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A bad faith claim arose after the insurer denied the insured’s claim for coverage as a result of a heating oil spill in the insured’s basement.  The insured had heating oil delivered to a house.  During the delivery to the insured’s above ground storage tank, gallons of oil leaked into the basement.  The insured hired a public adjuster to estimate the cost of the damage.  The insured had a homeowner’s policy with the insurer and made a claim for coverage of the damages.

The insurer hired a company to investigate the oil spill and the company determined that the oil had leaked as a result of the oil tank being overfilled.  As a result, the insurer denied the claim and asserted that the oil spill was excluded under the policy’s pollution exclusion.

The insured filed suit against the insurer for breach of contract and bad faith.  The insurer filed a motion for summary judgment and the insured responded with a cross motion for partial summary judgment.

The court found that the insurer failed to meet its burden to show that heating oil is a pollutant excluded from coverage. Therefore, the pollution exclusion in the policy is inapplicable here.  However the court found that the insurer’s denial of the insured’s claim did not amount to bad faith.

Pennsylvania law does not allow for the finding of bad faith when the insurer’s conduct is in accordance with a reasonable, albeit incorrect, interpretation of the insurance policy. The insurer relied on various case law that acknowledged heating oil as a pollutant in denying the insured’s claim.

Even though the court did not accept the insurer’s interpretation of heating oil as a pollutant, this interpretation was not wholly unreasonable or reckless.  Therefore because there is insufficient evidence that the insurer acted in bad faith in denying the claim, the court granted the insurer’s motion for summary judgment for the insured’s bad faith claim.

Date of Decision: September 30, 2008

Whitmore v. Liberty Mut. Fire Ins. Co., No. 07-5162, 2008 U.S. Dist. LEXIS 76049 (E.D. Pa. Sept. 30, 2008) (Pratter, J.)