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The insured brought a bad faith claim against the insurer based on the denial of its claim for losses and building damage. The insured is a homeowner’s association whose members own condominium units. The insured has a Business Provider Insurance policy for the real estate of the insured’s members. The insured observed cracks in the building and two of the units sustained structural damage caused by the movement of the foundation and floor slabs.  The insured hired an engineer to correct the problems.

The insured did not have any further problems until 12 years later when the insured observed the onset of additional structural issues.  The insured hired a second engineer who found the problem to be caused by a karst or carbonate bedrock related instability and opined that the previous engineer had incorrectly identified the problem. The insured then submitted a claim for losses and building damage to insurer.

The insurer had an agent investigate the policy claims made by the insured.  The agent concluded that the structural problems were due to sinkhole activity progressing over a period of several years.  Therefore the insurer denied coverage and asserted that the policy covered sinkhole damage only if it resulted from sudden collapse.

The insured filed a breach of contract and bad faith claim in state court.  The insurer removed the suit to federal court in the United States District Court for the Middle District of Pennsylvania.  The insurer then filed a motion to dismiss arguing that the lack of any sudden surface collapse places the insured’s harm outside the policy’s coverage.  The insurer further argued that the bad faith claim should be dismissed because its denial of benefits was reasonable under the circumstances.

The court stated that bad faith claims are very fact specific and depend upon the specific conduct of the insurer vis-a-vis its insured, and so the motion to dismiss was premature at this stage.  While the insurer’s asserted interpretation of the contract provision pertaining to collapse appears facially reasonable, facts may develop during discovery leading to a different conclusion.  Therefore the motion to dismiss the bad faith claim was denied.

Date of Decision: August 4, 2008

Amitie One Condo. Ass’n v. Nationwide Prop. & Cas. Ins. Co., United States District Court for the Middle District of Pennsylvania, No. 07-1756, 2008 U.S. Dist. LEXIS 60491 (M.D. Pa. Aug. 4, 2008) (Connor, J.)