Insurer acted in bad faith by denying claim for damages to improvements to collapsed buildings based on selective reading of the evidence.
The MIA found that Hanover Insurance Group acted in bad faith by selectively reading the evidence produced in their investigation. Hanover supported its denial of coverage by cherry-picking favorable facts from expert reports.
Gideon Properties (“Gideon”) is a residential building construction business that purchased insurance on its work from Hanover Insurance Group (“Hanover”) under a Commercial Inland Marine policy. The policy covered new construction and rehabs. Gideon Properties believed that (Op. 3).
Gideon believed (based on communications with their broker) that all the polices had “structure addendums.” These policies provided a $500,000 limit on damages for any one building or structure, an additional $10,000 in coverage for “soft cost and rental income to any one building subject to a $2500 deductible. (Op. 4.)
On June 22, 2011, Gideon purchased a property in Hagerstown. They received their plumbing and building permits on August 17, 2011, and September 27, 2011 respectively. (Op. 4.)
On October 12, 2011, part of the “foundation basement wall and the adjacent exterior walls of the building” collapsed. At the time, Gideon was installing a drainage system, to be followed by a new concrete floor. Gideon had dug a sewer trench line around the interior of the property to put in a new drain line. Gideon was deepening the original trench in response to a Hagerstown Code Enforcement order. After the wall collapsed, Gideon attempted to shore up the first floor with 2x4s, although this work was done in an unstable structure in the rain. Afterwards, another collapse occurred “between the first and second floor of the Property”, which damaged newly installed materials and mechanical systems. (Op. 4.)
Gideon hired a structural engineering firm, Regan-Matonak, to review the damage and tell them how to repair it. Regan-Matonak opined that the collapse was caused by latent damage to the brick work in addition to Gideon’s work on the sewer trench. (Op. 4-5.) (Gideon had not strictly-speaking asked Regan-Matonak about the cause of the collapse, but Regan-Matonak told them anyway.) (Op. 4.)
Gideon and Hanover hired a different firm, Structura Inc., to determine the cause of the collapse. Structura Inc reached essentially the same conclusion that Regan-Matonak did –the wall was already weak and digging the sewage trench led to its collapse. (Op. 5.) Structura also added that had the building been “properly shored up” after the first collapse, it would have mitigated the second collapse. (Op. 6.)
Hanover then denied coverage. (Op. 6.)
Positions of the Parties
Gideon made two arguments. First, it claimed that an Addendum to the policy granting coverage existed. Second, it claimed that if the engineer’s reports were accurate, a Supplemental Coverage provision for “costs to repair” and “increased cost to repair” covered the damages because the work was being done in response to a code enforcement order. (Op. 6.)
Hanover argued that the policy’s Residential Builder’s Coverage Form excluded coverage of any standing building, so the foundation and brick wall were not covered. Hanover further argued that the policy did not cover either “earth movements” or shoddy workmanship. Finally, Hanover argued that the collapse were not covered perils. (Op. 7.)
Hanover acted in good faith when it denied the claim for damages to the existing structure.
The MIA began by addressing the existing building exclusion. It found that the exclusion was clearly written in the policy. Gideon asserted that an addendum extending coverage existed, but did not submit the addendum. Hanover, meanwhile, denied it existed. The MIA concluded that “it is the Plaintiff’s word against the Defendant’s word that the Addendum exists.” It therefore concluded that the Addendum did not exist because Gideon bore the burden of proof. (Op. 9-10.)
Hanover acted in bad faith by breaching its obligation under the Policy to cover damage to improvements to the property.
The MIA then turned to the damage to the improvements on the property. It held that “there was no evidence” to support Hanover’s denial for shoddy workmanship or “earth movement.” Under the policy, “earth movement” was defined with examples such as “earthquake,” “landslide,” “mudslide,” and “mine subsidence.” The MIA found that the collapse that occurred was not in the same class as any of those examples. (Op. 10-12.)
MIA then turned to the Other Coverage provision that provided coverage of collapses if caused by one of six enumerated perils, including “hidden decay” and “defective materials.” Hanover argued that the collapse was caused by earth movement. To support their argument, they relied on selective readings and paraphrases from the Structure report. (Op. 11-14.)
Hanover argued alternatively that the Other Coverage provision contemplated concurrent-causes. Hanover argued that even if the collapse was partially caused by one of the enumerated perils, if it were also caused by a non-enumerated peril, it was excluded. The MIA rejected that argument because the Other Coverages section did not mention concurrent causes and the language implied that concurrent causes were not excluded. (Op. 14-15.)
Bottom line, the MIA concluded that Hanover acted in bad faith it “intentionally chose the findings from the Structura report that supported its refusal to extend coverage and ignored the findings that did not support its refusal to extend coverage.” (Op. 15.)
On a side note, the MIA denied attorney’s fees because Plaintiff’s attorneys had not shown that their requested $150,000 were incurred at all, much less incurred the bad-faith claim. (Op. 16-17.)