Pennsylvania Decides Again that Assignments of Bad Faith to Restorers are Valid

Pennsylvania Federal Court held that bad faith claims could be assigned to a third party, such as a restoration company, who alleged injury from the insurer’s conduct in adjusting the claim. 

State Farm Fire and Casualty Company (“State Farm”) insured 1133 Columbia LLC’s property (“Columbia”). Royal Water Damage Restoration (“Royal Water”) performed mitigation, remediation, and drying services after a water line burst, damaging the property. Columbia subsequently assigned its rights under the State Farm policy to Royal Water, which sued State Farm for breach of contract and statutory bad faith in the Philadelphia County Court of Common Pleas. State Farm moved to dismiss the bad faith claim, arguing that the bad faith claim could not be assigned. The Court denied the motion, allowing Royal Water to pursue the claim for bad faith and breach of contract against State Farm.


Columbia suffered a water line break, sustaining a loss to multiple units. Columbia submitted a timely claim to State Farm, which sent an adjuster to evaluate damages. Royal Water restored the property between December 2020 and February 2021. State Farm initially agreed with the scope of Royal Water’s work, and Royal Water billed State Farm $165,012.32 for its services.

After prior approval of the scope, State Farm sent Royal Water’s invoices to a Third Party vendor for an audit. The third-party was late to the project; thus, it only saw the completed site. Royal Water alleges the vendor’s “estimate for drying goals” was “an arbitrary number of days” and not “based on objective calculations as required by the Institute of Inspection Cleaning and Restoration Certification standards . . . .” (“IICRC”). Although Royal Water told State Farm three times that the third-party estimate did not comply with IICRC standards, State Farm paid Royal Water based on the estimate. 

Royal Water alleges that it has not been reimbursed approximately $45,000 for the reasonable expenses it incurred for its services because State Farm underestimated the extent of the damage. In addition, Royal Water alleges it is Columbia’s “creditor” because of “State Farm’s wrongful refusal to pay reasonable expenses” for Royal Water’s services. However, Royal Water did not allege there is an outstanding judgment for any unpaid amount. State Farm argues that Columbia’s assignment was invalid because Royal Water does not have an outstanding judgment.

Assignment of an Insurance Bad Faith Claim

Columbia “assigned any and all of its rights, benefits and causes of action” under its State Farm policy to Royal Water “to the extent [the restoration company] provided services” at the property. State Farm argued that case precedent in Pennsylvania required both the assignee being injured and the assignee is a judgment creditor (Allstate Prop. & Cas. Ins. Co. v. Wolfe (2014) 629 Pa. 444, 446 [105 A.3d 1181, 1182].). The court held that State Farm’s interpretation of Wolfe is inconsistent with the broader reasoning behind it.

“Allowing Royal Water to stand in Columbia’s shoes serves “the salutary purposes of encouraging good faith settlement negotiations, and punishing insurance carrier abuse”

When the bad faith statute was enacted, the Supreme Court had allowed assignments of bad faith claims “for almost twenty-five years.” It did not believe the legislature intended to change the practice because, as drafted, the statute does not explicitly bar assignments. Allowing insureds to assign their bad faith claims serves the statute’s “aim of deterrence.” It does not encourage plaintiffs to “pursue unreasonable settlement demands” or claims that otherwise never would have been pursued. 

The court goes on to state that even if Wolfe limited assignments to “injured” third parties, Royal Water has plausibly alleged it “has actually sustained injury” from State Farm’s conduct and is not “an uninterested party to the insurance claim” pursuing litigation just “to create an economic benefit to it.” The Pennsylvania Federal Court then held that: Royal Water seeks to recover from State Farm’s refusal to pay “expenses it incurred for its services at the insured premises relative to the covered loss. “Allowing Royal Water to stand in Columbia’s shoes serves “the salutary purposes of encouraging good faith settlement negotiations, and punishing insurance carrier abuse.” Wolfe, 105 A.3d at 1186

Don’t Be Afraid to Question the Insurance Company’s Decisions

Carriers need an objectively reasonable justification for denial of claims decisions or they face liability for insurance bad faith.

Put your questions in writing and demand that the insurance company put its position in writing as well. The adjuster may justify their claims handling in one way on the phone but it’s a different matter when they have to reduce their decision to writing. Remember, once an insurer puts its position in writing if you end up having to sue the insurer for bad faith they will have a hard time changing their position.  If you don’t “get it in writing” you might be surprised how the adjuster’s version of what was said to you changes when they are under oath in a deposition or in court.

If the policyholder or assignee believes the insurance company is acting unreasonably and unfairly, then it is probably time to seek the advice of an experienced insurance bad faith lawyer. 

Watch and learn more about insurance bad faith below.

Ready to learn about Assignments of Insurance Rights and Benefits?

The Book on the Assignment of Benefits, 2nd ed. by Ed Cross, contains forms for every State, a letter to place the carrier on notice, along with a training guide explaining the ins and outs of executing and enforcing an assignment.

There is no greater way to empower a restorer to recover fair market value for restoration service than with a properly-drafted Assignment of Insurance Rights. Assignments allow restorers to cause insurance companies to pay a reasonable price for restoration service, and to pay a second time if the insurer sends the restorer’s money to the policyholder. 

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