Defendant Icon Legacy Custom Modular was sued in two separate state court proceedings: one in New York and one in Massachusetts. Plaintiff Westfield Insurance Company initially agreed to defend Icon as to those actions, but subsequently initiated a declaratory action in the District Court for the Middle District of Pennsylvania seeking a declaration that it owed Icon no defense or indemnity under the subject policy. Icon was then sued again, this time in Vermont state court. The additional suit prompted Westfield to amend its complaint to include the Vermont matter in the declaratory action.
Icon countersued, alleging that Westfield’s decision to deny coverage as to the Vermont action was made in bad faith. Westfield filed a motion to dismiss the counterclaim, alleging that there were no plausibly pleaded facts to support the bad faith claim.
As a threshold issue, the court conducted a choice of law analysis to determine which state’s law applied to the bad faith claim. Because the declaratory judgment action was filed in Pennsylvania, Pennsylvania’s choice of law rules governed the analysis. Pennsylvania courts are to apply the law of the forum with the most interest in the problem, rather than the law of the place of injury.
In this case, the District Court found that the states’ various bad faith standards did not materially differ, but that in the interest of clarity, the court would apply Pennsylvania’s law of bad faith. In support of this determination, the court articulated that in the bad faith context, the primary factor to be considered is the state of residence of the insured, guided by the policy motive that the insured’s home state enjoys a significant interest in ensuring its citizens’ rights vis-à-vis those of insurers. In addition, the policy at issue was likely delivered to a Pennsylvania address, and the policy itself stipulated that it was subject to Pennsylvania law. Those factors pointed toward applying Pennsylvania law, the state of Icon’s incorporation as well as its principal place of business.
Applying Pennsylvania law, the court noted that to prove a claim of bad faith, a plaintiff “must demonstrate by clear and convincing evidence that: 1) the insurer lacked a reasonable basis for its handling of a claim; and, 2) the insurer knew of or recklessly disregarded the lack of a reasonable basis. This heightened standard requires the insured to provide evidence so clear, direct, weighty and convincing as to enable a clear conviction, without hesitation, about whether or not the defendants acted in bad faith.
The court noted that Icon’s bad faith claim was premised upon Icon’s assertion that Westfield has agreed to defend it in other, purportedly similar, matters, and therefore denial of defense here constituted bad faith. The court found that an agreement to defend may be premised upon calculated business judgment, risk avoidance, or litigation forecasts, and that a denial of defense for a similar claim would not constitute bad faith. Further, the court noted that Westfield’s declination letter was detailed, citing to the policy and supporting facts and providing justifications for Westfield’s denial of the claim. Finding that Westfield’s position was “at least arguable,” the court held that this “reasonable basis” would preclude a finding of bad faith. The court dismissed Plaintiff’s with prejudice.
