12th Nov 2014
Common law rule relating to performance of a contract
It is Hornbook law that where one contracting party prevents the other’s performance of a condition precedent, the party burdened by the condition is excused from performing it, and the benefitted party’s duty of performance becomes unconditional. The law does not merely prohibit a contracting party from actively interfering with the other’s performance of a condition; it may also impose a duty to affirmatively cooperate in that performance. If one party’s cooperation is “necessary for successful performance” by the other, the contract will generally be held to include an implied obligation to “give the cooperation” as well as to refrain from doing “anything that prevents the realization of the fruits of the performance”. [City of Hollister v. Monterey Ins. Co. (2008) 155 Cal. App. 4th 455, 490-491] See § C116.01 COOPERATION REQUIRED OF INSURER; § F7 FAIR CLAIMS SETTLEMENT PRACTICES REGULATIONS.
Subterfuges and evasions
Subterfuges and evasions violate the obligation of good faith and performance even though the actor believes his conduct to be justified. [R.J. Kuhl Corp. v. Sullivan (1993) 13 Cal. App. 4th 1589, 1602 (scheme to deprive a broker of a real estate commission; nontort action)] An insurance company is liable for a reasonable but incorrect decision causing it to pass up a settlement offer made within the insured’s policy limits. [Griffin Dewatering Corp v. Northern Ins. Co. of New York (2009) 176 Cal. App. 4th 172, 206, fn. 38] See § S25 SETTLEMENT [§ S25:2.5].
The obligation of good faith and performance goes further; bad faith may be overt or may consist of inaction and fair dealing may require more than honesty. [R.J. Kuhl Corp. v. Sullivan (1993) 13 Cal. App. 4th 1589, 1602] For example, 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 (2007) 148 Cal. App. 4th 1062, 1072] See § B2 BAD FAITH LAWSUIT – FIRST PARTY [§ B2:3.2 “Duties” or “characteristics” of the “akin to fiduciary relationship” of insurer and insured]; [§ B2:3.4 The Standard of reasonableness may require an insurer to conduct an independent investigation].
Catalogue of “types” of bad faith
The complete catalogue of types of bad faith is impossible, but the following types are among those which have been recognized in judicial decisions.
1. Evasion of the spirit of the bargain,
2. Lack of diligence and slacking off,
3. Abuse of a power to specify terms, and
4. Interference with or failure to cooperate with the other party’s performance. [R.J. Kuhl Corp. v. Sullivan (1993) 13 Cal. App.4th 1589, 1602]
The basic rule of reasonableness of coverage decisions made by an insurer is the same for first and third party insurance policies. [Griffin Dewatering Corp. v. Northern Ins. Co. of New York (2009) 176 Cal. App. 4th 172, 206] For a discussion and illustration of numerous appellate decisions involving concealment, see § B2 BAD FAITH LAWSUIT – FIRST PARTY [§ B2:3.5.3 Illustrations of conduct and tactics for which first-party insurers have been held liable]. That mostly related to the issue of concealment by an insurance company is when the insurance company denies a claim on an unfounded basis. See discussion at § B2 BAD FAITH LAWSUIT – FIRST PARTY [§ B2:3.5.4 Unfounded basis for denial of claim].
Disclosures must be made by insurer
Every insurer must disclose to a first party claimant or beneficiary the following:
1. All benefits,
2. All coverages,
3. All time limits, and
4. Other provisions of any insurance policy issued by the insured that may apply to the claim presented by the claimant. [Cal. Code Regs., Title X, Chapter 5, Subchapter 7.5, § 2695.4] See § D56 DISCLOSURE OF BENEFITS UNDER FIRST PARTY POLICY [§ D56:1 Duty of insurer on or after presentment of claim by insured].
Duty to defend claim by insured
When an insured/additional insured makes a demand for a defense under a liability policy, is a party making a first party demand for coverage. [Safeco Ins. v. Parks (2009) 170 Cal. App. 4th 992, 1006] See discussion at § F30 FIRST PARTY COVERAGE [§ F30:4 The duty-to-defend is first party coverage].
The fact that the duty-to-defend is first party coverage is further established by the fact that supplementary payments which include the payment of defense costs, is a benefit to the named insured, not a third party. [Clark v. California Ins. Guarantee (2011) 200 Cal. App. 4th 391, 395] Accordingly, unless a third party judgment creditor obtains an assignment from the insured for its rights under the insurance contract, the third party has no right to bring a claim upon the duty owed only to the insured. See § S124 SUPPLEMENTARY PAYMENT [§ S124:01 – 124:02].
An insurer that lies about no existence of coverage and/or never advises about availability of coverages may be guilty of bad faith, which action can support punitive damages. [Amerigraphics Inc. v. Mercury Cas. (2010) 182 Cal. App. 4th 1538, 1559-1560; Bock v. Hansen (2014) 225 Cal. App. 4th 215, 223] See § F8.02 FALSE STATEMENT BY INSURER OR ADJUSTER.
Ignorance alleged by insurer as defense to bad faith
An insurer denying benefits under a first party property policy or third party liability policy may contend as part of its defense that its adjuster or representative was “merely negligent” or merely exercised “mistake in judgment”. For multiple responses to this contention see § I.02 IGNORANCE OF INSURER [DUTY TO DEFEND; DUTY TO SETTLE].
Subjective belief of insurer
An insurer’s subjective knowledge can be relevant to the objective determination of bad faith. An insurer’s awareness of a claim for which a potential for coverage exists is relevant to a determination of whether its failure to defend is in bad faith. An insurer’s setting of reserves with respect to the insured’s claim potentially may be relevant to a determination of whether its delay in paying the insured’s full claim is in bad faith. [Bosetti v. US Life (2009) 175 Cal. App. 4th 1208, 1239, fn. 24] See discussion at § S103.03 SUBJECTIVE BELIEF OF THE INSURER AND INSURED.
References in bold are to Mr. Cornblum’s legal text CALIFORNIA INSURANCE LAW DICTIONARY AND DESK REFERENCE (2014), published by ThomsonReuters (1-800-344-5008). Those with WestLaw can search using the database CAINLAWDDR