JULY 2008 BAD FAITH CASES NO BAD FAITH WHERE INSURER DENIED A CLAIM BASED ON AN UNAMIBIGIOUS EXCLUSION IN THE INSURED’S POLICY RE SURFACE WATER (Third Circuit)
In T.H.E. Insurance Company v. Charles Boyer Childrens Trust, the insured’s bad faith counterclaim was based on the insurer’s denial of coverage for water damage that occurred to its property. A rainstorm hit the area and caused a sewer pipe to rupture near the bowling alley property. Water from the broken sewer pipe eventually collapsed the embankment and the water and mud rose to a high level and burst through the bowling alley’s doors. The damages were alleged to be $2 million. The insured filed a claim with its insurer for the damages and the insurer rejected the claim based on a policy exclusion for water damage which includes “surface water” in its list of non-covered causes of damage.
The insurer rejected coverage and filed a complaint seeking a declaratory judgment that the insurance policy it issued to the insured did not cover the damage to the bowling alley. The insured counterclaimed and alleged entitlement to coverage, bad faith, and fraud. Both parties filed motions for summary judgment. The District Court granted the insurer’s motion for summary judgment. The insured appealed to the United States Court of Appeals for the Third Circuit and argued that the exclusion within its insurance policy for damage caused by “surface water” should not apply to its claim.
The Third Circuit court found that while the insured had an all risk policy, the policy had a specific provision expressly excluding this “surface water” damage from coverage. Both the water from the broken sewer pipe and any water from the east parking lot constitute “surface water” within the meaning of the exclusion in the policy. Since the Third Circuit court found there was no dispute that the surface water caused the loss and the language in the exclusion was not ambiguous, the court found that the damage to the bowling alley resulted from an excluded clause under the policy. Therefore the Third Circuit affirmed the District Court’s grant of summary judgment to the insurer.