When Praveen and Joyti Patel bought their nearly 6,000-square-foot home in Delaware’s largest city, they insured the property with State Farm, just like their neighbors did. They paid just under $1 million for the home, built by Malvern Heritage in the upscale suburb of Brandywine, near the Pennsylvania border.

In late August four years ago, tragedy struck when a fire broke out in their neighbor’s house and spread to their property. When they filed a claim against State Farm, they expected the neighbor’s insurance company to cover their costs, but since State Farm also insured the neighbors, the company didn’t. That’s when they turned to lawyers.

Background: The case of Pravin Patel and Joti Patel v. State Farm Fire and Casualty Company revolves around a fire incident that occurred on August 2, 2020. The plaintiffs’ home, located at 403 Derby Way, Wilmington, Delaware, was severely damaged by a fire that originated from a neighboring property at 401 Derby Way. Both properties were insured by State Farm.

At the time of the incident, the plaintiffs’ property was covered by a State Farm insurance policy that provided dwelling coverage of $1,450,900.00, with a 5% deductible of $72,545.00. After the fire, the plaintiffs expected State Farm to cover their losses, and they also sought compensation from the insurance policy of the neighbor where the fire originated.

On August 1, 2023, the plaintiffs filed a complaint against State Farm, alleging breach of the implied covenant of good faith and fair dealing. The plaintiffs’ claims centered on two main issues: State Farm’s failure to explain the severity of the deductible and its failure to require subrogation of the neighbor’s insurance policy.

Legal issues:

1. Failure to Explain the Severity of the Deductible: Plaintiffs alleged that State Farm violated the implied covenant of good faith and fair dealing by failing to adequately explain the severity of the deductible in the insurance policy. They alleged that this omission affected their understanding and expectations of the policy.
2. Failure to Seek Alternative Remedies: Plaintiffs also alleged that State Farm acted in bad faith by failing to seek alternative remedies against the neighboring property owner. Alternative remedies would have allowed State Farm to recover costs from the party responsible for the fire. Plaintiffs believe that State Farm’s decision was influenced by its interest in insuring the two properties, creating a conflict of interest and making a self-serving decision.

Court analysis and decision:

• Duty to clarify the opponent:
  • The court noted that policyholders were required to read and understand their policies. The deductible of $72,545.00 was clearly stated in the policy.
  • The court cited precedent, holding that failure to read a contract does not relieve a party of its obligations under that contract. Because the deductible was expressly specified in the policy, the court ruled that State Farm was not required to provide additional explanations regarding its severity.

2. Interpretation of the solutions clause:

• The insurance policy included a subrogation clause, which allowed State Farm to seek to recover payments made under the policy from responsible third parties. However, this clause did not obligate State Farm to exercise this right.
• The court examined the implied covenant of good faith and fair dealing, which guarantees that parties to a contract will act in good faith and not defeat the purpose of the contract. It concluded that since the contract does not impose alternative remedies, State Farm’s decision not to seek alternative remedies did not constitute a breach of that covenant.
• The court held that an implied covenant could not be used to impose duties that were not in the contract. The terms of the alternative remedies were clear, and there was no requirement that State Farm seek alternative remedies on behalf of the plaintiffs.

Outcome: The court issued summary judgment in favor of State Farm, finding that:

• State Farm did not violate the implied covenant of good faith and fair dealing by failing to explain the deductible, as policyholders are responsible for reading and understanding their insurance contracts.
• State Farm’s decision not to seek alternative remedies did not constitute a breach of the implied covenant, as the insurance policy did not obligate it to seek alternative remedies.

• This case underscores the importance of brokers ensuring that policyholders thoroughly review and understand their insurance policies, and also highlights the limits of the implied covenant of good faith and fair dealing in imposing duties that go beyond the express terms of a contract.