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Failure To Recognize A Conflict In Defending Your Insured Can Be Bad Faith

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In what it termed “a plausible extension of existing (Maryland) law”, the U.S. District Court for the District of Maryland recently found that an insurer’s provision of a defense to its insured without recognizing its conflicting interest in the outcome of the case can create a bad faith cause of action.  The title insurance company, Fidelity National, agreed to defend the Perkins, Fidelity’s insured homeowners, in a neighbor’s suit over the validity of an easement.  A conflict arose from the fact that Fidelity would have no coverage if the easement were found valid, while the Perkins clearly did not want that outcome.  Fidelity allegedly controlled the litigation over the easement, but never explained the conflict to the Perkins or offered them independent counsel.

When the easement was ruled valid, Fidelity sued for a declaratory judgment of no coverage under the title policy and the Perkins (whom Jaszczuk P.C. is proud to represent) counterclaimed in two counts—one seeking a finding of coverage and a second alleging Fidelity acted in bad faith as to its conflict.  Fidelity moved to dismiss the second count, contending Maryland does not recognize an action for bad faith against a title insurer. After agreeing with Fidelity that there is no statutory basis for the Perkins’ claim, Judge Theodore D. Chuang analyzed whether the bad faith count could survive as a common law tort claim. The court recognized Maryland precedent allowing a bad faith claim for an insurer’s failure to settle within policy limits, based on the insurer’s control over settlement and defense and the resulting fiduciary duty.

After noting the lack of Maryland precedent imposing tort liability outside of a bad faith failure to settle, the court reasoned that the insurer’s duty of care in the context of providing a defense to its insured is sufficiently analogous to the settlement obligation to warrant an extension of existing law.  “Here, Defendants’ proposed tort claim is grounded … in the specialized claim that the insurer, once having agreed to provide a defense, breached a duty of care by failing to prevent a conflict of interest from adversely impacting the insured.” (Opin. at p. 9) The court denied the motion to dismiss and the case is now proceeding.

The case is Fidelity National Title Insurance Company v. James H. Perkins, et al., Civil Action No. 22-3094, pending in the U.S. District Court for the District of Maryland.

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