JANUARY 2006 BAD FAITH CASES
BAD FAITH CLAIM NOT BARRED BY “INTENTIONAL DISCRIMINATION” EXCLUSION, WHICH DOES NOT APPLY TO CLAIMS FOR VICARIOUS LIABILITY (Middle District)

The issue was whether an insurer breached a policy by failing to provide a defense in a lawsuit alleging that the agents and employees of a hotel operated by the insured instituted racially discriminatory polices and procedures during an event known as “Black Bike Week.” The event, sponsored by the town of Atlantic Beach, South Carolina, was an annual gathering of predominantly African American motorcycle enthusiasts.

The NAACP filed suit against the hotel operators, alleging that the hotel instituted racially disparate practices during the week of the event, which included requiring guests to sign a 34 rule guest contract (the breach of which results in forfeiture of all deposits and half the remaining balance due), higher room rates than at any other time of the year, and requiring guests to pay all three nights plus a three night deposit up front.

The carrier refused to provide a defense to the insured because the policy: (1) only covered the rendering of professional services; and, (2) did not apply to “discrimination…committed intentionally against any other person.” (emphasis added).

The Court first ruled that the injury arose from the hotel’s providing of guest accommodations, which is covered under the professional services endorsement.

The Court then ruled that the discrimination exclusion did not apply to the claims asserted against the hotel operators. The Court articulated that the hotel operators were only being sued under a theory of vicarious liability (liable for the conduct of their agents or employees), which does not require a showing that the hotel operators intended to racially discriminate.

The exclusion only applied to intentional discrimination. Therefore, the Court allowed the bad faith claim against the insurer to proceed to trial.

Date of Decision: January 19, 2006

General Direct Mktg., Inc. v. Lexington Ins. Co., United States District Court for the Middle District of PA, No. 3:05cv140, 410 F. Supp. 2d 387 (M.D. Pa. 2006) (Munley, J.)