MAY 2012 BAD FAITH CASES: COURT GRANTS SUMMARY JUDGMENT FOR CARRIER WHERE “INHERENT RISK” EXCLUSION APPLIED TO FURNACE CONTAINING DEFECT KNOWN TO INSURED (Western District)
In U.S. Fire Ins. Co. v. Kelman Bottles, the court heard cross-summary judgment motions between an insured glass-maker and its two carriers to determine the scope of coverage. While the insured asserted breach of contract claims against both carriers, it alleged bad faith conduct against its “all-risk” insurer for denying coverage.
The insured is an industrial glass-maker who operates a large furnace for melting glass. The company needed to replace the furnace every nine years and last replaced it in January 2004. In 2009, the furnace leaked and the insured replaced portions of the unit, but not the entire thing. In March 2011, there was a severe leak in the furnace that destroyed some of the insured’s property. This blog will only discuss the bad faith claim against the insured’s “all-risk” carrier, rather than the insured’s “equipment breakdown” carrier, because the latter only covered “sudden and accidental” breakdowns.
With respect to the all-risk insurer, the insured alleged breach of contract and bad faith for the carrier’s denial of coverage. However, the insured’s policy contained an “inherent vice exclusion,” which prevented coverage in this case. The court reasoned that, after the loss, the insured admitted that molten glass was an inherent risk to operating the furnace. As such, the insured’s breach of contract claim failed.
However, the insured argued that it should be covered as a “molten material loss” under the policy. The court disagreed, holding that the “molten material loss” clause is predicated upon the loss already being a covered loss under its policy. In this case, the escape of molten glass was an inherent risk and, as noted, the damage caused by the escape of molten glass is excluded under the policy’s inherent risk exception.
The insured also attempted to argue that it was covered via Pennsylvania’s adoption of the “Current Causation Doctrine,” which means that if two or more causes concurrently caused the insured’s loss and one of the causes is covered, the carrier must provide coverage. However, the court rejected this theory, holding that the only way coverage would be available is if “the inherent risk of operating a furnace containing molten glass [was] the proximate cause of the loss.”
Therefore, the court also rejected the insured’s bad faith claim – in the absence of a viable breach of contract suit, the insured was unable to maintain such an allegation.