No Bad Faith Claim Possible Over a Bona Fide Dispute About Coverage

By Don R. Sampen, published, Chicago Daily Law Bulletin, June 2, 2020

The 1st District Appellate Court, in a first-party coverage context, recently confirmed the principle that an insurer’s denial of coverage based on a bona fide dispute with the insured over compliance with policy conditions does not give rise to a bad faith claim.

The case is Wells v. State Farm Fire & Casualty Co., 2020 IL App (1st) 190631 (April 28). The insured, Gia Wells, was represented by Seward & Szczygiel P.C. of Chicago. SmithAmundsen LLC of Chicago represented the insurer, State Farm Fire & Casualty Co.

Wells reported flooding in her home to State Farm in May 2016. In response, State Firm initially investigated and then hired a firm, EFI Global Inc., to conduct a further investigation. Beginning in January 2017, EFI published a report and two addenda, which were not entirely consistent but, based on evolving information, ultimately concluded that the potential cause of the flooding was freezing, corrosion and vandalism.

State Farm’s homeowner’s policy issued to Wells covered the property but excluded coverage for the freezing of plumbing “while the dwelling is vacant” subject to certain exceptions. It also excluded coverage for corrosion and vandalism to the property while vacant.

Wells claimed that for a number of years prior to the flooding, she slept at her mother’s home but visited the property daily or weekly. She then got married at the end of 2015 but claimed she continued to keep most of her belongings at the property. After going on a honeymoon for 10 days in early 2016, she did not visit the property again until May.

Based on these and other facts — for example, Wells’ marriage certificate indicating she was marred in December 2014, not 2015 — State Farm concluded that the property was unoccupied and denied coverage.

Wells’ commenced the action in late 2017. She alleged that a State Farm representative who inspected the property shortly after she reported the flooding in May 2016 noted that she lived in the property part time. The representative also noted she had been on a honeymoon for five months prior to her discovery of the flooding in May 2016.

Wells further alleged that State Farm had determined an expert opinion was necessary to come to a different conclusion from the representative, and therefore hired EFI. In doing so she claimed State Farm improperly determined the property was unoccupied and committed bad faith in violation of the Insurance Code, 215 ILCS 5/155. In a second count she claimed breach of contract.

State Farm moved to dismiss the bad-faith count under both sections 2-615 and 2-619, 735 ILCS 5/2-615, 2-619, of the Code of Civil Procedure. It took the position not only that the property was unoccupied, but that other policy defenses also existed, including breach of the concealment-and-fraud condition, based on misrepresentations made by Wells and her new husband.

The trial court granted State Farm’s motion on the bad-faith count based on the existence of a bona fide dispute. Wells then took a voluntary dismissal of her breach-of-contract count.

The court allowed the dismissal, but also found that Wells had willfully failed to appear for her court-ordered deposition. Based on that finding State Farm opposed the voluntary dismissal, but the court nonetheless allowed it and, nunc pro tunc, vacated the finding of willfulness. Wells appealed and State Farm cross appealed.

Good-faith dispute

In an opinion by Justice Terrence J. Lavin, the 1st District affirmed. On the bad faith count, he found that the complaint failed under both sections 2-615 and 2-619. As to the former, he compared Wells’ claim that she was living at the property part-time with her further claim that she had been on a honeymoon for five months.

Given the lack of a definition of “unoccupied” in the policy, her limited use of the property, and her lack of any allegation that she took steps to protect the property in her absence, Lavin said a bona fide dispute existed based on her allegations.

He bolstered that determination with the conclusory nature of the allegations in her complaint about State Farm’s supposed determination to have EFI come up with a reason to deny her claim. In sum, the complaint failed to alleged that State Farm’s conduct was vexatious or unreasonable.

As for the section 2-619 part of the motion to dismiss, State Farm attached the affidavit of a State Farm claims specialist. The affidavit documented that State Farm discovered that the water in the property had been turned off by the municipality as early as 2014 for failure to pay the water bills. It also contained evidence that Wells had moved out of the property as early as 2007, and contained other statements contradicting information provided by Wells and her husband.

Lavin noted that Wells provided no counter affidavit, and the information in the State Farm affidavit therefore would be taken as true. All these facts pointed to the existence of a bona fide dispute over the occupancy of Well’s property, justifying dismissal of the bad-faith count.

Nunc pro tunc orders

On its cross appeal, State Farm argued that the trial court erred in using a nunc pro tunc order to alter its prior determination that Wells willfully violated a discovery order. Lavin explained that a nunc pro tunc order is intended to make the record reflect what was actually done before. Such an order may be made any time to correct a clerical error, even after the trial court loses jurisdiction.

In this case, however, the trial court had not lost jurisdiction at the time it entered the order vacating the finding of willfulness, so it was not necessary to enter the order nunc pro tunc. Lavin observed, moreover, that State Farm offered no argument going to the merits of the trial court’s ruling on willfulness. The trial court therefore acted properly.

Thus, the 1st District affirmed the dismissal of the section 155 claim and further found that no error occurred with respect to the trial court’s determination on willfulness regarding Wells’ deposition.

Key points

A claim of bad faith under section 155 of the insurance code cannot be sustained in the face of a bona fide coverage dispute between an insurer and insured.

A nunc pro tunc order may be made any time by a trial court to correct a clerical error, even after the trial court loses jurisdiction.