dismissed the insured’s action with prejudice.

However, the District Court converted the motion to dismiss into a motion for summary judgment, with no explanation and gave no notice to the parties of its intention to do so.

The Appellate Court found that the District Court erred in entering summary judgment without giving the parties notice, and without holding a hearing concerning the motion. Furthermore there was a genuine issue about whether the insured was entitled to a defense under the policy. Since there was a possibility that the claim against Wolk should have triggered a defense under his policy, and that the District Court’s entering of summary judgment was not a harmless error, the Third circuit vacated the order granting summary judgment, and directed the District Court to conduct further proceedings consistent with its opinion.

Date of Decision: May 7, 2008

Wolk v. Westport Ins. Corp., 2008 U.S. App. LEXIS 9856 (3d Cir. May 7, 2008)(Alarcon, J.).

J.M.A.