92 F. Supp. 3d 367
W.D. Pa.2015Background
- McMahon (insured dentist) was defended by Medical Protective in a malpractice suit; the insurer had a $2 million per-occurrence limit and led defense via retained counsel.
- At mediation shortly before trial, Medical Protective negotiated up to $1.5 million (claims manager Marshall) though higher internal authority existed; insurer later admitted CEO had authorized up to policy limits.
- Negotiations stalled; McMahon, after private consultation, agreed to contribute $50,000 of her own funds so the parties could settle for $1,550,000 (insurer paid $1.5M).
- Medical Protective refused to reimburse McMahon’s $50,000, relying on a policy Condition 2 clause barring insureds from making or contracting settlements except at the insured’s own cost without written insurer authorization.
- McMahon sued for breach of contract and bad faith (common-law and statutory, 42 Pa. Cons. Stat. § 8371); cross-motions for summary judgment were filed.
- The court held the policy exclusion applied (no written authorization to obligate insurer to reimburse), but found factual disputes about whether insurer agents misrepresented settlement limits or omitted material information such that contractual and statutory bad faith claims survive to trial.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does Condition 2 (no unauthorized settlements) bar recovery of McMahon’s $50,000 contribution? | McMahon: clause doesn’t apply to a jointly negotiated settlement; settlement signatures (defense counsel) constitute written authorization. | Med. Protective: clause unambiguous; insured’s $50K was a voluntary payment made "at insured's own cost" absent written authorization. | Held: Condition 2 is unambiguous and applies; settlement did not constitute written authorization to obligate insurer to reimburse the $50K. |
| Was insurer’s settlement conduct a breach of implied contractual duty of good faith? | McMahon: insurer misled/failed to disclose internal limits and encouraged contribution, causing her to pay $50K. | Med. Protective: negotiation tactics and nondisclosure were reasonable; defense counsel’s suggestion (if any) cannot be imputed to insurer. | Held: factual disputes exist (Ball/Marshall statements and omissions) that could support contractual bad faith; summary judgment denied on this issue. |
| Can insurer be vicariously liable for defense counsel’s alleged suggestion that insured contribute? | McMahon: defense counsel (Davies McFarland & Carroll) suggested contribution during mediation, binding insurer. | Med. Protective: counsel were independent contractors; no evidence insurer exercised abnormal control; insurer actually urged insured not to contribute. | Held: No reasonable jury could find Carroll’s alleged suggestion establishes insurer bad faith or vicarious liability; summary judgment granted for insurer on this claim. |
| Does McMahon state a statutory bad faith claim under 42 Pa.C.S. § 8371? | McMahon: insurer acted without reasonable basis and recklessly disregarded insured’s interests via misrepresentations/omissions and inviting contribution. | Med. Protective: had contractual defense (Condition 2) and reasonable negotiation stance; conduct not reckless or knowing. | Held: issues of fact remain whether Ball or Marshall made misrepresentations or material omissions such that statutory bad faith survives to trial; summary judgment denied on that narrow question, but granted as to counsel-invitation theory. |
Key Cases Cited
- Cowden v. Aetna Cas. & Sur. Co., 134 A.2d 223 (Pa. 1957) (insurer controlling settlement owes bona fide, substantive belief standard before risking insured’s interest)
- Birth Ctr., Inc. v. St. Paul Cos., 787 A.2d 376 (Pa. 2001) (insurer exercising control over defense owes insured a duty of good faith in settlement negotiations)
- Babcock & Wilcox Co. v. Am. Nuclear Insurers, 76 A.3d 1 (Pa. Super. Ct. 2013) (explains insurer/insured divergent incentives when exposure may exceed policy limits)
- Trinity Outdoor, LLC v. Cent. Mut. Ins. Co., 679 S.E.2d 10 (Ga. 2009) (insurer not liable to reimburse insured for voluntary excess contribution absent policy language binding insurer)
- DeWalt v. Ohio Cas. Ins. Co., 513 F. Supp. 2d 287 (E.D. Pa. 2007) (adopts negligence/unreasonableness standard for common-law third-party bad faith and recommends clear-and-convincing proof at trial)