Bad Faith – The Heat Is On
A federal court in North Carolina recently ruled that homeowner-defendants in a declaratory judgment action sufficiently pled a counterclaim for bad faith against their insurer. The homeowners filed a claim with their insurer after their residence suffered water damage while they were out of the country. The insurer denied the claim after it determined that the damage was due to a frozen pipe that burst because the homeowners turned off the heat in the residence, but left the water on, while they were away. The insurer brought a declaratory judgment action seeking a determination that there was no coverage under the policy and the homeowners counterclaimed, alleging among their claims bad faith, unfair and deceptive trade practices and constructive fraud. The insurer moved to dismiss these counterclaims, but the court denied the motion, in part, in IDS Property Casualty Ins. Co. v. Lu, 2016 WL 1532235 (E.D.N.C. April 15, 2016). It held that the homeowners sufficiently stated a claim for bad faith, specifically including allegations that the insurer deceived the homeowners by collecting premiums while never disclosing that the homeowners could only recover under the policy for this type of claim if the heat was on in their house when the damage occurred. However, the court dismissed the homeowners’ claim for constructive fraud, holding that claim contained only legal conclusions without factual support.