JANUARY 2016 BAD FAITH CASES: AGENT’S INVESTIGATION AND COMMUNICATIONS WERE ADEQUATE; INSURER’S FAILURE TO COMMUNICATE EVERY 45 DAYS PER UIPA WAS NEGLIGENCE AT MOST, NOT INTENTIONAL OR RECKLESS BAD FAITH (Philadelphia Federal)

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In Smith v. State Farm Fire & Casualty Company, the insureds brought suit against their insurer for breach of contract and bad faith in dealings arising from the insurer’s partial denial of coverage of the insureds’ homeowner’s insurance policy claim. The insurer moved for summary judgment, and argued that the insureds failed to prove bad faith by clear and convincing evidence, and the court granted the motion.

The insureds originally commissioned an inspection of their house for potential water damage after learning their neighbors were having issues with water damage, even though the insureds had not observed any water damage in their home at the time. The inspection revealed numerous design flaws and installation deficiencies, along with water damage. The insureds filed an insurance claim eighteen (18) months after receiving the inspection report.

The insurer sent an agent to inspect the home. The agent observed that certain damages would not be covered, but agreed to review the request for certain water damage. Twenty minutes after this inspection, the insurer reassigned the handling of the claim to another agent, who introduced himself to the insureds that same day. The new agent attempted to contact the insureds several times before finally performing an inspection weeks after the first inspection. The agent ultimately drafted a partial denial letter which was approved by another agent and sent to the insureds.

The insureds alleged that the insurer acted in bad faith by “refusing to honor their claim to replace the exterior insulation of their home, denying coverage without reasonable basis, and knowingly or recklessly disregarding its lack of reasonable basis for denying the claim.” The insureds asserted an unreasonable delay in adjusting the claim, failing to communicate, inadequately investigation, frivolous refusal to pay, misrepresenting policy provisions, and violating proper investigation standards.

The court reasoned that the insureds provided no evidence for their assertion that the original agent assigned to the claim intended to approve coverage; nor did the insureds explain why the seven days it took the subsequent agent to record the inspection he performed was an unreasonable amount of time. While the insurer did fail to communicate with the insureds every forty-five days, the court characterized this as “mere negligence,” which does not constitute bad faith.

Finally, although the insureds alleged that the insurer unreasonably interpreted and misrepresented the policy provisions, the court found that this disagreement was a contractual dispute. In a bad faith case, the court is only tasked with determining whether the insurer’s interpretation was unreasonable, not whether its ultimate decision was correct. The court found that the insurer’s denial letter established a reasonable basis for its decision, and granted summary judgment for the insurer.

Date of Decision:  November 24, 2015

Smith v. State Farm Fire & Cas. Co., CIVIL ACTION NO. 15-670, 2015 U.S. Dist. LEXIS 159127 (E.D. Pa. November 24, 2015) (Beetlestone, J.)

 

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