First-Party Bad Faith under California’s “Genuine Dispute” Doctrine
First-Party Bad Faith under California’s “Genuine Dispute” Doctrine
By David A. Gauntlett*
Introduction
Policyholders are generally eager to include a bad faith count along with breach of contract whenever a dispute with an insurer rises to the level of litigation. This is understandable as a successful bad faith claim can open the door to much greater recovery, including some forms not otherwise obtainable for simple breach of contract.[1] The most viable for opportunity for recovery is typically limited to Brandt fees, which cover only the portion of fees incurred by counsel to establish the insurer’s obligations under the contract.[2]
In California, the process if further complicated by courts imposing different standards for first-party claims (i.e., claims in which the insured entity seeks benefits due to injury it suffered) than they do for third-party claims (i.e., claims in which the insured entity seeks benefits due to injury of another). Herein, we discuss the former, which is subject to the “genuine dispute” doctrine. A separate “reasonableness” test applies for the latter.[3]
Origin of the “Genuine Dispute” Doctrine
In Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566 (1973), the California Supreme Court first extended the concept of “bad faith” to first-party cases.
It is manifest that a common legal principle underlies all of the foregoing decisions; namely, that in every insurance contract there is an implied covenant of good faith and fair dealing. The duty to so act is immanent in the contract whether the company is attending to the claims of third persons against the insured or the claims of the insured itself. Accordingly, when the insurer unreasonably and in bad faith withholds payment of the claim of its insured, it is subject to liability in tort.[4]
The term “genuine dispute” did not emerge as a label until nearly a decade later in Safeco Ins. Co. v. Guyton, 692 F.2d 551 (9th Cir. (Cal.) 1982).[5] The modern and most cited articulation of the rule comes from Chateau Chamberay Homeowners Ass'n v. Associated Internat. Ins. Co., 90 Cal. App. 4th 335 (2001):
[A]n 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.[6]
Chateau Chamberay also clarified two key aspects of the “genuine dispute” doctrine. First, “[w]hile the reasonableness of an insurer's claims-handling conduct is ordinarily a question of fact, it becomes a question of law where the evidence is undisputed and only one reasonable inference can be drawn from the evidence.”[7] Second, the “genuine dispute” doctrine extends beyond purely legal issues.[8]
What Conduct Suffices?
In Pollock v. Fed. Ins. Co., No. 21-cv-09975-JCS, 2022 U.S. Dist. LEXIS 57686, *19–20 (N.D. Cal. Mar. 29, 2022), the policyholder alleged that the insurer “ignored evidence of significant costs of repairs and replacement, ignored the evidence generated by its own consultants, misrepresented the available remedies under the Policy, misrepresented testing results and the efficacy of proposed remedies, misrepresented policy benefits and Homeowners' rights under the Insurance Code and applicable regulations, and failed to conduct an adequate investigation of the damage.” The court acknowledged that this conduct, if proven, would be sufficiently egregious to constitute bad faith. Bad faith can take a number of other forms as well, including delayed payment of policy benefits.[9]
What Conduct Does Not?
As Chateau Chamberay stated, “[s]loppy or negligent claims handling does not rise to the level of bad faith.”[10] There, the court concluded that the insurer acted properly when delaying payment of benefits while it investigated whether the claim included losses for which the policy provided no coverage such as upgrade work, pre-existing damage, repair or materials costs in excess of those necessary to restore damaged property to its previous condition, and unreasonable professional fees and emergency repair costs.[11] In Doan v. Allstate Northbrook Indem. Co., No. 20-cv-01060-AJB-KSC, 2022 U.S. Dist. LEXIS 182444 (S.D. Cal. June 27, 2022), the court found a genuine dispute had been raised regarding coverage for injuries from an automobile accident when some injuries were found to be degenerative rather than acute and also where an independent medical expert found one to two to be a reasonable number of steroid injections, rather than nine.[12]
Indeed, insurers often insulate themselves from bad faith liability by relying on expert reports.[13] An insurer may also avoid bad faith liability for delaying payment of the disputed portion of a claim, if it pays the claim’s actual cash value reasonably promptly under the circumstances, where there was a genuine dispute as to the home’s true replacement value.[14]
Conclusion
Not every denial, indeed not even every wrongful denial, qualifies as insurer bad faith. Under the “genuine dispute” doctrine, insurers are given great leeway to make mistakes and still restrict the policyholder’s recovery to the compensation available for breach of contract. Caution needs to be exercised in making the economic potential of a coverage lawsuit depend on a successful recovery of Brandt fees. If the money at issue for damages apart from any claims of bad faith does not support the investment of coverage litigation, it may not make sense to pursue such a claim.
*David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.
[1] W. Am. Ins. Co. v. Freeman, 46 Cal. App. 4th 1476, 1491 (1995) (Affirming trial court’s conclusion that insurer's bad faith actions in placing its own economic interests above the interests of appellee insured justified award of punitive damages, compensatory damages, and litigation costs.)
[2] Cassim v. Allstate Ins. Co., 33 Cal. 4th 780, 806 (2004) (“[I]f an insurer fails to act fairly and in good faith . . . , such breach may result in tort liability for proximately caused damages. Those damages can include the insured's cost to hire an attorney to vindicate the insured's legal rights under the insurance policy. ‘When an insurer's tortious conduct reasonably compels the insured to retain an attorney to obtain the benefits due under a policy, it follows that the insurer should be liable in a tort action for that expense. . . . These fees must be distinguished from recovery of attorney's fees qua attorney's fees, such as those attributable to the bringing of the bad faith action itself.’”) (quoting Brandt v. Superior Court, 37 Cal. 3d 813, 815 (1985)).
[3] My Choice Software, LLC v. Travelers Cas. Ins. Co. of Am., No. SACV 19-680 JVS (KESx), 2021 U.S. Dist. LEXIS 59763, *20 (C.D. Cal. Mar. 17, 2021) (“The Court agrees with MyChoice and finds that the genuine dispute doctrine is inapplicable in third party cases such as this one because a third party insurer, such as Travelers, ‘must defend a suit which potentially seeks damages within the coverage of the policy.’”) (quoting Gray v. Zurich Ins. Co., 65 Cal. 2d 263, 275 (1966)); Teleflex Med. Inc. v. Nat’l Union Fire Ins. Co., 851 F.3d 976, 988, n.3 (9th Cir. (Cal.) 2017) (“[O]ur court and several California appellate courts have expressed skepticism about [the ‘genuine dispute’ doctrine’s] applicability to ‘third party claim’ cases like this one.”). Public Serv. Mut. Ins. Co. v. Liberty Surplus Ins. Corp., 205 F. Supp.3d 1161, 1175 (E.D. Cal. 2016) (The court noted a different test is required because “‘[t]here are material differences in the purposes of first party insurance policies (that obligate the insurer to pay damages claimed by the insured itself) and third party insurance policies (that obligate the insurer to defend, settle and pay damages claimed by a third party against the insured).’” (quoting Howard v. American Nat'l Fire Ins. Co.,187 Cal. App. 4th 498, 530 (2010)).
[4] Gruenberg, 9 Cal. 3d at 575.
[5] Guyton, 692 F.2d at 557 (“[S]ince the policy in dispute involved a genuine issue concerning legal liability, Safeco could not, as a matter of law, have been acting in bad faith by refusing to pay on the Policyholders' claims.”)
[6] Chateau Chamberay, 90 Cal. App. 4th at 347.
[7] Id. at 346.
[8] Id. at 348.
[9] Fraley v. Allstate Ins. Co., 81 Cal. App. 4th 1282, 1292 (2000) (“Thus, when benefits are due an insured, delayed payment based on inadequate or tardy investigations, oppressive conduct by claims adjusters seeking to reduce the amounts legitimately payable and numerous other tactics may breach the implied covenant because it frustrates the insurer’s primary right to receive the benefits of his contract—i.e., prompt compensation for losses.”)
[10] Chateau Chamberay, 90 Cal. App. 4th at 351.
[11] Id. at 349; see also Rappaport-Scott v. Interinsurance Exch. of the Auto. Club, 146 Cal. App. 4th 831, 839 (2007) (Difference between losses claimed by insured ($346,732) and actual losses determined by arbitrator ($63,000) was sufficient to invoke “genuine dispute” doctrine regarding amount payable on claim.)
[12] Doan, 2022 U.S. Dist. LEXIS 182444 at *11–12.
[13] Fraley, 81 Cal. App. 4th at 1293 (“The record reveals that Allstate handled the Fraleys' claim reasonably, by retaining experts and investigating, paying the undisputed actual cash value of the loss and proceeding to appraisal on the disputed portion of the claim, replacement cost.”); but see Pontillas v. Fid. Life Ass'n, No. 8:19-cv-02211-SB-KES, 2021 U.S. Dist. LEXIS 54645, *10–11 (C.D. Cal. Feb. 12, 2021) (denying summary judgment where insurer relied on a sheriff’s report, an autopsy, and a short interview with a coroner to conclude a surfer’s death was due to a heart condition and not an accident drowning).
[14] Fraley v. Allstate Ins. Co., 81 Cal. App. 4th 1282, 1293 (2000).