Last week in my post titled A Wisconsin Policyholder’s Success in a Bad Faith Lawsuit Against Safeco, I began addressing a decision of a Wisconsin federal court that is favorable to the policyholder. I would like to pick up where I left off…

In the bad faith part of the Millers’ case, the Millers contended as follows:

…[H]ad Safeco properly investigated and evaluated the Millers’ claim, “it would have realized that its reasons for denying the Millers’ claim were based on reckless assumptions and statements that it actually knew were untrue.”

A closer look at the reasons Safeco used to deny the Millers’ claim will guide us through the court’s thorough analysis of the issues presented in this bad faith case. At the time the Millers filed their claim, a Safeco senior claims adjuster named Diedre Clair was assigned to the case. Clair attended what Safeco referred to as a “roundtable” discussion with two colleagues in an effort to determine whether the policy at issue provided coverage for the Miller’s loss. The reasons identified by Safeco in its letter denying coverage included the following:

  • The water damage to the property was a pre-existing condition and the Millers were aware of such damage before closing on the property;
  • No covered loss occurred to trigger the additional coverage for fungi, wet or dry rot;
  • The Millers discovered “additional” water damage shortly after closing on the property and did not report the loss until four months later; and
  • Safeco also contended that the Policy’s exclusions gave it a reasonable basis upon which to deny the Millers’ claim.

Safeco also stated, among other things, the following:

Based on the cause of the loss, an ongoing water leak, the fact that this occurrence began outside of the policy period and the provisions of the policy, we are unable to afford coverage for your loss.

The court found against Safeco with regard to the exclusions in the policy. During the first phase of the trial (the trial on the breach of contract/coverage claim), the court granted the Millers’ motion to preclude Safeco from invoking any of the policy’s exclusions because they were not notified of any potentially applicable exclusions before the loss to the property occurred.

Safeco denied the Millers’ claim on grounds that the water damage was pre-existing and that the Millers were aware of it before closing on the property. During their Recorded Statements, the Millers advised that they initially discovered damage when doing some remodeling work, and that the damage was not evident at the time that Mark Plotkin, of Summit Home Inspection (“Summit”), inspected the property on June 3, 2005, in connection with the Miller’s purchase of the home. The Millers subsequently closed on the house on July 1, 2005. They began renovations later that month and discovered severe inner wall water leaks.

Michael Mytas, a Safeco inspector, had a copy of the Summit report and conducted an inspection of the property. Mytas’ deposition testimony regarding his findings reflected the following, among other things:

Mytas agreed that he did not indicate in his report whether any of the areas of concern noted in the Summit Report had any relationship to the water damage that was the subject of the Millers’ claim. Mytas also testified that water could have leaked through the roof multiple times over an extended period of time and rotted the wood, without manifesting any problems on the inside of the house.

During the bad faith trial, the Millers pointed out on a floor plan of the house the areas of concern identified by both Summit and Mytas. The Millers placed transparencies of the diagram portion of Mytas’ report that indicated the location of various loss events over the floor plans. There were only two areas identified in the Summit report that fell within ten feet of any of the locations depicted in Mytas’ report.

The Millers admitted that the Summit report identified “items that involve water,” but they contended that the problems associated with water did not alert them to any problem with “water infiltration.” The Wisconsin federal court determined that this distinction pointed out by the Millers was an important one. The court provided a detailed analysis of specific areas of damage and ultimately determined that Safeco’s inability to: (1) confirm the existence of certain damage itemized in the Summit report, (2) determine the damage’s precise location, and (3) identify the damage’s relationship to the water infiltration, supported the Millers’ position that Safeco did not properly investigate the Millers’ claim and that the results of Safeco’s investigation were not subject to a reasonable evaluation and review.

There are still a few other grounds upon which Safeco’s denial of the Millers’ claim was based. I will pick up my discussion of the Wisconsin federal court’s evaluation of the rest of those grounds next Friday. Please tune in.