First Circuit holds insurer did not act in bad faith in relying on property damage estimate that was lower than policyholder's estimate, or in delays that were also caused by the policyholder

River Farm Realty Trust owns property in Sherborn, Massachusetts.  Paul and Linda DeRensis live on the property.  As at so many homes in Massachusetts in the winter of 2015 (blog readers who lived here then will remember this well), in February and March 2015 ice dams caused water infiltration into the house.

The property was insured by Farm Family Casualty Insurance Company ("FFI").  The DeRensises notified FFI of the damage in early March, 2015. Throughout the adjustment of the claim FFI made a number of small errors, such as emailing Linda DeRensis incorrect claim information because the adjuster had mixed up her claim with another claim from a different Linda.  All such errors were quickly corrected.  

 In June, 2015, after inspecting the property, an outside adjuster for FFI provided the DeRensises with an estimate of about $18,000 to repair the damage.

The DeRensises did not make any response until November 2015, when they submitted to FFI  estimates indicating a loss of about $155,000. They retained an attorney who, in February 2016, submitted a new estimate of about $236,000.  FFI had the house reinspected by a new outside adjuster.  The new estimate, less the deductible and depreciation, was for $28,000.  FFI issued payment to the DeRensises in that amount.

On March 28, 2016, River Farm demanded a reference proceeding.  (A reference proceeding is the proceeding required by Massachusetts statute, and incorporated into property insurance policies,  in which a panel of three referees determines a dispute over the amount of loss in a property damage claim.)

The reference proceeding was conducted in June and July, 2016.  The referees found the actual cash value of the loss to be $137,888.  (Although there is a lot of debate about the precise meaning of actual cash value, in shorthand it is the value of the damaged property just before the loss, taking into account that the property is not in new condition.  Under property damage policies, an insurer pays the actual cash value up front.  After repairs are actually made, it pays the difference between actual cash value and replacement cost value.)  FFI paid the actual cash value amount within a month of the decision.

River Farm sued FFI for breach of contract and violations of Mass. Gen. Laws chs. 93A and 176D.  It alleged that FFI violated the statutes because it was first notified of the claim in March, 2015 and did not resolve it until the reference award in July 2016.  River Farm also alleged that a violation was established by the disparity in amounts between FFI's estimates, River Farm's November demand, and the final reference award.

In River Farm Realty Trust v. Farm Family Casualty Insurance Company, __ F.3d __, 2019 WL 6124489 (1st Cir.), the United States Court of  Appeals affirmed summary judgment for FFI. 

The court held that the length of time it took to resolve the claim was not a violation of the statutes. There was no evidence that the time period was unreasonable, and no evidence that delays were a result of a desire to delay or of bad faith.  Although FFI made some internal errors, those errors were not in bad faith.  Other delays were a result of the DeRensises own failure to communicate timely.  The court held that delay caused by a legitimate dispute between the policyholder and the insurer is not a bad faith delay by the insurer.

The court held that the disparity in estimates was not bad faith by FFI.  River Farm offered no evidence or argument that FFI failed to act reasonably in estimating the damage, or that its estimate varied from industry practice.  Moreover, when irrelevant numbers were removed from the estimates, they were not that far apart from each other. 

US District Court stays bad faith claim until after reference proceeding

As I wrote about here, as required by statute Massachusetts homeowners policies require that a dispute about the value of first-party property damages go to an arbitration called a reference procedure.

In Santos v. Preferred Mut. Ins. Co., __ F. Supp. 2d __, 2013 WL 1633107 (D. Mass.), the plaintiff insured filed suit over damages as well as bad faith practices prior to a reference procedure. 

The insurer argued that summary judgment should enter for it on all counts due to the failure to begin with a reference procedure even though the reference procedure would not determine the bad faith counts.  The court took a much more reasonable approach, holding that the case should be stayed until after a reference proceeding. 

Reference proceedings in fire insurance policy claims

In Massachusetts, as in many states, provisions of fire insurance policies are set by statute. The long-ago author of the legislation was one heck of a micromanager.

The fire insurance statute provides for a “reference procedure,” in which a panel of three arbitrators, or “referees,” determines the amount of loss or damage. Mass. Gen. Laws ch. 175 § 99 (Eleventh).

The reference proceeding determines only the amount of the loss sustained or the sound value of the property, unless both parties agree that the proceeding will determine other issues as well. The reference proceeding ordinarily does not affect any defenses to the claim itself.

Pursuant to the statutory scheme the insurer must, within ten days after receiving the written demand for reference from the insured, submit to the insured in writing the names and addresses of three potential referees. The insured must, within ten days, notify the insurer in writing of his or her choice of one of those people to act as referee.

The insured also submits to the insurer the names and addresses of three potential referees. The insurer must notify the insured in writing within ten days of its choice of one of those persons to act as referee.

The two referees chosen have ten days to agree upon and select a third referee. If they fail to do so, then either of them or the parties may make written application to the commissioner of insurance to appoint a third referee.

The referees must reduce their award to writing. The third referee must deliver the award to the insured and to the insurer.

If an award is rendered by the referees in favor of the insured, the insurer and the insured are each liable to the third referee for one half of his or her charges for compensation and expenses. However, the third referee’s charges are paid by the insurer, who deducts from any award the insured’s share of such charges. If the award is rendered in favor of the insurer or if no award is rendered, the insurer is liable to the third referee for his or her charges, but may deduct one half of the charges from any payment it makes to the insured.