When a court finds insurance policy language to be ambiguous, it may deny an insurer’s motion for summary judgment, or find in favor of coverage.  Does that mean that the insurer who got it wrong acted in “bad faith”?  Apparently not.

In Gray v. Allstate Indemnity Co., the insurer denied coverage to an insured for a fire loss claim caused by vandalism and moved for summary judgment on both the insured’s breach of contract and bad faith claims.  The policy in question excluded coverage if the property had been vacant or unoccupied for a certain period of time prior to the vandalism causing the fire damage.  Holding that the terms “vacant” and “unoccupied” were ambiguous and facts surrounding these conditions in the case were disputed, the court denied summary judgment on the breach of contract claim.

With regard to the bad faith claim, the insured argued that the insurer purposely drafted an ambiguous contract so that the ambiguous language could be used to deny future coverage. The court rejected this argument because both the insurer’s factual basis for denying coverage and interpretation of the policy were determined to be reasonable.

While the court ruled against the insurer’s interpretation of the terms for the breach of contract claim, the way the insurer construed the terms was still a reasonable view. Thus, the court held that “[b]ad faith cannot be found where the insurer’s conduct is in accordance with a reasonable but incorrect interpretation of the insurance policy.” As such, summary judgment was granted to the insurer as to the bad faith claim.

Based on this case, it would appear that a reasonable basis for denial of coverage in Pennsylvania is sufficient to defeat a bad faith claim.

Thanks to Coleen Hill for her contribution to this post.