In this case, the court permitted the bad faith claim to proceed, however it struck all references to the Unfair Insurance Practices Act (UIPA) as “irrelevant” in determining violations of Pennsylvania’s Bad Faith Statute.
BAD FAITH PLAUSIBLY PLEADED
The insured alleged she “suffered ‘sudden and accidental direct physical loss’ to her insured premises.” She alleged the insurer “determined [the insured] suffered loss to property covered under the policy but did not completely indemnify [the insured] for the loss.”
She allegedly suffered water damage containing human waste. The complaint asserted that the public adjuster told the carrier it was not handling the claim according to the Institute of Inspection Clearing and Restoration Certification (IICRC) protocols, which required removing all porous material.
The insurer’s repair estimate did not include payment for removal and replacement of all porous material in contact with the contaminated water.
The insured alleged the insurer “knew that its estimate of repairs and ultimate payment did not comply with the insurance and construction industries for damage caused by contaminated water,” and that the insurer grossly underestimated the damage and grossly underpaid the claim. Additionally, she claimed the insurer “engaged in a pattern of behavior intended to delay and frustrate the adjustment process.”
To establish statutory bad faith, an insured must prove “(1) that the insurer lacked a reasonable basis for denying benefits; and (2) that the insurer knew or recklessly disregarded its lack of reasonable basis.” The insurer sought dismissal, citing earlier federal case law on inadequately pleading Pennsylvania bad faith claims. The court found, however, that the insured’s allegations were not purely conclusory legal statements made without factual support, lacking any description of the insurer’s behavior. Moreover, the court observed that an insured need not “prove her case at the pleading stage.”
The court concluded “the facts alleged by [the insured] . . . are sufficient to make out a claim for bad faith as the facts address the reasonableness of [insurer’s] actions.” The “Complaint contained numerous explanations and descriptions of the alleged bad faith conduct,” including, “notice of contaminated waste; violation of IICRC protocols; and knowledge that estimated repairs and ultimate payment was not in compliance with IICRC.” The insured set out sufficient facts to make out a plausible right to relief.
UIPA VIOLATIONS IRRELEVANT TO PROVING BAD FAITH CLAIMS
The court next considered the insured’s attempt to plead UIPA violations as evidence of bad faith. The court summarized the history of such efforts. It concluded that prior to Terletsky’s establishing the two-part bad faith test —recently adopted by the Pennsylvania Supreme Court — courts did look to the UIPA and Unfair Claim Settlement Practices (UCSP) regulations as bases to prove bad faith. However, once the two part bad faith test (quoted above), became the law, “[T]his two-pronged test effectively replaced the court’s analysis of UIPA or UCSP to determine bad faith.” Thus, all UIPA references in the complaint were stricken.
[Note: There are courts that will consider UIPA violations in evaluating statutory bad faith claims, as well as those recognizing UIPA violations do not themselves constitute bad faith.]
Date of Decision: June 21, 2018
Kunsman v. Metro. Direct Property & Casualty Insurance Co., U. S. District Court, Eastern District of Pennsylvania, NO. 17-4619, 2018 U.S. Dist. LEXIS 104621 (E.D. Pa. June 21, 2018) (Schmehl, J.)