NOVEMBER 2011 BAD FAITH CASES BREACH OF CONTRACT AND BAD FAITH DISMISSED BECAUSE CARRIER HAD ALREADY PAID POLICY LIMITS (Philadelphia Federal)
The court was faced with a set of facts stemming from an insured’s duty to defend a claim against its carrier. The carrier moved to dismiss the action and the district court granted the motion, holding that the carrier had already paid to the policy limits.
The federal suit arose after the insured engaged in state court litigation to determine the true directors of the church. In 1938, the St. Nicolas Brotherhood purchased a parcel of land to be used by the Holy Ghost Church as a place of worship. The Brotherhood rarely met, but existed to ensure the perpetual ownership of the property by the Church. As of 2008, no new directors of the Brotherhood had been elected, although one member of the Brotherhood was still alive. In 2008, the Church devised a plan to sell part of the land to developers as a means of raising money for the Church. The Church sought to quiet title and attain a decree that the Church could act on behalf of the Brotherhood. The claim was denied and the membership of the Brotherhood was still undecided.
Soon after, several members of the Church appointed themselves directors of the Brotherhood without the knowledge of the actual surviving member. The newly constituted Brotherhood executed an agreement of the sale of land and granted an easement to AT&T. Representatives of the original Brotherhood filed suit in state court. The Court of Common Pleas of Chester County ruled that all members of the Church were members of the Brotherhood. The judge also held that the officers and directors of the Brotherhood and the Church were identical. Therefore, the sale of land by the self-appointed directors of the Brotherhood was binding.
The self-appointed directors then filed suit against the carrier, seeking a declaration that the carrier had a duty to defend them in the initial state court action. The multi-peril policies held by the insured contained Director and Officer Coverage (“D&O Coverage”), which included the following language: “We will pay on your behalf those sums that any of your Directors, Officers or Trustees become legally obligated to pay for loss arising from any claim or claims because of injury arising out of a wrongful act to which this insurance applies…and we will have the right and duty to defend the insured against any suit seeking payment for loss and to pay for the defense expenses.”
However, the policy contained several exclusionary provisions and endorsements. For instance, coverage for disputes over “any claim involving title to the Named Insured’s property” were explicitly excluded under policy exclusion (f). In addition, the D&O coverage was modified by the “Affiliated Entity Dispute Legal Defense Coverage Endorsement Clause,” which limits defense coverage to $25,000 in suits brought against the directors and officers of the insured by affiliated entities.
First, the court sought to determine if the policy issued to the insured applied at all in this case. The court found that because the Brotherhood was the only named Plaintiff in the state court action, the insured was not entitled to defense coverage for the underlying lawsuit. Therefore, the court only needed to adjudicate coverage under the policy issued to the Church itself, not the Brotherhood.
Second, the court determined that exclusion (f) of the policy did not apply to the dispute because the state court action was not a “claim to settle questions of property ownership…but to settle questions of membership in and leadership of the Brotherhood.” The action, therefore, was not a “claim involving title” to the named insured’s property as required for exclusion under the policy.
Third, the court recognized that the state action was fundamentally a dispute about the appointment or election of directors, officers or trustees. Therefore the instant dispute “falls within the scope of the Affiliated Entity Endorsement,” which “modifies the right to benefits under the D&O provisions.” However, the insured was not entitled to additional benefits under the D&O policy, over and above the policy limits already tendered.
Lastly, the court interpreted the policy to mean that recovery under the “Legal Defense provision” is precluded where defense costs are covered by the “Affiliated Entity Endorsement” provision, as they are in this case. The court therefore concluded that, because “the Legal Defense coverage is limited to $5,000 per defensible incident, and [the carrier] has already paid $25,000,” it was not required to pay any additional monies to the insured.
In conclusion, the court held that the carrier had satisfied its duties under the insured’s policy and dismissed the insured’s declaratory judgment, breach of contract, and bad faith claims.
