In George Grigos and Aramingo Diner, Inc. v. Certain Underwriters at Lloyds, London, Case No. 10- 3684 (Common Pleas, Phila., Dec. 21, 2010), the Commonwealth Court of Pennsylvania ruled that an insurance company’s failure to properly and timely handle a claim violated the requirements of Pennsylvania’s Unfair Insurance Practices Act (UIPA).

Background

The plaintiff’s lawsuit for breach of contract and statutory remedies was premised on its insurance claim for loss due to a fire at the Aramingo Diner on December 14, 2006. As a result of the fire, the policyholder sustained damage to its building, damage to its business, and loss of income. The policy, issued by Certain Underwriters at Lloyds, London (Lloyd’s), covered loss caused by fire, including direct physical loss of or damage to covered property, building property, business personal property, business income, and loss to food products with limits of $400,000 with additional “enhancement” coverage of $25,000. The day after the fire, the policyholder notified Lloyd’s about the fire and the nature of the loss. Lloyd’s then assigned a third-party claims adjuster, Kenneth Holdom of Raphael & Associates, to investigate, evaluate, and handle the claim. Lloyd’s required the policyholder to communicate directly with Holdom on all issues related to the handling of the claim.

On January 9, 2007, the policyholder, through its public adjuster Young Adjustment Company, began providing Holdom with the specific amount of its food loss and its loss for business personal property and business income. Holdom, however, took the position that food loss was only covered by the enhancement coverage up to $25,000 and was not covered under the policy’s primary limits of $400,000.

On January 17, 2007, Young submitted a business interruption/loss of income claim for $83,091 and requested an advance of $50,000. On February 27, 2007, the policyholder sent Holdom a signed, sworn proof of loss. As four months passed, the diner remained closed and the policyholder continued to lose income. On April 5, 2007, the policyholder received an advance check for only $10,000, $40,000 less than what was requested. On May 1, 2007, the policyholder submitted additional proofs of loss—all of which were rejected by Holdom.

On June 4, 2007, the policyholder demanded an appraisal, which was required under the policy whenever the parties could not agree on the amount of a loss. Holdom refused. As a result, the policyholder retained an attorney who filed a Petition to Compel Appraisal and Appoint an Umpire in the Court of Common Pleas of Philadelphia County. In answering the petition, Lloyd’s agreed to the appraisal but refused to provide an explanation for its earlier refusal. During the appraisal, Lloyd’s admitted the entire food loss should be covered and was not limited solely to the coverage provided by the enhancement endorsement.

On January 28, 2008, the two appraisers and the umpire concluded that the business interruption/income loss was $202,857. Lloyd’s paid the claim the next day. On May 23, 2008, the two appraisers and the umpire concluded that the building damage was $340,221 and the business personal property loss was $52,818. On June 11, 2008, Lloyd’s paid these claims.

The Court’s Decision

On December 10, 2008, the policyholder initiated suit against Lloyd’s for breach of contract and bad faith. On September 7, 2010, Lloyd’s moved for summary judgment. On October 4, 2010, the policyholder responded and also moved for summary judgment, arguing that Lloyd’s had engaged in bad-faith claims handling in violation of Pennsylvania’s Unfair Insurance Practices Act (UIPA).  

The court applied Pennsylvania’s statutory bad-faith law, 42 Pa.C.S.A. § 8371, which requires the policyholder to show “that the defendant knew or recklessly disregarded its lack of reasonable basis in denying the claim” by comparing Lloyd’s handling of the claim to the conduct prohibited by the UIPA. As such, the court determined that Lloyd’s has engaged in prohibited bad-faith conduct and thus, the court granted plaintiff’s motion for summary judgment and set the case for trial on the assessment of statutory bad-faith damages.

Implications

Policyholders should be reminded by this decision that they can look to state statutes governing the claims handling practices of insurers, such as Pennsylvania’s Unfair Insurance Practices Act, as a basis to pursue claims against insurers that act improperly during the handling of a claim.