JUNE 2013 BAD FAITH CASES: PLAINTIFF’S WELL-PLED CLAIM FOR BAD FAITH IN DENIAL OF COVERAGE ALLEGEDLY BASED ON CONCURRENT CAUSES SURVIVES MOTION TO DISMISS STANDARD (Middle District)

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In Donahue v. Burns, plaintiff purchased a homeowner’s policy that provided coverage for the dwelling, personal property and loss of use of his home. The policy excluded water damage resulting from water or sewage overflow or back, and at defendant-carrier’s suggestion, plaintiff purchased a back-up sewer endorsement. On September 8, 2011, a back-up of sewage damaged plaintiff’s property, and plaintiff filed a claim with defendant-carrier. On October 11, 2011, defendant-carrier mailed a letter to plaintiff that denied coverage because the damage “was caused by flood waters, which is specifically excluded under the policy…”

Plaintiff filed suit alleging defendants (the insurance agent and insurance carrier) breached the insurance contract and acted in bad faith by denying coverage. Defendants filed a motion under F.R.C.P. 12 to dismiss the claim of bad faith.  Prior to resolution of the Motion by the Corut, Plaintiff agreed to dismiss the agent, and to pursue claims solely against the carrier. Under as F.R.C.P. 12, a plaintiff must demonstrate (1) that the insurer lacked a reasonable basis for denying benefits; and (2) that the insurer knew or recklessly disregarded its lack of reasonable basis; both elements must be supported with clear and convincing evidence. The Third Circuit has also recognized that bad faith conduct extends to “a frivolous or unfounded refusal to pay, lack of investigation into the facts, or a failure to communicate with the insured.”

The Court found plaintiff had adequately pled a bad faith cause of action. Plaintiff alleged that defendants based their denial on concurrent causes, which are unenforceable under state law. Plaintiff’s allegations, read in conjunction with plaintiff’s factual averments, satisfied the elements of a cause of action for bad faith under § 8371, and thereby defendants’ Motion to Dismiss was denied.

Date of Decision: May 13, 2013

Donahue v. Burns, No. 3:13cv7, 2013 U.S. Dist. LEXIS 67498, (M.D. Pa. May 13, 2013) (Munley, J.)

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