Pennsylvania Appellate Court Finds No Bad Faith When Insurer Demands Examination Under Oath of Insured’s Indicted Principal

On cross appeals from a $1.4 million judgment, the Superior Court of Pennsylvania, in Portside Investors, L.P. v. Northern Ins. Co. of N.Y., affirmed judgment in favor of an insured for breach of a property insurance policy, but also affirmed judgment in favor of the insurer on the insured’s statutory claim for bad faith under 42 Pa.C.S.A. § 8371.

The case stems from the May 18, 2000, collapse of Pier 34 on the Delaware River, causing three deaths and injuries to others in a restaurant/nightclub operated on the Pier. After the collapse, and during the claim adjustment process, Portside’s two principals were indicted for manslaughter for allegedly ignoring prior warnings of the Pier’s risk of imminent collapse. After the indictments were issued, Northern reopened its coverage investigation and demanded that Portside Investors’ indicted principals submit to examinations under oath before it would make determination regarding coverage.

The opinion sets forth a couple noteworthy points relating to insurance coverage and bad faith litigation in Pennsylvania.

First, the court found that Northern’s insistence on taking the insured’s examination under oath did not amount to a bad faith delay tactic, even though it knew they would exercise their Fifth Amendment rights. The indictment and grand jury presentment indicated the principals knew Pier 34 was in imminent danger of collapse at least 2 days prior to the collapse, which arguably would have provided a basis for denying coverage under the policy. Accordingly, Northern’s decision to insist on a sworn statement as to what they knew prior to the collapse was not an exercise in bad faith.

Second, the court determined the insured’s claim under the policy for actual cash value (“replacement cost less depreciation”) of the fallen Pier was properly supported by the evidence. The insured’s public adjuster, with 30 years of pier adjusting experience, was qualified to testify despite his lack of engineering credentials, and his ACV calculation was consistent with the notion that the 90-year old pier may have outlived its useful life as an industrial pier at the time of the collapse, but still had substantial value, recycled as a “social entertainment center.” The insurer never established that the opposing expert’s methodology was unreliable, lacked a foundation in fact, or conflicted with accepted industry practice.