Fourth Circuit Upholds Finding That Excess Insurer Did Not Act In Bad Faith Where Insured Would Not Be Liable To Pay

The U.S. Fourth Circuit Court of Appeals upheld a district court’s holding that an excess insurer did not act in bad faith when it denied coverage for a construction-defect claim because the insured was a dissolved company and would never be able to pay the judgment. Contravest Inc. v. Mt. Hawley Ins. Co., No. 20-1915, 2021 U.S. App. LEXIS 30545, 2021 WL 4782687 (4th Cir. Oct. 13, 2021). 

The underlying dispute centered around a construction-defect claim in South Carolina state court brought by a homeowners’ association against a construction company. The construction company asked its excess insurer to provide coverage for the lawsuit but the excess insurer concluded it had no duty to defend. Subsequently, and without the insurer’s involvement, the insured reached a settlement agreement and assigned to the homeowners’ association its rights to recovery from the insurer. 

The homeowners’ association then brought a bad-faith claim against the insurer for failing to defend. The district court granted summary judgment to the insurer. The court determined that the construction company was required to demonstrate that it suffered damages due to the insurer’s failure to defend or indemnify it in the underlying lawsuit. The court noted that because the construction company was dissolved, it could never pay the settlement amount and had failed to show damages. In affirming the district court’s holding, the Fourth Circuit emphasized that the damages alleged were a loss without injury as the insured would never be liable for the damages since its dissolution, and as such, the award of summary judgment to the insurer was proper.