The Superior Court of Pennsylvania recently affirmed a trial court opinion, which granted an insurance company’s motion for summary judgment to dismiss the appellant’s complaint alleging the insurance company acted in bad faith by initially denying coverage for water damage to the appellant’s building.

In the case of Reynolds v. Pennsylvania National Casualty Insurance Company, (“Penn National”) issued an all-risk business insurance policy to Reynolds, which provided coverage for water damage to Reynold’s building (the “Policy”).  The Policy, however, excluded coverage for damages to the interior of the structure caused by rain, except where the rain entered the building because of damage caused by a covered loss.  The Policy also included an endorsement which allowed coverage of up to $100,000 “for water damage caused by a backed up sewer, drain, or sump pump.”  After receiving notification of the initial water damage, Penn National sent a reservation of rights letter stating that Penn National would investigate the cause of loss and assign an expert to examine the damaged roof.   Based on Penn National’s investigation, which determined that the building’s roof was in “good condition,” Penn National sent Reynolds a denial letter.

Subsequently, one of Reynold’s employees reported that on the day of the water damage, he witnessed a blocked drain that forced the accumulation of 18 inches of water inside the building. Accordingly, Reynolds requested that Penn National reconsider its initial denial.  In doing so, Penn National agreed to rely on Reynold’s expert report, which indicated the “plugged drain caused a backup of rainwater on the roof.”  Accordingly, Penn National granted the limited coverage of $100,000 under the Policy’s Business owners endorsement, which was for damage caused by backed up sewers and drains.

While the Superior Court of Pennsylvania did consider the extenuating circumstances surrounding Penn National’s initial denial, ultimately the Court affirmed the trial court’s decision and analysis because Reynolds failed to provide any evidence that Penn National’s initial denial of coverage was done in bad faith.

Thanks to Lauren Berenbaum for her contribution for this post.  Please write to Vito A. Pinto for further information.