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“Deems Expedient” Clause Results in Expedient Dismissal of Bad Faith Lawsuit Over Settlement of Claim

The Eastern District of Pennsylvania recently granted an insurer’s motion to dismiss breach of contract and bad faith claims after finding that the insured’s claims were not sufficiently plead.  The Court held that an insurer could not act in bad faith by settling a claim on the insured’s behalf when a freely negotiated clause in the policy granted the insurer discretion to settle suits brought against its insured within policy limits.  See Healthfleet Ambulance, Inc. v. Markel Ins. Co., 2020 WL 4201618 (E.D. Pa July 22, 2020).

By way of background, a patient was traveling in the insured’s ambulance when a restraint in the ambulance malfunctioned, causing his head to violently come into contact with the van’s interior.  The incident was reported to the insurer.  Nearly two years later, the patient served a writ of summons against the insured in state court.  Shortly thereafter, the insurer settled the patient’s claim against the insured for an amount just shy of the policy limit.  The insured then brought claims against the insurer for both bad faith and breach of contract, alleging that the insurer settled with the patient in bad faith and that the insurer’s conduct has caused monetary damages to the insured in excess of $200,000 in increased insurance premiums.  With respect to the settlement, the insured alleged that, prior to the settlement, it had no substantive contact from the insurer with respect to the patient’s case.  The insured further alleged that the insurer conducted no discovery and made no attempt to determine whether another party, such as the manufacturer of the malfunctioning restraint, could be liable for the patient’s injuries.  The insurer moved to dismiss the insured’s complaint.  As a threshold matter, the insurer argued that the insured’s bad faith claim was barred by the two-year statute of limitations applicable to Pennsylvania’s bad faith statute.  The insurer further argued that even if the insured’s claims were timely, they were not sufficiently plead and should be dismissed.

With respect to the statute of limitations, the Court interpreted the insured’s complaint as alleging a claim for bad faith in the context of an insurance contract dispute, rather than an action for bad faith sounding in tort.  Consequently, the Court held that the insured’s bad faith claim “merges” with its breach of contract claim because a breach of contract claim and a separate contractual bad faith claim cannot be based on the same underlying conduct.  The Court concluded that the insured’s contractual claim was brought within the four-year statute of limitations.

While the Court found that the claim was timely filed, it ultimately dismissed the insured’s complaint for failure to state a claim for which relief can be granted.  The Court noted that Pennsylvania law disfavors bad faith claims where a policy contains a so-called “deems expedient” clause, which grants the insurer discretion to settle and where such settlement is within policy limits. The Court noted that a bad faith claim may only be asserted against an insurance company notwithstanding a “deems expedient” provision when the settlement was contrary to the intent and expectation of the parties.  Because there was no contention that the “deems expedient” clause was not freely negotiated, this exception did not apply.  Furthermore, the Court noted that the Third Circuit broadly interpreted “deems expedient” clauses as allowing insurers to settle claims subject to such clauses for nuisance value or even when the suit does not present a valid claim.  So even if more could have been done to investigate the patient’s claim, the “deems expedient” clause afforded the insurer the option of settling the claim simply because it preferred settlement over further investigation.  The Court dismissed the complaint and denied the insured’s motion to amend.