Bad Faith by Insurer Waives Coverage Defenses
In this case handed down yesterday, the Supreme Court held that a contractor's insurer was responsible for a $1.3 million settlement because it had waived its "your work" exclusion coverage defense by engaging in bad faith conduct.
The owner and insured/contractor were in a dispute and had scheduled an arbitration with the AAA. The insurer had retained defense counsel under a reservation of rights and had filed a dec action to contest coverage. So far, so good.
On the eve of the arbitration, however, the carrier served the arbitrator with a subpoena seeking to compel discovery of the grounds relied on by the arbitrator for whatever award the arbitrator eventually entered. In a cover letter, the carrier explained that its purpose was in part to obtain proof on whether its "your work" exclusion defense was valid.
The Supreme Court found this conduct to be in bad faith because the insured at that time was attempting to prove just the opposite -- that its work was not defective and did not result in harm to the project. By elevating its monetary interest in proving a coverage defense over the right of the insured to a strong defense on the merits of the claim, the Court held the carrier had committed bad faith.
After also deciding that the carrier had failed to rebut the Butler presumption of harm and that the $1.3 million settled reached by the parties on the 6th day of the hearing was reasonable, the Court affirmed judgment against the insurance company.
Copy of opinion also available here Download file
Excellent summary