Iowa’s Federal Court of Appeals Decision in Bad Faith Case Favors Insurer

A federal court of appeals found in favor of Liberty Mutual in a case that dealt with whether the carrier acted in bad faith upon refusing to reimburse defense costs in two underlying lawsuits against its insured.

The underlying case involved a declaratory judgment action filed by Liberty Mutual against its insured, Pella Corporation; Pella Windows and Doors, Inc. (Pella) in the district court.

Pella sought coverage under its policies with Liberty Mutual for claims asserted against it in two class-action lawsuits in Illinois federal and state courts. During the damage time span alleged within the complaints, Pella had several different insurance carriers.

Though Pella was insured by Liberty Mutual between September 1, 2000 and September 1, 2006, the carrier refused to offer to share defense costs, unlike Pella’s other insurers. Liberty Mutual denied coverage in one case because it determined there was no alleged covered “property damage”, and in the other case because there was no alleged “occurrence.” The carrier’s coverage stance was communicated to Pella by way of coverage letters.

The district court concluded that Liberty Mutual owed Pella a duty to reimburse Pella’s defense costs in the pending litigation. Pella cross appealed the district court’s entry of summary judgment on its counterclaim for a bad faith denial of coverage.

Liberty Mutual appealed the district court’s decision.

Liberty Mutual v. Pella Corporation

The United States Court of Appeals for the Eighth Circuit found that Liberty Mutual’s policies provided for the reimbursement of some defense costs.

The reimbursement language is defined differently in multiple versions of Liberty Mutual’s policies. In the 2000-2005 versions, the duty is phrased as follows: “For each “occurrence” we will reimburse the insured for “Allocated Loss Adjustment Expense” paid by or on behalf of the insured in excess of the “self-insured amount”.

Within the 2005-2006 policy, the duty is phrased as: “We will reimburse the insured for “Allocated Loss Adjustment Expense” incurred by the insured for any “occurrence” after the “self-insured amount” has been exhausted by the payment of damages and/or “Allocated Loss Adjustment Expense” by the insured for that “occurrence”…

Liberty Mutual contended that both policies require an “occurrence” to be established in fact – not just an allegation, and that the duty to reimburse is dependent upon it. The carrier also argued the policies were to be excess over other policy coverage provided to Pella, though Pella claimed it didn’t have any other applicable coverage.

Pella interpreted the policies as requiring Liberty Mutual to reimburse defense costs as soon as the “self-insured amount” was satisfied for each alleged occurrence.

The federal court of appeals concluded that the Liberty Mutual policies issued to Pella were “primary policies with an “other insurance” provision that would allow Liberty Mutual to seek contribution from other insurers – but not affect Pella’s right to recover from Liberty Mutual.”

In addition, the court found that the summary judgment granted on Pella’s bad faith claim was properly granted, given Liberty Mutual’s reasonable basis for denying coverage for the two underlying lawsuits.