Insurance Coverage Dispute Alone Not Bad Faith

Barry Zalma

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The tort of bad faith requires, for an insured to recover, that the insurer act intentionally to deprive the insured of the benefits of the policy of insurance. Garo Alexanian (d/b/a) Vet Mobile and Companion Animal Network, Inc. (“CAN,” and together with Alexanian, “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 filed against him New York, plus tort damages for the insurers bad faith denial of his claim for defense.

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, E.D. New York (September 30, 2022) dealt with both the claims for defense and the allegations allowing extracontractual 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]njury, other than advertising injury, caused by . . . oral or written publication, including publication by electronic means, of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services, provided that the claim is made or the suit is brought by a person or organization that claims to have been slandered or libeled, or that claims to have had its goods, products or services disparaged.”

The Travelers Policy excluded from coverage, however, personal injury to a person “arising out of . . . employment-related practices, policies, acts or omissions, such as coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation or discrimination directed at that person.”

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

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

Morales filed a counterclaim alleging that Alexanian defamed her. Travelers refused to defend Alexanian since Morales was an employee.

DISCUSSION

The duty to defend is exceedingly broad and an insurer will be called upon to provide a defense whenever the allegations of the complaint suggest a reasonable possibility of coverage. It follows then that an insurer must afford its insured a defense unless it can show that the allegations of the complaint put it solely within the policy exclusion. If the claims asserted, though frivolous, are within policy coverage, the insurer must defend irrespective of ultimate liability. When an insurer claims that an exclusion applies, it must satisfy the burden which it bears of establishing that the exclusions or exemptions apply in the particular case, and that they are subject to no other reasonable interpretation.

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

Travelers also argues that “to the extent the Counterclaims do not arise out of employment practices, they fall outside the limited scope for which Alexanian is an ‘insured’ under the Travelers Policy.” But, to support this point, Travelers directs the Court to a deed annexed to the declaration of Meg Reid, which is information outside of the amended complaint and which, even if dispositive, cannot be considered by the court on the motion before the USDC.

In short, Travelers failed to establish that the Underlying Action falls within the employment practice related exclusion or is otherwise outside the 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 Bad Faith, and Common Law Fraud

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

Alexanian’s arguments to the contrary amount to nothing more than referring to disagreements about policy terms as deception and falsehoods. Therefore, Alexanian’s implied covenant claims are dismissed. Alexanian argues, pointing to Travelers’ refusal to cover the defamation suit and alleged failure to consider Alexanian’s evidence, that Defendants’ refusal to defend him was a gross disregard of the interests of its insured. But a disagreement concerning interpretation of the policy, which is all Alexanian’s allegations demonstrate, does not amount to bad faith. There is no separate tort for bad faith refusal to comply with an insurance contract.

Alexanian’s fraud claims must be dismissed as well because “the alleged false representations are the essential terms of the contract and failure by [Defendants] to honor these terms gives rise for breach of contract, not one in tort.”

The alleged misrepresentations are not collateral or extraneous to the policies, but concern the policies themselves, and therefore, there is no parallel fraud claim here.

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

Attorney’s Fees

Defendants argued that Alexanian’s claims for attorney’s fees must be dismissed. The Court agreed for the same reasons it denied the bad faith claims.

CONCLUSION

GEICO’s motion to dismiss all extracontractual claims against it was granted. Traveler’s motion to dismiss was granted in part and denied in part. Alexanian’s breach of contract and declaratory judgment claims against both GEICO and Travelers survive, but all other claims were dismissed.
ZALMA OPINION

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

(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, 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 handling lawyer and more than 54 years in the insurance business.

He is available at http://www.zalma.com and [email protected].

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