In Colella v. State Farm Fire & Casualty Company, the insureds sued their insurance company for (1) breach of contract and (2) bad faith. They suffered a physical loss to their house, as a drain line underneath one of the rooms had leaked and caused water damage to the walls and carpet in the basement. The insurer covered the house under an all-risk insurance policy, and upon the insureds reporting their initial claim, the insurer’s representative retained a plumber to inspect the damage. The plumber discovered that the leak was somewhere in the pipe below the concrete slab underneath the house.
Language in the insurance policy excluded from coverage certain losses resulting from water damage from water below the surface or ground. Therefore, the insurer denied the insureds coverage, and the insureds sued.
The Court found for the carrier on the breach of contract claim, holding that the claim was subject to the policy exclusion as it did not matter under the policy whether the water at issue was natural ground water or from some other source. As to the bad faith claim, even though coverage was excluded, the Court still performed a bad faith analysis. The insureds claimed that in failing to pay for the loss, the carrier misrepresented the language and intent of the water damage exclusion, and deviated from industry standards, among other things. The insureds argued that the carrier ignored established case law and apparently failed to conduct an adequate search for legal precedent.
Under Terletsky v. Prudential Property and Casualty Insurance Co., in order to recover for a bad faith claim, a plaintiff must show: (1) that the defendant did not have a reasonable basis for denying benefits under the policy; and (2) that the defendant knew or recklessly disregarded its lack of reasonable basis in denying the claim. The District Court granted the insurer’s summary judgment motion because the insureds failed to show any evidence of bad faith. There was no case law directly on point covering the facts at issue that supported the insureds’ position, and the putative failure to conduct a legal search for precedent before denying the claim was at most negligent, which does give rise to a bad faith claim. There was no frivolous or unfounded refusal to provide coverage, and therefore there was no bad faith in this case.
Date of Decision: March 30, 2010
Colella v. State Farm Fire & Cas. Co.
, Civil Action No. 09-cv-2221, United States District Court for the Eastern District of Pennsylvania, 2010 U.S. Dist. LEXIS 31895 (E.D. Pa Mar. 2010) (Joyner, J.).