The ever-expanding genuine-dispute doctrine, and how to deal with it

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The ever-expanding genuine-dispute doctrine, and how to deal with it

Advocate. August 2007 | Download .pdf
By Jeffrey I. Ehrlich

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California Supreme Court, San Francisco, Earl Warren Building
Ehrlich Law Firm wins insurance bad-faith victory in California Supreme Court
Nov./Dec. 2007 – Insurance companies in California can no longer prevail in bad-faith lawsuits brought by their policyholders simply by showing that there was a “dispute” about whether the insurer should pay the claim. In Wilson v. 21st Century Ins. Co. (2007) 42 Cal.4th 713, the Supreme Court reined in the so-called “genuine dispute rule” that had become the insurance industries’ most potent defense in bad-faith cases, holding that the rule only applied at the summary-judgment stage, and then only in cases where a jury would be unable to make a finding that the insurer had acted unreasonably. The Wilson ruling makes it much harder for insurers to obtain summary judgment in bad-faith lawsuit. Download Wilson v. 21st Century Insurance Decision (.pdf)

The legal equivalent of kudzu

The genuine-dispute doctrine has become the legal equivalent of kudzu – an invasive species known for its explosive growth. “[T]he genuine dispute doctrine ‘holds that an insurer does not act in bad faith when it mistakenly withholds policy benefits, if the mistake is reasonable or is based on a legitimate dispute as to the insurer’s liability.” (Delgado v. Interinsurance Exch. of the Automobile Club of So. California (2007) __ Cal.App.4th __, __, __ Cal.Rptr.3rd __, [2007 WL 1810226], citing Century Surety Co. v. Polisso (2006) 139 Cal.App.4th 922, 949 [43 Cal.Rptr.3rd 468].)

This doctrine has become the first line of defense relied on by insurance companies who have been sued for insurance bad-faith in California. As originally adopted it was a tool that allowed trial courts to grant summary judgment in appropriate first-party, bad-faith cases, when there was a “genuine dispute” about the controlling legal principles that governed the claim. But in the last five or six years, its use has expanded to virtually every aspect of bad-faith litigation.

It now applies to factual, as well as legal disputes (Guebara v. Allstate Ins. Co. (9th Cir. 2001) 237 F.3d 987, 993-994; Chateau Chamberay Homeowners Association v. Assoc. International Ins. Co (2001) 90 Cal.App.4th 335, 348 [108 Cal.Rptr.2d 776]); to third-party as well as first-party claims (Delgado v. Interinsurance Exch. of the Automobile Club of So. California, __ Cal.App.4th at __ [2007 WL 1810226 at *11], and to judgments entered for the insurer based on a demurrer (Rappaport-Scott v. Interinsurance Exchange of the Automobile Club (2007) 146 Cal.App.4th 831, 839 [53 Cal.Rptr.3rd 245].) And even though it has principally been used as a means to justify summary judgment – meaning that a finding of a genuine-dispute is a legal issue determined by the trial court – recently-proposed modifications to the CACI bad-faith instructions would, in some cases, ask the jury to determine whether there was a genuine dispute. (These proposals are still under consideration by the Judicial Council.)

Old-school bad faith

It was not always this way. The existence of a “genuine issue” as a basis to defeat a bad-faith claim was recognized until 1982, in Safeco Ins. Co. of America v.Guyton (9th Cir. 1982) 692 F.2d 551. No published California decision recognized the defense until Opsal v. United Services Auto. Assoc. (1991) 2 Cal.App.4th 1197 [10 Cal.Rptr.2d 352], and the doctrine was not cited a second time in California for another 8 years, until Filippo Industries, Inc. v. Sun Ins. Co. (1999) 74 Cal.App.4th 1429, 1438 [88 Cal.Rptr.2d 881].)

By the time Filippo Industries was decided, California courts had been dealing with bad-faith cases for more than 40 years – since Communale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 658 [328 P.2d 198]. And they had been dealing with first-party bad-faith cases since at least 1973, when the Supreme Court decided Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 574 [108 Cal.Rptr. 480]. How did California courts deal with bad-faith cases in the decades before the genuine-issue doctrine was invented?

Exactly the way they deal with them now. This is because the genuine-issue doctrine is neither a doctrine nor an affirmative defense; it is merely a shorthand way of stating that the plaintiff ’s bad-faith claim is not sufficient to show that the insurer acted unreasonably when it denied the claim. The Ninth Circuit makes this clear in Amadeo v. Principal Mut. Life Ins. Co., 290 F.3d 1152, 1161(9th Cir. 2002), explaining:

The genuine issue rule in the context of bad faith claims allows a district court to grant summary judgment when it is undisputed or indisputable that the basis for the insurer’s denial of benefits was reasonable—for example, where even under the plaintiff ’s version of the facts there is a genuine issue as to the insurer’s liability under California law. Safeco Ins. Co. of Am. v. Guyton, 692 F.2d 551, 557 (9th Cir. 1982). In such a case, because a bad faith claim can succeed only if the insurer’s conduct was unreasonable, the insurer is entitled to judgment as a matter of law.

Seen in this light, the genuine-issue doctrine is neither all that imposing, nor even necessary. Since all it amounts to is a finding that the insurer acted reasonably as a matter of law, there is no case in which the doctrine was properly applied to grant judgment for the insurer that could not have been similarly decided without the use of the doctrine. If the circumstances of the case allow the insurer to show that it acted reasonably as a matter of law, then it wins the bad-faith case, with or without the genuine-issue doctrine.

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Appellate lawyer, Jeffrey EhrlichCalifornia appeals lawyer, Jeffrey I. Ehrlich, is the principal of the Ehrlich Law Firm with Los Angeles County law offices. He is certified as an appellate specialist by the California Bar’s Committee on Legal Specialization, and is the editor-in-chief of the Consumer Attorneys of Southern California’s Advocate magazine.