Third Circuit: Insurer Escapes Bad Faith for Failure to Defend Potential Malpractice Claim
The Third Circuit affirmed the decision of the lower court that an attorney’s professional liability insurer did not commit bad faith after failing to defend against a sanction petition that had a high likelihood of becoming a malpractice suit. The issue arose when the attorney allegedly committed malpractice in a medical malpractice case through discovery misconduct by withholding documents and redacting information. When the plaintiff from the medical malpractice suit filed a petition for sanctions, the insurer refused to defend the petition because the policy specifically excluded coverage for sanctions. However, the hospital, which the attorney had been defending, was joined in the sanctions proceedings and sought damages. The Third Circuit determined that letters sent by the hospital threatening a malpractice suit, coupled with the damages sought in the sanctions proceedings were enough to trigger defense under the policy. This resulted in a breach of contract and required damages in the form of defense costs to be determined on remand. As for bad faith, the court determined that the sanctions exclusion had provided a reasonable basis for the denial of coverage.