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Denial of Defense Not Bad Faith



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a bad faith tort requires, for an insured to recover, that the insurer act intentionally to deprive the insured of the benefits of the policy. Garo Alexanian (d/b/a) Vet Mobile and Companion Animal Network, Inc. (“CAN” and together with Alexanian, the “Plaintiffs”) sued Government Employees Insurance Company (“GEICO”) and Travelers Casualty Insurance Company of America ( ” Travelers,” and together with GEICO, “Defendants”) seeking a declaration that Defendants have a duty to defend and indemnify Alexanian against counterclaims brought against him New York, plus damages for the insurer’s bad faith denial of his claim to defend.

IN Garo Alexanian d/b/a Vet Mobile and Companion Animal Network, Inc. v. Government Employees Insurance Company and Travelers Casualty Insurance Company Of America. No. 21-CV-05427 (LDH) (TAM), United States District Court, ED New York (September 30, 2022) addressed both the defense claims and the allegations allowing non-contractual damages.

BACKGROUND[

Alexanian is an officer of CAN, which is a not-for-profit corporation that provides veterinary services. Alexanian purchased general liability business insurance from Travelers (the “Travelers Policy”).  As relevant here, the Travelers Policy defines personal injury as: “[I]ndamage, other than advertising damage, caused by . . . oral or written publication, including publication by electronic means, of material that defames or defames a person or organization or disparages the goods, products or services of a person or organization, provided that the claim is made or action is brought by a person or organization that claims to have been defamed or defamed, or who claim to have had their goods, products or services devalued.”

However, the Traveler policy excluded from coverage, personal injury to a person “arising from . . . employment-related practices, policies, acts, or omissions, such as coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation, or discrimination directed against that person.”

Alexanian also purchased an umbrella policy from GEICO (the “GEICO Policy”).

On January 15, 2021, Alexanian sued Rosa Morales for back rent, property damage, and removal of property (the “Underlying Action”). In the underlying action, Alexanian alleged that “[Alexanian] entered into an agreement with [Morales] requires [Morales] to pay a monthly rent. . . for living in the residential apartment managed by [Alexanian] and his business.” The complaint in the underlying action alleged that Morales was “employed by [Alexanian] and [Alexanian’s] operations from September 2015 to October 2019.” It also referred to Morales as a tenant.

Morales filed a counterclaim, claiming Alexanian defamed her. Travelers refused to defend Alexanian because Morales was an employee.

DISCUSSION

The duty to defend is extremely broad and an insurer will be required to provide a defense whenever the allegations in the complaint suggest a reasonable possibility of coverage. It follows that an insurer must provide its insured with a defense unless it can show that the complaint’s allegations alone place it within coverage. If the asserted claims, even if frivolous, are within the insurance coverage, the insurer must defend itself regardless of ultimate liability. When an insurer asserts that an exception applies, it must meet its burden of establishing that the exception or exceptions apply in the particular case, and that they are not subject to any other reasonable interpretation.

The court must determine only whether, assuming Alexanian’s allegations are true, the defamation claim is merely “within the policy exclusion.” The answer to that question is no. The breach of contract claim cannot therefore be rejected.

Travelers also argues that “to the extent that the counterclaims do not arise out of employment practices, they fall outside the limited scope for which Alexanian is an `insured’ under the Travel Policy.” However, in support of this point, Travelers refers the court to a document attached to Meg Reid’s declaration, which is information outside the amended complaint and which, although dispositive, cannot be considered by the court in the motion before the USDC.

In short, Travelers failed to establish that the underlying action falls within the employment practice exclusion or otherwise falls outside Travelers’ policy, and therefore the motion to dismiss Alexanian’s breach of contract claim must be denied.

Breach of the covenant of good faith and fair dealing, common law belief and fraud

Travelers and GEICO both argue that Alexanian’s tort claims are duplicative of his breach of contract claim and must be dismissed.

Alexanian’s argument to the contrary is nothing more than referring to disagreements about policy terms such as fraud and lies. Therefore, the Alexanian implied covenant claim is rejected. Alexanian argues, pointing to Travelers’ refusal to cover the defamation suit and alleged failure to consider Alexanian’s evidence, that the defendant’s refusal to defend him was a gross disregard of the insured’s interests. But a disagreement over the interpretation of the policy, which is all Alexanian’s allegations show, does not constitute bad faith. There is no separate tort for bad faith refusal to comply with an insurance contract.

Alexanian’s fraud claim must also be dismissed because “the alleged false representations are the essential terms of the contract and failure of [Defendants] respecting these terms gives rise to a breach of contract, not a crime.

The alleged misrepresentations are not collateral or alien to the policies, but relate to the policies themselves, and thus there are no parallel fraud claims here.

Alexanian’s allegations show nothing more than a private dispute between the parties.

Attorney’s fees

Defendants argued that Alexanian’s claim for attorney’s fees must be dismissed. The court agreed for the same reason it denied the bad faith claim.

CONCLUSION

GEICO’s motion to dismiss all non-contractual claims against the company was granted. The traveler’s request for termination was partially granted and partially denied. Alexanian’s breach of contract and declaratory judgment claims against both GEICO and Travelers survive, but all other claims were dismissed.

A coverage dispute is a contractual action where the only remedy available to the insured is to require the insurer to comply with the terms of the contract. When both parties to the policy, in good faith, dispute the promised benefits and the contract was breached in this case, Alexanian was entitled to a cross-claim defense but was not entitled to any non-contractual damages. Bad faith requires more than a simple disagreement about coverage.

(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, now limits his practice to serving as an insurance consultant specializing in insurance coverage, insurance claims management, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims attorney and more than 54 years in the insurance industry.

He can be reached at http://www.zalma.com and zalma@zalma.com.

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