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The court adjudicated a carrier’s motion for summary judgment that sought to dispose of an insured’s breach of contract and bad faith claims.  The suit relates to a claim that the insured submitted under a commercial insurance policy after a vehicle at its automotive repair garage combusted, causing great damage.  The carrier paid the insured for its claims, but withheld $64,118.86 on the basis of policy provisions that required the insured to first effectuate repairs and then submit receipts for repair costs before receiving benefits for depreciation.

The insured sued in state court in Philadelphia County, asserting breach of contract (Count I), detrimental reliance and misrepresentation (Count II), unfair insurance practices pursuant to 42 Pa. Cons. Stat. § 8371 (Count III), and violation of Pennsylvania’s Unfair Trade Practices Act, 73 Pa. Stat. § 201-2(4) (Count IV).

In 2010, the carrier removed the case and the insured responded by moving to remand.  After the court denied the motion to remand, the carrier successfully moved for dismissal.  The court dismissed the insured’s claims for punitive damages and attorneys fees in Count I, Count II in its entirety, and Count IV in its entirety.  In 2011, the carrier moved for summary judgment on the remaining Counts I and III.

First, the court recognized the ambiguity inherent in the policy, finding that its vague language warranted the denial of summary judgment.  The insured and the carrier both disputed over which policy provision would apply to the recovery of depreciation funds.  The insured argued that their claim fell under the Loss Payment provision, while the carrier argued that the Replacement Cost provision governed the claim for depreciation funds.

The Loss Payment provision stated that the carrier will “pay the value of the lost or damaged property,” cross-referencing the policy’s Valuation provision.  This provision provided that the valuation of claims must be on an Actual Cash Value basis.  Because the Actual Cash Value specifically excludes depreciation, the insured could not recover under the Loss Payment provision.

On the other hand, the Replacement Cost provision allowed the insured to receive an Actual Cash Value payment and file a supplemental claim for depreciation within 180 days.  This finding, the court held, was supported by the insured’s Sworn Proof of Loss Statements, which provided that it was entitled to an Actual Cash Value payment, but first must file a supplemental claim pursuant to the Replacement Cost provision.  The court proceeded to analyze the claim under the Replacement Cost portion of the policy and not the Loss Payment provision.

The Replacement Cost provision limits recovery to “[t]he amount actually spent that is necessary to repair or replace the lost or damaged property.”  However, the Court found that there was a genuine issue of material fact as to whether the insured actually spent such money.  Moreover, there was a dispute of fact as to whether the insured even needed to provide documentation of these expenditures within a supplemental claim.

The carrier could only point to the “books and records” provision for support of its argument that the insured was required to submit proof of its repairs.  Under this provision, the carrier is permitted to audit the insured during and after the policy period.  However, the court found that this was ambiguous as a matter of law because the provision would necessarily preclude recovery for depreciation if the insured’s records were lost or unavailable.  The court denied summary judgment for Count I, finding that the matter should proceed to trial for determinations of fact.

The court then analyzed Count III of the insured’s complaint, which alleged bad faith.  The insured claimed that the confusing and contradictory nature of the policy amounted to bad faith.  The insured also argued that the denial of its claim for benefits was unreasonable.  The court rejected this argument, finding that the carrier was reasonable to rely upon the “books and records” provision as requiring the insured to provide documentation of its repair expenditures.  The court also held that the carrier did not act in bad faith by delaying payment of the insured’s claim, citing case law where a carrier waited as long as forty-two months before paying an insured’s claim.

The court lastly addressed, sua sponte, a potential remand to state court.  After dismissing the insured’s bad faith claims, the amount in controversy fell below $75,000, the amount required for diversity jurisdiction.  However, in the interest of judicial economy, the court exercised its discretion and declined to remand the case.

Date of Decision: October 24, 2011

Mitch’s Auto Service Center v. State Automobile Mutual Insurance Company, No. 10-3413, U.S. District Court for the Eastern District of Pennsylvania, 2011 U.S. Dist. LEXIS 123119 (E.D. Pa. Oct. 24, 2011) (Robreno, J.)