“You say to-may-toe; I say to-mah-toe,” or so the saying goes. According to the Eastern District of Pennsylvania in Charter Oak Insurance Company v. Maglio Fresh Food, No. 12-3967 (E.D. Penn. Sept. 9, 2014), the same can be said of a “cost of appellate bond” provision in a liability policy: Debating whether this “hybrid” term is part of the duty to defend or the duty to indemnify “is not easily nor necessarily answerable.” The underlying Maglio Fresh Food case involved two distinct claims brought by Maglio’s competitor and two adverse jury verdicts. The district court had previously granted summary judgment to Maglio’s primary insurer, Charter Oak, and excess insurer, American Guarantee Liability and Insurance Company – finding that neither insurer owed a duty to indemnify Maglio for either verdict and/or resulting judgment. Despite this ruling, however, Charter Oak subsequently admitted coverage for one of the verdicts ($660,000), and as part of a settlement with Maglio, tendered its $1 million policy limits into the registry of the court. The court then held a bench trial on Maglio’s bad faith claims against its excess carrier, American Guarantee.
At the trial, Maglio contended, among other things, that American Guarantee was liable to it for bad faith due to its refusal to secure an appellate bond for Maglio so that Maglio could appeal the denial of its post-trial motions and the adverse verdicts at the two trials. Maglio wanted to appeal, but under the applicable rules would have been required to post a supersedeas bond in at least the amount of the adverse judgment, or $3.6 million, in order to stay the execution of the judgment. Maglio contended that its poor financial condition prevented it from obtaining funding for a bond from a surety company, but American Guarantee refused to post an appellate bond on Maglio’s behalf.
In addressing the duty owed by American Guarantee to Maglio following the denial of Maglio’s post-trial motions, the district court noted that “very few cases explore whether an insurer has a duty to pay for an appellate bond.” As an initial matter, the district court interpreted the relevant policy language — which provided for payment of the “cost” of a bond – to mean whatever amount would be necessary to secure a bond. Thus, for a financially viable company, for which a surety would issue an appeal bond based on payment of a premium, the “cost” would be the premium. In such a case, the insured would be responsible to pay the judgment if the appeal was unsuccessful and there was no coverage of the claim. If, however, the insured was a financially weak company, like Maglio, then the “cost” of the bond would be the full amount of the supersedeas bond necessary to take an appeal.
Turning to the issue of how to characterize the duty to post an appeal bond, the district court again noted the lack of controlling authority on the question:
On the one hand, it makes sense to conceptualize this duty as part of the duty to defend, since it is inextricably tied to an insured’s desire to continue to contest the claims against it. On the other hand, the practical effect of the provision, in the event of an unsuccessful appeal, will be that the insurer is required to functionally indemnify the insured by forfeiting the bond for the trial judgment. Requiring insurers to assume a broader duty to defend on this topic, then, may result in an insurer having to indemnify an insured for a claim that the policy does not cover, in contradiction of the policy language here.
Ultimately, the district court dodged this “unanswerable” question, focusing instead on the specific policy language at issue. American Guarantee, as an excess insurer, was only obligated to incur the cost of bonds once the primary policy limit had “been exhausted by payment of claims for which coverage is afforded under this policy.” In other words, American Guarantee had no duty to defend Maglio – or pay for the cost of bonds – unless Charter Oak paid its $1 million policy limits for a covered claim. Although Maglio argued that Charter Oak’s tender of its policy limits into the court registry exhausted its limits and, thus, triggered American Guarantee’s obligation to pay the cost of an appellate bond, the district court disagreed: “Assuming that Maglio is correct that payment of the Charter Oak policy limits ‘exhausted’ its policy, the payment was only in part for a ‘covered claim.’ Thus, the Court cannot conclude . . . that the primary insurance was ‘exhausted by payment of claims for which coverage is afforded.’” (Emphasis omitted.) Accordingly, the district court held that regardless of whether the duty to pay costs was part of the duty to defend or duty to indemnify, American Guarantee’s duty to post an appellate bond had not been triggered. The district court, thus, entered judgment in favor of American Guarantee on Maglio’s bad faith claim.
Although the Maglio Fresh Food opinion did not resolve the question of how to treat the “hybrid” duty to pay the costs of an appellate bond, the district court framed the practical issues facing an insurer when its insured in unable to secure a bond on its own behalf. To post a supersedeas bond on behalf on an insured when coverage under the policy is doubtful is to run the risk of effectively indemnifying an unsuccessful insured for a loss for which there was no coverage. To refuse to do so, however, opens an insurer up to claims of bad faith and potential damages resulting from a financially insolvent insured.
Image source: Daniel Schwen (Wikimedia)