California Court Allows Uninsured Motorist Bad Faith Suit to Proceed

In its recent decision in Maslo v. Ameriprise Auto & Home Insurance, 2014 Cal. App. LEXIS 564 (Cal. App. June 27, 2014), the California Court of Appeals for the Second Appellate District had occasion to consider whether an auto insurer’s election to compel arbitration regarding uninsured motorist benefits relieved the insurer of its statutory and common law duties to have fairly investigate, evaluate and process the claim.

Following an auto accident, the insured sought the entire $250,000 limit under his auto policy’s uninsured motorist coverage as compensation for injuries he sustained in an accident with an uninsured, at-fault motorist. Despite providing all medical records concerning his alleged injuries to the insurer, the insurer failed to respond to the claim for coverage. Some five months after the medical records were provided, the insured renewed his demand for payment of UM benefits and demanded a timely response. Two weeks later, the insurer requested an extension of time in which to respond. The insurer subsequently commenced an arbitration proceeding, and in doing so, rejected the insured’s offer to mediate the claim and also failed to make a settlement offer to the insured. The arbitration process took nearly two years to complete, the result of which was an award to the insured in an amount significantly less than the policy’s UM limit.

The insured subsequently commenced a lawsuit alleging that the insurer breached the covenant of good faith and fair dealing by forcing the insured into arbitration without investigating, evaluating and attempting to resolve the claim. Specifically, the insured argued that the insurer had breached its statutory duty of good faith and fair dealing under California Insurance Code section 790.03 by failing to attempt to effectuate a prompt, fair and equitable settlement for a claim in which liability had become reasonably clear, and that as a result, “Plaintiff was forced to go to Arbitration and to incur costs in excess of $25,000 as well as additional attorney fees.”

The insurer demurred on the basis that there had been a “genuine dispute” regarding payment due under the policy, as demonstrated by the arbitrator’s ultimate decision to award less than the policy’s $250,000 limit. The insurer further argued that the insured failed to demonstrate that its failure to make a settlement offer caused a delay in resolving the claim, but instead it was the insured’s overvaluation of his injuries that caused a delay in the claim being resolved. The trial court sustained the demurrer, reasoning that the insured “could not allege causation, as the fact did not show that the appellant’s damages ‘plainly exceed[ed] the unin[su]ed motorist coverage policy limits.”

On appeal, however, the court rejected the trial court’s reasoning. In so ruling, the court held that under California law, the insurer had a duty to act in good faith in the uninsured motorist context just as with any other claim. While the court acknowledged that the “genuine dispute” rule can serve as a defense to a bad faith claim, the court rejected the insurer’s contention that the arbitration award of less than policy limits was evidence of a “genuine dispute,” since the allegations were that the insurer failed to thoroughly and fairly investigate the UM claim before commencing the arbitration. The complaint’s allegations that the insurer was promptly advised of the accident and was provided with medical records, but otherwise made no attempt to investigate the loss until after it rejected the benefits and commenced an arbitration proceeding, demonstrated the lack of a genuine dispute, at least for purposes of sustaining a demurrer.

The court also rejected the insurer’s argument that its statutory right to arbitrate disputes over the amount of damages precluded a bad faith finding on the basis of failure to investigate. Specifically, the insurer had argued that it could only be liable for bad faith where the “damages plainly exceed the policy limits.” The court noted that prior California case law made clear that an insurer cannot use the arbitration process to “stonewall” UM/UIM claims by refusing to pay benefits until ordered to do so by an arbitrator. Thus, when damages and liability are reasonably clear, the insurer is under a duty to attempt to effectuate a prompt and fair settlement, the failure of which can constitute bad faith. As the court explained:

An insurer’s statutory duty to attempt to effectuate a prompt and fair settlement is not abrogated simply because the insured’s damages do not plainly exceed the policy limits. Nor is the insurer’s duty to investigate a claim excused by the arbitrator’s finding that the amount of damages was lower than the insured’s initial demand. Even where the amount of damages is lower than the policy limits, an insurer may act unreasonably by failing to pay damages that are certain and demanding arbitration on those damages.

The court, therefore, held the insured adequately pled a cause of action for bad faith, as he alleged that the insurer breached its duties by failing to adequately investigate, evaluate, and process the claim, and by failing to attempt to settlement after its liability became reasonably clear.

Finally, the court rejected the lower court’s reasoning that a demurrer should be sustained based on the insured’s failure to demonstrate causation between the insurer’s conduct and the delay in having the claim resolved, agreeing that it was not the insured’s “inflated” settlement demand that caused the delays, but instead the “insurer’s alleged refusal to investigate and process his claim.” Such allegations, agreed the court, in tandem with the allegation that the insurer refused to offer payment and refused to mediate the claim, were sufficient to state a cause of action and to avoid demurrer.


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Traub Lieberman Straus & Shrewsberry LLP on:

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