MAY 2015 BAD FAITH CASES: HOMEOWNER INSUREDS PLEAD SUFFICIENT FACTS TO DEFEAT MOTION TO DISMISS BAD FAITH CLAIM BASED ON INVESTIGATION FAILURES (Middle District)

In Sutton v. Allstate Insurance Company, the court determined that the insured adequately pled a bad faith cause of action against their insurer. The matter arose out of a rejected claim on a homeowners insurance policy. After the insurer denied coverage, the insureds filed suit and alleged breach of contract and bad faith. The insured moved to dismiss the bad faith claim.

The court explained the test the Third Circuit adopted in order to determine whether a bad faith claim is sufficient: the insurer must lack a reasonable basis for denying benefits, and the insurer “knew or recklessly disregarded its lack of reasonable basis.” Both of these elements must be proved by clear and convincing evidence. The court further cited the Third Circuit for the proposition that bad faith conduct also extends to “a frivolous or unfounded refusal to pay, lack of investigation into the facts, or a failure to communicate with the insured.”

Here, the court found that the insureds set forth sufficient allegations to state a claim. They alleged that the insurer “failed to adequately investigate plaintiffs’ claim, and engaged in dilatory and abusive claims handling.” The insureds further alleged that “the defendants did not have a reasonable basis to deny plaintiffs’ claim, whereas a proper investigation would have revealed that the claim was covered.” While in itself this may appear conclusory under Twombly/Iqbal, the court significantly followed with the statement: “Read in conjunction with plaintiffs’ factual averments, these allegations may satisfy the elements of a cause of action under Section 8371.” Accordingly, it denied the insurer’s motion to dismiss the bad faith claim.

Date of Decision: April 27, 2015

Sutton v. Allstate Ins. Co., No. 3:15cv54, 2015 U.S. Dist. LEXIS 54810 (M.D. Pa. April 27, 2015) (Munley, J.)