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INSURANCE NOTES

Yet Another Situation Where the Genuine Dispute Doctrine Does Not Bar A Bad Faith Suit

10.29.2008
California law recognizes that where there is a “genuine dispute” as to whether coverage exists or the amount of the insured’s claim, an insurer has a defense to bad faith liability. A recent California Court of Appeal decision emphasized that a “genuine dispute” is recognized only where the insurer has acted in good faith and on reasonable grounds.

In Brehm IV v. 21st Century Insurance Company, 166 Cal.App.4th 1225 (2008), the insured was involved in an auto accident and brought a claim under his own auto liability policy’s underinsured motorists coverage. The insured and insurer could not agree on the extent of the insured’s injuries. The dispute went to arbitration. In the arbitration proceedings, medical experts for the insurer and the insured differed significantly in their opinions of the damages. The insured ultimately received an arbitration award of $91,186 (reduced to the $90,000 policy limit). Before arbitration, the insurer had offered $5,000 plus up to $10,000 in expenses. The insurer paid the arbitration award shortly after it was issued. 

Then, the insured sued the insurer for bad faith. In defense, the insurer asserted there was a “genuine dispute” as to the amount of damages to which the insured was entitled. The trial court sustained the insurer’s demurrer and dismissed the insured’s suit on the grounds that the insurer had a contractual right to arbitrate the dispute and that the insurer had not breached an express provision of the insurance contract. The trial court ruled that there could be no bad faith liability for an insurer to advance its side of a “genuine dispute.”

The Court of Appeal disagreed, noting that breach of a specific contract provision was not a prerequisite to a bad faith claim because an insurer’s handling of the claim could cause harm to the insured. The Court cited examples from other decisions: (a) delayed payment of benefits owed under the insurance policy; (b) oppressive conduct by claims adjusters; (c) unreasonably withholding payment of the claim; and (d) failure to accept a reasonable settlement offer. Thus, although the insurer had a right to arbitrate the dispute, the insurer had a duty to reasonably attempt to resolve the dispute with the insured before arbitration.

The Court noted that an insurer had a duty to fairly investigate, evaluate and process the insured’s claim. A “genuine dispute” defense is recognized only when the insurer’s position is maintained in good faith and on reasonable grounds. A dispute is not “legitimate” unless it is founded on a basis that is reasonable under all the circumstances. Citing a prior decision, the Court added that “an expert's testimony will not automatically insulate an insurer from a bad faith claim based on a biased investigation.” 

However, the Court cited a case stating that the insured has the burden to prove that the insurer’s coverage position was not based upon an “honest mistake, bad judgment or negligence” but was instead the result of “a conscious and deliberate act.”

The insured alleged that the insurer’s expert’s opinion was a false report designed to provide the insurer with a basis to assert the “genuine dispute doctrine” as to his claim’s value. The Court expressed its skepticism as to this allegation, but nonetheless held that the allegation was entitled to be adjudicated by the trier of fact rather than be dismissed on the pleadings.
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