Overcoming the `genuine-issue' rule in bad-faith cases; insurers are working to expand the ways they can win summary judgment. Learn how to defeat the inevitable motion to dismiss.

For many gears, plaintiffs have obtained compensatory and punitive damages verdicts against insurers who acted in bad faith, denying or delaying legitimate claims. But the recent California case of Chateau Chamberay Homeowners Association v. Associated International Insurance Co. (1) threatens bad-faith cases with its broad language, which purportedly expands application of the "genuine-issue rule."

This rule, also called the "genuine-dispute doctrine," negates a bad-faith claim when the insurer can show that there was a real question regarding its duty to provide coverage. If the insurer shows that there was a genuine dispute, a court may conclude as a matter of law that the denial of coverage or delay in payment did not constitute bad faith and may grant summary judgment for the insurer.

Before Chateau Chamberay, the rule had been limited for the most part to legal issues, such as how policy language should be interpreted. But the decision extended the rule to factual disputes, such as those involving the value of a claim.

Many states other than California use the genuine-issue rule in bad-faith cases, (2) and California court decisions have often provided the foundation for bad-faith law in these states. Thus, plaintiff attorneys should expect that insurers nationwide will use Chateau Chamberay's broad view of the genuine-issue rule to support motions for summary judgment.

To oppose these motions, plaintiff counsel must be prepared to explain the proper application of the rule: While Chateau Chamberay appears to broaden the genuine-issue rule, it also contains important qualifying language. Attorneys can argue that the case merely reaffirms that an insurer is entitled to summary judgment in a bad-faith case only when there are no disputed factual issues.

In addition, case law contains specific examples of insurance practices that preclude summary judgment. To defeat insurers' motions, practitioners must conduct discovery to find evidence of such conduct.

The cause of action for bad faith arose out of public policy concerns. As one California court wrote: "The availability of tort remedies in the limited context of an insurer's breach of the covenant [of good faith and fair dealing] advances the social policy of safeguarding an insured in an inferior bargaining position who contracts for calamity protection, not commercial advantage." (3) Thus, the tort is specifically limited to the field of insurance.

California was the first state to recognize the tort of first-party bad faith, in the 1973 case of Gruenberg v. Aetna Insurance Co. (4) Today, most states either recognize a common law cause of action for bad faith or provide a statutory remedy. (5)

Bad-faith liability is determined under one of two standards. Many states follow the broad one of Gruenberg: An insurer is liable for bad faith when it unreasonably withholds payment due under a policy; fails to act fairly and in good faith in discharging its contractual obligations; or refuses, without proper cause, to compensate its insured for a covered loss. (6)

Under this broad standard, conduct that may constitute bad faith includes

* failing to evaluate a claim objectively (7)

* adopting unduly restrictive interpretations of claim forms (8)

* denying coverage based on improper standards (9)

* delaying the payment or processing of claims unreasonably (10)

* engaging in abusive conduct designed to avoid payment of claims (11)

* using unreasonable litigation tactics (12)

* failing to bring necessary information to an insured's attention. (13)

Other states apply a narrower standard of liability, requiring a plaintiff to show not only that an insurer acted unreasonably in denying benefits, but that it had "knowledge or reckless disregard of the lack of a reasonable basis for denying the claim." (14) In these jurisdictions, bad faith is an intentional tort: An insurer "may challenge claims which are fairly debatable and will be found liable only where it has intentionally denied ... a claim without a reasonable basis." (15)

The genuine-issue rule was created against this backdrop by the Ninth Circuit Court of Appeals in a 1982 case, Safeco Insurance Co. v. Guyton. The court held that under California law, bad-faith liability cannot be imposed where there "exists a genuine issue as to [the insurer's] liability." (16)

California courts interpreted "genuine-issue" to mean uncertainty as to applicable law (17) until the state court of appeal ruled in Fraley v. Allstate Insurance Co. in 2000. (18) In that case, the insurance industry made its first successful attempt to extend the genuine-issue rule to factual disputes. The insureds' home was extensively damaged by fire, and they brought a bad-faith action against Allstate for its alleged delay in paying the claim. Their evidence of bad faith consisted solely of the discrepancy between their expert's estimate of repairs and the estimate of Allstate's expert.

The court affirmed the award of summary judgment to Allstate, holding that "the `genuine-dispute' doctrine may be applied where the insurer denies a claim based on the opinions of experts." It found that where the parties rely on expert opinions, "even a substantial disparity in estimates for the scope and cost of repairs does not, by itself, suggest the insurer acted in bad faith." (19)

The Ninth Circuit, like the California courts, until recently applied the genuine-issue rule only to disputes based on law. (20) But in its January 2001 decision in Guebara v. Allstate Insurance Co., that court relied on Fraley to extend the rule to factual disputes in limited circumstances. (21)

Allstate denied Guebara's claim for payment to cover the alleged loss of belongings in a fire. The company based the denial on its experts' opinion that the belongings were not inside at the time the house burned. The court affirmed dismissal of Guebara's bad-faith claim, holding that there was a genuine dispute over Allstate's liability. The court said that the genuine-issue rule applied even though the dispute between Guebara and Allstate was not purely legal, but it declined to establish a bright-line rule:

   We hold that the genuine-dispute doctrine should be applied on a
   case-by-case basis. In some cases, the application of the rule to purely
   factual disputes will be inappropriate. In others, investigations by a
   defendant's independent experts will permit the invocation of the doctrine
   and summary judgment for the defendant on a bad-faith claim. (22)

Bad facts, bad law

Last July, the California Court of Appeal clearly extended the genuine-issue rule to factual disputes in Chateau Chamberay. But the case is an example of bad facts making bad law, and the court's apparently broad holding is so limited by qualifying language that plaintiff counsel can argue that the genuine-issue rule is not a rule at all, but simply a reaffirmation of the traditional standard for summary judgment.

These are the facts of the case: The Chateau Chamberay Homeowners Association (HOA) suffered earthquake damage to its condominium complex and submitted a claim to its insurer, Associated International Insurance Co. (AIIC), for about $5.8 million in repairs. Many of the items included in the claim were clearly not covered by the policy, including work required for building-code upgrades and repairs of preexisting damage over which the HOA had filed a design defect suit 14 years earlier.

After hiring an adjuster to assist in estimating the loss and a general contractor and structural engineer to evaluate the damage, AIIC paid nearly $2 million to the association and claimed that no further amounts were owed under the policy.

The HOA filed suit, and the insurer moved for summary judgment on the bad-faith claim. The HOA did not dispute a single fact that AIIC submitted in support of its motion, which led the trial court to conclude that the company's conduct was not unreasonable as a matter of law. The association's contract claim then went to arbitration, where the arbitrator concluded that AIIC owed about $600,000 in additional policy benefits.

Against this factual backdrop, the court of appeal held that summary judgment for the insurer was appropriate. The court concluded that there were genuine disputes over the portion of the HOA's claim that was covered and over the dollar amount for those losses that were covered. The court noted that the HOA failed to offer any factual support for the conclusion that AIIC acted unreasonably or without proper cause in its adjustment of the claim.

The court directly extended the genuine-issue rule to factual disputes, stating that "we see no reason why the genuine-dispute doctrine should be limited to legal issues." (23) But it cautioned that its decision did not mean "that the genuine-dispute doctrine may properly be applied in every case involving purely a factual dispute between an insurer and its insured." (24) A lower court can determine that a dispute is genuine, the court of appeal said, only when there is no disagreement over the underlying facts. (25) Like the Ninth Circuit in Guebara, this court concluded that the issue of whether the genuine-dispute doctrine may apply to a factual dispute should be decided on a case-by-case basis. (26)

As an example, the court cited Fraley and stated that "a basis may exist for ... summarily adjudicating a bad-faith claim in the insurer's favor" where the insurer relies on the opinions of experts. (27) But it also concurred with the Guebara court that "an expert's testimony will not automatically insulate an insurer from a bad-faith claim" and listed five circumstances in which an insurer's biased investigation would preclude summary judgment. (28)

Thus, Chateau Chamberay's initially broad language is so qualified that plaintiff counsel can argue that the genuine-issue rule is to be applied on a case-by-case basis and can be used only if the underlying facts creating the so-called genuine issue are undisputed. Even then, the "rule" only "may" apply. In the final analysis, both the Guebara and Chateau Chamberay courts reviewed the record as a whole to determine whether the insurer acted "reasonably and with proper cause"--the long-established standard for determining bad-faith liability without reference to any genuine-issue rule.

In the brief time since Chateau Chamberay extended the genuine-issue rule to factual disputes, courts have used it to throw out bad-faith claims arising under homeowner's, (29) auto, (30) health, (31) and disability policies. (32) Insurers in these cases have attempted to insulate themselves from liability by using an expert to create a factual dispute, then relying on the expert's opinion to argue that summary judgment is appropriate because there is a genuine dispute over coverage.

But plaintiff counsel can respond by educating the courts as to what the case law stands for: The most that can be said is that if an insurer has reasonably relied on an independent expert and no other evidence of bad faith exists, the insurer's conduct may be deemed reasonable as a matter of law.

In addition to stating that an expert's testimony will not automatically

insulate an insurer from a bad-faith claim, Chateau Chamberay reiterated five situations in which an insurer's biased investigation would preclude summary judgment. (33) Practitioners should conduct discovery designed to ferret out evidence supporting these examples of bias:

Misrepresenting the nature of the investigation. Plaintiff attorneys should review the claim file and all correspondence between the insurer and the client for any misrepresentations, and they should question the client about discussions with insurance company representatives. Often, insurer misrepresentations are not affirmative misstatements but omissions--important information that is kept from the insured. Insurers are obligated to inform policyholders of the facts they need to protect their interests, (34) so a failure to inform fully means the investigation was biased.

In disability cases, for example, the insurer will often conduct its investigation in secret, then deny the claim without giving the insured an opportunity to explain any discrepancies or inconsistencies. Plaintiff counsel should argue that such an investigation is designed solely to uncover evidence to support a denial of benefits. Thus, summarily denying a claim in this fashion is the result of a biased investigation.

Lying during depositions or to the insured. Plaintiff attorneys may find that, in contrast to merely withholding information, an insurer blatantly lied to an insured during the claim process, or a company employee lied in a deposition. Again, the attorney should thoroughly examine the claim file and all communications between the insurer and insured for evidence of misrepresentations. Plaintiff counsel should depose the company's adjusters thoroughly, paying particular attention to whether an adjuster has changed his or her story from the one presented to the insured.

Selecting experts dishonestly. If an insurer relies on expert opinions to create a so-called genuine issue, plaintiff counsel must thoroughly investigate how the insurer selected the expert. For example, in a disability case where an expert physician concludes that the insured is not disabled, the attorney should obtain all previous reports that this physician supplied to the same insurer. If the insurer frequently uses the same physician--one who always finds policyholders to be free of disability--there is evidence of bias that should be sufficient to defeat a motion for summary judgment. The plaintiff lawyer should also subpoena the expert's financial records to establish how much that expert has earned working for the insurance industry.

Relying on unreasonable conclusions of experts. Sometimes an expert's conclusions are so "over the top" that they are patently unreasonable, but often the issue is more subtle. Plaintiff counsel should investigate whether insurers' experts are properly qualified and whether they considered all available pertinent facts or only selective information provided by the insurer. The plaintiff should consult his or her own expert, not only about whether the expert disagrees with the conclusions of the insurer's expert, but also about whether those conclusions are unfounded and thus unreasonable.

The developing "treating physician rule" should also assist in establishing that an insurer unreasonably relied on the opinion of its own expert to deny a claim. This rule, as applied in Social Security and Employee Retirement Income Security Act disability cases, requires giving deference to the opinions of the claimant's treating physician. (35) Therefore, it is actually unlawful for an insurer to disregard the opinions of this physician without "specific reasons" based on "substantial evidence in the record." (36)

Failing to conduct a thorough investigation. The Ninth Circuit has already refused to apply the genuine-issue rule in an unpublished disability case for this reason. In Fontaine v. Provident Mutual Life Insurance Co., (37) the plaintiff claimed she was unable to pursue her career as an anesthesiologist because she suffered from post-traumatic stress disorder and major depression. Provident terminated benefits based on its medical expert's opinion that Fontaine could do the job.

After the jury found she was totally disabled and awarded benefits owed under the policy, Fontaine appealed the award of summary judgment to the insurer on her bad-faith claim. The Ninth Circuit reversed, because under California law an insured's employability is a factor in determining whether he or she is disabled, (38) and Provident had failed to investigate whether any hospital would actually hire Fontaine.

Knowledge is power

The purported expansion of the so-called genuine-issue rule to factual disputes represents a real threat to legitimate bad-faith claims. But educating courts about the limited application of the rule, and conducting careful discovery in anticipation of insurers' inevitable summary judgment motion's, will minimize its effect.

Notes

(1.) 108 Cal. Rptr. 2d 776 (Ct. App. 2001).

(2.) For example, one analogous rule is called the "fairly debatable" standard. It provides that "when a claim is fairly debatable the insurer is entitled to debate it and there is no bad faith on its part for doing so." Dirks v. Farm Bureau Mut. Ins. Co., 456 N.W.2d 857, 861 (Iowa 1991). See also Hatch v. State Farm Fire & Cas. Co., 842 P.2d 1089, 1092-93 (Wyo. 1991).

(3.) Kransco v. Am. Empire Surplus Lines Ins. Co., 2 P.3d 1, 8 (Cal. 2000).

(4.) 510 P.2d 1032 (Cal. 1973). First-party bad faith involves an insured's claim against the insurer relating to coverage written for the insured's direct benefit, such as a disability policy, a fire policy, or a homeowner's policy. A third-party bad-faith lawsuit involves an insured's suit against his or her liability insurer arising out of the insurer's mishandling of a claim against the insured, such as by unreasonably refusing to settle within policy limits. Courts had previously recognized bad faith only in the third-party context. See, e.g., Communale v. Traders & Gen. Ins. Co., 50 Cal. 2d 654 (1958); Gilley v. Farmer, 485 P.2d 1284, 1289 (Kan. 1971).

(5.) See STEPHEN S. ASHLEY, BAD FAITH ACTIONS: LIABILITY AND DAMAGES [section] 2.15 (2d ed. 1997).

(6.) See, e.g., Zilisch v. State Farm Mut. Auto. Ins. Co., 995 P.2d 276 (Ariz. 2000); Egan v. Mut. of Omaha Ins. Co., 620 P.2d 141 (Cal. 1979); Best Place, Inc. v. Penn Am. Ins. Co., 920 P.2d 334 (Haw. 1996); Christian v. Am. Home Assur. Co., 577 P.2d 899, 904-05 (Okla. 1977).

(7.) Egan, 620 P.2d 141, 146; McCoy v. Okla. Farm Bureau Mut. Ins. Co., 841 P.2d 568, 570-71 (Okla. 1992); Benke v. Mukwonago-Vernon Mut. Ins. Co., 329 N.W.2d 243, 247 (Wis. Ct. App. 1982).

(8.) Miller v. Nat'l Am. Life Ins. Co., 126 Cal. Rptr. 731,735 (Ct. App. 1976) (unduly restrictive interpretation of physician response on claim form); Delgado v. Heritage Life Ins. Co., 203 Cal. Rptr. 672, 681 (Ct. App. 1984) (failing to further investigate insured's ambiguous responses to disability claim form); Texas Employers Ins. Ass'nv. Puckett, 822 S.W. 2d 133 (Tex. Ct. App. 1991) (misinterpretation of accident form).

(9.) Moore v. Am. United Life Ins. Co., 197 Cal. Rptr. 878, 884 (Ct. App. 1984) (adopting narrow definition of total disability at odds with known California standard); Beck v. State Farm Mut. Auto. Ins. Co., 126 Cal. Rptr. 602, 606 (Ct. App. 1976) (asserting a defense to an uninsured motorist claim known to be invalid); Nationwide Mut. Ins. Co. v. Clay, 469 So. 2d 533 (Ala. 1985), vacated on other grounds, 476 U.S. 1101 (1986) (narrow construction of ambiguous policy provision in face of rule that such provisions are construed against the insurer).

(10). Fleming v. Safeco Ins. Co., 206 Cal. Rptr. 313, 315-16 (Ct. App. 1984) (unexplained delays in processing payment coupled with passing claim from one adjuster to another was bad faith); Dale v. Guaranty Nat'l. Ins. Co., 948 P.2d 545, 552-53 (Colo. 1997); Barnes v. Okla. Farm Bureau Mut. Ins. Co., 11 P.3d 162, 168 (Okla. 2000).

(11.) Fletcher v. W. Nat'l Life Ins. Co., 89 Cal. Rptr. 78, 87 (Ct. App. 1970) (threatening to rescind disability policy); Zilisch, 995 P.2d 276, 281 (although insurer had reasonable basis for denying claim, court affirmed liability for bad faith due to unreasonable claim settlement practices).

(12.) White v. W. Title Ins. Co., 710 P.2d 309 (Cal. 1985).

(13.) Davis v. Blue Cross, 600 P.2d 1060 (Cal. 1979); Boicourt v. Amex Assur. Co., 93 Cal. Rptr. 2d 763 (Ct. App. 2000); Lynch v. Mid-America Fire and Marine Ins. Co., 418 N.E.2d 421 (Ill. App. Ct. 1981).

(14.) Anderson v. Continental Ins. Co., 271 N.W.2d 368, 376 (Wis. 1978).

(15.) Id. at 377; see also Nat'l Sec. Fire & Cas. Co. v. Bowen, 417 So. 2d 179, 183 (Ala. 1982); Travelers Ins. Co. v. Savio, 706 P.2d 1258, 1274 (Colo. 1985); Curry v. Fireman's Fund Ins. Co., 784 S.W.2d 176, 178 (Ky. 1989).

(16.) 692 F.2d 551,557 (9th Cir. 1982).

(17.) See, e.g., Opsal v. United Servs. Auto. Assoc., 10 Cal. Rptr. 2d 352,357 (Ct. App. 1992); Filippo Indus., Inc. v. Sun Ins. Co., 88 Cal. Rptr. 2d 881, 886 (Ct. App. 1999).

(18.) 97 Cal. Rptr. 2d 386 (Ct. App. 2000).

(19.) Id. at 391-93.

(20.) See, e.g., Lunsford v. Am. Guar. & Liab. Ins. Co., 18 F.3d 653, 656 (9th Cir. 1994); Brinderson-Newberg Joint Venture v. Pac. Erectors, Inc., 971 F.2d 272,283 (9th Cir. 1992).

(21.) 237 E3d 987 (9th Cir. 2001).

(22.) Id. at 994.

(23.) Chateau Chamberay, 108 Cal. Rptr. 2d 776, 785.

(24.) Id.

(25.) Id. at n.7.

(26.) Id. at 785.

(27.) Id. (emphasis in original).

(28.) Id. (emphasis in original).

(29.) Feldman v. Allstate Ins. Co., No. CV 00-10029 CBM(RCX), 2001 WL 1188226 at *7 (C.D. Cal. July 2, 2001); Bean v. Cal. Fair Plan Ass'n, Nos. B146028, BC219530, 2001 WL 1190816 (Cal. Ct. App. 2001).

(30.) Benton v. Allstate Ins. Co., No. CV-00-00499, 2001 WL 210685 at *7 (C.D. Cal. Feb. 26, 2001); Beltran v. Allstate Ins. Co., No. 00-CV-1505-K, 2001 WL 741806 (S.D. Cal. 2001).

(31.) Badell v. Celtic Life Ins. Co., 159 F. Supp. 2d 1186, 1193 (N.D. Cal. 2001).

(32.) Fogel v. Unum Corp., No. B146857, 2001 WL 1359112 (Cal. Ct. App. Nov. 6, 2001). 33. 108 Cal. Rptr. 2d 776, 785.

(34.) See, e.g., Davis, 600 P.2d 1060; Lynch, 418 N.E.2d 421.

(35.) Murray v. Heckler, 722 F.2d 499 (9th Cir. 1983); Regula v. Delta Family-Care Disability Survivorship Plan, 266 F.3d 1130 (9th Cir. 2001); Donoho v. FMC Corp., 74 F.3d 894, 901 (8th Cir. 1996).

(36.) Regula, 266 F.3d 1130, 1139.

(37.) No. 99-56157, 2001 WL 275078 (9th Cir. Mar. 19, 2001).

(38.) See Moore v. Am. United Life Ins. Co., 197 Cal. Rptr. 878 (Ct. App. 1984) ("The test of total disability ... requires that the real-world employment marketplace be considered in determining whether an insured is totally disabled."). In Fontaine, the court upheld dismissal of the claim for punitive damages. This appears to be an unfortunate "middle road" approach that some courts may adopt--keeping an insured's bad-faith claim but throwing out punitive damages.

Prepare your insurance bad-faith case with documents available from the ATLA Exchange

The documents listed below and many others pertaining to insurance bad-faith litigation are available from the ATLA Exchange. For more information, visit the Exchange Web site at exchange. atla.org; call [phone] or fax [phone].

Diamond v. General American Life Insurance Co. The plaintiffs' complaint and response to General American's motion for summary judgment in a case alleging breach of contract and bad faith in connection with an insurer's termination of disability benefits. (No. 3376.)

Fisher v. Aetna Life Insurance Co. The plaintiff's memorandum opposing a motion for summary judgment and motions for judgment notwithstanding the verdict, new trial, or remittitur. The case alleged that an insurer acted in bad faith in denying the plaintiff's claim for disability benefits. (No. 3417.)

Hillery v. Connecticut Indemnity Co. The plaintiff's amended complaint, memorandum supporting a motion for partial summary judgment and opposing the defendants' motion for partial summary judgment, supplemental motion for partial summaary judgment, and order granting the plaintiff's motion for partial summary judgment. The case alleged bad faith where an insurer failed to notify its insured of an offer to settle all claims against the insured for an amount that was within his policy limits. (No. 3544.)

Perini Building Co. v. Insurance Co. of the West. The plaintiff's motion for summary judgment and reply memorandum against the defendant's counterclaims and cross-motion for summary judgment; the defendant's opposition to summary judgment and cross-motion for summary judgment and supporting reply; and the court's order regarding summary judgment motions. The case alleged breach of contract and bad faith for an insurance company's denial of payment under a performance bond. (No. 3661).

Skiba v. Fresh Mark, Inc. The plaintiffs' complaint, briefs opposing the defendants' motions to dismiss and for summary judgment, and the court's opinion and entry of judgment. The case alleged bad faith where an employer and the company that administered its insurance claims denied an employee's requests for reasonable and necessary medical treatment. (No. 3646.)

Super v. Agora Syndicate, Inc. The plaintiff's complaint, the defendant's motion for summary judgment and supporting memorandum, the plaintiff's response and memorandum opposing the motion, and reproduced record of the underlying case regarding coverage under a nightclub's commercial general liability policy. The case alleged bad faith and violation of the state unfair-insurance-practices act where an insurer failed to notify the club of its decision to deny coverage or explain the reasons for the denial. (No. 3594.)

Tidwell v. Allstate Insurance Co. The complaint and answer, the defendant's motion for partial summary judgment and supporting brief, the plaintiffs' response and opposing memorandum, the defendant's reply, and deposition transcripts in a case alleging bad faith where an insurer refused to settle a claim for policy limits. (No. 3648.)

Williams v. Garrison. The plaintiffs' trial brief in a case alleging that an insurer acted in bad faith by refusing to settle a claim for death benefits within the statutory period for filing a wrongful death case. (No. 3530.)

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Terrence Coleman and Arnold Levinson are partners in the San Francisco law firm of Pillsbury & Levinson.