Foss et al v. Phoenix Insurance Company

Filing 10

MEMORANDUM (Order to follow as separate docket entry) re 6 MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM Signed by Honorable James M. Munley on 11/30/17. (sm)

IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
MARTIN FOSS and SUSAN FOSS, :
No. 3:17cv1757
Plaintiffs
:
:
(Judge Munley)
v.
:
:
PHOENIX INSURANCE COMPANY, :
Defendant
:
::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::
MEMORANDUM
Before the court for disposition is Defendant Phoenix Insurance Company’s
(hereinafter “defendant”) motion to dismiss Count II of Plaintiffs’ Martin and
Susan Foss (hereinafter “plaintiffs”) complaint. The motion has been fully briefed
and the matter is ripe for disposition.
Background
Plaintiffs insured their home with defendant. (Doc. 1-1, compl. ¶ 3). The
homeowners’ policy included basic coverage as well as a value added policy, the
latter providing additional coverage. (Id. ¶ 7). Losses covered by the value
added policy included coverage up to $58,000.00 for “ordinance law” coverage.
(Id. ¶ 8). A damaged sewer pipe resulted in a loss at plaintiff’s property on
January 13, 2017. (Id. ¶ 9, 14). 1

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The record does not reveal the event or events that caused the loss.

In the ensuing excavation the fresh water supply pipe leading to plaintiffs’
home was found to be actually running through the sewer pipe, in violation of
building and construction codes. (Id. ¶ 14). In addition to separating the sewer
and water pipes, the homeowners’ insurance claim necessitated: removing
concrete stairs in front of the home (Id. ¶ 16); damage repair inside the home, (Id.
¶ 21); and electrical work inside the home, (Id. ¶ 19). This extra work is required
in order to comply with ordinances and laws. 2
Defendant has denied all coverage necessitated by the ordinance and law
upgrade expenses. (Id. ¶ 20). The sewer pipe remains exposed as a result. (Id.
¶ 23). The complaint alleges defendants payments are well below the loss,
defendants failed to honor the policy terms, along with wrongfully denying claims
under the value added policy mentioned above, resulting in desperate need for
repairs and a home in “complete disarray.” (Id. ¶ 25-28).
In response, plaintiffs filed their complaint on August 29, 2017 in the Court
of Common Pleas for Schuylkill County, Pennsylvania alleging the following:
Count I alleges breach of contract; and Count II alleges Breach of Duty of Good
Faith and Fair Dealing under 42 Pa.C.S.A. § 8371. Defendant timely filed a
notice of removal to this court on September 28, 2017, followed by the instant

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Plaintiff Susan Foss alleges she has become ill as a result of unsanitary
conditions inside the home.
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motion to dismiss on October 3, 2017, relative to Count II only, thus bringing the
case to its current posture.
Jurisdiction
Plaintiffs are citizens of Pottsville, Pennsylvania. (Doc. 1, notice of
removal). Defendant is a citizen of Connecticut. (Id. ¶ 8). Plaintiffs seek in
excess of $75,000 in damages. (Id. ¶ 9).
Thus, because the parties are citizens of different states this court has
diversity jurisdiction pursuant to 28 U.S.C. § 1332. See 28 U.S.C. § 1332(a)(1)
(“The district courts shall have original jurisdiction of all civil actions where the
matter in controversy exceeds the sum or value of $75,000, exclusive of interest
and costs, and is between . . . citizens of different States”). The substantive law
of Pennsylvania shall apply to the instant case because the court is sitting in
diversity. Chamberlain v. Giampapa, 210 F.3d 154, 158 (3d. Cir. 2000), citing
Erie R.R. v. Tompkins, 304 U.S. 64, 78 (1938).
Standard of review
Defendant filed its motion to dismiss the complaint pursuant to Federal
Rule of Civil Procedure 12(b)(6). The court tests the sufficiency of the
complaint’s allegations when considering a Rule 12(b)(6) motion. All wellpleaded allegations of the complaint must be viewed as true and in the light most
favorable to the non-movant to determine whether, “‘under any reasonable
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reading of the pleadings, the plaintiff may be entitled to relief.’” Colburn v. Upper
Darby Twp., 838 F.2d 663, 665-66 (3d Cir. 1988) (quoting Estate of Bailey by
Oare v. Cnty. of York, 768 F.2d 503, 506 (3d Cir. 1985)). The plaintiff must
describe “‘enough facts to raise a reasonable expectation that discovery will
reveal evidence of “[each] necessary element” of the claims alleged in the
complaint. Phillips v. Cnty. of Allegheny, 515 F.3d 224, 234 (3d Cir. 2008)
(quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007)). Moreover, the
plaintiff must allege facts that “justify moving the case beyond the pleadings to
the next stage of litigation.” Phillips, 515 F.3d at 234-35. In evaluating the
sufficiency of a complaint the court may also consider “matters of public record,
orders, exhibits attached to the complaint and items appearing in the record of
the case.” Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1384 n.2
(3d Cir. 1994) (citations omitted). The court does not have to accept legal
conclusions or unwarranted factual inferences. See Curay-Cramer v. Ursuline
Acad. of Wilmington, Del., Inc., 450 F.3d 130, 133 (3d Cir. 2006) (citing Morse v.
Lower Merion Sch. Dist., 132 F.3d 902, 906 (3d Cir. 1997)).
The federal rules require only that plaintiff provide “a short and plain
statement of the claim showing that the pleader is entitled to relief,” a standard
which “does not require detailed factual allegations,” but a plaintiff must make “a
showing, rather than a blanket assertion, of entitlement to relief that rises above
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the speculative level.” McTernan v. N.Y.C., 564 F.3d 636, 646 (3d Cir. 2009)
(citations and internal quotations and quotation marks omitted). The “complaint
must contain sufficient factual matter, accepted as true, to ‘state a claim to relief
that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting
Twombly, 550 U.S. at 570). Such “facial plausibility” exists “when the plaintiff
pleads factual content that allows the court to draw the reasonable inference that
the defendant is liable for the misconduct alleged.” Id. (citing Twombly, 550 U.S.
at 556). “[T]he factual detail in a complaint [cannot be] so undeveloped that it
does not provide a defendant the type of notice of claim which is contemplated
by Rule 8.” Phillips, 515 F.3d at 232 (citation omitted). “Though a complaint
‘does not need detailed factual allegations, . . . a formulaic recitation of the
elements of a cause of action will not do.’” DelRio-Mocci v. Connolly Props., Inc.,
672 F.3d 241, 245 (3d Cir. 2012) (quoting Twombly, 550 U.S. at 555).
Discussion
Defendant moves to dismiss Count II of the plaintiffs’ complaint, which
alleges a bad faith claim. Pennsylvania's bad faith statute provides as follows:
In an action arising under an insurance policy, if the court
finds that the insurer has acted in bad faith toward the
insured, the court may take all of the following actions:
(1) Award interest on the amount of the claim from the
date the claim was made by the insured in an amount
equal to the prime rate of interest plus 3%.
(2) Award punitive damages against the insurer.
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(3) Assess court costs and attorney fees against the
insurer.
42 PA. CONS. STAT. ANN. § 8371.
The statute does not define “bad faith.” Pennsylvania courts, however,
have adopted the following definition of “bad faith” on the part of an insurer:
[A]ny frivolous or unfounded refusal to pay proceeds of a
policy; it is not necessary that such refusal be fraudulent.
For purposes of an action against an insurer for failure to
pay a claim, such conduct imports a dishonest purpose
and means a breach of a known duty (i.e., good faith and
fair dealing), through some motive of self-interest or ill
will; mere negligence or bad judgment is not bad faith.
Perkins v. State Farm Ins. Co., 589 F. Supp. 2d 559, 562 (M.D. Pa. 2008) (citing
Terletsky v. Prudential Prop. & Cas. Ins. Co., 649 A.2d 680, 688 (Pa.Super. Ct.
1994) (quoting Black’s Law Dictionary (6th ed.1990)) (citations omitted); see also
Nw. Mut. Life Ins. Co. v. Babayan, 430 F.3d 121, 137 (3d Cir. 2005) (predicting
the Pennsylvania Supreme Court would define “bad faith” according to the
definition set forth in Terletsky)).
The United States Court of Appeals for the Third Circuit has adopted the
legal standard established by the Pennsylvania Superior Court for testing the
sufficiency of bad faith claims under section 8371. The courts apply a two-part
test “both elements of which must be supported with clear and convincing
evidence: (1) that the insurer lacked a reasonable basis for denying benefits; and
(2) that the insurer knew or recklessly disregarded its lack of reasonable basis.”
Klinger v. State Farm Mut. Auto. Ins. Co., 115 F.3d 230, 233 (3d Cir. 1997) (citing
Terletsky, 649 A.2d at 688).

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Defendant’s motion to dismiss launches two attacks on Count II of plaintiff’s
complaint. The first argues that any allegations against defendant for breach of
the duty of good faith and fair dealing constitute common law bad faith sounding
in tort, which should be dismissed for failure to state a claim for which relief can
be granted because Pennsylvania does not recognize a common law bad faith
claim sounding in tort. Next, defendant argues dismissal is appropriate because
the complaint merely makes “conclusory” allegations that provide insufficient
factual averments to support a bad faith claim.
Here, defendant’s first argument fails because it is clear on the face of the
complaint that plaintiff has not alleged a common law bad faith claim sounding in
tort, but rather, a claim under Pennsylvania’s bad faith statute discussed above.
Moreover, Count II is clearly captioned in the complaint as follows:
COUNT II
BREACH OF DUTY OF GOOD FAITH AND FAIR DEALING
IN VIOLATION OF 42 Pa.C.S.A. § 8371
(Doc. 1-1 at 6).
Next, defendant argues that plaintiffs fail to sufficiently allege a bad faith
claim because they merely state boiler-plate legal conclusions. According to
defendant, plaintiffs allege no facts to back up the conclusory legal statements.

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After a careful review of the complaint, (Doc. 1-1), and the insurance policy, 3
(Doc. 6-2 at 12-53), we disagree.
Our review pursuant to Klinger considers the well-pleaded allegations of
the complaint as true and in the light most favorable to the non-movant. The
insurance policy provides $294,000.00 of dwelling coverage for the plaintiffs’
home. (Doc. 1-1 ¶ 7). In addition, the plaintiffs opted for a value added policy
providing for twenty (20) percent of dwelling coverage for “the increase costs
[plaintiffs] incur due to the enforcement of any ordinance or law” instead of the
ten (10) percent ordinance or law coverage set forth in the main policy, (Doc. 6-2
at 22, 38-40), thus making $58,000 available for ordinance and law coverage.
Defendant does not argue that plaintiffs’ dwelling loss is not covered.
Instead, the underlying issue in this case is defendant’s refusal to pay for code
upgrades under the ordinance or law policy. According to plaintiffs, defendants
posit that the combined fresh water supply/sewer pipe is not covered under the
policy because the fresh water supply pipe was not damaged first by a covered
cause of loss. (Doc. 1-1 ¶ 20).
Our reading of the insurance policy (Doc. 6-2 at 12-63) reveals two
dispositive facts. First, the policy does not contemplate a fresh water supply pipe
located within a sewer pipe, for the same is not mentioned anywhere in the
3

Entitled: “Homeowner’s Policy Booklet from Travelers”
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policy. Second, the policy therefore does not exclude coverage where a fresh
water pipe was not damaged first, before the sewer pipe with which it is
combined, by the covered cause of the loss. Thus, under the first prong set forth
in Klinger, and construing everything in the light most favorable to the nonmoving party, we find that defendant lacked a reasonable basis for denying
benefits covering the various and sundry upgrades required by ordinance and
law in order to effectively cover the main dwelling policy claims.
The second prong in Klinger requires the court to determine whether the
insurer knew or recklessly disregarded its lack of reasonable basis. Under
Pennsylvania law we construe any ambiguities in the policy “in favor of the
insured to further the contract's prime purpose . . . and against the insurer, as the
insurer drafts the policy, and controls coverage.” Ramara, Inc. v. Westfield Ins.
Co., 814 F.3d 660, 674 (3d Cir. 2016), citing Kvaerner Metal Div. of Kvaerner
U.S., Inc. v. Commercial Union Ins. Co., 908 A.2d 888, 897 (Pa. 2006) (citation
omitted). In the case at bar, when viewed in the light most favorable to the nonmoving party, we do not confront an ambiguity in the policy. Rather, defendant’s
basis for refusing coverage is simply not present in the policy. It is axiomatic that
insurance policy language – or the lack thereof -- is imputed to the insurer,
because the insurer is the scrivener of the policy. We conclude, therefore, that
defendant knew or recklessly disregarded its lack of reasonable basis for denying
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coverage regarding the entire combined water supply pipe/sewer pipe loss
including the ordinance and law coverage pursuant to the value added policy.
Conclusion
After a careful review, defendant’s motion to dismiss Count II of the
plaintiffs’ complaint will be DENIED. An appropriate order follows.
Date: November 30, 2017

s/James M. Munley_______
JUDGE JAMES M. MUNLEY
United States District Court

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