Eastern District of Pennsylvania Finds No “Link” to Bad Faith in Excess Carrier’s Conduct Towards Sausage Company Insured

This month, the Eastern District of Pennsylvania held that excess carrier American Guarantee and Liability Insurance Company (“American Guarantee”) did not engage in bad faith conduct towards insured Maglio Fresh Foods (“Maglio”), a sausage company. Charter Oak Ins. Co. v. Maglio Fresh Foods, Case Civil No. 12-3967, 2012 WL 4434715 (E.D. Pa. Sept. 9, 2014).

Maglio filed cross-claims against American Guarantee for statutory bad faith under 42 P.S.A. § 8371 and breach of the implied covenant of good faith and fair dealing. The claims were based on American Guarantee’s refusal to post a supersedeas bond for Maglio so that Maglio could appeal an adverse judgment entered in the underlying action. Maglio argued that, as the primary carrier had already tendered its policy limits to the court, the primary limits were exhausted and American Guarantee’s duty to defend, including the duty to post the appellate bond, was triggered. In contrast, American Guarantee argued that, under the terms of its “follow form” policy, it had no duty to defend until the primary carrier exhausted its limits through payment for a covered claim. American Guarantee argued that only one out of the two claims in the underlying action was covered (the “Forte brand claim”). American Guarantee previously disclaimed coverage for the other claim (the “Maglio brand claim”). As the value of the covered Forte brand claim was less than the primary policy limit, the primary carrier’s payment of that claim did not exhaust the policy. American Guarantee further contended that the primary carrier’s payment of an additional $440,000 into the court was a “voluntary payment” that did not exhaust the primary policy.

The court found in favor of American Guarantee, holding that “Maglio has failed to prove, by the applicable standard of proof, clear and convincing evidence, that American Guarantee is liable for statutory bad faith, because the evidence does not show any conduct that meets the Pennsylvania legal standard for statutory bad faith, and certainly no conduct that would warrant punitive damages, under Pennsylvania law.” The court further held that its “analysis of the common law bad faith claim, arising out of the contractual relationship … leads to the same conclusion.”

With respect to its disclaimer of coverage, the court held that “Maglio has not brought forth evidence that American Guarantee’s conduct lacked a reasonable basis.” Rather, American Guarantee’s “vigilance” (including (1) conducting a reasonable investigation, (2) justifiably relying on the primary carrier’s denial of coverage of the Maglio brand claim and the primary carrier’s commitment to continue to defend the claim, and (3) hiring coverage counsel to monitor the underlying action), coupled with the primary carrier’s continued defense of Maglio, relieved American Guarantee of having to take any action in the defense. Moreover, the court held that, even if American Guarantee incorrectly evaluated coverage for the Maglio brand claim, “the evidence fails to show that American Guarantee did so out of self-interest or ill will.” The court found that, “[a]bsent such a showing, Maglio’s bad faith claim falls short.”

The court also determined that, as the verdict for the covered Forte brand claim was only $660,000, it did not exhaust the primary policy limits, and thus concluded that the primary insurer’s payment “did not trigger American Guarantee’s duty to defend, and therefore, its duty to post an appellate bond.” As a result, “American Guarantee did not act in bad faith by refusing to post such bond.”

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