Underlying every insurance contract in California is an implied promise of “good faith and fair dealing,” which requires that the insurer act in good faith when handling the insured’s claim.  If the insurer has a “genuine dispute” as to coverage, then the insurer will typically be found not to have acted in bad faith.  In a recent opinion, the California State Court of Appeal reversed a lower court ruling granting summary judgment in favor of the insurer on the genuine dispute doctrine.  Ultimately, the Court found that the insured raised an issue of material fact regarding whether the insurer reasonably relied on an expert opinion to repeatedly undervalue her claim.  In this article, we cover some of the basics of insurance bad faith and the “genuine dispute” doctrine as it applies to expert opinions.  Next, we cover the Court’s ruling in Zubillaga v. Allstate Indemnity Co., and how that ruling is favorable for insureds when they fight insurance company claim denials.

Bad Faith Basics

The implied covenant of good faith and fair dealing requires, among other things, that an insurer refrain from engaging in conduct that would harm an insured’s rights to receive benefits under that insurance contract.  Under California law, when an insurer acts “unreasonably” or “without proper cause,” it will likely have acted in bad faith.  When determining reasonableness of an insurer’s conduct, courts typically look to certain well-established standards or duties that are expected of the insurer.  For example, the insurer has a duty to conduct a thorough and fair investigation into all potential bases for coverage.  If an insurer fails to adhere to these duties, the insurer may be found to have acted in bad faith and consequently, may be liable for substantial additional damages, including emotional distress, consequential and punitive damages.

What is the Genuine Dispute Doctrine?

If an insurer can establish that there is a genuine dispute as to coverage, it typically will not be held liable for insurance bad faith.  However, the dispute itself must be a legitimate one.  In other words, the insurer cannot create an artificial reason to dispute coverage, the genuine dispute must be reached in a reasonable manner.  Often, whether there is a genuine dispute revolves around the insurer’s reliance on an expert opinion.  Where an insurer relies on independent experts, then a basis may exist for invoking the genuine dispute doctrine.  However, expert testimony alone does not automatically insulate an insurer from a bad faith claim.  The expert’s opinion and the insurer’s reliance on that expert’s opinion must also be reasonable.

Zubillaga v. Allstate Indemnity Co.

In Zubillaga v. Allstate Indemnity Co., No. G052603, 2017 WL 2627997 (June 19, 2017), the California Court of Appeal addressed an important issue regarding the genuine dispute doctrine and reasonable reliance on an expert opinion.  The facts of the case began when a driver ran a red light and hit plaintiff Carmen Zubillaga’s (“Zubillaga”) car.  Following the accident, Zubillaga suffered recurrent back pain and saw several doctors.  Based on that lower back pain, and her need for ongoing treatment with expensive epidural injections, Zubillaga submitted a claim for $30,000 to Allstate Indemnity Co. (“Allstate”).  Over time, Zubillaga repeatedly offered new evidence in support of her need for the epidural injections and, consequently, the higher settlement demand.  Allstate refused to meet Zubillaga’s demand, offering much less than $30,000.  In doing so, Allstate relied on the opinion of a medical expert to show that there was a reasonable and good faith dispute (genuine dispute) about the value of Zubillaga’s claim.

The trial court granted a motion for summary judgment in favor of Allstate based on the genuine dispute doctrine concerning Allstate’s reliance on an expert opinion.  However, the California Court of Appeal took issue with Allstate’s reliance on an expert opinion without reevaluation of material new information which had been provided to Allstate.  Since the initial expert opinion, Zubillaga received several treatments and new recommendations from doctors supporting her need for epidural injections.  Instead of addressing this latest information, Allstate continued to rely on an opinion which had considered only stale, non-updated evidence.  Ultimately, the Court found that Allstate’s assertion was without merit and inconsistent with Allstate’s duty to conduct an adequate and thorough investigation.  Accordingly, the Court found potential for bad faith conduct even though Allstate relied on an expert opinion.

In sum, this ruling is favorable to insureds because it reinforces the principle that having an expert opinion is not enough to shelter an insurer from bad faith.  Aside from the fact that the expert’s opinion must, itself, be reasonable, the insurer’s reliance must also be reasonable.  That also includes addressing material new evidence supplied by the insured, even if that means the insurer has to hire another expert to review updated information.  This case and the principles enunciated in it apply not only to automobile insurance claims but also to other types of insurance claims, such as medical insurance, life insurance, and disability insurance claims where updated medical information is often submitted to an insurer after it has made an initial decision based on stale medical information.  If the insurer has not investigated the updated medical or other information, this case may help an insured argue that the insurer acted bad faith by not adequately considering the updated information.