The below pieces were originally published on the Claims and Bad Faith Law Blog.
When Does an Excess Carrier Have Duties of Good Faith?
There is a theory by which primary carriers and policyholders assert that excess carriers have a duty of good faith and fair dealing even when the underlying limits defined in the excess policy have not yet been exhausted. The theory is that if the underlying claims against the insureds are big enough, then first of all, excess carriers have duties to address those claims, and second, when they address such claims they must act in good faith and deal fairly with such claims.
The excess carrier’s obligations under California law emphatically do not include that theory. “The excess insurer’s obligations begin only once a certain level of loss or liability is reached, i.e., once underlying limits are exhausted.” Vizio, Inc. v. Arch Ins. Co., No 2:20-CV-06864-ODW (ASx), 2021 WL 6135756, at *3 (C.D. Cal. December 29, 2021).
An excess insurer’s duties are triggered by exhaustion of the primary coverage, not by being put on notice that a claim might invade excess coverage.
Vizio, 2021 WL 6135756, at *3.
There being no coverage under the excess policy for the underlying claim at the time that Vizio claimed it was owed duties of good faith and fair dealing by its excess carrier, the Court granted the excess carrier’s motion to dismiss Vizio’s claim of bad faith against the excess carrier. Vizio, 2021 WL 6135756, at *5.
The Relation of Primary Insurer With Excess Carriers and Reinsurers is addressed by Dennis J. Wall in Chapter 6, Volume 1 LITIGATION AND PREVENTION OF INSURER BAD FAITH (3d ed. West, 2022 Supplements in process).
Duty to Defend Factual Allegations in Pennsylvania Underlying Complaint
In Vitamin Energy, LLC v. Evanston Ins. Co., ___ F.4th ___, No. 20-3461, 2022 WL 39839, *1 (3d Cir. Jan. 5, 2022), the Court applied Pennsylvania law, where a liability insurance company’s duty to defend is determined by comparing the allegations in the underlying complaint against the insured, with the provisions of the policy at issue. In that case, Vitamin Energy “took its insurer to court” for declaratory relief, breach of contract, and “bad-faith denial of coverage[.]” Vitamin Energy, 2022 WL 39839, at *2. The appellate court determined that the underlying complaint adequately alleged an “Advertising Injury,” holding that there is a duty to defend here.
Note that Pennsylvania law on the duty to defend requires a comparison of the policy with the factual allegations in the underlying complaint. Vitamin Energy, 2022 WL 39839, at *3, *6.
The Third Circuit panel said nothing about the bad-faith claim. The appellate court vacated and remanded in an appeal from a judgment on the pleadings, not intending “to signal how the coverage dispute here should ultimately be decided,” but “focused now solely on the duty to defend.” Vitamin Energy, 2022 WL 39839, at *6.
Other jurisdictions determine the liability carrier’s duty to defend differently, such as by comparing the policy to the claims alleged in the underlying complaint. The different tests are examined in 1 DENNIS J. WALL, LITIGATION AND PREVENTION OF INSURER BAD FAITH §§ 3:53-3:54 (West 3d edition, 2022 Supplements in process).