Insurance
Jun. 21, 2002
Bad Faith Liability Can Exist Absent Contractual Duty
Focus Column - By Kirk A. Pasich - Over the last few years, California and federal courts frequently have addressed whether an insured can prevail on a bad-faith claim against its insurance carrier when there is no coverage or when the carrier has paid the amount due under the policy.
By Kirk A. Pasich
Over the last few years, California and federal courts frequently have addressed whether an insured can prevail on a bad-faith claim against its insurance carrier when there is no coverage or when the carrier has paid the amount due under the policy.
Carriers often argue that they cannot be liable for bad faith in such situations. They point to Waller v. Truck Insurance Exchange Inc., 11 Cal.4th 1 (1995). There, the California Supreme Court rejected a claim for coverage under a general liability policy. The insureds argued that they faced claims of emotional and physical distress covered by the policy.
The court disagreed, holding that these injuries derived from the claimant's allegations of intentional and business torts, which were not covered. The court stated that "if there is no potential for coverage, and, hence, no duty to defend under the terms of the policy, there can be no action for breach of the implied covenant of good faith and fair dealing because the covenant is based on the contractual relationship between the insured and the insurer."
Insurers also point to more recent decisions that have recognized various circumstances in which a carrier cannot be liable for bad faith if there is a "genuine dispute" over the law or the facts.
In Guebara v. Allstate Insurance Co., 237 F.3d 987 (9th Cir. 2001), the insured sued its fire insurer, claiming breach of contract and bad faith. The court noted that "[u]nder California law, a bad faith claim can be dismissed on summary judgment if the defendant can show that there was a genuine dispute as to coverage." The court recognized that the "genuine dispute" doctrine could apply to both genuine disputes about coverage and genuine disputes about facts.
Two recent cases entitled Adams v. Allstate Insurance Co., 187 F. Supp.2d 1207 (C.D. Cal. 2002), and 187 F. Supp.2d 1219 (C.D. Cal. 2002), also address the doctrine. In both Adams cases, the court noted that, while the "genuine dispute" doctrine is well-settled, the California Supreme Court has "yet to define the limits of this doctrine."
These cases have led some carriers to argue that, no matter what their conduct, they cannot be liable for bad faith as long as there is a "genuine dispute." However, courts should reject such an argument. These decisions do not preclude a bad-faith claim in the absence of coverage.
For example, the conduct challenged in Waller related only to the interpretation of the policy as to which there was a genuine dispute. As the California Supreme Court recognized in Waller, there was "no indication that either [the insurer] unnecessarily delayed performing its investigative duties under the policy or misled [the insureds] into believing it would provide either a defense or coverage to the [underlying] complaint."
And the Adams cases involved unusual circumstances. In these cases, the insured submitted no expert reports to the insurer. The insurer relied on an independent expert's reports that the court found were based on correct scientific data and proper reasoning; the experts did not ignore relevant data or use improper data. Under those circumstances, the court found no basis for a bad-faith claim.
Indeed, the 9th Circuit specifically noted in Guebara that there are many situations where a bad-faith claim can exist without coverage: "Our decision does not eliminate bad faith claims based on an insurer's allegedly biased investigation. ... Although this list is not exhaustive, we can think of several circumstances where biased investigation claims could go to a jury: (1) the insurer is guilty of misrepresenting the nature of the investigatory proceeding; (2) the insurer's employees lie 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."
California courts also have recognized that a carrier can be liable for bad faith even if it has no present duty to pay under its policy. In Schwartz v. State Farm Fire & Casualty Co., 88 Cal.App.4th 1329 (2001), the carrier had paid the available limits under its policies to one claimant, even though it allegedly knew that the combined claims of that claimant and another claimant would exceed the available limits.
The court addressed the circumstances under when an excess insurer - with no immediate duty to indemnify - could be held liable for bad faith.
The court held as follows: "We reject the notion that, simply because a condition precedent to a particular obligation - the obligation to pay - has not yet occurred, the insurer is relieved from the implied covenants that inhere in every contract. State Farm ... had an insurance contract for which the [insureds] paid premiums, and State Farm necessarily had contractual obligations to them, albeit contingent on future events, from the moment the parties entered into the contract. The implied duty not to impair the insured's right to benefits 'arises from [the] contractual relationship existing between the parties,' and indeed is 'unconditional and independent of the performance of [the insured's] contractual obligations.'"
The Schwartz court expressly rejected the argument that there can be no liability for bad faith if there is no breach of an express contractual provision: "That argument is specious. It is well established that a breach of the implied covenant of good faith is a breach of the contract ... and that breach of a specific provision of the contract is not a necessary prerequisite to a claim for breach of the implied covenant of good faith and fair dealing. ... [E]ven an insurer that pays the full limits of its policy may be liable for breach of the implied covenant, if improper claims handling causes detriment to the insured."
Thus, it is clear that, even if a carrier does not owe a duty to indemnify under a policy, it still may be liable for bad faith. Likewise, even if a carrier does not dispute its duty to indemnify and ultimately makes all payments due under a policy, it, too, may face bad-faith liability.
As one Court of Appeal has explained, "There may be cases in which the insurer's delay in paying the claim or other misconduct causes special harm to the insured even though the claim is ultimately paid or settled. Such payment fulfills the insurer's contractual obligations. However, under appropriate circumstances, tort liability may still be imposed for the insurer's misconduct apart from performance of its contract obligation." Dalrymple v. United States Auto. Ass'n, 40 Cal.App.4th 497 (1995).
For example, in Larraburu Brothers Inc. v. Royal Indemnity Co., 604 F.2d 1208 (9th Cir. 1979), the insured was sued when one of its trucks struck and injured a child. Before trial, the insured apprised its carrier, Royal, of the possibility of a judgment in excess of policy limits and requested that it settle. It also advised Royal that its business was in a precarious financial situation and that any news of a judgment against it in excess of policy limits could run a risk to its credit.
Despite this information, Royal refused to tender its limits. Thereafter, a judgment was entered against the insured. Royal then rejected the insured's request that it announce publicly that it would accept responsibility for the amount of the judgment. As a result, the insured's creditors began to refuse additional credit and called in obligations simultaneously, causing the insured to go into bankruptcy.
Royal argued that any breach of its duty of good faith and fair dealing had been cured when it paid the judgment, including the amount in excess of its coverage.
The 9th Circuit disagreed: "That a plaintiff must await final disposition of the original action to determine whether he has a colorable claim against the insurer does not alter the fact that the conduct alleged to be unreasonable occurred at an earlier stage of the original lawsuit, and that the unreasonable conduct can be a proximate cause of injury before the final disposition as well as after ... [A]ssuming [the insured's] version of the facts to be true, [the carrier's] refusal to guarantee to creditors its payment of the excess of the ultimate judgment, while of course reserving the right to challenge the verdict, was tortious conduct if the failure to guarantee was unreasonable in light of the earlier management of the settlement negotiations."
Thus, Larraburu clearly holds that an insurer must consider the potential impact of its settlement conduct on its insured's business. See also Bodenhamer v. Superior Court, 192 Cal.App.3d 1472 (1987) (carrier that ultimately paid still faced liability for bad faith when it allegedly "misrepresented its own assessment of the validity of customer claims, delayed settlement of those claims in bad faith, and caused injury to the good will of [the insured's] business").
Therefore, even if a carrier has a reasonable ground for denying coverage under the policy, or has performed its duty to pay under its policy, it still may be liable for bad faith. In such a situation, a court must examine all of the circumstances and evidence to determine whether the carrier did, in fact, act in bad faith.
Kirk Pasich is a litigation partner in the Century City (Los Angeles) office of Howrey Simon Arnold & White. He represents insureds in complex coverage matters and is the author of "Casualty and Liability Insurance" (Matthew Bender 2000).
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