(Article from Insurance Law Alert, January 2018)
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A Mississippi federal district court refused to dismiss a bad faith claim against an insurer, notwithstanding the dismissal of a breach of contract claim arising out of the same underlying conduct. Heritage Props., Inc. v. Ironshore Specialty Ins. Co., 2018 WL 506483 (S.D. Miss. Jan. 22, 2018).
Heritage, a property management company, sought coverage for mold-related under a general liability policy issued by Ironshore. Ironshore assigned claim administration to York Risk Services Group. Several months later, Heritage learned that a default judgment had been issued against it. In response to inquiries made by Heritage, York initially claimed that it had sent a coverage denial several months earlier by certified mail, and that the letter was unclaimed and returned. York represented that it then sent a second denial via regular mail. York later admitted that the disclaimer had never been sent via certified mail. Thereafter, Heritage sued Ironshore, York and Ironshore’s underwriting company, asserting breach of contract and bad faith, among other claims.
The court dismissed the breach of contract claim on the basis of an “organic pathogen” exclusion, which provides that Ironshore has no duty to defend Heritage against claims arising out of harm attributable to “any type of bacteria, virus, fungi, mold, mushroom, or mycotoxin.” The court reasoned that the mold-related claims fall squarely within the scope of this exclusion and thus Ironshore had no duty to defend the underlying suit.
The court declined to dismiss the breach of the duty of good faith and fair dealing claim. The court rejected Heritage’s assertion that Ironshore breached the duty of good faith and fair dealing by failing to investigate the claim, explaining that the duty to investigate arises in first-party insurance cases but not in third-party claims where the insurer generally has no duty to investigate beyond the allegations in the complaint. However, noting the uncertainty of whether Mississippi law recognizes a bad faith claim based on an insurer’s failure to provide a denial of coverage, the court found that the allegations in the complaint sufficiently stated a plausible bad faith claim based on York’s failure to provide (and misrepresentations regarding) a coverage denial.