Making the wrong coverage decision generally does not constitute bad faith.  However, failing to explain the decision might.

In Rosewood Cancer Care Inc. et al. v. The Travelers Indemnity Co., a water leak damaged $1 million radiation machine. The insurer agreed to cover the radiation machine as “business personal property” which allowed up to $103,000 in coverage per the policy to replace the machine. Rosewood argued that the machine was a “building fixture,” which warranted $560,000 in coverage per the policy.

The insured sued for a declaration that the radiation machine should have been covered as a building fixture, rather than business personal property. The insured also alleged bad faith and breach of contract claims against the insurer for failing to provide coverage for the machine as a fixture, and for allegedly failing to provide an explanation for the denial of coverage as a building fixture after multiple requests. The insurer maintained that the radiation machine was business personal property since it was capable of being bought, sold, moved, installed or removed from the building.

On motion, the court ruled that the radiation machine should have been covered as a building fixture, since the machine was permanently attached to the building and would have required significant drilling through concrete to remove. The court allowed plaintiff to proceed to trial on the allegation of bad faith stemming from the alleged failure to provide a written explanation for its coverage decision.

This case demonstrates that for an insurer to prevent viable bad faith claims, communication with the insured and explanation is key.

Thanks to Rachel Freedman for her contribution to this post.