Court Rules Insurers Cannot Hide Behind Biased Expert Consultants to Dispose of Bad Faith Claims

Insurance companies owe a duty of good faith and fair dealing to the persons they insure. This duty is often referred to as the “implied covenant of good faith and fair dealing” which automatically exists by law in every insurance contract. They often defend “bad faith” litigation by invoking a what is known as the “genuine dispute” doctrine. In a recent California Court of Appeal decision, Fadeeff v. State Farm General Ins. Co., 50 Cal.App.5th 94 (2020), the Court ruled that an insurer relying on this doctrine should not automatically be considered to have acted in good faith just because the insurer relied on independent expert opinions when making claim determinations.

In Fadeeff, plaintiffs filed a property insurance claim with State Farm General Insurance Company (“State Farm”) for smoke and soot damage to their home due to a valley fire. After some initial payments, State Farm denied an additional claim for further smoke damage. After its denial, State Farm retained Forensic Analytical Consulting Services (“Forensic Analytical”) to perform an inspection and opine whether the additional repairs were necessary. Predictably, Forensic Analytical determined no further repairs were warranted. Plaintiffs filed a lawsuit against State Farm alleging breach of the implied covenant of good faith and fair dealing, or bad faith.

Subsequently, State Farm filed a motion for summary judgment asking the court to find that it did not deny plaintiffs’ claim in bad faith. State Farm argued that the genuine dispute doctrine automatically defeats a claim for bad faith where an insurer reasonably relies upon expert opinions when making its claim determinations. The trial court granted State Farm’s motion. Plaintiffs appealed.
State Farm argued that it could not have denied plaintiff’s claim in bad faith, since State Farm’s expert, Forensic Analytical, determined that no additional repairs were warranted. State Farm argued there could be no bad faith since its denial of the plaintiff’s claim was based on Forensic Analytical’s opinion and not its own opinion. The appellate court disagreed. The court held that an insurer’s reliance on an outside expert does not automatically insulate the insurer from a bad faith claim under the genuine dispute doctrine. Instead, when an insurer relies on the advice and opinions of independent experts, it is only a single factor in determining whether the insurer handled a claim in good faith. The court stated that there are several circumstances where a biased investigation claim should be decided by a jury.

In this case, the court held that all of State Farm’s conduct must be examined, not just the opinion of an independent expert when determining a claim for bad faith. For example, other factors to be considered include the following: (1) State Farm initially found that all claimed damage was caused by the fire, but the new adjuster for the additional claim concluded that some of the earlier claimed damage was caused by wear and tear; (2) Some of the additional damage was caused by the power washing that was recommended by State Farm; (3) It was apparent that Forensic Analytical did not perform a thorough investigation; and (4) State Farm’s coverage positions were inconsistent. Therefore, the court reversed the trial court dismissal of the plaintiff’s bad faith claim.
Importantly, the summary judgment motion was also reversed as to the issue of punitive damages. State Farm had previously argued that plaintiffs could not describe the factual basis for their punitive damages request and testified at deposition that they did not get the impression that anyone from State Farm was trying to harm them. However, with regard to punitive damages, the initial burden is on State Farm to show that plaintiffs could not prove that State Farm acted without malice, oppression or fraud. Only after State Farm had met its burden, did the burden shift to plaintiffs to establish evidence supporting punitive damages. The court held that State Farm had not met its burden, as plaintiffs’ “beliefs” do not conclusively answer the question of whether State Farm intentionally misrepresented or concealed a material fact because there can be other evidence to support these allegations.
Fadeeff is a very good opinion for California insureds who have all types of insurance claims, especially life and disability insurance claims as it significantly limits the genuine dispute doctrine, and thus the ability of insurers to utilize the doctrine as a complete defense to bad faith claims. This court did not allow insurers to hide behind its hired experts, no matter how biased they are, to avoid bad faith claims.

If your insurance company or plan administrator has mishandled or improperly denied your long-term disability, life insurance, health insurance, or accidental death claims, please contact our firm for a free consultation.

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