The ever-expanding genuine-dispute doctrine, and how to deal with it (Part 3)
Advocate. August 2007 | Download .pdf
By Jeffrey I. Ehrlich
Some good news
Not all the news on the genuine-issue front is bad, however. There are two Ninth Circuit decisions that offer clear guidance to the district courts on the limits of the doctrine: Hangarter v. Provident Life and Acc. Ins. Co. (9th Cir. 2004) 373 F.3d 998, 1010, and Amadeo v. Principal Mut. Life Ins. Co., 290 F.3d 1152, 1161 (9th Cir.2002).
In addition, two recent decisions by Division 3 of the Second Appellate district also contain language and analysis that is favorable to policyholders and that should help rein-in overzealous application of the doctrine, Jordan v. Allstate Ins. Co. (2007) 148 Cal.App.4th 1062 [56 Cal.Rptr.3rd 312], rev. denied June 27, 2007, and Delgado v. Interinsurance Exchange, supra.
Jordan is actually Jordan II. In Jordan v. Allstate Ins. Co. (2004) 116 Cal.App.4th 1206 [11 Cal.Rptr.3d 169] (Jordan I), the court held that while the carrier’s construction of its policy to deny coverage was a reasonable construction, it was not the only reasonable construction. Since the policy was ambiguous, the court reversed a summary judgment for the carrier. The carrier then sought to leverage the court’s finding that its coverage position was reasonable into a summary adjudication of the bad-faith claim based on the genuine-dispute doctrine. The trial court granted the motion.
The Jordan II decision rejected this approach, noting that it ignored the court’s finding that there were multiple ways to construe the policy. (148 Cal.App.4th at 1073.) The court explained that the carrier was obligated to fully investigate the policyholder’s claim, and could not ignore evidence that supported coverage. (Id.) Because the record showed no evidence that the carrier had, in response to the remand in Jordan I, taken any steps to investigate the claim based on the coverage theory that supported the claim, the court held that the genuine-dispute doctrine did not apply. (Id at 1074-1076.)
Jordan II is enormously helpful to policyholders for three reasons: (1) because it shows how the application of the genuine-dispute doctrine depends on the carrier establishing that it conducted a complete, unbiased investigation; (2) because it made clear that the carrier’s duty to investigate continues even after the policyholder files suit (148 Cal.App.4th at 1076, n. 7); and (3) because it explains that a policyholder may properly cite and rely on the carrier’s failure to comply with the provisions of the Unfair Insurance Practices Act (Ins. Code § 790.03) and the regulations promulgated under it (10 Cal. Code Regs § 2695.1, et seq.) to provide evidence that the carrier has breached the implied covenant of good faith and fair dealing. (148 Cal.App.4th at 1077-1078.)
With respect to this third point, the court rejected the carrier’s assertion that consideration of these statutory and regulatory provisions somehow violated the holding in Moradi-Shalal v. Fireman’s Fund Ins. Co. (1988) 46 Cal.3rd 287, 305 [250 Cal.Rptr. 116], that these provisions did not grant policyholders a direct private right of action for their violation.
Delgado, although largely favorable to policyholders, is more of a mixed-bag. The claim in that case was made on an Auto Club homeowner’s policy after the insured was involved in a fight with a neighbor and then sued. The complaint alleged two claims: that the insured had acted intentionally when he punched the plaintiff and that the insured had negligently believed he was acting in self defense when he punched the plaintiff. The Auto Club inexplicably ignored the potential for coverage inherent in the second claim, and denied all coverage based on the policy’s exclusion for intentional acts and on the statutory exclusion for willful acts, Ins. Code section 533. (2007 WL 1810226 at *1.)
After the Auto Club refused to defend him, the policyholder settled with the plaintiff. The parties stipulated in open court that the policyholder had been negligent, and that the plaintiff had sustained injuries of $150,000, and the court entered judgment on the stipulation. The policyholder then paid the plaintiff $25,000 cash and assigned his claims against the Auto Club arising from its refusal to defend or indemnify him, and the plaintiff in return gave a partial satisfaction of judgment and a covenant not to execute on the remainder of the judgment. The plaintiff (Delgado) then sued the Auto Club on the assigned claims and under the direct-action statute, Ins. Code section 11580, subd. (b)(2), as an adjudicated creditor of the insured. (Id. at *2.)
The trial court dismissed the bad-faith action on demurrer, and the plaintiff made the case appealable by dismissing his breach-of-contract claims. (Meaning that on remand, the only claim he could assert and recover on was for bad faith.) The appellate court reversed, finding that the trial court had no basis to sustain a demurrer to the bad-faith claim.
While many cases explain in clear terms how broad an insurer’s duty to defend is, Delgado is particularly helpful because it takes that analysis further and explains what the policyholder’s options are when the carrier breaches the duty to defend, as well as how those options play out in later litigation against the carrier. The last two sections of the opinion explain why Delgado’s complaint stated a cause of action against the Auto Club for bad faith arising out of the breach of its duty to defend. In particular, they explain why the genuine-dispute doctrine did not preclude the bad-faith claim.
Unreasonable, or untenable?
Unfortunately, the court does appear to hold that the genuine-dispute doctrine does apply to third-party claims. More specifically, it holds that if the insurer’s refusal to defend is based on a “legal dispute;” that is, one where the coverage issue turns on a legal question and not on the resolution of disputed facts, the genuine- dispute doctrine would probably apply.
Worse, the court speculates (but does not hold) that in such a case, the standard for whether the insurer’s position was actionable would be akin to that in a malicious-prosecution action. (2007 WL 1810226 at *12, n. 16.) If the court is suggesting that a carrier may reasonably assert any legal position against its own insured in order to deny coverage, as long as the position would not provide the predicate for a malicious-prosecution claim, it appears to have failed to factor into its analysis the insurer’s obligation to give its policyholder’s interests equal weight with its own. Surely an insurer who is required to act reasonably and to give equal consideration to its insured’s interests when it evaluates coverage should be held to a higher standard than “not tortious.”
In Amadeo and Hangarter, the Ninth Circuit has insisted that the carrier’s interpretation of its own policy be reasonable; not simply tenable. For example, in Amadeo, the court explained:
[A]n insurer is not entitled to judgment as a matter of law where, viewing the facts in the light most favorable to the plaintiff, a jury could conclude that the insurer acted unreasonably. [Citation omitted.] . . . . Although summary judgment may be awarded under the genuine issue rule where the insurer reasonably construes ambiguous language in its policy, see Guebara, 237 F.3d at 993 (discussing cases), summary judgment is not appropriate when the insurer’s interpretation of the policy is sufficiently “arbitrary or unreasonable” that a jury could conclude it was adopted in bad faith. [Citations.] (Amadeo, 290 F.3d at 1161-1162.)
Hangartner cites this language with approval. (373 F.3d at 1009 -1010). With respect to denials that are based on factual disputes, the Delgado decision is rock solid. It holds that a carrier who denies a defense based on a factual dispute has effectively committed bad faith as a matter of law:
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.
(Id., at *12, emphasis in text.)
Delgado was originally published in May 2007, but the opinion was withdrawn after the court granted the Auto Club’s petition for rehearing. The new opinion was issued on June 25, 2007, and is largely identical to the original version. The chief difference is the court’s response to the carrier’s assertion in the rehearing petition that it was justified in concluding that its policyholder had acted intentionally irrespective of the way the complaint was framed. More specifically, the court rejected the Auto Club’s claims that even if the policyholder had negligently believed he was acting in self defense, his punches to Delgado’s face were delivered intentionally, which negated coverage. The case is therefore also helpful for cases involving coverage for a claim of negligent self defense.