Posts Tagged ‘New York’

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

Thursday, September 25th, 2014

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.”

New York’s Highest Court Rappels Down From Possible Major Shift in Insurance Law in K2 Decision

Tuesday, February 18th, 2014

By Katelin O’Rourke Gorman, Sedgwick New York

Today, the New York Court of Appeals elected to adhere to precedent in holding that an insurer is indeed allowed to rely on its policy exclusions when faced with a request for indemnity, even if the insurer was not correct in deciding that it did not have a duty to defend. K2 Investment Group, LLC v. American Guarantee & Liability Ins. Co., — N.Y.3d –, 2014 WL 590662 (N.Y. Feb. 18, 2014) (“K2-II”). The K2-II decision follows reargument of an earlier decision by the Court of Appeals issued on June 13, 2013. 21 N.Y.3d 384, 971 N.Y.S.2d 229 (N.Y. June 11, 2013) (“K2-I”).

As background, legal malpractice claims had been brought against American Guarantee & Liability Insurance Company’s insured, Jeffrey Daniels. American Guarantee determined that its legal malpractice policy did not cover the claim and, therefore, it did not owe a defense to Daniels, although the court decided otherwise. K2-II at 2. In the underlying malpractice action, the court entered a default judgment against Daniels. Daniels then assigned his rights under the American Guarantee policy to plaintiffs. Plaintiffs, in turn, brought suit against American Guarantee seeking coverage for the judgment entered against Daniels. American Guarantee maintained it had no obligation to provide indemnification for the judgment because “the loss sought was not covered[.]” K2-II at 2. The trial court disagreed with American Guarantee’s position, and granted plaintiffs’ motion for summary judgment. This determination was affirmed on two appeals, the latest under K2-I, on the basis that “American Guarantee’s breach of its duty to defend barred it from relying on policy exclusions.” K2-II at 2.

American Guarantee requested a re-hearing of the K2-I decision, which the Court of Appeals granted on September 3, 2013. Upon rehearing, the court agreed with American Guarantee, noting that the court had failed to “take account of a controlling precedent, Servidone Const. Corp. v. Security Ins. Co. of Hartford (64 NY2d 419 [1985]).” K2-II at 1-2. As a result, the Court of Appeals vacated its decision in K2-I, and reversed the Appellate Division’s order.

The Court of Appeals’ decision in K2-II is largely tied to Servidone. At issue in Servidone was whether an insurer that had breached its duty to defend would be barred from raising coverage defenses to a request for indemnification of a subsequent, reasonable settlement. There, the answer was no; the insurer would not be barred from raising potentially applicable coverage defenses. See K2-II at 2-3. In K2-I, the Court of Appeals had held that, “when a liability insurer has breached its duty to defend its insured, the insurer may not later rely on policy exclusions to escape its duty to indemnify the insured for a judgment against him.” K2-II at 3 (citations omitted). In reaching today’s decision, the Court of Appeals stated that, “[t]he Servidone and K2-I holdings cannot be reconciled.” K2-II at 3. The Court of Appeals also: (1) rejected plaintiffs’ attempt to distinguish Servidone because it involved a settlement, rather than a judgment as was the case in K2; (2) stated that Lang v. Hanover Ins. Co., in which the Court of Appeals held that, “when an insurer has refused to defend its insured, it may litigate only the validity of the disclaimer,” did not apply because “the issue we now face was not presented in Lang,” i.e., “we did not consider any defense based on policy exclusions;” (3) pointed to various other jurisdictions that follow the Servidone approach; and (4) invoked the rule of stare decisis, stating that it is “strong enough” to govern this case. K2-II at 3-6 (citations omitted).

The K2-II decision will come as a relief to insurers, as the Court of Appeals potentially was going to blaze a new path for New York insurance law and significantly restrict an insurer’s ability to deny coverage under an applicable policy exclusion. The court aptly noted: “When our Court decides a question of insurance law, insurers and insureds alike should ordinarily be entitled to assume that the decision will remain unchanged unless or until the Legislature decides otherwise.” K2-II, at 6. However, insurers should be mindful that the rule still exists in New York that, if it does not provide a defense to its insured, it may not relitigate the issues in the underlying action.

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