20th Oct 2014
Negligence of an insurer can arise as an alleged basis for liability in several different contexts. The insured (or an assignee of an insured) may contend that the insurer is liable due to the fact that an adjuster negligently handled the claims adjustment process. An insured may contend that the insurer’s negligence is a basis for “bad faith”, and if so the insured (or its assignee) is entitled to tort damages. An insured may claim the insurer wrongfully denied a defense to the insured based upon the insurer’s negligence in failing to investigate.
The law as it relates to each contention above is the following:
1. Negligent claims adjusting
Negligence is not a basis of recovery against an insurer. [Sanchez v. Lindsey Morden Claims Services (1999) 72 Cal. App. 4th 249, 254 (suit against adjuster cannot be based upon negligence); Bock v. Hansen (2014) 225 Cal. App. 4th 215, 227, fn. 5 (adjuster can be liable for negligent misrepresentation of the facts as a basis for denying a claim)] See also § A28 ADJUSTER; § I23 INDEPENDENT ADJUSTER [§ I23:2 Negligence: no liability to third party]; § D45 DIRECT ACTION AGAINST INSURANCE CO. [§ D45:4]. For discussion of improper claims handling see § C32.03 CLAIMS HANDLING AND TACTICS.
2. Bad faith [breach of implied covenant of good faith and fair dealing]
Mere mistake in judgment or negligence alone is not a basis for a “bad faith” claim against the insurer. [Adelman v. Associated (2001) 90 Cal. App. 4th 352, 369-370] See § B2 BAD FAITH LAWSUIT – FIRST PARTY [§ B2:3.1]; but compare § I.02 IGNORANCE OF INSURER [§ I.02:1 In general].
3. Duty to defend
If an insurer denies a defense to an insured, the only issue is whether or not the denial is wrongful. Wrongful denial in this context means merely an erroneous denial of coverage. [Johansen v. California State Auto (1975) 15 Cal.3d 9, 16] An insurer’s belief in the non-existence of coverage even if not entirely groundless is not a defense for the insurer. [Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 660] See § D85 DUTY TO DEFEND [§ D85:18 Duty to defend: Unreasonable denial of defense as bad faith]; CACI 2336 discussed at § J13.03 JURY INSTRUCTIONS [§ J13.03:4.17.
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.