Can an Insurer Escape Bad Faith Liability When it Unreasonably Forces an Insured to Arbitrate an Uninsured Motorist Claim? No Way!

In a very good ruling for policyholders, the California Court of Appeal ruled that an insurance company cannot escape insurance bad faith liability by forcing a claimant to arbitrate his claim without first fairly investigating, evaluating and attempting to resolve the claim.  In Maslo v Ameriprise Auto & Home Insurance, 2014 Cal. App. LEXIS 564, 2014 WL 2918866 (June 27, 2014), the court explained that “[t]here can be no serious dispute that an insurer is required to thoroughly and fairly investigate, process, and evaluate its insured’s claim,” and the failure to do so exposes the insurer to bad faith liability.

The insured, Ted Maslo, was injured in connection with an auto accident caused by an uninsured motorist (“UM”).  After filing an UM claim with his own insurer, providing the insurer with his medical records and a police report concluding that the uninsured motorist was the sole cause of the accident, Maslo made a policy limits demand of $250,000.  Maslo also offered to mediate his claim.  However, the insurer refused to participate in a mediation, refused of make a settlement offer or otherwise respond to Maslo’s policy limits demand and failed to conduct an investigation of the claim.  Instead, IDS Property Casualty Insurance Company (and its parent company Ameriprise Financial) forced Maslo to participate in an arbitration.

In the arbitration, Maslo was awarded $64,120.91 in medical damages, plus $100,000 in general damages, for a total of $64,120.91.  Shortly after the arbitration, Maslo initiated litigation alleging a single cause of action for breach of the implied covenant of good faith and fair dealing.  The insurer filed a series of demurrers, which were sustained by the Superior Court.

On appeal, the Superior Court’s ruling was overturned, as the Court of Appeal ruled that Maslo’s allegations that the insurer knew Maslo was not at fault, that the insurer rejected the demand without an adequate investigation and that the insurer made no offer of settlement, only agreeing to pay the claim after the arbitration, among others, were sufficient to maintain a bad faith cause of action.  The insurer offered four arguments in support of its position that Maslo did not, and could not, state a bad faith cause of action, all of which were rejected by the Court of Appeal.

First, relying on out-of-state authority, the insurer argued that it did not have the same duty to act in good faith with respect to an UM claim as it does it other contexts.  The Court swiftly rejected this argument, noting that Wilson v. 21st Century Insurance Co., 42 Cal. 4th 713, 720 (2007) and Insurance Code section 790.03 make it clear that an insurer’s obligation to “give at least as much consideration to the interests of the insured as it gives to its own interests,” applied to “all persons engaged in the business of insurance.”

Second, the insurer argued that the complaint demonstrated the existence of a “genuine dispute” over the amount of the claim, therefore shielding it from bad faith liability.  In the most important part of this ruling, the Court also rejected this argument, explaining that “[t]he genuine dispute rule does not relieve an insurer from its obligation to thoroughly and fairly investigate, process and evaluate the insured’s claim. A genuine dispute exists only where the insurer’s position is maintained in good faith and on reasonable grounds.”  Given that the insurer “failed to respond in good faith to [Maslo’s] settlement demand, made no settlement offer, failed to provide a reason for withholding payment, refused [Maslo’s] offer to participate in mediation, and provided [Maslo] no opportunity to negotiate a settlement,” it could be liable for bad faith.  The Court of Appeal further noted that because the complaint “alleged an inadequate investigation and dilatory claim handling procedures, the genuine dispute rule provides no basis for sustaining the demurrer.”

Next, the insurer argued that it could not be liable for bad faith because the arbitration award was less than the settlement demand.  According the insurer, it can only be liable for bad faith when the damages plainly exceed the policy limits.  The insurer contended, that in all other circumstances, “when faced with a claim for which liability is shown with reasonable certainty, it may refuse to investigate, evaluate or even respond to its insured, force the insured to incur the costs of arbitration, and avoid liability for breaching its common law and statutory duties so long as the ultimate award is less than the insured’s initial demand.”  The Court explained that this position was rejected in Hightower v. Farmers Insurance Exchange, 38 Cal. App. 4th 853 (1995), which noted that while an insurer has a statutory right to binding arbitration when there is a disagreement over the existence or extent of coverage, that “did not abrogate the insurer’s duty of good faith in handling uninsured motorist claims.”  An insurer is not allowed to fail to investigate a claim by the mere act of requesting UM arbitration.

Thus, the Court ruled that “an insurer may be liable for bad faith in failing to attempt to effectuate a prompt and fair settlement (1) where it unreasonably demands arbitration, or (2) where it commits other wrongful conduct, such as failing to investigate a claim.”  Further, the duty to investigate a claim is not “excused by the arbitrator’s finding that the amount of damages was lower than the insured’s initial demand.”  It can still be bad faith for an insurer failed to pay damages that are certain and demanding an arbitration on those damages.

Finally, the insurer argued that its actions were not the cause of Maslo’s damages, because the Complaint did not include an allegation that Maslo would have accepted less than his initial demand.  This argument was not persuasive, as the court noted that it “was not appellant’s initial demand that made arbitration inevitable, but the insurer’s alleged refusal to investigate and process his claim.”

In conclusion, the Court noted that there is no serious dispute that an insurer is required to thoroughly and fairly investigate, process and evaluation the insured’s claim.  The failure to do so exposes the insurer to bad faith liability, even, unfortunately for insurers, in UM claims.

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