SEPTEMBER 2011 BAD FAITH CASES COURT UPHOLDS SUMMARY JUDGMENT TO CARRIER BECAUSE IT THOROUGHLY INVESTIGATED A QUESTIONABLE INSURANCE CLAIM (THIRD CIRCUIT)

In 3039 B Street Associates, Inc. v. Lexington Insurance Co., the Third Circuit was faced with an appeal from the district court’s grant of summary judgment to the carrier.  In the initial action, the insured sought damages for bad faith after the carrier waited over a year to contact the insured’s maintenance employee in reference to its claim.

In January 2008, the insured discovered that a sprinkler pipe had ruptured inside of its property, damaging its building and some electrical equipment it had stored there.  The insured subsequently submitted a claim for insurance benefits to its carrier.

The carrier hired an independent adjustment firm to investigate the damage.  The adjuster sought to determine if the insured had maintained heat at its property, as required under the insurance policy.  The adjuster was particularly concerned about this issue because many windows were broken, rendering it difficult to heat the property.  Moreover, it appeared that much of the water damage was caused by water that had entered through these broken windows and pre-existing leaks in the roof.

When the adjuster sought confirmation that heating oil had been delivered to the property, it noticed that the last documented delivery occurred in March of 2007.  When questioned about its purchase of heating oil, the insured claimed that he had received 2500 gallons of heating oil in the fall of 2007.  However, this claim was unsubstantiated by the insurance adjuster. 

In March 2008, the insured suggested that its maintenance employee would attest to the state of the premises.  However, the carrier and its adjuster failed to contact the maintenance employee until the time of his deposition in June 2009.  During this deposition, the employee testified that the property had always been heated.  Despite its concerns, the carrier decided not to dispute coverage and it mailed a check in the amount of $78,511.84.

The court reasoned that the insured’s claim was highly questionable because “(1) the [insured] could not provide documentation showing a recent oil delivery to the premises, (2) the property had numerous broken windows, such that it would have been difficult to heat it, and (3) while [the insured] claimed to have received a delivery of oil from another company, it could not recall the name of the company, and [its employee’s] attempts to confirm the delivery were unsuccessful.” 

Citing Third Circuit precedent in Northwestern Mut. Life Ins. Co. v. Babayan, the court ruled that “it is not bad faith to conduct a thorough investigation into a questionable claim.”  The court therefore concluded that summary judgment in favor of the carrier was appropriate at the trial stage. 

Date of Decision: September 19, 2011

3039 B Street Assocs. v. Lexington Ins. Co., No. 10-3881, U.S. Court of Appeals for the Third Circuit, 2011 U.S. App. LEXIS 19311 (3d Cir. Sept. 19, 2011) (Barry, J.)