August 2008 Bad Faith Cases Collapse vs. Insect Infestations – Summary Judgment Granted When Damage Was Caused By Termite Infestation (Philadelphia Federal)

In Miller v. First Liberty Ins. Corp., the Eastern District of Pennsylvania was presented with a motion for summary judgment after Plaintiff filed a complaint alleging breach of contract and bad faith against the insurer for failing to pay a purported “collapse” claim made under a homeowners policy.  On April 11, 2006, Plaintiff, while adding a second floor on top of an existing addition, discovered that termites had caused structural damage to the walls of the addition.  The addition had experienced termite infestation in 1996 for which Plaintiff had retained an exterminator.  However, the structural damage to the walls to the addition caused by the termites remained hidden until April 2006, when Plaintiff’s contractor were preparing to put on the second floor.  As a result of the damage to the addition, it would not support a second floor.  Consequently, Plaintiff’s contractors were required to remove the damaged addition.  Thereafter, Plaintiff submitted a claim for the damage caused to the addition by termites.  Defendant conducted an investigation by taking Plaintiff’s recorded statement.  Based on the investigation and a determination that the damage to Plaintiff’s house was caused by termite infestation, Defendant denied coverage.  Specifically, Defendant’s policy included an exclusion for “for loss … [c]aused by … [b]irds, vermin, rodents, or insects”
Plaintiff contended that the policy provided coverage for loss caused by a “collapse”.  Specifically, the policy stated that there is coverage for “direct physical loss to covered property involving collapse of a building or any part of a building caused only by one or more of the following: . . . c. Hidden insect or vermin damage. . . .”  Collapse is defined in the insurance policy as, inter alia, “sudden and entire falling down or caving in of a building or any part of a building . . .”  Further, the policy stated that “collapse” does not include “a building or any part of a building that is in danger of falling down or caving”.
The court concluded that Defendant did not act in bad faith in denying Plaintiff’s claims for multiple reasons.  First, the court found that Defendant reasonably determined that the loss occurred in 1996.  Since Plaintiff was required to give prompt notice of a loss and the loss occurred in 1996, Defendant did not act in bad faith in denying coverage.
Second, there was no basis for coverage when Defendant learned from Plaintiff that Plaintiff’s contractor had voluntarily removed the walls as a result of the termite damage.
The court relied on 401 Fourth Street, Inc. v. Investors Insurance Group, 879 A.2d 166 (Pa. 2005), in which the Pennsylvania Supreme Court noted that “[h]istorically, our Court has considered the policy term ‘collapse’ to require the sudden falling together of a structure.”  The Court reasoned that the “collapse” provision required the falling of a building, and that substantial impairment of structural integrity was not sufficient.  The Court warned that such an interpretation “would possibly convert the policy into a maintenance agreement by permitting recovery for damage which, while substantial, does not threaten collapse of the structure.”
Based on the reasoning in 401 Fourth Street and the fact that Plaintiff voluntarily removed the walls to the addition after finding structural damage, the court concluded that the insurance policy did not cover either the structural damage caused to the walls or the removal of the walls due to the structural damage.
Lastly, the court stated that to the extent that Defendant neglected the possibility of collapse, Defendant was, at most, negligent or demonstrated bad judgment.  Mere negligence or bad judgment does not constitute bad faith.  Consequently, the court granted Defendant’s motion for summary judgment.
Date of decision:  June 17, 2008
Miller v. First Liberty Insurance Corporation, United States District Court for the Eastern District of Pennsylvania, Civil Action No. 07-1338 (E.D. Pa. June 17, 2008).
(O’Neill, J.)

H.P.M.