Circuit Says: Insurer That Investigated Claim and Filed Declaratory Judgment Action Had Not Acted in Bad Faith

The U.S. Court of Appeals for the Third Circuit has affirmed a decision by the U.S. District Court for the Middle District of Pennsylvania granting summary judgment in favor of an insurance carrier in a bad faith case.

The Case

A man working for Stephen Bodnar died when a trench they were digging collapsed.

Danielle Berry, the man’s widow, sued Bodnar, who filed a claim under the commercial general liability insurance policy that had been issued to him by Nationwide Mutual Insurance Company.

Nationwide determined that coverage depended on whether Berry’s husband had been working for Bodnar as an employee or as a temporary worker. If he had been an employee, there was no coverage because employees specifically were excluded under the policy. If he had been a temporary worker, however, the policy could cover him.

To determine its obligations under the policy, Nationwide filed a declaratory judgment action and took Bodnar’s deposition. He said that Berry’s husband had been a temporary worker and not an employee because he had brought his own tools to work, he only had planned to work with Bodnar for a few weeks, and Bodnar had not paid him like a regular employee.

Nationwide discontinued its declaratory judgment action and paid Berry the policy limit of $1 million, plus interest.

Bodnar and Berry sued Nationwide, alleging that it had handled Bodnar’s claim for indemnification in bad faith and had breached its contractual duty of good faith and fair dealing. After discovery, Nationwide moved for summary judgment.

The U.S. District Court for the Middle District of Pennsylvania found that the facts did not support bad faith or a breach of the duty of good faith and fair dealing, and Bodnar and Berry appealed to the Third Circuit.

The Third Circuit’s Decision

The circuit court affirmed.

In its decision, the Third Circuit rejected the argument by Bodnar and Berry that Nationwide had failed to conduct an unbiased investigation in good faith. It observed that the claims file showed that Nationwide had evaluated Bodnar’s claim, had consulted with legal counsel, and had tried to determine whether Berry’s husband was an employee or a temporary worker.

Moreover, the circuit court continued, rather than denying the claim, Nationwide had filed a declaratory judgment action and had asked a court to adjudicate Berry’s husband’s employment status to determine whether there was coverage.

Additionally, Nationwide had ultimately paid the policy’s liability limit, which “demonstrated its willingness to consider new evidence and adjust its position,” the Third Circuit reasoned. In any event, the court added: “Nationwide had the right to investigate Bodnar’s claim and determine whether it was covered under the policy, regardless of whether Nationwide initially sought to exclude the claim.”

The Third Circuit also was not persuaded by the argument by Bodnar and Berry that Nationwide had acted in bad faith because it had reached a consensus that Berry’s husband was a temporary worker but had then decided to file a declaratory judgment action just a few days later. The circuit court noted that Nationwide had consulted with in-house legal counsel before deciding to file a declaratory judgment action, which demonstrated “ongoing consideration of Bodnar’s claim.” Given the “ambiguities” surrounding Berry’s husband’s employment status, the Third Circuit concluded, it was “reasonable for Nationwide to seek declaratory relief.”

The case is Bodnar v. Nationwide Mutual Ins. Co., No. 15-3485 (3d Cir. Oct. 4, 2016).