(Article from Insurance Law Alert, April 2025)
For more information, please visit the Insurance Law Alert Resource Center.
Holding
A Pennsylvania district court granted a property insurer’s summary judgment motion, ruling that its selection of a particular setting in an appraisal software program did not constitute a breach of contract. Belotti v. State Farm Fire & Cas. Co., 2025 U.S. Dist. LEXIS 54471 (M.D. Pa. Mar. 25, 2025).
Background
Homeowners notified State Farm of a fire that allegedly caused “catastrophic” damage to their home. The homeowners retained a public adjuster and State Farm hired a contractor to jointly inspect the loss. Both State Farm’s and the homeowners’ estimates were established using a software tool called Xactimate. State Farm’s specialist selected a “new construction” labor efficiency in the software based on his understanding that the repair work would essentially be new construction and the homeowners would not occupy the property during reconstruction. The homeowners’ public adjuster selected a “Restoration/Service/Remodel” labor efficiency setting in the software program. Because of the differently selected labor efficiencies, the homeowners’ replacement cost estimate was approximately $200,000 higher than State Farm’s estimate.
State Farm demanded appraisal, and the parties’ respective appraisers ultimately reached an agreement as to the amount of loss. The appraisal award, which was higher than State Farm’s estimate but lower than the homeowners’ estimate, did not involve use of Xactimate software.
The homeowners brought suit, alleging breach of contract, breach of the implied covenant of good faith and fair dealing, declaratory relief, and violations of state statutory law. The court granted State Farm’s summary judgment motion, dismissing all claims.
Decision
The crux of the homeowners’ breach of contract claim was that State Farm’s use of the “new construction” setting on Xactimate violated a policy provision requiring State Farm to “pay the cost of repair or replacement” of the “damaged part of the property” with “similar construction.” The homeowners asserted that use of State Farm’s selected setting in Xactimate was “nowhere made a term of the policy nor disclosed in the Policy.” Additionally, the homeowners argued that the phrase “damaged part of the property” requires “an estimation model that strictly covers costs to repair or replace, and thus not a ‘new construction model.’”
Rejecting these assertions, the court ruled that State Farm had no contractual duty to use any “singular method of computation” when estimating losses. The court explained that the policy only requires use of “similar construction,” stating: “We cannot identify any language that directly or indirectly concerns any method of computation within the provision, much less any language that requires a singular method of computation. The language of an insurance policy should not be stretched beyond its plain meaning to create ambiguous terms.”
Having determined that State Farm did not breach the contract, the court dismissed the bad faith and statutory claims relating to unfair practices and deceptive acts. The court noted that the bad faith claim also involved allegations relating to State Farm’s conduct throughout the appraisal process (beyond use of the “new construction” Xactimate setting) but concluded that the record was devoid of evidence that substantiated those allegations.
Comments
The decision not only sets a clear parameter relating to the interpretation of unambiguous policy language, but also reinforces an important principle relating to bad faith claims. The fact that the parties’ appraisers ultimately assigned a higher value to the claim than State Farm’s estimate does not mean that State Farm acted in bad faith. Similarly, an unusually lengthy appraisal process, as was the case here due to external, uncontrollable factors, does not in itself constitute an unreasonable delay for purposes of establishing bad faith.