• Insurer Loses on Property Damage Coverage Fight and Heads to Trial on Bad Faith
  • July 4, 2013 | Author: Collin J. Hite
  • Law Firm: Hirschler Fleischer A Professional Corporation - Richmond Office
  • Commercial property insurance policies are a necessary requirement of operating almost any business. Without proper property insurance a business can quickly end up out-of-business if there is a significant loss. The recent case of Davis v. Peerless Indemnity Insurance Co., 2013 WL 2147796 (M.D. PA May 16, 2013) highlights the problems with all-risk property insurance that has been endorsed to extend coverage. In this instance, the court determined that the policy clearly provided additional coverage for debris removal costs above the blanket limit, which then threw the insurer into the realm of possibly acting in bad faith when it denied coverage. Denying coverage to a law firm may have been this insurer’s first bad idea.

    The Buzgon Davis Law Offices sustained significant water damage when a sump pump failed at its office one night. Luckily, the firm had commercial property insurance that had been extended by endorsement to cover such damage when a sump pump fails. Otherwise, coverage would have been excluded for “water that backs up or overflows from a sewer, drain or sump.” Even more fortuitous was the fact that the law firm increased its coverage limit from $10,000 to $100,000. However, the issue and dispute revolved around coverage for excess debris removal.

    Peerless Insurance assigned a veteran adjuster to the claim. She had at least twenty years of experience in the industry. The adjuster concluded that the loss exceeded $100,000. Peerless paid what it believed was the policy limit. Buzgon Davis’ lawyers disagreed and argued that debris removal could be in excess of the $100,000 limit. Peerless would not budge in the battle of letters that went back and forth. Believing its interpretation of the policy was correct, the law firm filed suit against Peerless for breach of contract and bad faith in handling the claim. Pennsylvania’s laws include a statutory right to pursue bad faith claims against insurers.

    The federal court followed Pennsylvania’s common law in interpreting the insurance contract - the parties’ intent when they made the agreement governs the interpretation. In reviewing the debris removal language in the policy the court found that it unambiguously provided for payment above the $100,000 blanket limit. The pertinent section of the policy used language related to paying for debris removal “up to an additional $25,000” and “but will never exceed the Limit of Insurance on the Covered Property that has sustained loss or damage, plus $25,000.” (emphasis added). The court easily concluded that the language of the debris removal provisions called for payment over and above the policy limit.

    The court also addressed bad faith. Pennsylvania allows recovery for bad faith if the policyholder can prove by clear and convincing evidence that the insurer “(1) did not have a reasonable basis for denying benefits under the policy and (2) knew or recklessly disregarded its lack of a reasonable basis in denying the claim.” Peerless argued that its denial was reasonable in that the policy either: (a) excluded additional payments for debris removal after paying the $100,000 limit, or (b) the language in the policy was ambiguous, which negates

    acting in bad faith. The court easily rejected the first argument since it found coverage for debris removal up to an additional $25,000. The court went on to note that it was not convinced the ambiguity argument was dispositive since it ruled that the policy was clear in terms of the extra coverage. Due to the heightened standard for bad faith the federal court held that a finder of fact was required to resolve the claim. In short, a trial on the bad faith claim would be required; very bad news for Peerless.

    This case provides a strong example to policyholders regarding the need to stand their ground against an insurer’s denial of coverage if there is an arguable basis for coverage in the contract. In this instance, Peerless stood firm on the blanket endorsement’s limit of $100,000 without addressing the language of the debris removal provisions. Ignoring the policyholder’s arguments for coverage can led to a bad faith claim. Policyholders are encouraged to never just give up in the face of a denial of coverage if there is an arguable basis under the insurance policy.