Bad Faith - Federal Court Holds That No Bad Faith Action Exists Under Pennsylvania Law Where Insurer Settles Within Policy Limits Before Entry of Excess Judgment Against Insured
The U.S. District Court for the Eastern District of Pennsylvania recently addressed what it termed a “novel issue” of Pennsylvania bad faith law. In Daniel P. Fuss Builders-Contractors, Inc. v. Assurance Company of America,
Civil Action No. 06-1182, 2006 WL 2372226 (Aug. 11, 2006), the court considered “whether Pennsylvania law recognizes a bad faith cause of action against an insurer who ultimately settles a third party insurance claim within
policy limits before an excess verdict has been entered.” The Fuss court held that no claim exists under such circumstances.
The action arose from a lawsuit against Fuss Builders, a construction contractor insured under a speciality contractors insurance policy issued by Assurance Company of America. The insurer asserted its right to defend the lawsuit
and, even though Fuss Builders admitted that it had been negligent and asked that the claim be settled, the insurer retained defense counsel who allegedly filed an answer denying liability without the insured’s knowledge.
Defense counsel thereafter allegedly employed delay tactics in the litigation and continued to deny Fuss Builders’ liability despite the insured’s admissions to the contrary. The insured allegedly informed the
insurer that its failure to resolve the claim was damaging the insured’s business relationship with the plaintiff (an individual who frequently hired Fuss Builders to provide construction services for numerous investment properties).
Nevertheless, the insurer continued to defend the case and made settlement offers significantly below the amount demanded by plaintiff. Ultimately, on the day before trial was set to begin, the insurer made a higher settlement
offer that was accepted by the plaintiff.
The insured thereafter filed suit against Assurance, contending that as a result of the four-year litigation, the plaintiff never resumed business with Fuss Builders and the company accordingly lost substantial revenue. The
insured asserted claims against the insurer for breach of the duty of good faith, violation of 42 Pa. Cons.Stat. §8371, and breach of fiduciary duty.
Assurance filed a motion to dismiss arguing that no cause of action exists if an insurer settles a third party claim within its policy limits before an excess verdict has been entered. The court noted that the Pennsylvania
Supreme Court had not addressed this question. It then rejected Fuss Builders’ contention that Birth Center v. St. Paul Companies, 787 A.2d 376 (Pa. 2001) authorized such a claim. Birth Center, the Fuss court concluded, “did not address an insurer’s delay in settling a third party claim . . ., but instead it maintained the insured’s right to recover compensatory damages for contractual
bad faith when its insurer unreasonably refused to settle such claim” (emphasis in original). The district court accordingly declined to “create a cause of action not yet recognized by Pennsylvania law”
and held that no cause of action existed against the insurer for delaying settlement of a third party claim.