On July 30, 2012, the Andrews submitted a “Property Loss Notice” to their homeowners' insurance company, Merchants Mutual Insurance Company.

Shortly thereafter, the Andrews provided to Merchants an invoice for emergency roof repairs and an estimate for replacing the entire roof. The Andrews concluded that the entire roof should be replaced because the sheathing under the roof shingles had been damaged in the derecho storm.

Merchants' independent adjuster, Tri-State Adjusters, inspected the property and advised Merchants that there was, indeed, a leak in the roof, but that replacing the entire roof was “excessive.”

A separate flooring contractor also inspected, on behalf of Merchants, the Andrews' newly refinished hardwood floors that were damaged by the leaking water.

In late October, Mr. Andrews said, he saw extensive mold on his clothes and shoes in the master bath closet. The Andrews said that they assumed that the mold came from the water that leaked in from the roof.

Superstorm Sandy hit New Jersey on October 29-30, 2012. The Andrews' home's crawlspace flooded. According to the Andrews, subsurface water came up through the ground, resulting in one to two feet of standing water in the crawlspace.

The Andrews asserted that, after Sandy, they also observed water coming down from the ceiling in the same area where they previously had the roof leak. Specifically, Ms. Andrews said that, “we got a big bulge of water”; “a big leak over the vanity [in the master bathroom] … where it just like crashed down. The water just came barging down right over the master bath vanity.” Mr. Andrews said that, “we found [water] stains on the ceiling” and “sheetrock was caving in from water from rain.”

Soon after Sandy, the Andrews said that they began to suspect that they had a significant mold problem. Ms. Andrews said, “we had mold before [Sandy] but nothing – it wasn't inside the house, growing in the windows and every place that we found, it kind of like exploded when Sandy hit.”

By check dated November 3, 2012, Merchants paid the Andrews $6,457.06. The insurer's file reflected that the reason was “damages.”

On November 12, 2012, the Andrews' mold remediation company, Quality Air Care, took samples throughout the house to send out for lab testing. Quality Air's resulting “MoldView” report indicated that the Andrews' house had high levels of cladosporium and aspergillus/penicillium mold, with highest spore concentrations occurring in the crawlspace.

Two weeks later, on November 26, 2012, a second independent adjuster for Merchants inspected the Andrews' house.

Two days later, Merchants' mold remediation specialist, Briggs Associates, performed “fungi investigation and microbial testing” in the house. The resulting report also indicated high levels of cladosporium and penicillium, with highest spore concentrations occurring in the crawlspace. The report also observed “dark water staining” and “possible mold” “on [the] ceiling joists throughout” the attic.

In a letter dated December 5, 2012, Merchants enclosed a check dated December 6, 2012, payable to the Andrews in the amount of $12,158.06. The letter explained:

Taking into consideration the payment of $6,457.06 already issued to you on this claim, you will be receiving under separate cover a supplemental payment in the amount of $12,158.06 to conclude the adjustment of this claim…. [W]e allowed for the replacement of dimensional shingles on the two rear slopes of the roof, refinishing of the hardwood floors, custom based molding throughout the first floor, insulation, repair of the cabinet and made allowance for three days of additional living expenses while the floors were being refinished.

The letter also stated:

As outlined in the mold report prepared by mold expert Doug Ferry, the elevated interior fungal concentrations arose from the crawl space and not the attic. Based upon this information we regretfully inform you that the mold remediation subject to a $10,000 limit under the policy of insurance would not be covered.

Merchants' internal records indicated that the claim then was closed, but two weeks later, on December 21, 2012, Merchants issued a third check payable to the Andrews in the amount of $10,000, which represented the full mold sublimit payment available under the policy.

In mid-September 2013, the Andrews demolished their house with the intent to rebuild it with all new materials. The Andrews said that they had decided to demolish and rebuild because they had concluded that mold remediation would be cost-prohibitive and might not eliminate all of the mold.

In August 2014, the Andrews sued Merchants for breach of contract and bad faith. The insurer moved for summary judgment.

The District Court's Decision

The district court granted the insurer's motion.

In its decision, the district court first found that because Merchants had paid the policy limit of $10,000 for mold damage, Merchants had fully performed under the policy and was entitled to summary judgment on the Andrews' breach of contract claim.

Then, the district court granted Merchants' motion for summary judgment with respect to the Andrews' bad faith claim.

It explained that the Andrews were claiming damages above and beyond the policy limits because Merchants had delayed the processing of the derecho-related claim because:

[1] the insurer initially put the wrong dates on the paperwork, [2] the insurer initially mistakenly said that [the Andrews] did not have mold coverage when they did, [3] the insurer initially said the policy had lapsed when in fact it had not, [4] and the insurer mistakenly marked the case closed when in fact it was still pending.

The district court said that the evidence did not support the inference that Merchants had acted in bad faith in processing the Andrews' claim. It pointed out that neither negligence nor mistake was sufficient to show bad faith.

The case is Andrews v. Merchants Mutual Ins. Co., No. 14-5147 (D.N.J. July 12, 2016).