INSURER REASONABLY RELYING ON ENGINEERING INSPECTION REPORT CANNOT BE LIABLE FOR BAD FAITH (Philadelphia Federal)

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The insureds had two nearly identical losses. In 2016, there was water damage to their roof and interior home damage. The insurer originally paid for the interior damage, while having an engineer inspect the roof. The engineer concluded the roof damage was not the result of a storm, but the result of uncovered faulty construction. Moreover, he concluded that even the interior home damage resulted from the uncovered faulty roof construction. The insurer issued a denial letter on this basis and the insureds did not respond.

Two years later, there was another storm, with new roof and interior damage. The insurer sent out the same engineer who reached the same conclusions, i.e., the damage resulted from faulty construction, not storm damage. Further, the record showed that the insureds had not repaired the roof after the original loss two years earlier. Again, under the policy, “coverage for damage caused by faulty, inadequate, or defective workmanship was explicitly excluded in their homeowner’s insurance policy.” Thus, the insurer denied the second claim.

On the second claim, the insured engaged a public adjuster and their own engineer. The public adjuster inspected the home, and took the position the insureds were not seeking coverage for faulty construction, but for damage caused by wind, snow and ice, on the theory that the poorly installed roof only made the home susceptible to these covered elements. The insurer’s engineer reviewed the other engineer’s report, but did not change his position, nor did the insurer rescind its denial.

The insureds sued for breach of contract and bad faith. The insurer moved for summary judgment on the bad faith claim.

The court observed that an insurer “may defeat a claim of bad faith by showing that it had a reasonable basis for its actions.” The court tied this axiom to the legal principle that summary judgment is warranted in bad faith cases when insureds cannot meet their burden of proving by clear and convincing evidence that the insurer’s conduct was unreasonable.

The insureds attempted to argue that the insurer improperly relied on its expert’s denying the first claim to deny the second, independent, claim. Judge Bartle rejected that argument.

The insureds conceded they never repaired the original damages identified two years earlier. Further, they did not dispute that the insurer’s engineer came out a second time and did a completely new report concluding “that the same unrepaired faulty construction caused the claimed damage,” and further rejecting the insureds’ claim the damage was caused by wind, ice, and snow.

In finding no bad faith, Judge Bartle stated “the cause of damage is not material to the plaintiffs’ bad faith claim. … Rather, the plaintiffs must present clear and convincing evidence to substantiate their claim that [the insurer] acted unreasonably.” They did not do so in this case.

The record demonstrated the insurer sent its engineer out to do a second inspection, and that the second denial was based on the second inspection, not events that transpired two years earlier. Once it was established that the insurer did base its denial on a current second inspection, the court found that “[f]or purposes of defeating a bad faith claim, an insurer may rely on the conclusions of its independent experts.”

Thus, summary judgment was granted on the bad faith claim.

Date of Decision: April 9, 2020

Balu v. The Cincinnati Ins. Co., U. S. District Court Eastern District of Pennsylvania NO. 19-3604, 2020 U.S. Dist. LEXIS 63987 (E.D. Pa. April 9, 2020 (Bartle, J.)

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