Federal Court Refuses to Dismiss Bad Faith Claims Against Insurer for Failure to Indemnify Pipeline Manufacturer

Gulf Prod. Co. v. Hoover Oilfield Supply, Inc. (U.S. Dist. E.D.LA, January 11, 2012)

A Louisiana federal court denied an insurer’s motion to dismiss bad faith claims brought in an insurance coverage dispute involving the manufacturer of a pipeline.  The manufacturer itself is no longer a party to the action, having settled with the underlying gas company plaintiffs.  The plaintiffs are seeking compensation from the insurer for bad faith due to the insurer’s alleged arbitrary and capricious decision not to offer a settlement and a dispute over attorneys’ fees sought by the manufacturer.

The gas companies had sued the pipeline manufacturer for $2 million for allegedly misrepresenting the quality of its pipe.  The companies were involved in a 2008 gas extraction project in Louisiana, which they alleged was significantly hampered by the manufacturer’s allegedly shoddy pipelines.  According to the suit, the pipes allegedly failed at much lower pressures than the pipes were supposed to withstand.  The gas company plaintiffs claimed that the pipeline manufacturer made false representations when selling the pipes and said the ThermoFlex pipe could withstand pressures of up to 1,200 psi, but actually failed at levels well below that threshold.  Indeed, the plaintiffs assert that the pipeline failed during a hydrostatic test at 756 psi, rupturing in several places and causing the pipeline to twist and coil over the marsh, damaging wetlands and bottom water.

In its motion for summary judgment, the insurer argued that it had provided an adequate defense to the manufacturer and the dispute was limited to the fees paid to the manufacturer’s attorneys.  It argued that it is not possible for the insurance company to be in bad faith when it is providing a defense to its insured and the failure to pay sums demanded by the manufacturer for attorneys’ fees does not warrant bad faith penalties unless arbitrary, capricious or without probable cause.  The plaintiffs contended in opposition to the motion that the bad faith claims are over more than attorneys’ fees and now include the refusal to offer a settlement, which the plaintiffs say was arbitrary and capricious.

The federal court held in its order that the insurer’s motion failed to overcome substantial issues of fact concerning the extent of insurance coverage and what providing coverage requires the insurer to do.  The court held that this is ultimately a factual determination that must be submitted to the trial court.  Trial is scheduled to begin later this month.

For a copy of the decision click here Joanna Roberto and Bryan Richmond

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