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In this unusual case, the insured wanted a $75,000 property damage policy. The carrier mistakenly issued a policy with $750,000 limits, at higher premiums. The insured never objected, and paid the higher premiums for the ten-fold greater policy limits. The insured suffered a fire loss above $75,000, and the insurer responded by issuing a policy amendment limiting coverage to $75,000, on the basis of a mutual mistake, and refused to pay more.

The carrier brought a declaratory judgment action seeking a finding the policy had a $75,000 limit. The insured counterclaimed for breach of contract and bad faith. The insurer moved for summary judgment.

The court found an issue of fact remained on whether the policy issued for $750,000 in coverage was enforceable, and denied the insurer’s summary judgment motion. It would be for the jury to decide if there was a mutual mistake. The court, however, granted summary judgment on the bad faith claim.

Eastern District Judge Gallagher states:

“There is no genuine dispute about whether the Insurer had a reasonable basis for denying the Insured’s claim, so the Court must enter summary judgment in the Insurer’s favor. The Insurer denied the Insured’s claim because the Insurer believed the written policy reflected a mutual mistake regarding the amount of coverage the parties had intended. Indeed, almost all the evidence that was in the Insured’s possession when it denied the Insured’s claim supported the Insured’s belief that there had been a mutual mistake. The Insurer’s broker had told the Insurer that the Insured desired $75,000 of personal property coverage, and that coverage was much more in line with the parties’ previous insurance policies than was the $750,000 figure that ended up in the contract.”

While the insured did pay higher premiums, this did not make it unreasonable for the insurer to take the position the $750,000 policy was the result of mutual mistake, especially when there was no dispute the insured itself asked for $75,000 in coverage. “Because the Insurer did not possess evidence clearly demonstrating that the Insured had noticed the expanded coverage and assented to it and because litigation presented a reasonable chance of producing information that would have warranted reformation, the Insurer’s decision to delay payment to litigate the issue of mutual mistake was reasonable as a matter of law.”

Thus, while “the factfinder might ultimately conclude that there was no mutual mistake between the parties[,] the Insurer was not unreasonable in believing that there had been a mutual mistake and acting on that belief when the pre-discovery evidence in the Insurer’s possession supported such a belief.”

The opinion’s language specifically indicates that bringing the declaratory judgment action as a means to determine the insured’s intent was not bad faith.

Date of Decision: December 27, 2021

Acuity v. Stone Haven Servs., LLC, U.S. District Court Eastern District of Pennsylvania No. 5:20-CV-06414-JMG, 2021 WL 6113378 (E.D. Pa. Dec. 27, 2021) (Gallagher, J.)