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Pending Criminal Case Allows Insurer to Delay Coverage Decision (PA)

October 17, 2013

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A pending criminal investigation or prosecution often complicates an insurer's efforts to adjust the related insurance claim, and a Pennsylvania court recently held that a criminal investigation or prosecution could provide a reasonable basis for the delay of a coverage determination.
In <a href="" target="_blank" rel="noopener"><em>Atwood v. State Farm</em></a>, the plaintiff's home was insured by State Farm. In February of 2012, federal authorities, led by the Drug Enforcement Agency (DEA) knocked down the door of the plaintiff’s home and the plaintiff and his family temporarily fled to avoid arrest.  During the time that they were absent, the home remained unsecured due to the front door having been knocked down. Multiple thefts and vandalisms occurred within the home, as well as a fire in March of 2012. In May of 2012, plaintiff, his wife and his parents were arrested in Colorado and criminal proceedings were commenced against the plaintiff in the Middle District of Pennsylvania.
The plaintiff made a claim for the damages sustained to his home but State Farm was unable to reach a coverage determination on the claim due to the related criminal proceedings, including a restraining order filed by prosecutor's regarding disbursement of any insurance proceeds. Plaintiff then sued State Farm, alleging breach of contract and bad faith.
The court noted that to show bad faith, a plaintiff must either demonstrate that the insurer lacked a reasonable basis for denying benefits and knew or recklessly disregarded its lack of reasonable basis. Given that State Farm had not yet reached a determination on the plaintiff’s claims, those standards were not met.
The court further noted that while a plaintiff may also make a claim for bad faith if the insurer does not display a good faith investigation into the claim or fails to communicate with the client, those elements did not exist here because the reason for the insurer’s inaction was a pending criminal proceeding that prohibited the insurer from full access to investigate the property.  As a result, the court granted State Farm's motion to dismiss.
Thanks to Thalia Staikos for her contribution to this post.  If you would like more information please write to <a href="" target="_blank" rel="noopener">Mike Bono</a>.


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