14th Jun 2013
[DUTY TO DEFEND; DUTY TO SETTLE]
State v. Continental Ins. Co. (2012) 55 Cal.4th 186
An insurer denying benefits under a first party property policy or third party liability policy may contend as part of its defense that it’s adjuster or representative was “merely negligent” or merely exercised a “mistake in judgment.” [Adelman v. Associated Intern. Ins. Co., 90 Cal. App. 4th 352, 369-370, 108 Cal. Rptr. 2d 788 (2d Dist. 2001); but see Amerigraphics, Inc. v. Mercury Cas. Co., 182 Cal. App. 4th 1538, 1560, 107 Cal. Rptr. 3d 307 (2d Dist. 2010) (negligent or incompetent claims handling; attempted “spin of the facts” by insurer to avoid bad faith and punitive damages is a question of fact for the jury)] See § S25 SETTLEMENT [§ S25:5 Negligent and bad faith, compared; liability insurer not liable for mere negligence handling of a claim], [See No. 12 and No. 13, infra, this section]. Such alleged excuses based upon ignorance urged by insurer include:
1. The adjuster’s conduct was mere negligence. See § S25 SETTLEMENT [§ S25:5].
2. The insurer did not act dishonestly. See § B2 BAD FAITH LAWSUIT—FIRST PARTY [§ B2:3 Absent of breach of contract, “bad faith” does not exist; Dishonesty not required].
3. The adjuster or claims representative ignored existing evidence available to it inadvertently. See § B2 BAD FAITH LAWSUIT—FIRST PARTY [§§ B2:3.5.5 to B2:3.5.6].
4. The adjuster or claims representative innocently misread the complaint. See § R5 READING THE COMPLAINT [§ R5:1].
Insured’s responses to contentions of ignorance
An insurer is charged with knowledge of all information a diligent inquiry would have revealed. [OneBeacon America Ins. Co. v. Fireman’s Fund Ins. Co., 175 Cal. App. 4th 183, 205-206, 95 Cal. Rptr. 3d 808 (2d Dist. 2009)] Due diligence is defined as: “The diligence reasonably expected from, and ordinarily exercised by, a person who seeks to satisfy a legal requirement or to discharge an obligation.” [Black’s Law Dictionary (9th), page 523 (Due diligence)] See § D41.03 DILIGENT SEARCH; DUTY OF INSURER]
An insured’s response to an insurer’s claim of ignorance, “mere negligence,” innocence or mere mistake in judgment may include one or more of the following principles which refute such defenses to bad faith. Each principle discussed below should be submitted as a jury instruction on the theory that they are offered to refute the insurer’s claim of ignorance, “mere negligence,” or mere mistake.
1. The insurer cannot perform acts of subterfuge or perform acts of evasion. The Supreme Court has emphasized that in order to protect the interest of the insured, it is essential that an insurer FULLY INQUIRE into the possible basis that might support the insured’s claim. [Jordan v. Allstate Ins. Co., 148 Cal. App. 4th 1062, 1072, 56 Cal. Rptr. 3d 312 (2d Dist. 2007)] See § B3 BAD FAITH LAWSUIT—THIRD PARTY [§ B3:2.01 Bad faith; improper conduct prohibited by insurer].
2. Constructive notice. The law will charge a party with notice of all those facts which he or she might have ascertained had he or she diligently pursued the requisite inquiry. [California Shoppers, Inc. v. Royal Globe Ins. Co., 175 Cal. App. 3d 1, 37, 221 Cal. Rptr. 171 (4th Dist. 1 9 8 5 ) ] See § D14 DEFAULT JUDGMENT—AGAINST NAMED INSURED [§ D14:5 Binding on insurer].
3. When investigating a claim, an insurance company has a duty to diligently search for evidence which supports its insured’s claim. If it seeks to discover only the evidence that defeats the claim it holds its own interest above that of the insured. [Mariscal v. Old Republic Life Ins. Co., 42 Cal. App. 4th 1617, 1620, 50 Cal. Rptr. 2d 224 (2d Dist. 1996)] See § I81 INVESTIGATE: DUTY OF INSURER—FIRST PARTY POLICY [§ I81:2 “Thoroughly investigate” defined]; § D41.03 DILIGENT SEARCH; § I80 I N V E S T I G A T E : D U T Y O F INSURER—DUTY TO DEFEND [§ I80:3.1 Failure to perform a thorough investigation of all the facts].
4. Search for all policies. An insurer has a duty to search for all policies. See § A13.02 ACTION ON A SECOND POLICY [§ A13.02:6].
5. Dishonesty. Dishonesty on behalf of the insurer is not a required element. See § B2 BAD FAITH LAWSUIT—FIRST PARTY [§ B2:3]; § D64 DISHONESTY [§ D64:1].
6. Full investigation. A claim cannot be denied without the insurer fully investigating the grounds for its denial. See § B2 BAD FAITH LAWSUIT—FIRST PARTY [§ B2:3.4 The standard of reasonableness may require an insurer to conduct an independent investigation].
7. Contradictory facts exist. Denial of a claim contradicted by existing facts may be deemed unreasonable by a jury. See § B2 BAD FAITH LAWSUIT—FIRST PARTY [§ B2:3.5.5].
8. Reading the complaint. Merely “perusing” the complaint does not fulfill the insurer’s responsibilities to the insured. The Court of Appeal has rejected the blanket proposition that an insurer always fulfills its fiduciary duty to its insured by merely perusing the complaint and examining its policy. [Eigner v. Worthington, 57 Cal. App. 4th 188, 198, 66 Cal. Rptr. 2d 808 (4th Dist. 1997)] See § R5 READING THE COMPLAINT BY INSURER [§ R5:1 In general].
9. Doubt. Any doubt as to whether the facts create a duty to defend is resolved in favor of the insured. [Smith Kandal Real Estate v. Continental Cas. Co., 67 Cal. App. 4th 406, 414, 79 Cal. Rptr. 2d 52 (4th Dist. 1998)] See § P67 POTENTIAL LIABILITY UNDER POLICY [§ P67:10 Proof of potential coverage under the policy for the underlying claim against the insured].
10. Duty to discover evidence. A failure of the insurer to consider, or seek to discover evidence relevant to the issues of liability and/or damages is “bad faith.” [Mariscal v. Old Republic Life Ins. Co., 42 Cal. App. 4th 1617, 50 Cal. Rptr. 2d 224 (2d Dist. 1996)] To protect its insureds’ security and peace of mind, it is essential that an insurer fully inquire into possible basis that might support the insurer’s claim for denying it. [Wilson v. 21st Century Ins. Co., 42 Cal. 4th 713, 721, 68 Cal. Rptr. 3d 746, 171 P.3d 1082 (2007)] See § B2 BAD FAITH LAWSUIT—FIRST PARTY [§ B2:17 Failure of insurer to consider, seek to discover, failure to investigate].
11. Wrongfully interpreting the policy. A wrongful interpretation by the insurer of its own first party policy may be bad faith. See § B2 BAD FAITH LAWSUIT—FIRST PARTY [§ B2:30 Wrongful interpretation by insurer of its own first party policy may be bad faith]; [§ B2:3.5.3 Illustrations of conduct and tactics for which first-party insurers have been held liable]; [§ B2:3.5.4 Unfounded basis for denial of claim].
12. Ignoring facts. The insurer cannot ignore facts submitted on behalf of the insured. Such conduct is inconsistent with the implied covenant of good faith and fair dealing. [Wilson v. 21st Century Ins. Co., 42 Cal. 4th 713, 722, 68 Cal. Rptr. 3d 746, 171 P.3d 1082 (2007)].
13. Insurer’s head in the sand. An insurer cannot hide its head in the sand when it is performing a reasonable investigation. [Betts v. Allstate Ins. Co., 154 Cal. App. 3d 688, 707, 201 Cal. Rptr. 528 (4th Dist. 1984)].