Let’s face it. Despite all the allegations that are thrown around by policyholders, it is rare for an insurer to be found to have made a coverage determination in bad faith. The standards are just too high. An insurer getting a coverage determination wrong, and getting it wrong by acting maliciously or intentionally or recklessly or with an evil motive, are two very different things. Most insurer bad faith arises in the context of failure to settle, and not failure to figure out what’s covered.

This is why Williford Roofing v. Endurance American Specialty Insurance Company, No. 16-1830 (D.S.C. Feb. 6, 2017) is a significant decision. The court found the insurer may have acted in bad faith. Its sin? Not applying the correct test for determining whether it had a duty to defend.

Williford Roofing is an interesting decision on two levels. Williford sued a homeowner for monies owed for roofing work. The homeowner counterclaimed, alleging that rainwater entered her home after Williford removed shingles and left it exposed to heavy rain. Williford then brought in its subcontractors that performed the roofing work. The case settled for $35,000 and Williford incurred $29,000 in defense costs.

Williford filed suit against its insurer, Endurance, alleging that it breached its duty to defend and indemnify it against the underlying suit. Endurance’s defense was that it was entitled to disclaim coverage based on its Roofing Limitation Endorsement, which provided as follows: “It is hereby agreed that we do not cover claims, loss, costs or expense due to ‘property damage’ arising out of wind, hail, snow, rain, ice or any combination of these unless a suitable waterproof temporary covering, able to withstand the normal elements and large enough to cover the area being worked on, has been properly secured in place. This cover is to be put into place any time the contractor leaves the job site. This limitation applies to any sub-contracted work performed on behalf of the insured, including any sub-contractors of sub-contractors.” (emphasis added).

Thus, Endurance’s coverage determination turned on whether a “suitable waterproof temporary covering” had been secured on the roof. Endurance maintained that it had not been, and, therefore, a defense was not owed. The court held that, since the policy did not define the term “suitable,” and since there was no judicially-determined definition of the term, there was a genuine issue of material fact whether the Roofing Limitation Endorsement barred coverage.

But the real issue in Williford Roofing was not how to define the term “suitable.” Rather, it was the manner in which Endurance made the determination that it had no duty to defend.

In concluding that a suitable waterproof temporary covering had not been secured on the roof, Endurance relied on a letter from the homeowner’s counsel stating that Williford “failed to adequately cover the open portions [of Devore’s roof] during heavy rains.”

However, the counterclaim itself alleged that Willford “fail[ed] to notice rainwater and other exterior environmental elements coming into Ms. Devore’s house through their roof covering; [and] in failing to stop the rainwater and other exterior environmental elements coming into Ms. Devore’s house through their roof covering[.]” (emphasis added).

Accordingly, the court held that the dispute between Williford and Endurance, over whether the roof was actually covered on the night it rained, must be resolved in favor of Williford as the non-moving party. Therefore, the insurer’s summary judgment motion was denied.

But that wasn’t the end of it. The court turned to Williford’s bad faith claim. Here too the court concluded that summary judgment for the insurer was not appropriate.

The court put much emphasis on the fact that the insurer disclaimed a defense by relying on the letter from the homeowner’s counsel stating that Williford “failed to adequately cover the open portions [of Devore’s roof] during heavy rains.” It was on this basis that the insurer concluded that the Roofing Limitation Endorsement barred coverage.

However, the court concluded that the insurer’s reliance on the letter was inappropriate. While noting that it is true that an insurer’s duty to defend is not strictly controlled by the complaint, an evaluation of the complaint is the first step an insurer must take in determining whether it has a duty to defend. Turning to the matter at hand, the court determined that a trier of fact could find that the insurer acted in bad faith when it refused to defend.

The decision could have done a better job explaining, under what circumstances, an insurer’s duty to defend can be determined based on things other than the complaint. However, it appears that the court’s decision was that, because the complaint, standing alone, triggered a defense, i.e., the Roofing Limitation Endorsement was not applicable, the analysis should have ended there. In other words, the letter from the homeowner’s counsel could not be used to alter a “four corners”-based duty to defend conclusion.

The court’s decision does not state what the appropriate standard is to prove that the insurer acted in bad faith. Hopefully for insurers it is more than simply applying the wrong duty to defend test.