OCTOBER 2013 BAD FAITH CASES: INSURER’S “PAID WHEN INCURRED” DISBURSEMENT OF FUNDS DID NOT BREACH CONTRACT; NO BAD FAITH (Philadelphia Federal)
Plaintiffs brought suit alleging the insurer’s practice of withholding funds for certain repairs as “paid when incurred” (PWI) was a breach of contract and constituted bad faith. Plaintiffs’ roof and siding were damaged in a storm, and plaintiffs submitted a claim for damages to the insurer. Plaintiffs hired an independent adjuster that valued the total cost of repairs at $80,443.13 for total replacement of the home’s roof and siding. The insurer retained its own adjuster, who determined covered damage occurred on small parts of three out of the four sides of the house and approximately thirty square feet of the roof. The estimate totaled $43,711.21 with $17,091.58 to be paid to plaintiffs up front as a net actual cash value payment, and $26,619.63 to be “paid when incurred” by plaintiffs.
The estimate defined the “paid when incurred” items as “items which may not be necessary in the repair of your property damaged by a covered loss.” Through litigation, it was determined these costs were to replace the undamaged parts of the siding and roof and would be provided once plaintiffs provided evidence they had contracted for repair of these portions of the home. Plaintiffs believed they were entitled to the receive the actual cash value of the entire roof and siding because the insurer determined it would be unable to replace the damaged portions with materials that matched the existing undamaged portions of the home.
The court determined that to require the insurer to provide the costs upfront for undamaged property would result in a windfall to the insured. Rather, the insurer’s method of designating funds as PWI and providing the funds if and when plaintiffs chose to repair the entire home was fair, and not a breach of contract because plaintiffs had already been provided with the depreciated value of the damaged property. Therefore, finding no breach of contract, plaintiffs were unable to establish the insurer acted in bad faith by using the PWI method. As such, plaintiff’s complaint was dismissed with prejudice.