Obligations of the Excess Carrier—When Does Refusing To Pay or Defend Constitute Bad Faith?

08.12.2013

The United States District Court for the Eastern District of Louisiana recently addressed the following questions: did the excess carrier owe a duty to defend, and if so, did its failure to do so constitute bad faith?  In XL Specialty Insurance Co. v. Bollinger Shipyards, Inc., 2013 WL 3216105 (E.D. La. June 24, 2013), the district court validated the excess carrier’s decision to refuse to take a coverage position until the position of the primary carrier was known by granting partial summary judgment in favor of the excess carrier.  The court held that under the policies, the excess carrier did not owe a clear duty to defend or pay claims before its insured had exhausted its primary coverage.  Because the excess carrier reasonably believed that the primary layer of insurance had not been exhausted, it did not act in bad faith by refusing to pay or defend the insured’s claims.

In an earlier suit, the United States sued Bollinger, the insured, in connection with the failure of eight Coast Guard vessels that Bollinger had converted from 110-foot patrol boats to 123-foot patrol boats.  The claims were based on allegations that Bollinger had knowingly misrepresented the strength of the boats’ hulls in order to induce the Coast Guard to proceed with converting the vessels. 

The issue in the case before the Eastern District of Louisiana was the extent to which Bollinger’s defense and potential liability in the underlying suit were covered under insurance policies issued by the defendant insurance companies.  Importantly, Bollinger carried primary general liability insurance provided by XL Specialty Insurance Company, as well as excess general liability coverage provided by Continental Insurance Company. 

When Bollinger provided notice of the government’s claim to Continental, Continental responded less than one month later with a reservation of rights letter.  The letter notified Bollinger’s agent that it was premature to ask Continental to provide a defense to Bollinger since the primary limit of $26 million had not been exhausted.  Continental further stated that it could not take a coverage position until the position of the primary carrier, XL Specialty, was known.  Shortly thereafter, XL Specialty initiated this action seeking a declaration as to whether its policies afforded coverage to Bollinger.  Bollinger’s state court action, which sought coverage and bad faith damages against XL Specialty and Continental, was removed to the district court and consolidated with XL Specialty’s suit.  Bollinger alleged that it was entitled to the full amount due under the policy, as well as to penalties under Louisiana Revised Statutes §§ 22:1892 and 22:1973 for Continental’s failure to pay Bollinger’s claims in a timely manner without good cause.

In ruling on Continental’s motion for partial summary judgment on the bad faith claims, the court first discussed the penalties set forth in La. Rev. Stat. Ann. §§ 22:1892 and 22:1973.  As the court explained, a party seeking relief under either statute has the burden of establishing three things: (1) the insurer received a satisfactory proof of loss; (2) the insurer failed to pay the claim within the applicable statutory period; and (3) the insurer’s failure to pay the claim was arbitrary and capricious.  The court defined “arbitrary and capricious” as a “vexatious refusal to pay, without reasonable or probable cause or excuse.”  However, the court went on to clarify that an insurer has not acted arbitrarily and capriciously when it withholds payment based on a genuine dispute about the amount of the loss or applicability of coverage.

After reviewing the terms of the relevant policies, the court held Continental, as an excess provider, was not liable to pay claims until the primary insurance had been exhausted and that Continental did not owe a duty to defend.  The mere fact that the total damages in the government’s suit could potentially exhaust the primary coverage was insufficient to trigger Continental’s duty to defend.  The insurance contract, construed according to the entirety of its terms, provided that Continental’s coverage began only when the coverage provided by the primary insurer had been exhausted.

The court went on to hold that even if Continental had been required to pay Bollinger’s defense, a finding of bad faith was inappropriate because Continental did not owe a clear duty to defend or pay claims.  Continental reasonably believed that the primary layer of insurance had not been exhausted.  In fact, Continental had promptly responded to the claims by notifying Bollinger that it believed it was premature to ask Continental to provide a defense, since the primary limit of $26 million had not been exhausted.  Because Continental’s duty to pay for Bollinger’s defense was not clear at the time of Bollinger’s claims, Continental did not act in bad faith by refusing to take a coverage position.

This case is the latest in a long line of cases in which the Louisiana courts have declined to find bad faith when doubt existed as to whether the plaintiff was covered under the defendant’s insurance policy.  This case reinforces the idea that if there is a serious dispute as to the amount of the claim, the extent of coverage, or whether the primary layer of insurance has been exhausted, the excess carrier’s refusal to pay or defend claims does not constitute bad faith.  Excess carriers would be wise to do as Continental did—confirm the position of the primary carrier before agreeing to defend or pay the claims of the insured. 

Jaime Wisegarver is an associate in the Litigation Section, where she handles a variety of civil and commercial matters, including insurance recovery litigation and counseling. For more information, please contact Jaime at (804) 771-5634 or jwisegarver@hf-law.com.