Genuine Dispute Summary Judgment Reversed for Abuse of Discretion and Trial of Fact Questions About Expert Opinions

Christopher Kendrick and Valerie A. Moore | Haight Brown & Bonesteel

In Fadeeff v. State Farm General Ins. Co. (No. A155691, filed 5/22/20 ord. pub. 6/8/20), a California appeals court held that triable issues of fact and the trial court’s failure to address a request for a continuance precluded summary judgment for an insurer under the genuine dispute doctrine.

In Fadeeff, the policyholders made a claim to State Farm for smoke damage to their home from the 2015 Valley Fire in Hidden Valley Lake, California. With State Farm’s approval, the insureds retained the restoration company, ServPro, to assist with smoke and soot mitigation. State Farm documented smoke and soot on the interior walls, ceilings and carpeting, and on all exterior elevations, including on the deck and handrail. State Farm made a series of payments on the claim totaling about $50,000.

The insureds then hired a public adjuster and submitted supplemental claims for further dwelling repairs and additional contents replacement, totaling approximately $75,000. State Farm responded by using its own independent adjuster to investigate, who was neither licensed as an adjuster, nor as a contractor. State Farm also retained forensic consultants for the structure and the HVAC system, but neither the independent adjuster nor the consultants were aware that State Farm had an internal operation guide for the use of third-party experts in handling first party claims, which guidelines were therefore not followed. In addition, the consultants made allegedly superficial inspections, with one attributing smoke and soot damage to other sources of combustion, including the insureds’ exterior propane barbecue, an internal wood fireplace and wood stove and candles that had been burned in the living room. None of the consultants asked the insureds when they had last used any of the sources of combustion.

State Farm denied the supplemental claim and in the subsequent bad faith lawsuit, State Farm, relying on its use of experts, moved for summary judgment on the ground that the “genuine dispute” doctrine defeats the bad faith claim where an insurer reasonably relies upon expert opinions in reaching a claim decision. The insureds’ opposition was based on declarations from their own adjuster and expert, who opined that the work performed to date had not completely removed soot throughout the structure, or the HVAC system. The declaration from the insureds’ expert also refuted the opinions of State Farm’s expert. Plus, the insureds made a request for a continuance under Code of Civil Procedure section 437c(h), which authorizes a court to order a continuance for additional discovery, on affidavits of necessity.

At the hearing on the summary judgment motion, the trial court did not address the request for continuance. The court sustained State Farm’s objections to portions of the insureds’ declarations and reports, which gutted the insureds’ evidence contradicting State Farm’s expert, and granted State Farm’s motion. On appeal, however, the appeals court found both factual questions and an abuse of discretion by the trial court, mandating reversal.

Regarding the former, the Fadeeff court said that the use of experts does not automatically insulate an insurer from bad faith liability under the genuine dispute doctrine. (Citing Guebara v. Allstate Ins. Co. (9th Cir. 2001) 237 F.3d 987, 994.) In particular, the Fadeeff court said that where the dispute is purely factual, such as differing opinions of experts, whether there was a genuine dispute can only be decided on a case-by-case basis. (Citing Chateau Chamberay Homeowners Assn. v. Associated International Ins. Co. (2001) 90 Cal.App.4th 335, 348.) The Fadeeff court quoted Chateau Chamberay’s list of circumstances where a biased investigation claim should go to jury: (1) the insurer was guilty of misrepresenting the nature of the investigatory proceedings; (2) the insurer’s employee’s lied during the depositions or to the insured; (3) the insurer dishonestly selected its experts; (4) the insurer’s experts were unreasonable; and (5) the insurer failed to conduct a thorough investigation. (Quoting Chateau Chamberay, supra, at 348-349.)

The Fadeeff court pointed out that the insureds had presented evidence that part of their claim had been denied by State Farm in violation of the California fair claim handling regulations, based on ServPro’s work power washing the outside of the structure, which had caused the paint to peel. State Farm had denied that part of the claim on the ground that it, as well as damage to carpets and wall coverings, was not smoke or fire damage, and excluded as wear, tear or deterioration. But the insureds argued that the damage to the exterior caused by power washing was required to be covered under California Code of Regulations, title 10, section 2695.9(a)(1), as “consequential physical damage incurred in making the repair or replacement not otherwise excluded by the policy [which should] be included in the loss.” The court also noted the problem of the internal operation guide, and the State Farm independent adjuster’s failure to follow it. That and several other inconsistencies lead the Fadeeff court to conclude that there were triable issues regarding whether State Farm could have reasonably relied on its experts in denying the supplemental claims.

The Fadeeff court also reversed the summary adjudication on punitive damages, finding that State Farm failed to carry its burden to show that the Fadeeffs could not prove that State Farm acted with an absence of malice, oppression or fraud. (Civ. Code, § 3294, subd. (a); § 437c, subd. (f)(1); Basich v. Allstate Ins. Co. (2001) 87 Cal.App.4th 1112, 1118.) The Fadeeff court found that “The fact that an individual plaintiff may not believe that the people at State Farm ’wanted to harm you or hurt you intentionally’ does not conclusively answer the question whether State Farm intentionally misrepresented or concealed a material fact, or acted with knowing disregard of the rights of others.” (Citing CACI No. 3946—Punitive Damages.)

More fundamentally, the Fadeeff court found that reversal was required in any case, because of the trial court’s failure to address the request for a continuance, either at the hearing or in its ruling. The court stated that whether or not to grant a continuance under section 437c(f) is a matter within the court’s discretion, and is reviewed for abuse of discretion. But the Fadeeff court stated that reversal was mandated because a trial court’s failure to exercise discretion is itself an abuse of discretion. (Citing Kim v. Euromotors West/The Auto Galley (2007) 149 Cal.App.4th 170, 176.)

Court Affirms Summary Adjudication of Bad Faith Claim Where Expert Opinions Raised a Genuine Dispute

Christopher Kendrick and Valerie A. Moore | Haight Brown & Bonesteel

In 501 East 51st Street etc. v. Kookmin Best Ins. Co., Ltd. (No. B293605, filed 4/2/20, ordered pub. 4/16/20), a California appeals court affirmed summary adjudication and dismissal of a bad faith claim based on the genuine dispute doctrine.

501 East 51st Street Long-Beach-10, LLC (501) was the owner of a 10-unit apartment complex, insured by Kookmin Best. In 2017, an underground water main alongside the building burst which, according to 501, caused the building to move and crack. 501 made a claim and supplied a geotechnical report finding cracks in the foundation walls, cracks in the stucco and significant floor deformation and tilting near the water leak. The engineer’s opinion concluded that that “existing building distress was substantially contributed to by the water main break. The water introduced to the soil medium appears to have triggered differential foundation movement causing the stress features to develop.”

Kookmin retained its own engineers to investigate, who returned an opinion that the leak had exacerbated long-term pre-existing settlement which would continue. Under the policy, damage to the building caused by earth movement and settlement were excluded, but water damage resulting from an “accidental discharge” of water was covered. Kookmin then obtained an opinion from coverage counsel, who opined that only damage allocable to the water leak would be covered.

Kookmin sought further investigation and testing, which uncovered evidence of prior repairs. And a geotechnical engineer gave Kookmin an opinion that the pipe leak did not contribute to the building tilting or cracks. In addition, a pre-purchase inspection report from five years earlier contained references to stucco, slab and drywall cracks. Based on the additional reports, Kookmin’s coverage counsel gave an opinion that the efficient proximate cause of the loss was long-term soil movement, excluded from coverage. Kookmin then denied coverage.

In the following bad faith lawsuit, Kookmin moved for summary adjudication of plaintiff’s claim for breach of the covenant of good faith and fair dealing arguing that the “genuine dispute doctrine” provided a complete defense to a finding of bad faith.

In opposing, 501 pointed out that Kookmin’s experts had originally agreed that some damage was caused by the leak, from which it could be inferred that Kookmin sought further opinions in a bad faith effort to deny the claim. Also, claim file notes indicated an initial decision to pay for certain of the damage. And 501 argued that a follow-up report from Kookmin’s original experts had been changed in its phrasing to emphasize preexisting damage. Finally, 501 argued that the summary adjudication motion should be denied based on section 437c(h) of the summary judgment statute, which authorizes denial or continuances of summary judgment motions if it appears facts may exist to oppose the motion but cannot be presented. (Code Civ. Proc., § 437c(h).) 501 argued that Kookmin company witnesses had been instructed not to answer 53 questions in deposition, which answers would have led to admissible evidence to oppose the motion.

The trial court granted summary adjudication and the appeals court affirmed. The appeals court first recited the rule that “If a loss was caused by more than one occurrence, including covered and not-covered events, then the insurer is liable only if the ‘efficient proximate cause’ or the ‘predominate’ cause was a covered risk.” (Citing City of Carlsbad v. Insurance Co. of State of Pennsylvania (2009) 180 Cal.App.4th 176, 183.) The 501 court then explained the genuine dispute doctrine, stating:

“’Where there is a genuine issue as to the insurer’s liability under the policy for the claim asserted by the insured, there can be no bad faith liability imposed on the insurer for advancing its side of that dispute.’… [¶] ‘The ‘genuine dispute’ doctrine may be applied where the insurer denies a claim based on the opinions of experts.’… Reliance on an expert… ‘will not automatically insulate an insurer from a bad faith claim based on a biased investigation.’… Although an insurer may rely on experts, summary judgment on a bad faith claim must be denied where the evidence shows ‘the insurer dishonestly selected its experts[,] the insurer’s experts were unreasonable[,] [or] the insurer failed to conduct a thorough investigation.’” (Quoting McCoy v. Progressive West Ins. Co. (2009) 171 Cal.App.4th 785, 793.)

The 501 court rejected the argument that evidence of uncertainty as to cause and origin or “unknowns” in the course of the claim investigation raised an inference of bad faith, stating:

“We agree with the trial court’s assessment that none of plaintiff’s evidence raised a triable issue that this was not a genuine coverage dispute. There is no dispute that defendants based their claim denial on the final expert report, and there is no evidence that report was contrived or false. As the trial court aptly stated, ‘Initial opinions are often superseded by further investigation.’”

The 501 court also rejected the section 437c(h) argument because there was no explanation how the supposedly missing evidence would have changed the result: “Counsel’s supporting declaration was very general, and did not explain why the answer to any of the questions at the PMK deposition was essential to opposing the summary adjudication motion. The only testimony that plaintiff complains it was unable to obtain was an opinion about whether denial of the claim was ‘appropriate,’ and we see no reason to conclude the PMK’s opinion, whether yes or no, would be a material fact, or that it was essential to oppose the motion.”

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The Genuine Dispute Defense and Bad Faith

Kevin Pollack | Property Insurance Coverage Law Blog | February 1, 2017

Insurers often seek to avoid liability for bad faith by asserting the “Genuine Dispute Doctrine.” Under the genuine dispute rule, an insurer’s coverage or claim decision may not be in bad faith when it mistakenly withholds policy benefits, if the mistake is reasonable and is based on a legitimate dispute as to the insurer’s liability.1

However, the genuine dispute doctrine is inapplicable when the coverage decision is reached as a result of a biased or inadequate investigation.2 Under the genuine dispute doctrine, “[a] genuine dispute exists only where the insurer’s position is maintained in good faith and on reasonable grounds.”3

Further, the reasonableness of the insurer’s actions and decision to deny benefits is evaluated “as of the time they were made rather than with the benefit of hindsight.”4Therefore, an insurer seeking to justify its conduct on the basis of a genuine dispute must establish that it reasonably relied on the disputed issue at the time it made its decision to deny coverage, and that it informed its insured of the basis of the denial.5

The above legal principles provide important points:

  • Often insurers’ litigation attorneys will raise defenses and arguments not asserted during the claim. These new arguments cannot be used to support a genuine dispute defense.
  • When an insurer fails to investigate a claim, it cannot, by definition, reasonably and in good faith deny coverage. This distinction is also important. When insurers’ claims decisions are based on defective investigations, the coverage decisions reached are often flawed. When the insurer later seeks to avoid bad faith liability by asserting the genuine dispute rule, policyholder advocates should make sure trial judges are aware that the defense is not available if the bad faith claim is based upon the factual predicate of an insufficient investigation.

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1 Wilson v. 21st Century Ins. Co., 42 Cal. 4th 713, 723-24 & n.7 (2007).
2 See Brehm v. 21st Century Ins. Co., 166 Cal.App.4th 1225 (2008); see also Egan v. Mutual of Omaha Ins. Co., 24 Cal. 3d 809, 819 (1979) (“an insurer cannot reasonably and in good faith deny payments to its insured without thoroughly investigating the foundation for its denial”).
3 Wilson, 42 Cal. 4th at 725.
4 Century Surety Co. v. Polisso, 139 Cal. App. 4th 922, 949 (2006).
5 Id. at 953 (holding that because insurer did not cite particular issue “as a ground for denial of coverage when the claim was tendered, it was never the subject of a genuine dispute between the parties”).