Defense Digest

A Bad Insured Does Not Make A Bad Insurer

It is well established by the courts that an insured's intentional act precludes coverage under a policy of insurance. Accordingly, when the court voids coverage, there cannot be a later claim for bad faith.

In the matter of T.A. and H.A. v. Allen, 2005 Pa. Super LEXIS 111 (Pa. Super. 2005), the court addressed two actions filed with regard to alleged sexual abuse committed against the minor plaintiffs. Following a criminal conviction of the minors’ grandfather, who later died, the minor plaintiffs filed a civil action against the estate of their deceased grandfather and grandmother. After a jury trial, an award was entered in favor of the minors in the amount of $46 million against the grandparents. The Superior Court later entered judgment in favor of the grandmother and reversed the judgment against her. See T.A. v. Allen, 447 Pa. Super. 302, 669 A.2d 360 (Pa. Super. 1995), alloc. denied, 544 Pa. 661, 676 A.2d 1201 (1996).

Split Decision On The Declaratory Judgment Action

Prior to the jury's verdict, the insurer for the grandmother and deceased grandfather filed a declaratory judgment action against the decedent, the grandmother, and the minors for a declaration that it had no duty to defend or indemnify the insureds. In this complaint, the insurer sought to preclude coverage for the acts of the decedent based upon a provision in the policy of insurance which excluded claims for bodily injury that are expected or intended by the insured.

The court referenced an underlying opinion it issued in this matter that found that the acts of the decedent were intentional and that no duty to defend or indemnify was owed to the decedent. The court, however, found that, because the acts of the grandmother were not intentional, the insurer owed a duty to defend her. See General Accident Ins. Co. of America v. Allen, 708 A.2d 828 (Pa. Super. 1998).

The court noted, however, that it and the trial court failed to address the New Matter of the minors to the declaratory judgment complaint that raised statutory and contractual claims of bad faith against the insurer for its alleged conduct during settlement negotiations and strategies.

No Assignment, No Garnishment Proceedings

The minors sought to collect the $46 million verdict from the grandfather’s insurer, contending that it acted in bad faith.

At the time that the minors filed an amended Answer to the declaratory judgment complaint of the insurer for the decedent, they had not obtained an assignment from him to assert a claim for bad faith. After his death, however, the minors obtained an assignment from the estate of their grandfather to file a claim for bad faith against the insurer.

At the trial court, the insurer filed a Motion for Summary Judgment seeking to dismiss the minors’ claim of bad faith based upon the statute of limitations. The trial court found in favor of the insurer. The Superior Court affirmed the decision of the trial court.

As part of its reasoning, the Superior Court reiterated the principle that the minors, as judgment creditors, could only attach the "liquidated" damages, or in other words, applicable limits of the policy of insurance. They could not, however, attach the "unliquidated" damages concerning bad faith as these alleged damages were not readily identifiable. The Superior Court stated, however, that the minors could not recover any monies from the insurer since it was already determined that the insurer owed no duty to defend or indemnify the decedent for his intentional conduct.

The Superior Court also found that, although it recently determined that bad faith actions are subject to the two-year statute of limitations, the insurer could not have acted in bad faith towards the minors since it owed no duty to defend or indemnify the decedent. Further, since the Superior Court previously entered judgment in favor of the grandmother, there could be no claim for bad faith against the insurer for failure to settle the claims against her.

As a result, the Superior Court determined that any claims for alleged bad faith were moot against both the decedent and the grandmother.

To resolve any possible remaining issues, the Superior Court also concluded that any claims of bad faith must fail as the minors failed to obtain an assignment from the grandmother to pursue a claim for bad faith against her insurer.

The opinion of the Superior Court is important because it reiterates the recent principle that bad faith actions are subject to the two-year statute of limitations. Further, the opinion also reinforces the court’s previous ruling that an assignment must be obtained from an insured in order for a non-insured to pursue a claim for bad faith against the insurer. Lastly, an insurer cannot be held liable for bad faith when there is no coverage because an insured's conduct falls within an exclusion contained in the policy of insurance.

*Steve is an associate in our Philadelphia, PA office. He can be reached at (215) 575-4552 or schung@mdwcg.com.