Bad Faith Exclusion Bars Coverage for Bad Faith Failure to Settle Claim That Also Alleges Negligence

The United States District Court for the Eastern District of North Carolina has held that, where all of a policyholder’s potential loss in the underlying action results from or is inextricably intertwined with excluded conduct—“alleged lack of good faith or unfair dealing”—there is no coverage for the claim.  Greenwich Ins. Co. v. Med. Mut. Ins. Co. of N.C., No. 5:14-cv-295-D (W.D.N.C. Jan. 27, 2015).  The court rejected the policyholder’s argument that allegations of negligence in the underlying complaint triggered the insurer’s duty to defend.  Wiley Rein represented the insurer.

After the policyholder—a medical malpractice insurer—rejected multiple offers to settle a malpractice claim against its insured doctor, the doctor incurred a judgment in excess of policy limits.  The doctor subsequently filed suit against the medical malpractice insurer, alleging bad faith refusal to settle, breach of fiduciary duty, constructive fraud, intentional and/or negligent infliction of emotional distress, and unfair and deceptive trade practices.  The medical malpractice insurer tendered the doctor’s claim to its D&O insurer, which denied coverage based on an exclusion for “Loss … resulting from any claim for … any actual or alleged lack of good faith or unfair dealing in the handling of any Claim[.]”

In the coverage litigation that followed, the district court held that the bad faith and unfair dealing exclusion in the policy barred coverage for the doctor’s suit.  The court reasoned that “all of [the medical malpractice insurer’s] potential loss … result[s] from [its] alleged lack of good faith or unfair dealing in refusing to settle the [doctor’s suit] within the liability limits of the [medical malpractice] policy” because “[i]f [the medical malpractice insurer] had settled the [doctor’s suit] within … limits, [the doctor] would have no other injury.”  The court rejected the argument that the allegations of negligence in the underlying complaint triggered coverage, holding that “all the claims in [the doctor’s] complaint allege a single course of conduct whereby [the medical malpractice insurer] handled [a] claim with a lack of good faith or with acts of unfair dealing,” and “all the claims, and all potential loss, ‘result from’ and are inextricably intertwined with [the doctor’s] allegation of . . . lack of good faith or unfair dealing in the handling of her insurance claim.”