Despite No Duty To Defend, Insurer’s Lack of Due Diligence Prevents Summary Judgment in its Favor on Breach of Implied Covenant of Good Faith and Fair Dealing

In Travelers Property Casualty Co. of America v. Federal Recovery Services, Inc., 2016 WL 146453 (D. Utah Jan. 12, 2016), the U.S. District Court for the District of Utah denied an insurer’s motion for summary judgment on the insured’s counterclaim for breach of the implied covenant of good faith and fair dealing, despite having found no coverage under the insurance policy.

In Travelers, Federal Recovery Services (FRS) tendered the defense of a lawsuit against it under a CyberFirst Technology Errors and Omissions Liability Form Policy (the CyberFirst Policy). Travelers initially denied coverage and filed a declaratory relief lawsuit against FRS, seeking a determination that there was no duty to defend. During the course of the declaratory relief suit, after FRS made another tender, Travelers accepted the defense subject to a full and complete reservation of rights, including the right to seek a judicial declaration that it had no duty to defend.

In the declaratory relief, following the federal court’s denial of FRS’ motion for summary judgment on the duty to defend, Travelers moved for summary judgment on the counterclaims against it for breach of contract, breach of the implied covenant of good faith and fair dealing, and breach of fiduciary duty.

Based on its earlier finding that there was no coverage and no duty to defend under the policy, the federal court first held that there could be no breach of contract or breach of fiduciary duty.

With regard to the bad faith claim, FRS argued that the absence of coverage did not preclude its claim because Travelers acted improperly during the claims investigation by: (1) requiring it to first receive suit papers in the underlying lawsuit before initiating a claim under the policy; and (2) failing to “diligently investigate, fairly evaluate, and promptly and reasonably communicate” with FRS during the claim investigation. FRS provided expert testimony stating Travelers’ conduct did not measure up to the standard required for insurance claims investigations and that a claim, not a “suit,” triggered Travelers’ duty to diligently investigate the claim.

Despite finding no coverage and no breach of contract under Utah law, the federal court held that the narrow issue of whether Travelers inappropriately required the filing of suit papers in contravention of the policy provisions, which may have resulted in a dilatory denial of defense causing severe financial consequences to the insured, is a factual issue and should be submitted to the jury.

Tressler Comments

This case highlights the atypical result in some jurisdictions of allowing a bad faith case to proceed even after a finding of no coverage and no breach of contract. It is a reminder that, even when there is a supportable basis for denying coverage, the insurer must conduct a diligent claim investigation, document the file, maintain communication with the insured during the claim investigation process and be timely in responding to the claim.