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Clear & Unambiguous Exclusion Must be Enforced

After claiming that on or about July 25, 2019 Ms. Levine noticed significant structural damage to one of the walls in her house’s basement and more specifically, that the wall was swelling, cracked, and bowing inward she filed a claim with State Farm. After the claim was denied the insurer was sued in Linda Levine and Susan Liebeler v. State Farm Fire And Casualty Company, Civil Action No. 20-1108, United States District Court, W.D. Pennsylvania (September 30, 2021). State Farm moved to dismiss.

BACKGROUND

On or about July 25, 2019, Plaintiffs Linda Levine (“Ms. Levine”) and Susan Liebeler (“Ms. Liebeler”) were joint owners of a home located at 147 Shannon Drive in New Castle, Lawrence County, Pennsylvania (“the Shannon House”). Ms. Levine resided in the Shannon House on a full-time basis at the time of the events described in the Amended Complaint, and Ms. Liebeler is a resident of California.

The Shannon House’s basement is described as being “partially below the ground with four foundation walls,” with each foundation wall extending “between five and twelve inches above the surface of the ground,” and with “the portion of each foundation wall extending above the surface of the ground (including the wall that Ms. Levine observed to be bowing inward on July 25, 2019)” being “exposed to the elements on the exterior side.”

The plaintiffs were insured against the risks of loss not excluded of the Shannon House on July 25, 2019 “under a policy and/or contract of homeowners insurance issued by” Defendant State Farm “to and for the benefit of Plaintiffs, (the “Policy”). That same day, Ms. Levine reported the damage to the foundation wall to State Farm and initiated a formal claim under the Policy.

State Farm claim specialist David C. Smilek (“Mr. Smilek”) visited the Shannon House and Ms. Levine in response to her claim. The Amended Complaint alleges that Mr. Smilek spent no more than 20 to 30 minutes at the Shannon House, and no more than ten minutes observing and examining the house, during which time he did not conduct testing or take measurements. At the end of his visit, “Mr. Smilek told Ms. Levine that the Homeowners Policy did not cover the damages to the Shannon House,” and the following day, July 27, 2019, State Farm issued a formal letter addressed to Ms. Levine and signed by Mr. Smilek (the “denial letter”) in which State Farm denied any and all coverage under the Policy for the losses described in her claim.

Plaintiffs further aver that at or about the same time they initiated their claim with State Farm, they also initiated a mine subsidence claim under an insuring agreement issued by the Pennsylvania Department of Environmental Protection (“PA DEP”). According to the Amended Complaint, a PA DEP engineer conducted an investigation at the Shannon House the day before Mr. Smilek’s visit and later provided Plaintiffs with a report indicating that, while the damage to the Shannon House was not caused by a sinkhole or mine subsidence, several other causes for the damage were possible, including causes covered under the Policy.

LEGAL ANALYSIS

Count I: Breach of Contract

The District Court concluded that Plaintiffs failed to allege losses that are covered under the plain language of that Policy.

In SECTION I (“YOUR PROPERTY”) of the Policy at issue here, the LOSSES NOT INSURED sub-section provides as follows: “1. We do not insure for any loss to the property described in Coverage A [(the Dwelling)] which consists of, or is directly and immediately caused by, one or more of the perils listed in items a. through n. below, regardless of whether the loss occurs suddenly or gradually, involves isolated or widespread damage, arises from natural or external forces, or occurs as a result of any combination of these: … c. freezing, thawing, pressure or weight of water or ice, whether driven by wind or not, to a swimming pool, hot tub or spa, including their filtration and circulation systems, fence, pavement, patio, foundation, retaining wall, bulkhead, pier, wharf or dock;   l. settling, cracking, shrinking, bulging, or expansion of pavements, patios, foundation, walls, floors, roofs or ceilings . . . .”

The District Court found that the claimed losses related to the damaged basement foundation wall – allegedly caused by water striking the outer foundation wall above the ground during periods of excess rainfall – are clearly excluded from coverage. First, Plaintiffs’ alleged losses related to the damaged foundation wall, as described in the Amended Complaint, clearly occurred as a result of “freezing, thawing, pressure or weight of water or ice . . . to a . . . foundation, ” as set forth in Item 1.c.

Courts Should Never Torture the Language of a Policy to Find Coverage

Upon review of the plain language of the exclusion it is clear that the Policy does not cover Plaintiff’s alleged losses. State Farm also argued that Plaintiffs’ alleged losses are excluded and the Court did not see a material difference in the plain meaning of the exclusion. Furthermore, given the clear, simple language of the Policy, and because straightforward policy language should be given its natural meaning. The District Court found that it would be inappropriate to torture such language to create an ambiguity in order to construe coverage for Plaintiffs here.

Plaintiffs also failed to plead losses that are covered under the plain language of the Policy and, accordingly, that they have failed to state a plausible breach of contract claim under Pennsylvania law.

Count II: Bad Faith – Insufficient Allegations of Inadequate Investigation

Count II of the Amended Complaint alleges that the acts and omissions of State Farm in the handling and denial of Plaintiffs’ insurance claim violated 42 Pa. C.S. § 8371 and constitute statutory bad faith. Pennsylvania’s statute regarding bad faith insurance practices provides that:

To recover in a bad faith action, the plaintiff must present clear and convincing evidence (1) that the insurer did not have a reasonable basis for denying benefits under the policy and (2) that the insurer knew of or recklessly disregarded its lack of a reasonable basis.

Additionally, a bad faith claim is generally an independent cause of action separate from the contract claim. Thus, resolution of a coverage claim on the merits in favor of the insurer requires dismissal of a bad faith claim premised on the denial of coverage, because under the circumstances the insurer necessarily has a reasonable basis for denying benefits. However, if bad faith is asserted as to conduct beyond a denial of coverage, the bad faith claim is actionable as to that conduct regardless of whether the contract claim survives.

Therefore, to the extent that Plaintiffs’ bad faith claim is based on State Farm’s denial of coverage under the Policy, the dismissal of Count I for the reasons discussed requires the dismissal of Count II as well. To the extent that Plaintiffs’ bad faith claim is based on State Farm’s alleged failure to conduct an adequate investigation, Plaintiffs simply do not assert sufficient factual allegations in their Amended Complaint to support such a cognizable bad faith claim.

Although the duration of an adjuster’s inspection might be relevant to a claim of bad faith, it does not itself demonstrate bad faith. Thus, even accepting the cited allegations as true, Plaintiffs have not pled sufficient facts in their Amended Complaint to support a cognizable claim of bad faith for State Farm’s failure to conduct an adequate investigation.

Plaintiffs’ Amended Complaint in its entirety was dismissed without prejudice to amendment with sufficient facts to state a claim.

ZALMA OPINION

Although it was clear to the court that the denial of the claim was proper, even if the investigation lasted only thirty minutes, there was no claim of a loss not excluded and no evidence to even indicate bad faith conduct. Regardless, the court allowed the Plaintiffs a third attempt to state a cause of action that asserts facts sufficient to overcome the clear and unambiguous exclusions or allege acts that would support a claim that State Farm committed the tort of bad faith.


© 2021 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

Subscribe to Excellence in Claims Handling at https://barryzalma.substack.com/welcome.

He is available at http://www.zalma.com and zalma@zalma.com. Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to training available at https://claimschool.com; articles at https://zalma.substack.com,  the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

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