A recent federal court decision in Madison helps us understand what constitutes bad faith in Wisconsin. The case is Abegglen v. State Farm. In this case, the plaintiff property owner was insured by State Farm which issued a policy that insures “accidental direct physical loss to the property”, an undefined term. State Farm relied on internal guidelines given to adjusters which states that “granular loss” on shingles is insufficient to be covered hail damage. The internal guideline required the damage to be “bruising” or “fracturing” of the shingle mat.
The property owner claimed hail damaged his roof causing granular loss. State Farm’s adjuster hired a vendor to inspect the roof. The vendor wrote a report concluding there was no hail or storm related damage, but at his deposition he testified that hail could cause granular loss. At a second inspection by two State Farm employees, the adjusters found no damage. One later testified that in State Farm training for recognizing hail taught him, “the shingle must exhibit a bruise, fracture or penetration of the mat”. Based on these inspections and State Farm’s policy to not cover granular loss the insurer denied the claim.
The property owner hired an engineer who opined the granular loss was from hail impacts. After an impasse with State Farm, the property owner filed suit. State Farm moved to dismiss the property owner’s bad faith claim. Bad faith in Wisconsin requires a property owner to prove the insurance company lacked a reasonable basis for denying a policy benefit, and the insurance company knew it or was reckless in disregarding a lack of a reasonable basis. This test includes an objective and subjective component. The objective component tests whether the insurer properly investigates a claim and whether the results were subject to a reasonable evaluation and review. When a claim is debatable, the insurer has not committed bad faith.
The core of the property owner’s bad faith argument is that a blanket, categorical exclusion of all granular loss claims is bad faith. State Farm’s vendor testified that granular loss could be caused by hail but did not think it was in this scenario. The adjuster that attended the second inspection stated he would not count any granular loss as insurable damage. Taken together, the judge held a reasonable jury could find that the categorical denial of any granular loss is bad faith. The judge gave the green light for the bad faith claim to proceed to trial.
This case is very helpful in understanding how bad faith operates in Wisconsin. First, a categorical, blanket denial of certain types of damage, even when caused by an insured loss like hail, is impossible. Only policy language, like the definition of an insured loss or an exclusion, can operate to categorically deny a loss event. Here, there was no exclusion for granular loss. Second, the case stands for the important principle that internal guidelines for assessing a loss are not binding. The binding policy is the insurance policy issued to the customer, not an internal guideline. Internal training and guidelines that result in an adjustment less than what is insured is impossible.
This is an excellent case for understanding how bad faith in Wisconsin operates. Feel free to e-mail me if you have any questions at ed@beckmannlawfirm.com.