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A CASE OF FIRST IMPRESSION IN PENNSYLVANIA
Louis Hockman, Esquire and Lawrence M. Kelly, Esquire
On March 17, 2006, a Philadelphia jury returned a defense verdict in litigation between insurance companies over coverage relating to a $37 million dollar settlement in a bad faith action that originated in a federal court in Massachusetts. The case, Ace American Insurance Co. vs. Underwriters at Lloyds and Cos., stems from a failed project in the mid 1980s to build a trash-to-steam facility in Massachusetts. ACE later assumed CIGNA's interest in this matter. Those in charge of the project had taken out an "efficacy" insurance policy with CIGNA for $25 million in excess coverage. At that time, CIGNA was itself covered by a series of "errors and omissions" policies to protect against any bad faith action that may be filed against them.
In a pre-trial decision in this case, Judge Howland W. Abramson found that an insurer can seek and deny coverage under a "claims made" policy need not show prejudice where there has been a failure to comply with the policy's notice requirements. Various Lloyds Underwriters provided the first layer of coverage under CIGNA's excess insurance package. Judge Abramson found that CIGNA's agreement with Lloyd called for CIGNA to alert insurers "as soon as practicable," or at least within a three month window, once a claim was filed with CIGNA that had the potential of implicating the excess policy. If the underlying claim file with CIGNA could be "reasonably likely" to result in bad faith damages of more than $4 million dollars, CIGNA was to alert Lloyds Group about the specific claim as soon as possible. If the amount in issue was less than $4 million dollars, CIGNA was allowed to provide notice via quarterly filed memorandum.
As a result of the failed trash-to-steam project, the owners ordered CIGNA to require coverage and also a bad faith action against that insurer. In the late 1990s, after extensive litigation, CIGNA had paid the $25 million policy limits of its efficacy policy. But the judge in federal court later ordered CIGNA to pay the projects backers an additional $25,000,000 in prejudgment interest. It was about this time that ACE America acquired CIGNA's property and casualty division. ACE America, a successor to CIGNA, chose to settle the bad faith case with the project heads for roughly $37 million. ACE America had also succeeded the rights of CIGNA's excess policies package and then sought coverage under those policies in conjunction with that settlement. The excess insurers declined, resulting in the litigation giving rise to the action.
Prior to trial, ACE America filed a Motion for Summary Judgment. Judge Abramson denied the Motion, noting that it "is clear that notice of any claim under the [Lloyd's] policy was to be provided by June 30, 1999, at the very latest." Judge Abramson continued that it "is undisputed that ACE reported the [trash-to-steam project] claim by way of [itemized memorandum], at the very latest, as of June 29, 1999. It is likewise undisputed that ACE did not provide more detailed notice of [that] claim until well after June 30, 1999. The question then becomes whether ACE was reasonable in its determination that [that] claim was unlikely to result in a loss exceeding $4 million. If not, ACE was obligated to provide notice in a more detailed manner than by [itemized memo] 'as soon as practicable.' The court found that these are disputed issues of material fact." Accordingly, the Motion for Summary Judgment was denied. In the same decision, Judge Abramson, relying on prior federal court rulings, reached the conclusion that under Pennsylvania Law the "notice-prejudice" rule does not extend to claims made policies, which, in contrast to occurrence policies, typically feature specific notice guidelines.
The jury deliberated for approximately five hours over the course of two days and returned a defense verdict finding that ACE had not provided its excess insurers with timely notice and they had not reasonably evaluated the bad faith claim.
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