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The court was faced with a carrier’s motion for summary judgment on an insured’s breach of contract and bad faith claims. The suit arose from a fire that occurred at a property rented by the insured. At the time of the incident, the insured had renter’s insurance with the carrier.

The insured moved into the rental home and shortly thereafter a fire erupted at the property. The fire marshal investigating the matter ruled that the fire was the result of arson. The insured began the claims process by filling out an inventory form, as required by the carrier. The forms indicated a large amount of valuable items, many of them less than two years old.

The carrier was put in contact with the investigating fire marshal, who ruled the fire arson and told the carrier that he did not see very much person property at the residence. He also reported that the insured had previously been involved in arson of another property. The carrier then decided to have the matter further investigated.

The carrier requested that the insured party sign various authorization forms, as required under the policy, requesting phone and financial records. The insured refused. The carrier also hired a salvage company to begin working on the damaged property, but the insured’s landlord denied entrance to their home for several weeks. The carrier subsequently sent the insured a Reservation of Rights letter, citing questions over the cause of the fire and whether the insured misrepresented their claims. The carrier hired an outside party to conduct an Examination under Oath, but the insured again refused to cooperate with the investigation. After the carrier denied coverage, the insured filed suit.

The court first examined the insured’s bad faith claim, finding that the carrier acted reasonably and did not delay or stall the investigation of the insured’s claim. Specifically, several significant “red flags” provided a reasonable basis for investigating the claim, including: the fire being ruled an arson; the claim being on a policy less than six months old; and the history of late payments on the policy.

Moreover, the insured refused to turn over the records they were contractually obligated to provide. Without the requested financial and telephone records, which were critical to determining the insured’s motive and opportunity for setting the fire, the carrier could not complete the investigation. Therefore, the court concluded that summary judgment was appropriate on the bad faith claim.

The court also granted summary judgment on the insured’s breach of contract claim. The insured was contractually bound to provide any documents requested by the carrier. The refusal to do so was a significant departure from the terms of their policy and substantially prejudiced the carrier’s investigation of the claim. Therefore, the court disposed of the matter because the insured’s material breach of the terms of its policy precluded any finding of liability on the part of the carrier.

Date of Decision: November 23, 2011

Verdetto v. State Farm Fire and Casualty Company, NO. 3:10-CV-1917, U.S. District Court for the Middle District of Pennsylvania, 2011 U.S. Dist. LEXIS 135287 (M.D. Pa. Nov. 23, 2011) (Caputo, J.)