The genuine-dispute doctrine after Wilson v. 21st Century Ins. Co.
Wilson v. 21st Century
Wilson was an underinsured-motorist (UIM) bad-faith case. The claimant, Regan Wilson, was a 21-year old woman who suffered neck injuries in an auto accident when she was struck by a drunk driver. She demanded policy limits of $100,000 from her UIM carrier.
Wilson’s demand was based on the opinion of her treating orthopedic surgeon, Dr. Southern, who, based on x-rays and an MRI, found that she suffered changes in her cervical spine that were atypical for a woman her age and were the result of the trauma. He also opined she would suffer degenerative disk changes as a result of her injury. Wilson went on a long-planned backpacking trip in Europe after the accident. Her attorney told 21st Century that her neck pain ruined the trip. He also told the carrier that she was planning to study in Australia for a year.
21st Century did not obtain an independent medical examination, or speak to Dr. Southern. Based on its adjuster’s view that Wilson had only suffered soft-tissue injuries and had a preexisting degenerative illness, it offered her $5,000 in med-pay benefits, which it contended, when added to the $15,000 she had received from the other driver, would fully compensate her.
When the case would not settle, Wilson commenced arbitration proceedings. She continued to treat with various doctors as the case moved forward. When 21st Century learned during her deposition that one of her doctors recommended surgery, it sought an independent medical examination. Its IME doctor found injuries that warranted surgery, and 21st Century paid the balance of its $100,000 policy, less a $15,000 credit for the amount Wilson recovered from the other driver.
The trial court granted summary judgment for the carrier, finding that there was a genuine dispute about the extent of her injuries. The Court of Appeal reversed in a published decision. The Supreme Court affirmed the Court of Appeal’s decision.
The legal analysis of the decision is divided into two parts. Part I is titled, “Lack of Thorough Investigation and Fair Evaluation.” In it, the Court relies on statements from its prior decisions, and from two appellate decisions, to reaffirm in strong terms that an insurer who denies a claim without conducting a fair, thorough investigation, can be held liable for bad faith. The Court explained:
While an insurance company has no obligation under the implied covenant of good faith and fair dealing to pay every claim its insured makes, the insurer cannot deny the claim “without fully investigating the grounds for its denial.” (Frommoethelydo v. Fire Ins. Exchange, supra, 42 Cal.3d at p. 215.) To protect its insured’s contractual interest in security and peace of mind, “it is essential that an insurer fully inquire into possible bases that might support the insured’s claim” before denying it. (Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 819.) By the same token, denial of a claim on a basis unfounded in the facts known to the insurer, or contradicted by those facts, may be deemed unreasonable. “A trier of fact may find that an insurer acted unreasonably if the insurer ignores evidence available to it which supports the claim. The insurer may not just focus on those facts which justify denial of the claim.”
(Mariscal v. Old Republic Life Ins. Co. (1996) 42 Cal.App.4th 1617, 1623 [50 Cal.Rptr.2d 224]; see also Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc. (2000) 78 Cal.App.4th 847, 880 [93 Cal.Rptr.2d 364].) (Id., 42 Cal.4th at 721.)
Applying these standards to the summary-judgment record, the Court held that there was a triable issue of fact as to whether 21st Century’s denial of her claim was made unreasonably and in bad faith. (Ibid.) The Court explained that 21st Century was not obliged to accept Dr. Southern’s opinion without scrutiny or investigation. If it had good-faith doubts, it would have been within its rights to investigate Wilson’s claim by asking Dr. Southern to explain or re-examine his findings, to have another doctor review the medical records and provide it with an opinion, or to have Wilson examined by an IME physician. (Id. at 722.) It could not, however, simply ignore Dr. Southern’s opinion without making any attempt to investigate, and reach a contrary conclusion that lacked any discernable medical foundation. (Ibid.) Since a jury could find that this is what the carrier did, summary judgment was improper. (Ibid.)
Part II of the decision is titled “The Genuine Dispute Rule.” It acknowledges that an insurer’s delay in paying or denial of a claim is not tortious unless it is unreasonable. As a close corollary of this rule, it cites Chateau Chamberay for the rule that if the denial of a claim is based on a genuine dispute, then it is not tortious, even if it is found to have breached the contract. The Court noted that the rule was originally applied to legal disputes, but that recent decisions have broadened it to apply to factual disputes as well. The Court then explained that the rule did not relieve an insurer from its obligation to conduct a thorough investigation, and to fairly process and evaluate its insured’s claim. (Wilson, 42 Cal.4th at 723.) The Court also noted that a dispute cannot be said to be “genuine” unless the insurer’s position is maintained in good faith and on reasonable grounds. (Ibid.) The Court then added a footnote, explaining that certain cases applying the rule had stated that, under the rule, “bad faith cannot be established where the insurer’s withholding of benefits’is reasonable or is based on a legitimate dispute as to the insurer’s liability,” citing Century Surety Co. v. Polisso (2006) 139 Cal.App.4th 922, 949 [43 Cal.Rptr.3d 468], Chateau Chamberay, 90 Cal.App.4th at 346, and Tomaselli v. Transamerica Ins. Co. (1994) 25 Cal.App.4th 1269, 1281 [31 Cal.Rptr.2d 433]. The Court stated that this formulation was misleading, because, “In the insurance bad faith context, a dispute is not’legitimate’ unless it is founded on a basis that is reasonable under all the circumstances.”
(Wilson, 42 Cal.4th at 723, n.7.)
The Court then went to the heart of the matter, and explained when the genuine-dispute rule can be used to dispose of a bad-faith claim, and when it cannot:
Nor does the rule alter the standards for deciding and reviewing motions for summary judgment. “The genuine issue rule in the context of bad faith claims allows a [trial] 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. [Citation.] … On the other hand, an 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.” (Amadeo v. Principal Mut. Life Ins. Co. (9th Cir. 2002) 290 F.3d 1152, 11611162.) Thus, an insurer is entitled to summary judgment based on a genuine dispute over coverage or the value of the insured’s claim only where the summary judgment record demonstrates the absence of triable issues (Code Civ. Proc., § 437c, subd. (c)) as to whether the disputed position upon which the insurer denied the claim was reached reasonably and in good faith.
(Wilson, 42 Cal.4th at 723-724.)
The Court then turned to the three contentions made by 21st Century about why there was a genuine dispute, rejected each of them. First, it held that the carrier’s investigation was insufficient, so that its evaluation of Wilson’s medical condition was not reasonable. Second, it rejected the carrier’s claim that its offer was reasonable in light of the fact that Wilson’s medical expenses were only $4,700. The Court found that the value of Wilson’s claim was in her future medical difficulties, and therefore the fact that her expenses had thus far been modest did not address that issue. Finally, the Court rejected 21st Century’s reliance on the fact that Wilson traveled to Europe and studied in Australia after the accident. It found that the claims adjuster’s reliance on these facts without having a medical opinion to support his view showed that the opinion was merely a rationalization of the decision not to pay the claim. (Wilson, 42 Cal.4th at 724, 725.)