A bad-faith claim against State Farm Fire & Casualty Co. has survived a motion to dismiss in federal court.

The judge excused the individual agent who sold the homeowners’ insurance policy and struck the plaintiff’s request for attorney fees, but let stand the bad-faith claim.

U.S. District Judge James M. Munley of the Middle District of Pennsylvania agreed with Samuel Donahue, who brought the case, that the insurance company had been faulty in denying his claim on concurrent causes.

"Plaintiff alleges that defendants based their denial on concurrent causes, which are unenforceable according to state law," Munley said in Donahue v. State Farm Fire & Casualty.

Donahue initially sued State Farm in the Bradford County, Pa., Court of Common Pleas in 2012, a year after sewage backup damaged his property. Donahue had a State Farm insurance policy for his home in Athens, Pa., that covered the house, his personal property, and loss of use. The policy, though, was subject to several exclusions, including water damage. That exclusion applies to any loss from water or sewage overflow or backup, according to the opinion.

"To circumvent this exclusion, State Farm offered, and plaintiff purchased, a backup of sewer endorsement," Munley said.

However, the insurance company denied his claim for coverage following the sewer backup, citing the water-damage exclusion in the primary policy.

After State Farm removed the case to federal court, it sought dismissal on all claims except the breach of contract, according to the opinion.

Donahue agreed with the insurance company that the agent who sold the policy should be dismissed. So did the judge.

Regarding Donahue’s request for attorney fees, which was included in the list of damages he sought, Munley sided with State Farm. The judge cited precedent from the Pennsylvania Supreme Court that explored the general rule in the state that each party is responsible for paying its own attorney fees.

"This general rule ‘holds true "unless there is express statutory authorization, a clear agreement of the parties or some other established exceptions,"’" Munley said, quoting from the Pennsylvania Supreme Court’s 2009 opinion in McMullen v. Kutz, which quoted its 2002 opinion in Mosaica Academy Charter School v. Commonwealth.

The insurance policy that Donahue bought didn’t have an agreement about payment of attorney fees and attorney fees aren’t statutorily permitted in breach of contract actions, Munley said. Also, he said, Donahue didn’t give an argument to persuade the court to grant an exception to the general rule against requesting attorney fees. The judge struck Donahue’s request for fees.

Donahue, however, succeeded on keeping his claim of bad faith against the insurance company alive.

"The Third Circuit Court of Appeals has adopted the legal standard established by the Pennsylvania Superior Court for testing the sufficiency of bad-faith claims under Section 8371," Munley said, referring to Pennsylvania’s bad-faith statute.

Both halves of the two-part test have to be satisfied with "clear and convincing evidence," he said. The first being "that the insurer lacked a reasonable basis for denying benefits," Munley said, and the second being "that the insurer knew or recklessly disregarded its lack of reasonable basis."

The U.S. Court of Appeals for the Third Circuit adopted that standard in 1997 with its opinion in Klinger v. State Farm Mutual Automobile Insurance. The appeals court extended that precedent two years later when it recognized in Frog, Switch & Manufacturing v. Travelers that bad-faith conduct can be found in "’a frivolous or unfounded refusal to pay, lack of investigation into the facts, or a failure to communicate with the insured,’" Munley said, quoting from that opinion.

Following that line, Munley held that Donahue had adequately pled a bad-faith cause of action.

He looked to the Pennsylvania Superior Court’s 2009 opinion in Bishops v. Penn National Insurance, which found that a concurrent-cause exclusion provision was unenforceable when there is an affirmative grant of coverage, and held that State Farm’s denial of the claim based on concurrent causes wouldn’t pass muster.

Myron DeWitt, who has a practice in Susquehanna, Pa., represented Donahue and didn’t return a call for comment.

Lee Ullman of Forry Ullman in Reading, Pa., represented State Farm and referred all requests for comment to the company’s public relations department.

Dave Phillips, a spokesman for State Farm, declined to comment on the recently-released opinion, beyond saying that it "speaks for itself."

Saranac Hale Spencer can be contacted at 215-557-2449 or sspencer@alm.com. Follow her on Twitter @SSpencerTLI.

(Copies of the 13-page opinion in Donahue v. State Farm Fire & Casualty, PICS No. 13-1095, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •