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The claim involves property losses to a hydroponic organic farming operation, where the event causing the loss was in dispute.  Both parties engaged experts to identify the crop failure’s origin, and the insurer used the services of multiple other investigators. The carrier’s investigation identified a cause for which there would be no coverage, and denied the claim.  The insured sued for breach of contract and bad faith, among other things.  Both parties moved for summary judgment.

The court granted the insurer summary judgment on the contract claim, as the insured could not meet its burden to show there was a covered cause of loss.  The best the insured could offer was speculation that there might be a covered cause, and that could not survive the summary judgment standard or the law concerning insurance coverage. It was the insured’s burden to make out a prima facie case for coverage, and the insured simply lacked the facts to meet these standards.

No bad faith were no coverage exists

As to the bad faith claim, Western District Judge Hornak first observed, “where no coverage exists under an insurance policy, the insurer cannot be found to have acted in bad faith for having denied coverage.” Judge Hornak relied upon the Third Circuit’s 2006 USX decision, summarized here, and 2019 631 N. Broad Street decision, summarized here, to support this conclusion.

No bad faith even if coverage exists where investigation is reasonable

Despite this conclusion that the insurance company correctly denied the claim because no coverage was due (and thus no benefit was denied), Judge Hornak went on to address, at length, the insurer’s investigation conduct.

He observed the legal principle that “even where an insurer’s coverage position is ultimately incorrect, ‘an insurance company’s substantial, thorough investigation, based upon which the insurance company refuses to make or continue benefit payments, establishes a reasonable basis that defeats a bad faith claim.” As discussed ad naseum on this Blog, there is a strong argument under Pennsylvania law that if no benefit has been denied, there can be no statutory bad faith as a matter of law.  Per this view, allegations concerning investigation standards are irrelevant to a Pennsylvania statutory bad faith claim if the insurer has not denied a benefit due, i.e., if there is no duty to defend or indemnify due in third party cases or indemnification due in first party claims, there can be no bad faith as a matter of law, regardless of the quality of the insurer’s investigation.

Whether one accepts this view or not, Judge Hornak’s discussion of what sort of investigation does not constitute bad faith is valuable in understanding that kind of claim.  He found no bad faith investigation for the following reasons.

  1. The insurer appropriately and timely responded to the insured’s claim.
  2. The insurer “quickly conducted an initial investigation”, sending out an investigator, and shortly thereafter an expert.
  3. For the (small) part of the claim that was covered, per the expert’s opinion, the insurer promptly sent a check, while continuing to investigate the remaining claim.
  4. After the insured rejected that payment and demanded further testing, the insurer agreed to carry out that testing and hired yet another company to conduct those tests; and when that company was unable to conduct the needed test, the carrier sent out a third investigator.
  5. The third investigator could not carry out its function because of insured-caused delays, but still carried out further testing once allowed access by the insured.
  6. “Courts have repeatedly held that ‘an insurer’s reasonable reliance on an engineering expert’s report for a coverage decision does not constitute bad faith.’”

Judge Hornak relied upon his own 2012 Hamm decision, summarized here, and Eastern District Judge Robreno’s 2020 Gethsemane opinion, summarized here, and 2011 El Bor decision, summarized here.

(See also Eastern District Judge Marston’s recent October 2021 opinion in Covenant Realty, summarized here.)

Date of Decision:  December 29, 2021

Three Rivers Hydroponics, LLC v. Florists’ Mutual Insurance Company, U.S. District Court Western District of Pennsylvania No. 2:15-CV-00809, 2021 WL 6133304 (W.D. Pa. Dec. 29, 2021) (Hornak, J.)