The opinion of the court was delivered by: JOYNER
We address today the motion for summary judgment filed by the defendant, Pacific Indemnity Company ("Pacific"), in this diversity case arising under Pennsylvania law. The plaintiffs are Anthony and Tammy Parasco (the "Parascos"), a husband and wife who held a homeowners' insurance policy issued by Pacific. On June 23, 1993, the Parascos' home and its contents were destroyed by fire. The Parascos subsequently made a claim for insurance proceeds under the policy. After conducting an investigation, Pacific concluded that Mr. Parasco had set the fire, and refused to pay the Parascos' insurance claim. This lawsuit ensued. In their complaint, the Parascos allege that Pacific is liable to them under four theories: (1) breach of contract; (2) breach of the covenant of utmost fair dealing; (3) bad faith under 42 Pa. Cons. Stat. Ann. § 8371 (Supp. 1994); and (4) violations of Pennsylvania's Unfair Trade Practices and Consumer Protection Law, 73 Pa. Cons. Stat. Ann. §§ 201-1--201-9.2 (1993) (the "CPA").
Pacific responded with an answer and counterclaim, in which it denies the Parascos' allegations and asserts that it is entitled to recover all payments it made under the policy, as well as the expenses it incurred investigating the loss. At the conclusion of the discovery period, Pacific submitted the instant motion, in which it argues that it is entitled to summary judgment not only on the entirety of the Parascos' complaint, but also as to its counterclaim. We turn now to address Pacific's motion.
We begin by summarizing the facts educed during the discovery period. Mr. Parasco is a real estate investor who earns his living by purchasing, improving, and reselling residential properties. In May of 1992, the Parascos purchased three acres of land in Stony Creek Mills, Pennsylvania, and began constructing a log cabin home (the "house") there later that year. To finance this endeavor, the Parascos borrowed a total of approximately $ 170,000 from two banks: the Great Valley Savings Bank ("Great Valley") and the National Bank of Boyertown ("Boyertown"). The Parascos also applied for a home equity loan from the Blue Ball National Bank ("Blue Ball"). As part of the loan application procedure, Great Valley required the Parascos to submit tax returns from the previous two years and a financial statement describing the fiscal condition of their business interests. Likewise, Boyertown and Blue Ball requested that the Parascos provide copies of their tax returns as part of the loan application.
The tax returns and other financial data that the Parascos submitted to the banks were fraudulent. For example, the tax return they filed with the federal government for 1991 reflected an adjusted gross income ("AGI") of $ 12,896. The tax return contained a Schedule "C," which showed that the Parascos had not generated any income from their import-export business. For 1992, the Parascos submitted a tax return indicating an AGI of $ 1,115. The attached Schedule "C" showed a loss of $ 16,360 incurred by the "Parasco Investment Properties" business. The tax returns offered by the Parascos in support of their loan applications told a different story, however. The 1991 tax return submitted to Great Valley indicated an AGI of $ 179,864; and the 1991 and 1992 tax returns provided to Boyertown and Blue Ball showed AGIs of $ 142,712 and $ 154,480, respectively. Mr. Parasco has conceded that the data he provided to the banks did not comport with his tax returns, that he forged the signature of his tax preparer on the 1991 return submitted to Boyertown, and that he changed the tax preparer's social security number on the fraudulent 1991 tax return.
The record indicates that before the Parascos moved into the house in March of 1993, Mr. Parasco had already initiated efforts to sell it. In February of 1993, Mr. Parasco contacted Barbara Wagner, a real estate agent, to discuss listing the house for sale. Mr. Parasco insisted that it would sell for $ 350,000. Ms. Wagner visited and inspected the house on February 8, and informed Mr. Parasco that his expectation as to the property's value was unrealistically high. Soon after this contact, and as an apparent result of their disagreement over the property's value, discussions between Ms. Wagner and Mr. Parasco concluded.
Mr. Parasco continued his efforts to sell the house through the spring of 1993. In April, Mr. Parasco placed an advertisement in a Reading, Pennsylvania newspaper, offering the property for sale for $ 350,000. The next month, Mr. Parasco contacted Diane Podlesny, another real estate agent, to inquire about selling the house. Ms. Podlesny states in her affidavit that she visited the property and informed Mr. Parasco "that $ 350,000 was a completely unrealistic listing price for the home," and that a figure of $ 180,000 to $ 200,000 was more reasonable. Ms. Podlesny also informed Mr. Parasco that due to the nature of the real estate market in the area, the property would likely remain on the market for at least one year before it would sell. Finally, Mr. Parasco notified Ms. Podlesny in June that he was ready to list the property for sale. Indeed, on June 23, the day of the fire, Mr. Parasco made a June 25 appointment with Ms. Podlesny, so that she could visit the house and more exactly determine an appropriate listing price. Mr. Parasco cancelled this appointment in the aftermath of the fire.
On June 24, Leon Huey, the Pennsylvania State Police Fire Marshal, investigated the circumstances surrounding the fire and concluded that it was incendiary in nature.
Pacific retained a private cause and origin investigator, who likewise concluded that the fire resulted from arson.
In light of this information, Pacific launched its own investigation regarding the claim. On July 1, the Parascos met with Mark Zimmerman, a Pacific insurance adjuster who asked the Parascos to execute a release allowing Pacific access to the financial information they submitted to the banks. The Parascos refused to sign the release, despite repeated requests.
Pacific then conducted an examination of the Parascos under oath. In connection with the examination, the Parascos submitted tax returns from 1990, 1991 and 1992 to Pacific, which reflected AGIs of $ 68,730, $ 12,896 and $ 1,115, respectively. Pacific then questioned Mr. Parasco concerning the materials he submitted to Blue Ball in support of his loan application. Mr. Parasco testified that he had obtained the loan file personally from Blue Ball. According to the Blue Ball executive who dealt with Mr. Parasco, the file contained the 1991 and 1992 tax returns and the loan application when it was given to Mr. Parasco. However, the file that Mr. Parasco turned over to Pacific did not contain the tax returns. Mr. Parasco further stated that he had removed the financial statement from the file before providing it to Pacific. The exchange proceeded as follows:
Q. What exactly did you take out of the file before you gave it to [your attorney]?
A. Scratch paper, things that weren't relevant to -- it was a very thin file. It wasn't like a whole bunch of things. It was this, the financial statement, and scratch paper. And I don't remember if there was anything else.
Q. What happened to the financial statement? Was that given to [your attorney]?
Mr. Parasco's depo., 8/27/93, p. 401. When Pacific's attorney requested production of the financial statement, Mr. Parasco's attorney conceded that he possessed it, but refused to produce it. Later, Mr. Parasco's attorney denied that he possessed the financial statement. Moreover, Mr. Parasco specifically denied removing the tax returns from the file. The examination was then terminated at Mr. Parasco's insistence.
By the time Mr. Parasco's examination resumed in November of 1993, Pacific had received copies of the loan files held by Great Valley and Boyertown, pursuant to releases executed by Mr. Parasco. Thus, Pacific had become aware of the fraudulent tax returns Mr. Parasco submitted in support of his loan applications. When Mr. Parasco was confronted with the conflicting figures contained on the tax returns he submitted with the federal government and the fraudulent returns he presented to the banks, he attempted to explain the discrepancy by stating that the tax returns submitted to the banks represented a mere "speculation of income," prepared for the purpose of obtaining financing from the banks. Mr. Parasco further testified that he did not know that the banks would rely on the information provided on the tax returns in processing his loan applications, and that he had no intention of deceiving the banks.
Q. Aside from the appraisal we have seen here for $ 225,000, the one you testified about and the insurance appraisal, did anyone else ever give you an opinion as to what the house would be worth if you put it on the market, what you would get for it?
A. No. No one can tell you how much the house is worth.
Q. I am talking about after it is done up to the day of the fire, did anybody else say, well, I think it is worth 400; I think it is worth 250; 350; whatever?
Q. Nobody ever put a number on it?
A. No. First of all, it is worth whatever I want to ask for it. No ...