Honesdale Volunteer Ambulance Corp. v. American Alternative Insurance Corp. involved a property damage claim in relation to an earthquake. The policy excluded coverage for “earth movement,” but covered earthquake damage and had an “earthquake deductible” of $57,910.00. The insured argued that the earthquake caused damage to the building, and the carrier contended that damage to the building pre-existed the earthquake, and was caused by erosion and settlement and not covered by the policy. The insurer also argued that the losses were caused by neglect, and not covered.
The court provided a detailed history of inspections of the property, both before and after the earthquake, including some colorful language of the insurer’s adjuster which the insured’s agent attributed to an intention to deny the claim. The carrier asserted that the insured failed to establish that it suffered a “direct physical loss” as a result of the earthquake, and that the evidence instead showed that any damage to the building was caused by preexisting, excluded conditions, including earth movement, building settlement, and neglect. Under the policy, coverage existed for “direct physical loss or damage to ‘real Property’ at a ‘premises’ caused by or resulting from any ‘covered cause of loss.'” “Direct physical loss” was not defined in the policy, but prior decisions found it to mean “that the loss must have a ‘close logical, causal, or consequential relationship’ with an earlier event.”The policy’s earth movement exclusion provided that any “sinking, rising, shifting, freezing, thawing, erosion, compaction, or expansion of the earth, including mine subsidence” is not covered. Building settlement is also not covered. However, “earthquake” damage was explicitly noted to be covered in the text of the exclusion. There was no dispute that the building suffered damage on account of earth movement. The question before the court was whether that movement was erosion and settlement, excluded under the policy, or earthquake. Citing the various expert reports and disparate facts, the court found that there was a material issue of fact on coverage. For similar reasons, the court also rejected the argument that the “lead-in” clause to the policy’s exclusions barred coverage.
The court then rejected the insurer’s known-loss doctrine argument, as the insured alleged an unknowable event. The court added that the doctrine requires some intentional or negligent act by the insured, or hiding the loss in question when applying for the policy; issues of fact that were in dispute.
Next, the court addressed the summary judgment motion on the insured’s bad faith claim. The court observed the rules that mere negligence is not sufficient to establish a bad faith claim, which must be proved by clear and convincing evidence. Further, an insurance company can defend itself by showing it had a reasonable basis for its conclusions, which need not have been correct. Nor must an insurer show that the process by which it reached its conclusion was flawless or that the investigatory methods it employed eliminated possibilities at odds with its conclusion. Rather, it must show that it conducted a review or investigation sufficiently thorough to yield a reasonable foundation for its action. At the summary judgment stage, as at trial, the insured must show that the evidence is so clear, direct, weighty and convincing as to enable a clear conviction, without hesitation, about whether or not the defendants acted in bad faith.
First, the insurer attempted to submit an expert report that it did not act in bad faith. The court did not consider that report because making a bad faith determination at the summary judgment stage does not require scientific, technical, or other specialized knowledge but only a consideration of the facts. Moreover, a district court need not give an expert report any weight in considering a bad faith claim, citing Federal Rule of Evidence 702.
The insurer also argued that there could be no bad faith because it responded promptly, agreed to reconsider the claim after receiving a report, and its reliance on an engineering report in reaching a decision. The insured argued that the carrier’s adjusters improperly judged the claim before even doing an investigation, that one of them improperly investigated the claim by looking at information online, and that the insurer failed to interview witnesses whose testimony supported the insured’s claim. The court found that the insured failed to meet its substantial burden of proof.
First, and most importantly an insurer’s reasonable reliance on an engineering expert’s report for a coverage decision does not constitute bad faith. In this case, the engineer made a prompt independent inspection, meeting with the insured’s expert and representative to review the claim. He made another inspection thereafter, and his opinion was consistent throughout. There was no evidence that the engineer shared in the mindset of the allegedly biased adjusters (who as lower level claims representatives had no authority in making a coverage decision themselves), nor evidence of any bias or impropriety. Rather, his reports were indicative of having undertaken a reasonable investigation. Under all the circumstances, the carrier’s reliance on this engineer was reasonable. Moreover, the adjusters’ rude conduct demonstrated poor behavior, but did not rise to the level of so tainting the investigation as to create bad faith by clear and convincing evidence. One other interesting point was the insured’s claim that the insurer’s adjuster looked at anonymous blog posting speaking ill of the insured. The court found no case law in the Third Circuit or Pennsylvania prohibiting claim investigators from researching on the internet. Moreover, an insurer does not act in bad faith by investigating and litigating legitimate issues of coverage. Thus, looking into whether there was serious preexisting damage to the building was legitimate and does not evince bad faith. Finally, there was no bad faith in the investigation simply because the insurer did not interview the employees working in the building on the day of the earthquake. While interviewing the employees may have been helpful in evaluating the claim, the insurer need not show that the process used to reach its conclusion was flawless or that its investigatory methods eliminated possibilities at odds with its conclusion. Rather, an insurance company simply must show that it conducted a review or investigation sufficiently thorough to yield a reasonable foundation for its action. The other evidence considered by the court showed that the insurer conducted a reasonable investigation.
Thus summary judgment was granted on the bad faith claim.
Date of Decision: March 24, 2014
Honesdale Volunteer Ambulance Corp. v. Am. Alternative Ins. Corp., CIVIL ACTION NO. 3:11-1488, 2014 U.S. Dist. LEXIS 38184 (M.D. Pa. March 24, 2014) (Mannion, J.)