(1) NO BAD FAITH WHERE COVERAGE LAW UNCERTAIN (2) BAD FAITH POSSIBLE FOR DELAY AND DENIAL OF ALLEGEDLY UNADDRESSED CLAIM (Philadelphia Federal)
This case involved a highly disputed factual issue on coverage, with no clear guidance in the case law. The court denied summary judgment on the insured’s breach of contract claim, and rendered a split decision on the two bad faith claims.
The Close Coverage Call
Coverage existed if a roof was damaged by wind, allowing water to enter a building. The issue was whether a tarp could be considered part of a roof. The insurer denied coverage on the basis the tarp at issue was a temporary stopgap when blown off during a windstorm. The insured argued the tarp was sufficiently stable and integrated to be part of a roof system when it was blown off.
The court looked at local and national case law on when a tarp might be part of a more permanent structure, and thus part of a roof. The court found the issue highly fact-driven under this case law, and inappropriate for summary judgment. A jury had to decide the issue after hearing the disputed evidence and expert opinions.
The Bad Faith Claims
On the bad faith claims, the court stated that both denial of a benefit and/or improper investigative practices could constitute bad faith.
[As we have written on this Blog ad naseum, the idea that statutory bad faith covers anything other than benefit denials arguably runs contrary to Pennsylvania Supreme Court case law. In the 2007 Toy v. Metropolitan Life decision, Pennsylvania’s Supreme Court strongly appears to state that only denial of a benefit creates a cognizable statutory bad faith action, whereas matters like poor claims handling would be evidence of bad faith. See this article.
A few months later, the Supreme Court seems to confirm this conclusion. In Ash v. Continental Insurance Company, citing Toy, the Supreme Court states, “The bad faith insurance statute, on the other hand, is concerned with ‘the duty of good faith and fair dealing in the parties’ contract and the manner by which an insurer discharge[s] its obligation of defense and indemnification in the third party claim context or its obligation to pay for a loss in the first party claim context.’” (Emphasis added)
While it appears highly likely Pennsylvania’s Supreme Court made clear 13 years ago that section 8371 is limited to claims for denying benefits, numerous subsequent opinions conclude that there can be other bases for statutory bad faith. These cases typically do not address Toy or Ash in reaching this conclusion.]
In the present case, the insured allegedly made two separate claims, 19 days apart. The first had to do with wind damage to roof shingles, and the second addressed the issue concerning the tarp and interior water damage.
Bad Faith Possible for Undue Delay
On the first claim, the insured alleged it gave proper notice of loss, and the insurer failed to respond at all to the claim. The insurer alleged it had no notice, but in any event took the position that its denial letter addressed both the roof shingle and tarp claims.
The court found that there was an issue of whether the insurer had constructive notice of the first claim, even without formal notice. The adjuster was made fully aware of the event, but it is unclear if the insurer thought of this as a distinct event or just part of the continuum in a single claim. It was also unclear whether the denial letter actually addressed the shingle damage as such.
Thus, bad faith had to go to the jury. “If a jury were to conclude that Defendant was aware that Plaintiff had made a claim for the April damage, but ignored it, that could be seen as an objectively unreasonable, frivolous, intentional refusal to pay (or to otherwise resolve the claim in a timely fashion).”
[While there are certainly claims handling issues here regarding delay and responsiveness to an insured, this claim ultimately includes the denial of a benefit. Thus, the issue of whether there can be statutory bad faith without the denial of a benefit is not actually before the court.]
No Bad Faith where Governing Law is Uncertain
As to the second claim, the insurer won summary judgment. This gets back to the dispute over whether the tarp constitutes a roof. “An insurer who makes a reasonable legal conclusion based on an uncertain area of the law has not acted in bad faith.” Thus, “[w]ith no binding guidance from the Pennsylvania Supreme Court or the Third Circuit, and numerous fact-intensive cases on the subject, Defendant reasonably interpreted the membrane, and not the tarp, to be the roof. Even if that call is ultimately found to have been incorrect, Defendant did not act in bad faith by denying the claim.”
Date of Decision: March 18, 2020
Harrisburg v. Axis Surplus Ins. Co., U.S. District Court Eastern District of Pennsylvania CIVIL ACTION NO. 19-1213, 2020 U.S. Dist. LEXIS 48115 (E.D. Pa. Mar. 18, 2020) (Beetlestone, J.)