Verdetto v. State Farm Fire & Casualty Co., 2011 U.S. Dist. LEXIS 135287

Plaintiffs Verdettoes sue State Farm for breach of contract and bad faith after a fire damaged their renters’ property.
Verdettos had State Farm contents coverage of $50,000 and reported the fire in May 2009; arson was later determined by the Fire Marshal.
State Farm initiated a formal investigation, highlighting red flags such as an arson ruling, a recently issued policy, and prior late premium payments.
Insurer sought and obtained authorizations for financial and telephone records, but the Verdettos repeatedly refused to sign.
State Farm conducted an EUO and ultimately denied coverage for the contents claim due to lack of cooperation; plaintiffs filed suit September 14, 2010.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether State Farm acted in bad faith in denying the claim	Verdettos contend insurer lacked reasonable basis and acted with improper motive.	State Farm had a reasonable basis based on red flags and lack of cooperation by Verdettos.	Summary judgment for State Farm on bad faith claim; reasonable basis shown.
Whether plaintiffs’ noncooperation was a material, prejudicial breach voiding the policy	Verdettos argue cooperation was fulfilled and noncooperation did not void coverage.	Refusal to provide requested documents and records was a material breach prejudicial to insurer.	Summary judgment for State Farm on breach of contract; cooperation breach voided policy.

Northwestern Mut. Life Ins. Co. v. Babayan, 430 F.3d 121 (3d Cir. 2005) (bad faith requires lack of reasonable basis and knowledge or reckless disregard)
Terletsky v. Prudential Prop. & Cas. Ins. Co., 649 A.2d 680 (Pa. Super. Ct. 1994) (bad faith requires a tort-like intent or ill will; not mere negligence)
Polselli v. Nationwide Mut. Fire Ins. Co., 23 F.3d 747 (3d Cir. 1994) (clear and convincing standard for bad faith; emphasis on reasonable basis and prejudice)