Home Page The Publication The Editor Contact Information Insurance Key issues Book Subscribe


Vol. 7 - Issue 9
December 19, 2018


Insurer Provides Defense And Indemnity: And May Still Be In Bad Faith


The law of bad faith can be complex and it is certainly voluminous.  But, as a general principle, it arises in the context of an insurer that has failed to pay a claim that it otherwise should have.  But that’s not what happened in Higginbotham v. Liberty Ins. Corp., No. 18-747 (W.D. Pa. Nov. 27, 2018).  Here the insurer defended its insured under a reservation of rights, litigated coverage and then settled the claim.  End of story, right?  No.  The Pennsylvania federal court concluded that the insurer could still be in bad faith.

At issue was coverage for Erica Higginbotham, under a homeowner’s policy, for claims arising out of sexual abuse by her father-in-law of children whom Higginbotham was babysitting.  In particular, Higginbotham was sued for negligent supervision of the children and failing to recognize the risk that her father-in-law posed.   
Liberty Insurance, the homeowner’s insurer, undertook Higginbotham defense under a reservation of rights, citing several exclusions.  Liberty and Higginbotham each filed declaratory judgment actions on the issue of whether coverage was owed for defense and any liability.  Liberty filed in federal court.  Higginbotham went the state court route.  The court in the federal action declined jurisdiction on account of the parallel state action.  Liberty filed a counterclaim in the state action.  Liberty’s motion for judgment on the pleadings was denied.  An appeal to the Pennsylvania Superior Court was quashed.  The underlying action was settled by Liberty and the state court declaratory judgment action was now over.  Phew. 

But that wasn’t the end of the story.  Higginbotham filed a complaint against Liberty, in Pennsylvania state court, asserting a claim for statutory bad faith and contractual bad faith.  Liberty removed the bad faith action to federal court and filed a motion for judgment on the pleadings.  The court denied the motion with respect to both the contractual bad faith claim and statutory bad faith claim.

The parties competing positions were as follows: Liberty argued “that it was entitled to judgment on the pleadings because it did not act in bad faith (1) by filing the federal action and a counterclaim in the state action while providing Higginbotham with a defense in the underlying lawsuit, or (2) in its handling of the issues surrounding the underlying litigation.  In her response, Higginbotham argues that Liberty’s issuance of a ‘manipulative’ reservation of rights and use of the courts to delay resolution of the underlying litigation in order to ‘improve its negotiating position,’ was done in bad faith, and caused her to suffer emotional distress and bodily harm and to incur legal expenses to defend herself against Liberty’s unfounded declaratory judgment actions.” 

On the contractual bad faith claim, the court was mindful that “Pennsylvania Supreme Court precedent allows the insurer to defend subject to a reservation of rights [and] . . . applicable caselaw encourages insurers to file declaratory judgment actions.”  However, despite the fact that Liberty did both of these things, it was still not insulated from the possibility of bad faith: “It is undisputed that Liberty investigated the underlying lawsuit once the complaint was brought to its attention; that Liberty provided Higginbotham with counsel, subject to reservation of rights; that Higginbotham chose to hire private counsel to litigate Liberty’s declaratory judgment motions; and that the underlying lawsuit was ultimately settled. However, the thoroughness of that investigation, applicability of the exclusions relied upon by Liberty, and propriety of delaying settlement for two years to actively pursue declaratory relief against its insured present unsettled questions of fact. Viewing the evidence in the light most favorable to Higginbotham, a reasonable jury could find that Liberty’s actions, in the aggregate, constituted a bad faith breach of its contractual duties to Higginbotham, and could lead that jury to return a verdict in her favor.”

On the statutory bad faith claim -- 42 Pa.C.S. § 8371 – the court concluded that the “focus in section 8371 claims cannot be on whether the insurer ultimately fulfilled its policy obligations, since if that were the case then insurers could act in bad faith throughout the entire pendency of the claim process, but avoid any liability under section 8371 by paying the claim at the end.... [T]he issue in connection with section 8371 claims is the manner in which insurers discharge their duties of good faith and fair dealing during the pendency of an insurance claim, not whether the claim is eventually paid.”  (emphasis added).

At least at this stage, the court was not willing to say that there was no possibility of bad faith:  “The allegations in the pleadings demonstrate that there are outstanding material issues of fact which could lead a reasonable jury to conclude that Liberty’s investigation and claim-handling was motivated by its own self-interest, and in bad faith, regardless of the fact that the claim was ultimately paid.” 

I do not know enough about the “manner” in which the claim was handled by Liberty to address the decision in any detail.  Bad faith cases are often fact-driven.  And the court’s decision was on a motion for judgment on the pleadings – which could have a lot to do with it.  But, in general, when an insurer defends under a reservation of rights and files a declaratory judgment action (two things that are judicially encouraged) and then settles the underlying action, and can still face a subsequent bad faith claim, insurers should take notice.


Website by Balderrama Design Copyright Randy Maniloff All Rights Reserved