Awhile back on this blog, we were discussing developments in insurance bad faith law, and I hypothesized that Courts were generally more apt to find bad faith in cases involving a carrier’s delay of benefits, rather than outright denial.  But what if the outright denial contains a bald-faced lie, or a deliberate omission?  In that case, the complexion of the matter may change substantially. 

Along these lines, Bob Chesler at Lowenstein Sandler, one of the preeminent policyholder-side coverage lawyers in the country, recently sent around a copy of an interesting unreported federal court decision in Dawn Restaurant Inc. v. Penn Millers Insurance Co.

The case involves a warped roof at a restaurant.  The carrier hired an engineer (Sharick)  to inspect the premises and determine the cause of the warping. Sharick concluded that the damage could not be positively attributed to a single cause.  He cited a variety of factors contributing to the damage, including excessive humidity in the attic, the long-term load on the rooftop, HVAC equipment, and repeated instances of normal rainfall and snowfall during the life of the building. 

The carrier denied the claim, citing all of the factors noted by Sharick….except for precipitation.  That’s because, unlike the other factors, damage by precipitation would have resulted in a covered loss under the Business Owners Coverage section of the policy.

After the carrier’s denial, Dawn Restaurant sued the carrier for breach of contract.  Later, having obtained a copy of Sharick’s report, Dawn moved to amend its complaint to include a count for bad faith based upon the carrier’s selective recitation of causes of loss in the denial letter.  The carrier opposed the amendment, in part because (according to the carrier) such amendment would be “futile.” The carrier argued that the omission of “precipitation” as a cause was at most negligence, as opposed to bad faith.

The Court, however, found that the restaurant had more than enough ammo to proceed with a bad faith claim, writing:

“In the proposed amended complaint Plaintiff alleges that Defendant intentionally withheld selected reasoning of its expert so that the insurance policy would not trigger…Both parties agree that certain forms of rainfall damage do trigger clauses in the insurance policy that would cover the cost of repairs…Accepting all of the facts in the Proposed Amended Complaint as true, the Court is able to draw a reasonable inference that Defendant is liable for the misconduct alleged.”

Of course, this all leads to the ultimate question:  Should a policyholder include a bad faith claim in its complaint against a carrier, when the policyholder believes that the carrier has behaved unfairly?  Well…in my view, not always.  Bad faith claims often degenerate into expensive and time-consuming sideshows, and punitive damages against a carrier are relatively rare.  (Why are there expensive and time-consuming sideshows?  Could it be that insurance defense lawyers, who are getting lowballed on fees by their carrier clients, convince the carriers that it’s absolutely necessary to leave no stone unturned?  Nah, that couldn’t be it.)  If you have substantial consequential  damages, though – such as increased costs due to the carrier’s delay or denial – then a bad faith claim may well be worth thinking about.  You may be able to recover the additional damages in addition to the principal amount of the claim.