The "Genuine Dispute" Doctrine May Be A Defense To Bad Faith In Third Party Cases, But Not As To Factual Disputes Over Duty To Defend07.18.2007
Under California's "genuine dispute" doctrine, an insurer does not act in bad faith when it mistakenly withholds policy benefits, if the mistake is reasonable or is based on a legitimate dispute as to its liability. The doctrine's application to first party claims for benefits asserted by an insured is well established, but to what extent does the doctrine apply in third party cases?
The Court in Delgado v. Interinsurance Exchange of the Auto. Club of So. Cal., 2007 WL 1810226 (June 25, 2007), held the "genuine dispute" doctrine applies in third party cases but not to factual disputes as to the duty to defend.
The Delgado Court stated the genuine dispute doctrine "probably would apply" to a legal dispute as to the insurer's duty to defend. The Court reasoned that if the insurer had raised a legitimate, arguable question under the law as to its liability, which ultimately turned out to be wrong, or the insurer had denied a defense based on unsettled law that ultimately was resolved in favor of the insured, the insurer would be liable for breach of contract but not for bad faith. In such cases, the insurer had proper cause to deny a defense.
The same could not be said, however, for a factual dispute as to coverage because a potential for coverage establishes the duty to defend and that potential necessarily arises from the existence of the factual dispute. In Delgado, the insured was sued for kicking and striking the claimant. The claimant alleged the insured acted intentionally, and alternatively, negligently or in self-defense. The Court held a claim for bad faith was stated against the insurer for failing to defend the insured, because the unresolved factual dispute over whether the insured's actions were intentional or negligent created the potential for coverage, establishing the duty to defend.
As the insurer's indemnity obligation depends on actual and not potential coverage, the Court further stated the "genuine dispute" doctrine also applies in determining whether the insurer's denial of indemnity was in bad faith.