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The Third Circuit addressed the carrier’s appeal stemming from the district court’s award of damages to the insured. The carrier had earlier won dismissal of the bad faith claim, which was not appealed by the insured.

In 2000, the insured purchased a homeowner policy from the carrier. The policy excluded “water damage,” unless such damage “is sudden and accidental” or “hidden and concealed for a period of time.” The policy required that “a hidden or concealed loss must be reported to us no later than 30 days after the date appreciable loss…is detected or should have been detected.”

In 2006, the paint around the insured’s windows began peeling. The insured contacted a stucco inspector who suspected high moisture levels in the home. The inspector advised the insured that it would need to deconstruct the walls in order to know the true status of the home’s substrate.

The insured consulted a plastering company, who advised them that to discover the problems existing behind the home’s stucco, they had to expose the space between the stucco and the drywall. The company also advised the insured that their roof had been incorrectly installed. Based on this advice, the insured redid their roof and replaced their windows. After that process, the plastering company removed the stucco for inspection. In November 2007, the insured learned the extent of the water damage to their home.

The insured filed a claim with the carrier in December 2007, interpreting the notice provision to mean that, where damage was hidden, each new discovery of damage began a new thirty-day cycle. An adjuster for the carrier denied the insured’s claim based on the policy exclusion for defective construction and failure to comply with the thirty-day notice provision for water damage.

The insured subsequently filed a claim in Delaware County, alleging breach of contract, bad faith, and violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law. The carrier removed to federal court, which denied summary judgment in favor of the carrier, held a bench trial, and awarded the insured $104,432 in damages. The court also awarded attorney’s fees and interest.

On appeal, the carrier first contested the denial of summary judgment, claiming that disputes as to material fact regarding whether the insured met its burden of showing that the amount of costs attributable to home repair satisfied the policy’s water damage exception. The appellate court examined copies of checks from November to December 2007, made out to the plastering company, which went towards payment of work related to hidden water damage discovered after removal of the external stucco. Concurring with the district court, the appellate court found that genuine disputes of material fact existed as to which costs were attributable to home repair for defects versus water damage.

Second, the carrier argued that the insured failed to meet its burden of proving damages under the policy. Under a highly deferential standard of review, the appellate court agreed that the insured adequately proved its loss in the amount of $104,432.50 for hidden water damage. Specifically, the appellate court affirmed the district court’s finding that testimony from the insured and the plastering company supported the finding that two checks were issued for stuccowork related to the water damage.

Lastly, the carrier claimed that the insured failed to provide notice, as required in their insurance contract, and that the district court incorrectly interpreted the notice provision. Specifically, the carrier argues that the policy’s notice provision is not a “rolling notice” policy and that the insured was obligated to give notice sooner than was done in order to be covered under the policy.

The Third Circuit held that, based on the plain language of the policy, the nature of the hidden damage, and the inspections that the insured had on the house, there cannot be a “definite and firm conviction that the District Court made a mistake.” Until the stucco was completely off and the damage could be clearly seen, it was not possible for the insured to appreciate the underlying damage.

Although the carrier argued that expert reports concerning water damage should have triggered earlier notice, the appellate court disagreed, finding that a cancelled check made out to the plastering company on November 5, 2007 corroborates the notion that the water damage was discovered during the proper timeframe.

As such, the appellate court affirmed the damages award of the district court. However, the appellate court overturned the insured’s $35,000 award of attorney’s fees, as the policy did not include an attorney’s fee provision, a point that the insured conceded on appeal.

Spector v. Fireman’s Fund Insurance Co., No. 10-4265, U.S. Court of Appeals for the Third Circuit, 2011 U.S. App. LEXIS 19843 (3d Cir. Sept 22, 2011) (Greenaway, J.)