The Genuine-Dispute Doctrine: Has The Tide Changed?
As appeared in the Advocate, Journal of Consumer Attorneys Association for Southern California
By Heather M. McKeon and Eric L. Brown
Background of genuine-dispute doctrine
In California, the relationship between an insurer and its insured is recognized as a fiduciary-like relationship. (Vu v. Prudential Prop and Casualty Ins.Co (2001) 26 Cal.4th 1142, 1150-51, [113 Cal.Rptr.2d 70].) Accordingly, this special relationship provides for damages that are not commonly available in breach of contract actions. When an insurer unreasonably breaches the insurance contract, the insured is entitled to tort damages, including emotional distress, attorney’s fees and, in certain circumstances, punitive damages. (Neal v. Farmers Ins. Exch. (1978) 21 Cal.3d 910, [148 Cal.Rptr. 389]; and Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, [169 Cal.Rptr. 691].) This is what is commonly known as breach of the covenant of good faith and fair dealing that is implied by law in the insurance contract, i.e., “insurance bad-faith.” The breach is proved by showing that the insurer refused to pay or delayed paying benefits without a proper reason.
The issue of “reasonable” conduct is traditionally a matter for a jury to decide. However, the courts have created a defense for insurers, the genuine-dispute doctrine, which allows the judge, not the jury, to decide whether an insurer was “reasonable” in denying a claim. In other words, if a carrier can show that a genuine dispute existed as to coverage, then it is entitled to summary adjudication of the insured’s bad-faith cause of action. The jury never hears evidence of the insurer’s conduct in adjusting the claim. If the motion is denied, the case proceeds to trial and the jury may be instructed as to the genuine-dispute doctrine. Consequently, an insurer has two chances, the judge and jury, to avoid tort damages. And the doctrine does not appear ever to operate the other way: there are no instances known to the authors where a trial court or appellate panel has ruled, as a matter of law, that an insurer was unreasonable.
Historically, the genuine-dispute doctrine was only available in legal disputes, i.e., when no facts were in dispute, a court could decide as a matter of law that the insurer acted reasonably in denying or delaying payment of the insured’s claim. A good illustration of this is Safeco Insurance Company of America v. Guyton (9th Cir. 1982) 692 F.2d 551. In Safeco, the facts were not in dispute, but there was a contract interpretation dispute between the insurer and the insured. The court found that the insurer acted reasonably, because there was a genuine dispute about the meaning of the concurrent-causation clause in the insurance policy. (Id.)
The high point for insurers applying the genuine-dispute doctrine
Unfortunately for insureds, the Ninth Circuit expanded its application of the genuine-dispute doctrine to factual disputes that may arise during the claims adjustment process in Guebara v. Allstate Ins. Co. (9th Cir. 2001) 237 F.3d 987. In Guebara, a homeowner sought to recover the value of her home and its contents after a house fire. During its investigation, Allstate received several statements from the insured in connection with the contents of the residence. Further, Allstate retained three separate fire/arson experts who concluded that it was improbable that the contents claimed by the insured were actually lost in the fire. (Id. at 990-991.)
The Ninth Circuit in Guebara concluded that, based upon the opinions of multiple experts and the material misstatements by the insured, a genuine dispute existed concerning the cause of the fire (arson was suspected and would have negated coverage), and the contents that were actually destroyed in the fire. (Id. at 991-92.) Therefore, the insurer’s conduct in handling the claim was reasonable as a matter of law. In practice, this holding means that even if the underlying facts are in dispute, the insurer may still win on summary adjudication if the abundance of facts presented shows that the insurer reasonably relied on experts when making its coverage decision.
The Ninth Circuit in Guebara was clear, however, that there are limits to the genuine-dispute doctrine. Merely hiring an expert, or relying on expert testimony, does not automatically insulate the insurer from a bad-faith claim. (Guebara, 237 F.3d at 996.) The Guebara Court enumerated several situations where, despite an insurer’s reliance on expert reports, it may be found that an insurer acted unreasonably, i.e., there is not a genuine dispute where 1) the insurer is guilty of misrepresenting the nature of investigatory proceedings; 2) the insurer’s employees lie to the insured; 3) the insurer’s employees lie during a deposition; and 4) the insurer improperly selects its experts. (Id. at 996.) In these situations, among others which are discussed below, there may be a disagreement between the insurer and insured about coverage, but because the insurer fails to properly handle the insured’s claim, there is not a sincere and honest, or “genuine,” dispute. Therefore, it cannot be concluded that, as a matter of law, the insurer acted reasonably in denying the claim.
Encouraged by Guebara, insurers routinely file motions for summary adjudication in connection with an insured’s bad-faith claim. Citing Guebara, insurers base their summary- adjudication motions on the contention that the insurer relied on its expert’s findings, combined with any kind of “questionable” behavior by the insured (misstatements, failure to cooperate, etc.), and argue that its decision to deny the claim was reasonable as a matter of law.
California courts officially recognized the genuine-dispute doctrine in Chateau Chamberay Homeowner’s Association v. Associated International Insurance Company (2001) 90 Cal.App.4th 335, [108 Cal.Rptr.2d 776]. Chateau Chamberay involved a homeowner’s association’s claim for insurance benefits for damages that were sustained during the Northridge earthquake to its condominium complex. (Id.) The insurer paid the undisputed portion, and the disputed portion was resolved in arbitration. In arguing over the disputed portion, the insurer relied on several expert reports which it included as evidence in its motion for summary adjudication of the bad-faith claim.
In opposition to the insurer’s motion based on the genuine-dispute doctrine, the insured offered a two-page declaration by its “bad-faith” expert stating that he had read the claims files and had concluded that: the insurer failed to conduct an adequate investigation; engaged in dilatory claims handling; and failed to obtain all of the necessary reports. (Id. at 349.) Dismissing this opinion evidence as mere conclusions, the Chateau Chamberay court ruled that the insured failed to present evidence that any factual issues were in dispute, and therefore, the insurer’s evidence permitted only one inference: the insurer had acted reasonably as a matter of law. (Id. at 349-50.)
Although Chateau Chamberay reached the same result as Guebara, the court approached the analysis of the genuine-dispute doctrine slightly differently. Chateau Chamberay used a “two step” analysis, suggesting that as long as there was no dispute about the underlying facts, it may be for the court, not the jury, to decide if the insurer acted reasonably. (Id. at 349-350.) Using this passage, it appears that if the insured, in opposing an insurer’s motion for summary adjudication, proves that there are legitimate factual disputes (what the parties did and said), the insured should survive summary adjudication. In other words, the basic rule of summary judgment practice still holds: the motion will not be granted where there is a dispute of material fact.
The second step in Chateau Chamberay’s analysis is whether there is only one inference (i.e., the insurer acted reasonably) that can be drawn from the undisputed facts. If there is more than one possible inference, then the insurer is not entitled to summary adjudication. Therefore, if the insured, in opposing an insurer’s motion for summary adjudication, can present sufficient facts to convince a judge that it would be appropriate for a jury to find bad-faith, the insured will be allowed to present his evidence to the jury.
Mixed results after Chateau Chamberay
In spite of expanding the scope of the genuine-dispute doctrine to factual disputes in Guebara, the Ninth Circuit has not always applied the doctrine in favor of the insurer. Amadeo v. Principal Mutual Life Insurance Company (9th Cir. 2002) 290 F.3d 1152 illustrates how an insured may defeat a motion based on the doctrine. Amadeo involved a disability insurer who denied benefits to the insured plaintiff, arguing that the insured was unemployed when her disability began. (Id.) In finding that the lower court erred in granting summary adjudication in favor of the insurer, the Ninth Circuit found that, unlike the insured in Chateau Chamberay, Amadeo had presented enough evidence to show that a jury could find that the insurer had acted unreasonably in the handling and denial of the claim. Specifically, the insured presented legitimate evidence that the insurer arbitrarily and unreasonably interpreted the policy, and that in failing to interview plaintiff’s treating physician the insurer failed to conduct a reasonable and adequate investigation into plaintiff’s claim. The insurer’s dispute was not a genuine one, because in viewing the facts in the light most favorable to the plaintiff, a jury could conclude that the insurer actually acted unreasonably. (Id. at 1162.)
Two cases in point
Since 2002, the cases in this area have continued to show mixed results. Two recent district court opinions with similar facts but opposing decisions suggest that a court’s view of whether a dispute is “genuine” is no less subjective than a jury’s view of what is “reasonable.” These cases are described below.
In Ramil v. Allstate Ins. Co (N.D. Cal, 2005) WL 1876062, the court applied the genuine-dispute doctrine and granted the insurer’s motion to summarily adjudicate plaintiff’s bad-faith cause of action. Ramil involved an insured who sought to recover medical treatment benefits stemming from an automobile accident. Allstate withheld payments because it thought plaintiff’s medical bills were excessive. This belief was supported by an expert retained by Allstate. Plaintiff brought a claim for bad-faith against Allstate, asserting that the insurer withheld payments unreasonably. Plaintiff argued that Allstate’s expert worked predominantly for defense firms, and that Allstate failed to take into consideration the severity of her injuries. Further, plaintiff contended that Allstate’s adjustor demonstrated hostility towards her. Objectively, this sounds like a garden-variety bad-faith claim where a jury would weigh the evidence and decide whether the carrier’s conduct was reasonable or not. Nonetheless, the court had little difficulty in dismissing plaintiff’s bad-faith cause of action based on the genuine-dispute doctrine. The court found that “[t]he factors plaintiff contends [Allstate’s expert] did not consider are clearly present in his report and [plaintiff] presents no other evidence that Allstate failed to appropriately weigh and balance conflicting medical evidence.” (Id.) The court also found that plaintiff’s claims regarding the adjustor’s hostile attitude were without merit as all she could produce to support her contention was one email from an Allstate employee stating that the adjustor had made a comment that he “would not pay plaintiff a dime.”
However, in Kelsey v. Allstate Ins. Co. (N.D. Cal. 2005) WL 1773302, the court reached the opposite conclusion. Kelsey involved an insured who made a claim to his insurer for fire damage to his residence. Kelsey eventually brought a bad-faith action against Allstate for failure to promptly and fully pay benefits, including the refusal to pay extended additional living expenses (“ALE”). (Id.) Not surprisingly, Allstate brought its motion for summary adjudication based on genuine dispute. In analyzing the case, the court, quoting from Chateau Chamberay, stated, “[w]hile the reasonableness of an insurer’s claims-handling conduct is ordinarily a question of fact, it becomes a question of law where the evidence is undisputed and only one reasonable inference can be drawn from the evidence.” The Kelsey court held that there was more than one inference because “[p]laintiff produced some evidence” that Allstate reneged on a promise to extend ALE. This evidence was sufficient to survive summary adjudication. (Id. at *10.)
Both Kelsey and Ramil are useful to insureds. Kelsey shows that by just offering some facts, when they are specific and cannot be fully disproved by the insurer, an insured can overcome a motion for summary adjudication. And Ramil, although a defense decision, is useful in helping insureds better understand the amount of proof they must present to the court to overcome the motion. So although decisions regarding the genuine-dispute doctrine have seemingly different results, the courts are slowly offering clarity about the nature of facts an insured must present to overcome a motion for summary adjudication based on the genuine-dispute doctrine.
A new hope for insureds
Recently, the California Court of Appeal addressed the genuine-dispute doctrine again, and this time the opinion is favorable to insureds. (Wilson v. 21st Century (2006) 136 Cal.App.4th 97, [38 Cal.Rptr.3d 514].) Wilson involves an insured who was injured in an auto accident. The other party’s insurer only covered a portion of the insured’s damages, and she turned to her insurer to cover the balance. For over two years, plaintiff sought several medical opinions, which all agreed that plaintiff had cervical damage, but came to different conclusions as to the appropriate course of treatment. (Id. at 103.) Finally, after two years, 21st Century paid the benefits in full. Wilson then filed a bad-faith and breach of contract action against 21st Century for failing to promptly, fairly, and reasonably investigate and pay her claim.
21st Century filed a motion for summary adjudication based on the genuine-dispute doctrine, arguing that it acted reasonably in the handling of plaintiff’s claim because it considered all of the evidence supplied by the insured. (Id. at 107.) 21st Century, relying on Chateau Chamberay, further argued that its delay in payment was based on a genuine dispute based on the differing values of the claim. (Id.) The court held that “[i]n other words, a breach of the covenant of good faith and fair dealing can be found even where the insurer harbors actual doubts about the amount of benefits which should be paid on a covered claim if a reasonable investigation would have disclosed information making those doubts no longer tenable...At this stage of the proceedings, however, the issue of causation remains an issue of fact.” (Id.)
In reversing the trial court’s grant of 21st Century’s motion for summary judgment, the court stressed that “the key word is ‘genuine.’” (Id.) Wilson, in opposing the insurer’s motion for summary judgment, produced evidence that 21st Century: 1) failed to have Wilson’s case evaluated by a competent personal injury attorney; 2) failed to objectively evaluate Wilson’s claim for pain and suffering by ignoring particular doctor reports; and 3) failed to use the “Colossus” computer program to more fully analyze Wilson’s personal injury claim. (Wilson (2006) 136 Cal.App.4th 97, [38 Cal.Rptr.3d 514].) Apparently, the insured in Wilson met a burden that the insureds in Guebara, Chateau, and Ramil failed to meet, and therefore was entitled to summary judgment.
Wilson provides the clearest example for insureds on how to defeat the expected motion for summary adjudication based on the genuine-dispute doctrine. Keeping Wilson in mind will make it more likely that a jury will hear the plaintiff’s bad-faith claim. The language of the Wilson court is: “The key word here is ‘genuine.’” (Wilson (2006) 136 Cal.App.4th 97, 107 [38 Cal.Rptr.3d 514].)
Under Wilson, an insurer may not rely on the genuine-dispute doctrine if it failed to conduct a thorough investigation into an insured’s claim. This inadequate investigation now makes the dispute “disingenuous.” We have learned from Wilson and Chateau Chamberay that insureds need to support their oppositions with evidence, including facts which show that the insurer failed to conduct a fair and thorough investigation of the insured’s claim. This will enable insureds to clear the hurdle of the genuine-dispute doctrine, and the issue of an insurer’s reasonableness may be heard by the jury.
In conclusion, the genuine-dispute doctrine allows a judge to subjectively decide “what is bad-faith” instead of a jury. However, it is paramount that any attorney representing an insured persuade the judge that the insurer acted unreasonably to defeat a motion for summary adjudication based on the genuine-dispute doctrine. To do this, the attorney should gear his discovery towards gathering evidence to present to the judge showing that: (1) the insurer did not reasonably rely on expert opinion; (2) the carrier’s expert was biased in some fashion; and most importantly (3) the carrier conducted an inadequate investigation. Using the language in Wilson, make sure the court has the evidence to conclude that the carrier not only conducted an inadequate investigation, but that a thorough investigation could have affected the coverage decision. If the court finds the insured’s evidence credible, then the court will more likely than not find disputed facts and let the jury decide whether the insurer acted unreasonably.
