In general

“Mistaken withholding of policy benefits” is a defense often urged by insurers to a suit filed by the insured for wrongful withholding of policy benefits, i.e. a refusal to pay benefits without proper cause.   Compare § W31 WRONGFUL WITHHOLDING.  [Graciano v. Mercury General (2014) 231 Cal. App. 4th 414, 433-434]  This defense may be raised in differing factual contexts.  Such contexts are:

1.    Is the mistaken withholding based upon a wrongful identity by the third party of the insured or of the  policy in question?  [Graciano v. Mercury General (2014) 231 Cal. App. 4th 414, 433-434 (third party mistakenly identified the named insured and misidentified the policy number)]  Compare § P21.02 PAYMENT OF PROCEEDS TO WRONG PERSON.

2.    Is the mistaken withholding of benefits based upon an insurer’s erroneous belief that the claim is not covered?  [De Witt v. Monterey Ins. (2012) 204 Cal. App. 4th 233, 251]  See § D85 DUTY TO DEFEND [§ D85:18 Duty to defend: Unreasonable denial of defense as bad faith].

3.    Is the mistaken withholding of  benefits based upon the insurer’s “too narrowly” reading of the third party complaint?   [Graciano v. Mercury General (2014) 231 Cal. App. 4th 414, 433-434 (third party mistakenly identified the named insured and misidentified the policy number); Comunale v. Traders (1958) 50 Cal. 2d 654, 660]  See § D85 DUTY TO DEFEND [§ D85:1.6]; § P67 POTENTIAL LIABILITY UNDER POLICY [§ P67:2.5.1 Specific allegations vs. general allegations; both alleged in the third party complaint]; § R5 READING THE COMPLAINT.

Where the mistaken withholding of benefits is performed unreasonably or without proper cause to compensate its insured for a loss covered by the policy, the insurer is acting in breach of the policy terms as well as a potential breach of the duty of good faith and fair dealing.  See § P106.02 PROPER CAUSE; §U24 UNREASONABLY .  

Mistaken withholding of policy benefits based upon the insurer’s mistaken identity of the insured or the policy due to erroneous information furnished by the third party is a withholding of benefits for “proper cause”.  [Graciano v. Mercury General (2014) 231 Cal. App. 4th 414, 433-434]

For related discussions pertaining to mistaken withholding of policy benefits see § B2 BAD FAITH LAWSUIT – FIRST PARTY [§ B2:3.2.2 Evidentiary proof of bad faith by cross-examination of adjuster and/or claims supervisors]; [§ B2:3.5.4 Unfounded basis for denial of claim]; § B3 BAD FAITH LAWSUIT – THIRD PARTY [§ B3:3 Negligence and bad faith, compared; conscious deliberate act required for “bad faith”]; [§ B3:4 Factors: Refusal of insurer to settle with third party]; § D85 DUTY TO DEFEND [§ D85:18 Duty to defend: Unreasonable denial of defense is bad faith]; § S25 SETTLEMENT [§ S25:1.3 Meaning of ‘wrongful’].

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.