Presumption of No Bad Faith Upheld Where District Court Interpreted Exclusion Like the Insurer

In Global Management Enterprise, L.L.C. v. Commerce & Industry Insurance Co., the insurer provided workers’ compensation coverage to the plaintiff-employer. 2015 U.S. App. LEXIS 9179, *3 (5th Cir. June 2, 2015). The policy excluded employees eligible for benefits under the Longshore and Harbor Workers’ Compensation Act (LHWCA), but, by endorsement, the policy extended to “street cleaning.” An employee injured while cleaning a beach sought to recover benefits. The insurer originally disclaimed based on the LHWCA exclusion and later denied that the employee was covered by the “street cleaning” endorsement.

Initially at the trial court, summary judgment was granted in favor of the insurer. On appeal the Fifth Circuit reversed and held that the employee was subject to the LHWCA. On remand, the employer moved for summary judgment on its bad faith claim, contending the insurer acted in bad faith by concluding the street cleaning endorsement did not override the LHWCA exclusion. The trial court granted summary judgment to the insurer on this claim.

On a second appeal, the Fifth Circuit noted the LHWCA exclusion was mandated by state law. As such, any tension between the exclusion and the endorsement was amplified by the fact that the exclusion “has the force of state law behind it.” The court went on to note that, to prevail, the employer would need to show the insurer acted in bad faith in two respects: (1) by concluding that the LHWCA exclusion applied, and (2) by refusing to grant coverage under the endorsement. The court, however, noted that no reasonable factfinder could find that the insurer’s interpretation of the LHWCA exclusion was “arbitrary, capricious, or without probable cause.” The court found strong support in the district court initially siding with the insurer. The Fifth Circuit stated “[a]lthough the district court erroneously concluded that [the employee] was injured at a situs covered by the LHWCA, its holding is ‘virtually conclusive’ that [the insurer’s] decision to dispute LHWCA coverage was ‘reasonable.’” The Fifth Circuit acknowledged, “when the initial court to review an insurance dispute sides with the insurer, on a question of fact or law, that court’s decision, which later proves erroneous, creates a very strong presumption that the insurer did not act in bad faith.”