In Hammond v. U.S. Liability Ins. Co., 2016 WL 929288 (3rd Cir. 2016), the insured sought coverage under a Businessowners and Technology Professional Liability policy after he was sued by a technology information company. The technology company asserted ownership rights to certain software as its intellectual property. An amendment to the complaint included claims of breach of contract, conversion and intentional interference with existing and prospective contractual relations. The insurer denied coverage in response to the tender of the original and amended complaints.

In the underlying litigation, the insured asserted a counterclaim. In response, the technology company sought attorney’s fees and costs. The insured maintained that the technology company’s request for attorney’s fees and costs constituted a claim for malicious prosecution and tendered that claim to the insurer. The insurer again denied any obligation to defend or indemnify.

After the insured resolved the litigation with the technology company, it instituted suit against the insurer, alleging that the insurer acted in bad faith when it denied coverage.

Having determined that the insured could not meet his burden to prove bad faith under Pennsylvania law, the 3rd U.S. Circuit Court of Appeals affirmed the District Court’s dismissal of the suit. Specifically, the 3rd Circuit held that the insured could not establish by clear and convincing evidence that the insurer: (1) did not have a reasonable basis for denial of coverage; and (2) knew or recklessly disregarded its lack of reasonable basis in denying the claim.

Further, the 3rd Circuit affirmed the District Court’s determination that the two-year statute of limitations for bad faith claims barred the insured’s suit. Having given the insured definite notice of a refusal to defend or indemnify more than two years before the insured sued the insurer, the statute of limitations expired before the suit was filed.

Tressler Comments

This case illustrates the effectiveness of motions to dismiss, which are generally met more liberally than summary judgment motions. Here, the insured had a difficult burden that the insurer could show at the outset he would not be able to meet.