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In United States Fire Insurance Company v. Kelman Bottles, LLC, property damage occurred for the insured from an event concerning an industrial glass making furnace. The insured’s all risk carrier brought a declaratory judgment action against the insured. The insured also had a Boiler and Machinery insurance policy, and it joined that carrier by way of third party complaint, raising breach of contract and bad faith claims.

There was preliminary contact between the Boiler and Machinery insurer and the insured, prior to a formal written denial of coverage. There was also an inspection and a report from an expert for the insurer, on which the insurer ultimately based its denial of coverage, concerning the cause of the incident. The insurer argued that the cause did not fall within the policy definition of covered occurrences.

The insured asserted that the insurer’s stated reasons set forth in its declination letter were at a minimum unclear, and at worst, were intentionally vague in violation of Pennsylvania insurance law; and that within a month of the breakdown, the insurer’s adjuster, retained engineering expert, risk control specialist, and a subrogation specialist all concluded that the “breakdown” was “sudden and accidental”, which was a term of art which should have triggered coverage, not a denial of coverage. The insurer moved for summary judgment.

The court first rejected the insured’s argument that the allegedly unclear letter violated Pennsylvania’s Unfair Claims Practices Act or Unfair Insurance Practices Act (“UIPA”), stating that there is no private right of action under the UIPA, and thus this claim failed as a matter of law.  (This decision adds to the split in federal district courts about whether the UIPA can be used to argue a statutory bad faith claim in Pennsylvania.)

The court then analyzed the letter, and concluded it could not provide the insured with clear and convincing evidence that the carrier was either intentionally vague or unclear as to its reasons for a denial, and found no genuine issue of material fact suggesting that this letter was intentionally vague or unclear.

The court also concluded that the carrier’s position that the event was not sudden accidental was reasonable.  The carrier’s own adjuster included in his notes that the expert said the event was sudden and accidental, which was not the expert’s conclusion or analysis in his report. Thus, the court granted summary judgment, even though the contradictions existed within the insurer’s own records.

The court explained that while it was technically correct that the claim note contradicted the carrier’s position, the putative contradiction was “of no moment” because the claim note was the adjuster’s interpretation/characterization of what the expert told him orally during a telephone conversation, the expert’s testimony that he would not have used the terms “sudden and accidental” during that  conversation with the adjuster, and the statements and conclusions set forth in the expert’s written report clearly contradict a “sudden and accidental” finding.

Thus, the court concluded that the singular claim note did not provide clear and convincing evidence that the insurer engaged in bad faith.

The insured also asserted bad faith in the claims handling process, which argument ultimately was not based on UIPA violations. Rather, it asserted that the adjuster misrepresented the policy language; that letters from the carrier suggested it was investigating the claim when it was not; and that the carrier refused to provide any further explanation and factual support for its denial of coverage.

On the first point, the court found there was no evidence that the statement at issue was anything more than a simple mistake, and there was no evidence offered of ill will or intent, and therefore the insured could not meet its burden of showing bad faith on this point.

Next, as to the letters, the court found no bad faith. The insurer’s prior oral notification that a denial of coverage was imminent, but delay in issuing its written denial of coverage while monitoring the investigation of another insurance company, did not constitute bad faith.

The court found that the insured did not offer evidence as to how the delay between the oral and written denials illustrated breach of the duty of good faith and fair dealing through a motive of self-interest or ill will.

Finally, the court ruled that the alleged refusal to supply additional information following the issuance of the denial letter was not bad faith. The court found that the carrier did not ignore the request for additional information. Rather, it directed the insured back to its denial letter for the answers.

Furthermore, there was no evidence of a dishonest purpose in the alleged refusal to provide additional information outside of what was contained in the denial letter. Rather, the court viewed this aspect of the dispute as a disagreement on coverage, which was to be resolved via the breach of contract claim.

A motion for reconsideration, heard by Judge Fischer of the Third Circuit sitting as a trial judge by designation, was denied.  The Third Circuit has previously addressed a coverage issue in the case, but the court found that this ruling was not applicable in analyzing the bad faith claim.

Date of Original Decision: May 23, 2014

United States Fire Ins. Co. v. Kelman Bottles LLC, 11cv0891, 2014 U.S. Dist. LEXIS 71220 (W. D. Pa. May 23, 2014) (Schwab, J.)

Date of Decision on Reconsideration: June 27, 2014

United States Fire Ins. Co. v. Kelman Bottles LLC, 11cv0891, 2014 U.S. Dist. LEXIS 88256 (W.D. Pa. June 27, 2014) (Fisher, J.)