Bad Faith Blog

The Western District of Pennsylvania held that an insurer did not act in bad faith but was well within its rights in denying an insured’s claim and voiding his policy.  The insured’s material misrepresentations caused the court to find that no reasonable jury could conclude that the insurer acted in bad faith in denying the claim. Mr. Felix submitted a homeowner’s insurance claim in excess of $1 million after a fire ravaged his home. The insurer assigned the case to a special investigations unit after identifying several “red flags” suggesting fraud. 

Summary: The seller of a home was insured under a Homeowner’s Policy and a Renter’s Policy issued by United Services Automobile Association (USAA). Past basement problems, including flooding, were not disclosed by the seller. The basement flooded after the buyer took possession, and buyer sued the seller. After USAA denied coverage, the parties reached a settlement wherein a consent judgment was entered for $300,000 in favor of Huckins in the underlying case and Huckins then filed suit against USAA for breach of the duty to defend Van Sickle, breach of contract, common law and statutory bad faith, and punitive damages. The District Court held that USAA had not breached its duty to defend, as the claim was not an “occurrence,” and the buyer appealed. The Montana Supreme Court reversed and held USAA had a duty to defend under the renter’s policy.

Homeowners David and Kristina Parks, brought an action against Safeco Insurance Company alleging breach of contract and bad faith in handling the claim after a wildfire destroyed their house. Safeco then hired an appraiser to determine the actual cash value (“ACV”) of the destroyed house who determined the ACV to be $169,000. Safeco paid that amount five days after the determination. Safeco also advised the Parks of their options for recovering the full replacement cost. Safeco estimated that it would cost $440,195.55 to replace the home using equivalent construction. Safeco also informed the Parks that Safeco would “pay the replacement cost of the dwelling up to $440,195.55 or the amount actually incurred, whichever is less.”

Summary: The insureds sued their homeowners’ insurer and the defense attorneys hired by the insurer alleging bad faith in handling their claim, legal malpractice, and breach of fiduciary duty. The insurer resolved the bad faith claim by funding a settlement of the underlying third party claim. The Court of Appeals affirmed judgment entered in favor of the defense attorneys after an analysis of the challenging relationship between insurer, defense attorney, and insured. This case serves as a reminder that proper handling of the tri-partite relationship is necessary whenever the insurer has a duty to defend; otherwise, the insurer may face bad faith exposure.

Summary: The United States District Court in Arizona held that an insurer, which admitted and rectified errors in calculation of the actual cash value of a homeowner’s property damage claim after the error was brought to its attention by the insured, did not commit bad faith.