Middle District of Pennsylvania Allows Plaintiff to Reassert Bad Faith Count, Finding That Insurance Company’s Actions May Effectively Amount to Denial of Coverage

October 1, 2014

In Atwood v. State Farm Fire & Ins. Co., Civ. No. 1:13-CV-1000, 2014 U.S. Dist. LEXIS 139085 (M.D. Pa. Oct. 1, 2014) (Opinion by J. Rambo), the United States District Court for the Middle District of Pennsylvania allowed Plaintiff to amend his complaint to reassert his bad faith count against the defendant, State Farm Fire and Casualty Company (“State Farm”), finding while State Farm did not issue a denial of coverage, its actions in this case may effectively amount to a denial of coverage.

Plaintiff purchased a homeowner’s policy for his residence and personal property from State Farm. On February 7, 2012, federal authorities entered Plaintiff’s home by knocking down the front door and leaving the property unsecured. After leaving the area to evade police, Plaintiff learned that daily thefts from his home and garage were occurring. In addition, a fire occurred at the residence in March of that year. Plaintiff wrote a letter to State Farm on April 3, 2012, providing written notice of the fire and thefts and provided an inventory of the personal property stolen or destroyed by the fire. State Farm investigated the claim. In May of 2012, Plaintiff was arrested and criminal proceedings were filed against Plaintiff. In addition, a forfeiture proceeding was initiated against Plaintiff’s residence. Plaintiff submitted claims to State Farm for losses of $287,000.00 for his dwelling with an additional “$55,600.00 under Option ID,” $219,134.00 for personal property and $48,000.00 for loss of use. State Farm did not deny the claim but made only partial payment. State Farm issued a check to the mortgage lienholder in the amount of $180,970.82 for the remaining mortgage balance plus interest and paid Plaintiff $128,824.05 for loss of the personal property.

Plaintiff filed a complaint for breach of contract and bad faith, which was removed to federal court. State Farm then moved to dismiss the complaint. Plaintiff filed a response to the motion to dismiss and requested leave to file an amended complaint. After filing an amended complaint, State Farm amended its motion to dismiss to which Plaintiff responded. The court then granted the motion and dismissed Plaintiff’s bad faith count without prejudice on the basis that State Farm had not yet denied coverage and that State Farm had a reasonable basis to delay its final coverage decision in light of Plaintiff’s pending criminal charges. However, the court indicated that Plaintiff may be permitted to amend the complaint if a final coverage decision from State Farm regarding Plaintiff’s claims was issued. Following State Farm’s answer to the amended complaint, Plaintiff again moved to amend the complaint on July 30, 2014.

The court addressed the issue of whether Plaintiff should be allowed to reassert his bad faith claim. In order to establish a claim for bad faith under 42 Pa. C.S.A. § 8371, Plaintiff “must show that the defendant did not have a reasonable basis for denying benefits under the policy and that [the] defendant knew or recklessly disregarded its lack of reasonable basis in denying the claim.” The court, however, recognized that the bad faith statute is not limited to the denial of a claim. A plaintiff may establish a claim for bad faith “in an insurer’s investigative practices, such as a lack of good faith investigation into facts, and failure to communicate with the claimant.” Also, delay is a factor in determining whether bad faith has occurred even where a claim is eventually paid. Clear and convincing evidence must be shown to establish bad faith and “the plaintiff must show that the insurer breached its duty of good faith ‘through some motive of self-interest or ill-will.’ ”

In the present case, Plaintiff’s proposed amended complaint alleged that twenty-eight months passed since the date of loss with eighteen months passing from the date of loss to the date the government withdrew its motion for a restraining order. However, even before the government withdrew its motion, State Farm knew that it was going to pay the claim. After ten additional months, State Farm still has not paid. Plaintiff alleged that State Farm only paid approximately fifty-seven percent of the personal property claim and declined to pay the loss of use claim. Given these allegations, the court determined that State Farm’s failure to pay the balance of a personal property claim and the loss of use claim may have effectively amounted to a denial of coverage, especially in light of the time that had passed.

State Farm had argued that the proposed amendments to the complaint were futile but the court held that such arguments were better suited for a motion for summary judgment. Furthermore, the court held that the bad faith count and additional allegations do not appear to be futile. Thus, Plaintiff was permitted to reassert his bad faith claim against State Farm and to amend his complaint.

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