The ever-expanding genuine-dispute doctrine, and how to deal with it (Part 2)
Advocate. August 2007 | Download .pdf
By Jeffrey I. Ehrlich
Why do the courts love it so?
So why have the courts adopted the doctrine with such gusto since 1999? Perhaps as a way to attempt to make bad-faith cases seem less ad-hoc. Rather than forcing the fact-finder to decide what is reasonable on a case-by-case basis, the doctrine appears to reflect an effort to fashion a set of generally-applicable rules that make bad-faith law more predictable. Insurers are told that if they do x or y or z, then they do not have to worry about bad-faith liability, even if their decision is determined, in hindsight, to be incorrect.
In an attempt to develop broadly applicable rules the courts have focused more on the process that the carriers used to reach a coverage decision, rather than on the decision itself. Carriers are told that if they based their coverage decision on a fair investigation, or upon the advice of unbiased experts, then their decision cannot be characterized as having been made in bad faith.
The problems with this approach are threefold. First, it uses the decision-making process as a proxy for the decision itself, assuming that a reasonable process results in a reasonable decision. In many cases this will be true, but there will always be a temptation for the carrier to attempt to “game” the process to appear unbiased, but to predictably produce the outcome the carrier wants. While a fair process should produce a reasonable outcome, there are simply too many ways for the carrier to manipulate the process to allow the inquiry to be on the process alone. Courts should never lose sight of the fact that the ultimate test of whether a carrier has acted in bad faith is whether its coverage decision was reasonable. (Pilimai v. Farmers Ins. Exchange Co. (2006) 39 Cal.4th 133, 147 [45 Cal.Rptr. 3rd 760].)
This leads to the second difficulty in formulating broadly-applicable rules that focus on the decision-making process. The courts’ efforts to build in safeguards undermines the utility of the rules. For example, the genuine-dispute doctrine will not apply in the following circumstances: (1) where the insurer was guilty of misrepresenting the nature of investigatory proceedings, (2) if the insurer’s employees lie during the depositions, or to the insured, (3) if the insurer selected its experts dishonestly, (4) if the experts were unreasonable, or (5) if the insurer failed to conduct a thorough investigation. (Guebera, 237 F.3d at 987; Chateau Chamberay, 90 Cal.App.4th at 348-349.)
This is as it should be. But there can be no question that these exceptions provide a fertile field for policyholders’ counsel to find factual issues that should preclude summary adjudication, and therefore limit the cases where a court can rely on a generally-applicable rule to resolve a bad-faith case.
The third problem is that efforts to expand the use of the genuine-issue doctrine leads to confusion and untenable outcomes. I can cite two examples. One is the idea that if the policyholder fails to reasonably value his or her claim, this will justify the insurer in similarly making an unreasonable valuation and result in a genuine dispute. The second is the belief that, in all cases, the inquiry into whether the carrier’s conduct is reasonable is an objective one, and therefore the carrier’s subjective intent has no relevance.
The worst example of the former is the Rappaport-Scott case, which arose out of an underinsured-motorist (“UIM”) claim. In essence, the court held that the disparity between the amount of damages claimed by the policyholder — $346,000 – and the amount awarded by the arbitrator — $66,000, established that there was a genuine dispute about the amount of damages, as a matter of law. (146 Cal.App.4th at 839.) But in reality the plaintiff had not sought a settlement of $346,000 from her insurer; she had demanded $75,000 (her $100,000 policy limit less a $25,000 credit for settlement with the under-insured driver.)
It is simply illogical to say that because the policyholder was asking for too much that the carrier could offer her only a small fraction of what her claim was actually worth, and that this would be reasonable as a matter of law. The insurer’s duty to investigate its policyholder’s claim and to fairly evaluate it is independent of the duties the policy imposes upon her. (Kransco v. American Surplus Lines Ins. Co. (2000) 24 Cal.4th 390, 402 [100 Cal.Rptr.2d 617].) Hence, even if she had inflated her claim, this would not affect her carrier’s obligation to treat her fairly and to properly evaluate her claim.
Even more puzzling is the insistence that only the carrier’s objective conduct is relevant to the bad-faith inquiry. This school of thought got its start in two cases decided by the same court, the Division Three of the Fourth Appellate District, Morris v. Paul Revere Life Ins. Co. (2003) 109 Cal.App.4th 966, 973-974 [135 Cal.Rptr.2d 718]; and CalFarm Ins. Co. v. Krusiewicz (2005) 131 Cal.App.4th 273, 287 [31 Cal.Rptr.2d 619].) More recently, it has been adopted by Division Three of the Second Appellate District, in Delgado.
In Morris, the court rejected the policyholder’s claim that it could avoid summary adjudication of its bad-faith claim by arguing that there were “unresolved factual issues pertaining to Revere’s subjective understanding of the law and its intent in shaping the law to suit its own ends.” (Id. at 973.) The court responded by saying: “However, if the conduct of Revere in defending this case was objectively reasonable, its subjective intent is irrelevant.” No authority was cited for this particular proposition, but it seems inarguably correct in the context of the facts presented. The same court relied on Morris for this proposition when it cited in Krusiewicz. (131 Cal.App.4th at 287.)
It is not self-evident why this statement should be true in every case. What if discovery unearthed a note in the claims file stating that the insurer wanted to take a hard line against its insured simply because it wanted to develop a reputation for being tough, even though it subjectively believed that the claim was worth more than it was offering to resolve it? What if the note said that the carrier’s employees were angry at the insured for making disparaging public comments and wanted to teach him a lesson? Should the court ignore this evidence of improper motive in denying a claim, because it is “subjective”? Of course not. (See Bernstein v. Traveler’s Ins. Co. (N.D. Cal. 2006) 447 F.Supp. 1100, 1110 – 1116 [holding that under California law, subjective intent can be relevant in a bad-faith case].)
The focus on “objective” intent to the exclusion of other relevant information can lead a court to absurd results. For example, in Starr-Gordon v. Massachusetts Mutual Life Ins. Co. (E.D. Cal. 2006) 2006 WL 3218778, the court held that the purportedly objective nature of the genuine-issue-inquiry required it to grant summary adjudication of the policyholder’s bad-faith claim because the insurer’s investigation was adequate. But on the same record, it was also compelled it to deny the summary-adjudication with respect to the claims for fraud, because the record would support a finding that the carrier deliberately and improperly attempted to terminate her disability benefits with knowledge that she was entitled receive them!
Realizing that this seemed anomalous, the court dropped a footnote, explaining that, “[T]his conclusion would not contradict the court’s ruling with respect to the bad faith claim. For example, an insurer may be liable for intentional misrepresentation because it had the subjective intent to defraud the insured but not liable for bad faith because its actions were objectively reasonable. See Morris, 109 Cal.App.4th at 973.” (Id. at *15, n.12.) With respect to the district court, this cannot be right. A carrier who stands to be liable for fraud as a result of the manner in which it handled a policyholder’s claim cannot have acted reasonably as matter of law. As the Bernstein court explains, “[A]s a general proposition, the covenant of good faith and fair dealing ‘has both a subjective and an objective aspect – subjective good faith and objective fair dealing: [a] party violates the covenant of good faith and fair dealing if it subjectively lacks belief in the validity of its act or if its conduct is objectively unreasonable.” (Id. 447 F.Supp. at ___, citing Croskey, Heeseman, et al., California Practice Guide – Insurance Litigation (Rutter 2006) Ch. 12 A-C, para: 12:27, citing Carma Developers (Calif.) Inc. v. Marathon Develop. Calif. (1992) 2 Cal.4th 342, 376 [6 Cal.Rptr. 2d 467].)