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Is an Insurer's Reliance on Unsettled Case Law Enough to Defend Against a Bad Faith Claim?

July 6, 2017

Insurers are often faced with making coverage decisions where the case law is unsettled. Does reliance on that case law supporting the insurer’s decision insulate an insurer from a claim of bad faith? A recent case from the Eastern District of Pennsylvania suggests that the existence of case law to support its position may not alone be enough.

In Allstate Ins. Co. v. Lagreca, 2017 U.S. Dist. LEXIS 35197 (E.D. Pa. Mar. 13, 2017), the insured assaulted the underlying plaintiff. When the insured was sued for the underlying plaintiff’s injuries, he sought a defense under the homeowners’ policy issued to his parents. After deciding that case law existed to support a conclusion that the insured’s intoxication would not negate intent, Allstate denied coverage and filed a declaratory judgment action. After the underlying case concluded, Allstate moved for summary judgment on the insured’s bad faith counterclaim. In a decision related to previous motion practice, the court had determined that Allstate was required to defend the insured, a decision that the court described in this opinion as a close one.

Although the court granted summary judgment in favor of the insurer, it noted that the mere fact that there was some case law to sustain Allstate’s coverage decision was not sufficient to protect it from a claim of bad faith. The court noted that “[s]upporting authority, though highly relevant, does not automatically defeat a bad faith claim.”  Therefore, “the mere existence of disparate decisions” may not be enough to prevent a bad faith claim.

What factors did the Lagreca court discuss as applicable in assessing the bad faith claim? The court looked to whether the issues presented were simple or complex, noting that the case law was complex and the court’s coverage decision was difficult. The Lagreca court also analyzed the clarity of the underlying complaint allegations, finding that they were unclear about the level of the insured’s intoxication, a question critical to a decision about intent. Another factor the court looked to was whether the case law provided “a substantial legal basis” for the claims decision. In a related inquiry, the court examined whether reasonable minds could differ on the applicability of that case law, harkening back to the close decision it had to make with respect to the coverage claim. A final factor examined by the court was whether the insurer looked at the body of case law as a whole, because a showing that the insurer undertook “a reasoned process” in considering the existing case law, was significant.

Each of these factors requires a case-specific factual examination. It is most likely not enough for an insurer simply to point to a case supporting a claims decision in order to preclude bad faith liability, but if the insurer can point to facts supporting the factors discussed in Lagreca, an insurer can put its best foot forward in defending a bad faith claim.

Disclaimer: This post does not offer specific legal advice, nor does it create an attorney-client relationship. You should not reach any legal conclusions based on the information contained in this post without first seeking the advice of counsel.

About the Author:  

Lindsay B. Andreuzzi is a Principal in the Firm's Insurance Law Department. She focuses her litigation practice on advising and defending personal, commercial and surplus line insurers in complex insurance coverage matters and allegations of bad faith claims handling. Learn More >>