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In Young Sook Pak v. Alea London Ltd., the case involved commercial property insurance and a wall collapse on the insured’s grocery store.  There were actually two carriers writing half of the insurance each, their agent who bound the policies, an adjustor hired by their agent to investigate the case and an engineer hired by that adjustor to determine the source of the collapse.

The policy covered wall collapses if the collapse was caused by “decay that is hidden from view”, however, if “the presence of such decay is known to the insured prior to collapse” there would be no coverage.

The court went through the adjustor’s investigation at length, as well as other investigation into the collapse, including plaintiff’s expert and an engineer sent out by the City of York prior to the parties even sending their own experts. The focus was on the causes and visibility of any deterioration in the wall that could be associated with the collapse.

The experts varied in their theories on the collapse and/or the visibility of the problems associated with the collapse.  The building’s history showed that the insured’s had done maintenance in the past when face with a water leak in their roof, being as much to the point of how they would have reacted if they did have knowledge as to any sort of causation.

The insureds did not speak English well and the investigator did not get an interpreter.  The insurers’ engineer said she spoke to the insureds about their knowledge of the wall’s history, but they denied such a conversation.  Based solely on this engineer’s report as to cause and these communications, coverage was denied.  The denial letter cited various policy exclusions, and stated that the collapse was not a covered peril.

This last point was clearly incorrect as there was additional coverage in the policy for a collapse, as stated above.  In bringing a summary judgment motion, the carriers evidently conceded that this part of the policy governed, rather than the exclusions.

The Court denied summary judgment on the insured’s breach of contract claim.  Although the insureds had the burden to show that the exception to coverage did not apply, the Court found that it could not grant summary judgment as the issue of the insured’s knowledge of the wall’s decay could not be determined conclusively on the record before the Court.  The insureds would be held to an objective test of whether a “reasonable insured under such circumstances would have seen or otherwise been aware of the decay.”

As to the Bad Faith claim, the Court likewise declined to grant summary judgment.  The focus of the bad faith claim was on the investigation.

The Court stated that “bad faith can exist when an insurance company fails to conduct a meaningful investigation of a claim, or where the insurer’s evaluation is less than honest, intelligent and objective.” The insureds arguments on investigation boiled down to:  “(1) Defendants conducted an investigation without consideration of the coverage of the insurance policy; (2) they failed to conduct a  meaningful investigation regarding whether decay was visible to Plaintiffs; (3) they made no effort to meaningfully communicate with Plaintiffs; and (4) Defendants blindly relied on a single expert witness.”

The Court concluded that “a reasonable jury could decide, on the basis of clear and convincing evidence, that Defendants acted in bad faith by (1) applying the wrong sections of the insurance contract, and (2) failing to conduct a meaningful investigation regarding whether the decay of the collapsed wall was visible to the Paks prior to the collapse.”

This did not mean the insureds would prevail; just that they would have their day in court to adduce evidence that could meet their burden.

Date of Decision:  July 30, 2009

Young Sook Pak v. Alea London Ltd., CIVIL NO. 1:08-CV-0824, UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF PENNSYLVANIA, 2009 U.S. Dist. LEXIS 65640  (M.D. Pa. July 30, 2009) (Rambo, J.)