Summary: After plaintiff homeowners discovered significant water damage to their home, they filed a claim with their homeowner insurer, defendant Chubb, which denied the claim on the basis that it was excluded under the policy. Homeowners filed suit against Chubb in Minnesota state court. Chubb removed the case to the US District Court. After the court denied Chubb’s Motion for Summary Judgment, plaintiffs moved to amend the complaint to assert a bad faith claim under a Minnesota statute that allows such claims. The court considered the merits of the proposed bad faith claim on the basis that an amendment may be denied when it would not withstand a motion to dismiss.
Joseph and Carolyn Friedberg v Chubb and Son, Inc. (D. Minnesota F. Supp. 2d 2011 WL 3347850)
The Minnesota statute provides for a bad faith claim and allows costs and attorney’s fees. The statute requires that the insured show two things:
- The absence of a reasonable basis for denying the benefits in the insurance policy; and
- That the insurer knew of the lack of a reasonable basis for denying benefits in the insurance policy or acted in reckless disregard of the lack of a reasonable basis to do so.
Minn. Stat. §604.18, subd 2(a). The district court focused its analysis on the first prong of the test and analyzed whether the claim was properly investigated and whether the result of the investigation was subjected to reasonable evaluation and review.
The issue in dispute between the insurer and the insured was whether the damage was covered by the ensuing loss provision of its policy. The plaintiffs argued that ensuing losses were covered even if excluded as a direct cause of the loss. The court analyzed Chubb’s position that the ensuing loss provision “should be interpreted as a causation-in-fact-breaking-link-in-coverage exclusion i.e., permitting only independent, non-foreseeable losses caused by faulty construction.” The court extensively analyzed similar cases.
Even though the court acknowledged that there were issues of material fact regarding what caused plaintiffs’ loss, it held that Chubb’s coverage position was fairly debatable and thus plaintiff could not meet the first element required to find bad faith. The court also noted that the fairly debatable standard for determining bad faith is followed in the vast majority of the jurisdictions.
This reportedly is the first case discussing what the new Minnesota statute means. Since the court’s review of other cases showed that there was considerable confusion about how to analyze ensuing loss provisions, the court felt it could not blame Chubb for its position even if ultimately wrong. Being wrong is okay if the answer is in doubt.
