Third Circuit Affirms District Court’s Rejection of Insured’s Bad Faith and Breach of Contract Claims in Stromboli Case

December 1, 2015 | Insurance Coverage

The U.S. Court of Appeals for the Third Circuit has affirmed a decision by the U.S. District Court for the Eastern District of Pennsylvania rejecting an insured’s bad faith and breach of contract claims against its excess and umbrella insurer in connection with an underlying lawsuit involving the sale of stromboli.

The Case

Leonetti’s, a supplier and competitor of Maglio Fresh Foods, sued Maglio in a state court in Pennsylvania. The court interpreted Leonetti’s complaint as essentially raising two claims: The “Maglio brand claim” and the “Forte brand claim.”

The “Maglio brand claim” referred to Leonetti’s claim that, after terminating its private label manufacturing agreement with Leonetti’s and finding a new manufacturer, Maglio had continued to use boxes reflecting product information corresponding to Leonetti’s stromboli, instead of the new manufacturer’s stromboli.

The “Forte brand claim” referred to Leonetti’s claim that Maglio had sold stromboli under the “Forte” brand name, despite the fact that Leonetti’s had purchased and obtained exclusive rights to distribute Forte brand stromboli.

In connection with the lawsuit, Maglio sought a defense and indemnity from its primary insurer, The Charter Oak Fire Insurance Company, and its excess and umbrella insurer, American Guarantee & Liability Insurance Company.

Charter Oak agreed to defend Maglio with respect to the allegations in Leonetti’s complaint subject to a reservation of rights.

American Guarantee acknowledged Maglio’s claim and corresponded with defense counsel. After receiving counsel’s case analysis and copies of the pleadings, it determined that the case was unlikely to reach the excess layer of coverage and closed its file.

The lawsuit proceeded to a trial before a jury, which awarded damages to Leonetti’s.

Settlement discussions ensued between Maglio, Leonetti’s, and the insurers. Maglio entered into a settlement agreement and assignment of rights with Leonetti’s, awarding Leonetti’s $4.5 million and assigning to Leonetti’s its claims against the insurers.

Charter Oak then brought an action in the U.S. District Court for the Eastern District of Pennsylvania against Maglio and against American Guarantee as a “nominal defendant,” seeking a declaratory judgment that Leonetti’s claims against Maglio in the underlying state court action were not covered under its policy. American Guarantee brought a cross claim seeking a similar declaratory judgment, and Maglio brought counter and cross claims for breach of contract and bad faith against the insurers.

The district court granted the insurers’ motions for summary judgment and entered a declaratory judgment in their favor on the issue of coverage.

Charter Oak settled with Maglio on its claim prior to trial. After a bench trial, the district court ruled in favor of American Guarantee, concluding that Maglio had failed to meet its burden to show that American Guarantee had acted in bad faith or had breached the policy.

Maglio appealed to the Third Circuit.

The Third Circuit’s Decision

The circuit court affirmed.

In its decision, the Third Circuit found that neither the excess nor umbrella coverage in the American Guarantee policy applied to the damages payable by Maglio.

The circuit court rejected Maglio’s contention that the jury could have found that Maglio had disparaged Leonetti’s products because the evidence showed that it had placed Leonetti’s product information on inferior stromboli, observing that there was “no evidence at trial that any consumer ever knew that Leonetti’s made a Maglio stromboli.”

The circuit court declared that even if it were to conclude that the Maglio brand claim fit within the definition of “advertising injury,” coverage was excluded under the policy’s “knowledge of falsity” exclusion, given that Maglio’s broker and sales manager had testified that he knew the Maglio brand boxes contained false statements and did not accurately represent the product contained within them.

Having ruled that American Guarantee owed Maglio no duty of indemnity, the Third Circuit concluded that American Guarantee had not acted in bad faith by failing to defend Maglio.

The case is Charter Oak Ins. Co. v. Maglio Fresh Foods, No. 14-4094 (3d Cir. Nov. 4, 2015).

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  • Robert Tugander





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