Introduction
The good news
is, insurers
have pushed so
hard on the
genuine dispute
doctrine as a
defense to bad
faith that it
may be the
courts, both
state and
federal, are
starting to push
back. The bad
news is, the
common law
develops slowly,
so insurance bad
faith litigation
remains a
challenging
area.
As for the
advice of
counsel defense,
it seems that
genuine dispute
has been so
powerful for
carriers that to
the extent
advice of
counsel is used,
it no longer
plays a leading
role. Even so,
practitioners
need to keep a
weather eye out
to avoid getting
surprised at
trial. It's
simple to do,
but you will
need to add the
prophylactic
measures
described below
to your bag of
tricks.
Defining the
Limits of
Genuine Dispute
As you probably
already know,
the genuine
dispute doctrine
really found its
feet as a
powerful defense
in 2001 Guebara
v. Allstate Ins.
Co. (9th Cir.
2001) 237 F.3d
987 (no bad
faith where
there is genuine
dispute over
carrier's legal
obligation) and
Chateau
Chamberay v.
Associated
Intn'l Ins. Co.
(2001) 90
Cal.App.4th 335
(an insurer
cannot be liable
for bad faith if
there is an
objectively
reasonable
dispute about
coverage).
Simply put,
genuine dispute
gives the trial
court broad
powers to
dismiss bad
faith and
punitive damages
on summary
adjudication.
At the time
Chateau
Chamberay was
published, many
defense minds
crowed that it
spelled the end
of bad faith. Of
course, it
hasn't, but it
has encouraged
carriers to push
the envelope.
Two recent Court
of Appeal
decisions,
Delgado and
Jordan,
highlight the
trend towards
refining genuine
dispute rather
than expanding
its reach.
Delgado v.
Interinsurance
Exch. of the
Auto. Club of
So. Cal. (June
25, 2007) 152
Cal.App.4th 671,
declined to
apply the
defense to a
factual dispute
in a third party
failure to
defend case.
|
As
we
have
shown,
a
potential
for
coverage
establishes
the
duty
to
defend.
Such
a
potential
necessarily
arises
from
the
existence
of a
factual
dispute
as
to
coverage
under
the
policy.
Thus,
an
insurer
faced
with
a
pleading
such
as
the
one
filed
against
the
insured
Reid
in
this
case,
would
have
no
reasonable
basis
for
concluding
that
a
defense
obligation
was
not
owed,
at
least
until
it
could
conclusively
negate
the
possibility
of
coverage
raised
by
such
pleading.
It
was
the
very
existence
of
the
unresolved
factual
dispute,
raised
by
that
pleading,
over
whether
Reid's
actions
were
intentional
or
negligent
that
created
the
potential
for
coverage
in
the
first
place,
thereby
establishing
the
duty
to
defend.
|
Id. at 692-693.
In Jordan v.
Allstate Ins.
Co. (Apr. 20,
2007) 148
Cal.App.4th
1062, summary
judgment was
reversed where
there was
evidence of the
carrier's
failure to
conduct a full,
fair
investigation in
the context of a
homeowner claim,
even though the
carrier's
interpretation
of policy terms
was reasonable.
|
As
we
made
clear
in
[Chateau
Chamberay],
where
an
insurer
denies
coverage
but
a
reasonable
investigation
would
have
disclosed
facts
showing
the
claim
was
covered,
the
insurer's
failure
to
investigate
breaches
its
implied
covenant.
The
insurer
cannot
claim
a
“genuine
dispute”
regarding
coverage
in
such
cases
because,
by
failing
to
investigate,
it
has
deprived
itself
of
the
ability
to
make
a
fair
evaluation
of
the
claim.
Thus,
although
Allstate's
interpretation
of a
policy
exclusion
was
reasonable,
it
also
had
a
duty
to
investigate
Jordan's
coverage
claim
that
was
based
on
the
“additional
coverage”
provisions
relating
to
an
“entire
collapse,”
which
we
held,
in
[our
prior
opinion
in
this
case]
was
also
reasonable
and
consistent
with
Jordan's
objectively
reasonable
expectations. |
Id. at 1074.
Other cases you
should consider
in framing your
discovery and
summary
judgment/adjudication
oppositions are:
United Investors
Life Ins. Co. v.
Grant (E.D.CA
Feb. 15, 2007)
2007 WL 521804.
Bench memorandum
denying in part
and granting in
part summary
adjudication.
Life insurance
policy claim
where the
decedent was
murdered and the
beneficiary
spouse was not
eliminated as a
suspect.
(California
Probate Code §
252 prohibits a
beneficiary
involved in a
murder from
collecting on a
policy insuring
the life of the
victim.) After
fourteen months,
carrier filed
interpleader for
face amount of
the policy
($518,616.44).
Surviving spouse
cross-complained
for bad faith
and other
claims. Held: In
California,
unreasonable
delay in paying
a covered claim
may support a
bad faith claim.
Carrier could
not rely on
genuine dispute
doctrine to
avoid the
general
proposition that
delay in paying
an admittedly
payable claim
may be
actionable.
Claims for
intentional and
negligent
infliction of
emotional
distress,
coverage by
estoppel and
punitive damages
dismissed.
NOT CITABLE BY
WATCH FOR
DEVELOPMENTS:
Wilson v. 21st
Century Ins. Co.
(Jan. 30, 2006)
136 Cal.App.4th
97, rev. granted
April 26, 2006.
Underinsured
motorist claim
with $100,000
policy limit.
Auto v. auto
accident, other
driver carried
$15,000 limits.
Plaintiff
claimed
orthopedic
injuries valued
at $500,000 to
$1.5 million.
21st Century
adjuster
evaluated as
soft tissue with
pre-existing
degenerative
disc disease and
stated plaintiff
was fully
compensated at
$20,000 ($15,000
from adverse
driver, $5,000
in medpay).
After two year
delay, plaintiff
was evaluated by
21st Century
neurosurgeon who
examined
plaintiff and
reviewed medical
records,
concluding
surgical
intervention was
indicated. Less
than one month
after the
report, 21st
Century paid the
remaining amount
of UIM coverage
available,
$85,000.
Plaintiff filed
suit for bad
faith delay.
Trial court
granted summary
judgment. Court
of Appeal
reversed. Held:
Genuine dispute
doctrine did not
provide a
defense because
there were
triable issues
as to whether
21st Century
fulfilled its
duty to conduct
a thorough
investigation of
the claim. "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."
Opinion at 520.
Note: This is a
useful case for
anyone handling
a UM or UIM
claim. The
discussion of
Colossus is
especially
valuable.
However, it is
not citable
authority.
Bernstein v.
Travelers Ins.
Co. (N.D.Cal.
Aug. 28, 2006)
447 F.Supp.2d
1100.
Plaintiff's
discovery motion
seeking to
obtain reserve
information.
Underlying case
seeks bad faith
for carrier
allegedly
delaying payment
and making a
lowball offer in
hopes of forcing
insured to
settle a
property claim
for less than
fair value.
Defense argued
information is
irrelevant.
Court cited
Lipton v.
Superior Court
(1996) 48
Cal.App.4th 1599
(which
authorized such
discovery), as
helpful but not
controlling,
though noting
that federal
Rule 26
discovery is
narrower than
California's
Discovery Act
and because of
recent genuine
dispute case
law.
Held: Motion
granted with
protective
order.
|
Under
California
law,
there
are
limits
to
the
applicability
of
the
genuine
dispute
doctrine
--
and
courts
should
take
care
not
to
extend
the
use
of
that
doctrine
so
far
that
it
obliterates
across
the
board
the
fundamental
precept
that
the
requirement
of
"good
faith
and
fair
dealing"
imposes
both
a
subjective
and
an
objective
duty.
In
other
words,
despite
(or
maybe
even
especially
in
view
of)
the
creep
of
the
genuine
dispute
doctrine,
California
court
should
not
forget
that
"an
insurer's
bad
faith
is
ordinarily
a
question
of
fact
to
be
determined
by
the
jury
by
considering
the
evidence
of
motive,
intent
and
state
of
mind."
Chateau
Chamberay,
90
Cal.App.4th
at
350.
|
Bernstein, 447
F.Supp.2d at
1114 (emphasis
in original).
Century Surety
Co. v. Polisso
(May 22, 2006)
139 Cal.App.4th
922. Bad faith
and punitive
damage verdict
for failure to
defend and
indemnify a
third party
claim. Defendant
carrier
contended awards
must be reversed
because of
genuine disputes
as to its legal
liability under
CGL policy and
floater. Held:
Verdict
affirmed. The
carrier's
conduct is
judged according
to its conduct
during the
claim, not in
hindsight. The
carrier knew
that it had a
duty to defend,
but engaged in
unfair conduct
and pressure
tactics to try
to escape paying
for a full
defense. No
legitimate
dispute
regarding
coverage for
defense or
indemnity. Note:
This is a good
case to
illustrate how
far a carrier
will go to
wriggle out of
its obligations.
The underlying
file must be
humongous! Also,
in upholding the
$2,015,000
punitive award,
the Court of
Appeal observed
that at "only
3.2 percent" of
the carrier's
net worth,
anything less
"would not
amount to much
more than a slap
on the wrist."
Finally, the
jury found the
defendant had
not reasonably
relied on the
advice of
counsel. The
defendant did
not challenge
this finding on
appeal.
Dealing with
the Advice of
Counsel Defense.
The advice of
counsel defense
seems to have
lost its luster
since the
blossoming of
genuine dispute.
Even so, it can
directly impact
your ability to
claim bad faith
and punitive
damage, so it
cannot be
disregarded.
Since advice of
counsel need not
be pled as an
affirmative
defense (State
Farm Mut. Auto.
Ins. Co. v.
Superior Court
(1991) 228
Cal.App.3d 721,
725-726), it is
up to you to
determine in
discovery
whether or not
it will be a
factor in your
case.
I routinely
propound a
special
interrogatory
asking if the
defendant is
relying on
advice of
counsel ("Are
you relying on
advice of
counsel as a
defense in this
matter?) and
then add a
request for
admission for
good measure
("Admit you are
relying on
defense of
counsel as a
defense").
Nine times out
of ten the
response is that
the defense will
not be raised.
However, if you
do not propound
the discovery,
it allows the
defendant the
option of
springing it on
you at trial.
The elements of
the advice of
counsel defense
are: (1) That
the carrier
acted in good
faith reliance
upon the advice
of counsel, (2)
the carrier was
not so
knowledgeable as
to the legal
standard
involved that it
knew the advice
of counsel was
erroneous, (3)
it made a full
disclosure of
all relevant
facts to counsel
and (4) the
carrier was
willing to
reconsider and
act accordingly
when it
determined the
lawyer's advice
was incorrect.
See, Melorich
Builders, Inc.
v. Superior
Court (1984) 160
Cal.App.3d 931,
936-937.
What's great
about the
defense is that,
in raising it
during a case,
the carrier
waives the
attorney client
privilege as to
all relevant
communications.
This is a big
reason why
defendants are
leery about
using advice of
counsel.
If you find
yourself facing
advice of
counsel as a
defense in your
case, check out
the Rutter
Group's
Cal.Prac.Guide
Ins.Lit. Ch.
12D-F (Insurer's
Reliance On
Advice Of
Counsel) to
educate yourself
on the scope of
the defense and
discovery tips
you can utilize.
Then, ask
yourself how the
attorney advice
will play into
genuine dispute.
(Also, see 16
Am.Jur. Proof of
Facts 3d 419
(Insurance Bad
Faith Actions --
"Advice of
Counsel"
Defense).)
LEARNING
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