Bad Faith: Scottsdale Ins. Co. V. Byrne and Bolton

Being wrong does not automatically constitute bad faith. The U.S.D.C. for the District of Massachusetts recently held that an insurer’s acts did not amount to bad faith because the denial of coverage, although incorrect, was not unreasonable. Plaintiff, Scottsdale, insured Wellesley Advisors Funds. Defendants were co-chairs of the Board of Trustees for Pension Funds which invested in “WARF,” an investment fund that mismanaged funds and engaged in self-dealing. In a subsequent suit, Scottsdale declined to defend WARF. In the coverage action, defendants alleged breach of contract, breach of the implied covenant of good faith and dealing, and violation of G.L c.93A.

On March 1, 2018, the court held that Scottsdale breached the contract by refusing to defend. Following this, Scottsdale moved for clarification and/or reconsideration of the memorandum and order. On May 2, 2018, the court granted Scottsdale’s motion for summary judgment on claims of bad-faith, and denied defendants’ motion for payment of the entire judgment. Plaintiff’s refusal to pay on the policy, although incorrect, was reasonable, and thus did not amount to bad faith. The good-faith plaintiffs were only answerable for the $3 million policy limit.