AN INSURANCE COMPANY SHOULD NOT BE PERMITTED TO AVOID BAD FAITH BY ARGUING THE “LEGITIMATE FACTUAL DISPUTE” DOCTRINE

by TIMOTHY D. McGONIGLE

      In California, an insurance company is under a duty to act fairly and in good faith in discharging its contractual responsibilities to its insured, and, as part of its obligation, defendant must act fairly and in good faith in handling claims submitted by its insured.   Delos v. Farmers Ins. Group, Inc. (1979) 93 Cal.App.3d 642, 650.   An insurer breaches the covenant of good faith and fair dealing when it fails to properly investigate the insured’s claim.   Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 817.   It is essential that an insurer fully inquire into all possible bases that might support the insured’s claim.

Under California law when an insurer "fails to deal fairly and in good faith with its insured by refusing, without proper cause, to compensate its insured for a loss covered by the policy, such conduct gives rise to a cause of action in tort for breach of an implied covenant of good faith and fair dealing."  Neal v. Farmers Insurance Exchange, 21 Cal.3d 910, 920, 148 Cal.Rptr. 389, 394, 582 P.2d 980, 985 (1978).

The question whether the insurer acted in good faith in rejecting a claim is one of fact for the jury whose finding must be affirmed if supported by substantial evidence.  Neal, supra, 21 Cal.3d at 922, 148 Cal.Rptr. at 395, 582 P.2d at 987.

Insurance companies attempt to avoid “bad faith” liability for breach of the covenant of good faith and fair dealing by arguing that there is a legitimate factual dispute over whether the claimed damages was covered by the policy.  The issue of a legitimate factual dispute is one of a number of factors that may be considered along with other factors in deciding whether an insurer acted unreasonably and in bad faith.

There is nothing “new” about the issue of the possible existence of a genuine dispute being considered in evaluating bad faith conduct of an insurer. Established summary judgment standards will apply and questions of fact are for juries to resolve.

Courts have recognized for some time that if a “genuine issue” exists as to the legal liability of an insurer on the insurance contract (e.g., the existence of coverage) a court may find that an insurer is not liable for bad faith as a matter of law.  See e.g., Opsal v. United Services Automobile Association (1991) , 1204-1206, 10 Cal.Rptr.2d 352; Chateau Chamberay Homeowners Associated International Insurance Company (2001) 90 Cal.App.4th 335, 347-348, 108 Cal.Rptr.2d 776; Fraley v. Allstate Insurance Company (200l) 81 Cal.App.4th 1282, 1293, 97 Cal.Rptr.2d 386.

In Chateau Chamberay Homeowners Assn. v. Associated Internat. Ins. Co., the court held that “an insurer denying or delaying the payment of policy benefits due to the existence of a genuine dispute with its insured as to the existence of coverage liability or the amount of the insured's coverage claim is not liable in bad faith even though it might be liable for breach of contract. [Citation.]” The key word here is “genuine.” As the Chateau Chamberay court recognized, the genuine dispute defense does not apply when the dispute arises because “the insurer failed to conduct a thorough investigation.”  In other words, a breach of the covenant of good faith and fair dealing can be found even where the insurer harbors actual doubts about the amount of benefits which should be paid on a covered claim if a reasonable investigation would have disclosed information making those doubts no longer tenable.

The finding of a “genuine dispute” sufficient to justify holding that an insurer is relieved of its duties of good faith and fair dealing on the facts of a particular case, or sufficient to remove consideration of factual disputes from a jury on the issue of bad faith, should be, as it has historically been, an unusual occurrence reserved only for extraordinary circumstances in which there are no disputed or disputable material facts and reasonable minds could not differ about the conclusion.

A careful reading of the “genuine dispute” cases indicate that the presence or absence of a genuine dispute is but one factor to be considered in evaluating the conduct of an insurer in its investigation, claim handling and its delay of or withholding of benefits.  All of these cases acknowledge the long-standing rules of insurance bad faith, including the primary rule that the key to a bad faith claim is whether or not the insurer’s denial of coverage was reasonable. Fraley v. Allstate, supra at 1292.  It is also important to note that these “genuine dispute” cases recognize that summary judgment is only appropriate in insurance bad faith cases, like any other case in which summary judgment is sought, where there are no disputed material facts and reasonable minds could only draw one conclusion.  See e.g., Chateau Chamberay v. Associated International, supra at 344-345. The cases also acknowledge that reasonableness is usually a question of fact.

Consistent with these observations, the Ninth Circuit observed in Amadeo v. Principal Mutual Live Insurance Company, 290 F.3d. 1152 (9th Cir. 2002) that the “genuine issue” rule allows summary judgment in bad faith claims only when “it is undisputed or indisputable that the bases for the insurer’s denial of benefits was reasonable...” 290 F.3d at 1162.

Consequently, the court in Jordan v. Allstate Ins. Co. (2004) 116 Cal.App.4th 1206, 11 Cal.Rptr.3d 169, analyzed Allstate’s argument that its construction of its policy to deny coverage was reasonable and the bad faith claim should be dismissed based on the genuine dispute doctrine.   The Court of Appeal noted that there were multiple ways to construe the policy. Id at 1073.  The court rejected the trial court’s granting of Allstate’s summary judgment, explaining that the carrier was obligated to fully investigate the policyholder’s claim, and could not ignore evidence that supported coverage. Id.  Because the record showed no evidence that the carrier had taken any steps to investigate the claim based on the coverage theory that supported the claim, the court held that the genuine-dispute doctrine did not apply.   Id. at 1074-1076.
 
A careful examination of the facts of the cases in which courts have found a “genuine dispute” to exist reveals that, by and large, the disputes were genuine even in the context of the duty of good faith and fair dealing imposed upon the insurer; that duty remains unchanged by the presence of, or finding of, a “genuine dispute.”  In other words, an insurer cannot reasonably manufacture a genuine dispute; it still must investigate all reasonably available evidence that could support a claim, it cannot focus unduly on facts that would justify denial of the claim, it cannot place its interests above that of the insured, and it cannot act unreasonably. See e.g., Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 574, 108 Ca. Rptr. 480.

Counsel for the insured must always conduct thorough discovery, including obtaining the claim file and conducting a thorough deposition of the carrier’s employees involved in the denial of the claim, to establish that the bases for the denial of the claim was not reasonable, especially if they are relying on a supposed “independent examination”.   Such a rigorous examination of their denial should establish that their denial of the claim was not reasonable, thereby entitling the insured to a trial by jury.
 
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