Winning Isn’t Everything: Insurer’s Arbitration Success Does Not Prevent Claim for Bad Faith Failure to Settle

more+
less-

Winning Isn’t Everything: Insurer’s Arbitration Success Does Not Prevent Claim for Bad Faith Failure to Settle

After he was rear-ended by a driver without insurance, the plaintiff in Maslo v. Ameriprise Auto & Home Insurance, No. B249271 (Cal. App. Ct. June 27, 2014) incurred $64,000 in medical expenses, but he filed a claim with his own insurer for the $250,000 limit on his uninsured motorist coverage.  The claim was arbitrated, and he received another $100,000 for “general damages” (popularly known as “pain and suffering”), for a total award of $164,000.

In June, a California appellate court held that these facts do not establish the existence of a “genuine dispute” about the amount the plaintiff was due, and so that the insurer could still be liable for bad faith in connection with the claim.  The court’s ruling was based on allegations that the insurer had failed to conduct a legitimate investigation and made no good faith attempt to settle the claim, and that it had thereby forced the plaintiff to incur the costs of arbitration.  The court’s reasoning suggests insurers might have to make pro forma settlement offers, even where arbitration seems inevitable, to avoid additional litigation costs and possible extra-contractual liability.

Arbitrating Pain and Suffering

The accident occurred in September 2008, and an LAPD collision report concluded that the uninsured driver had been the sole cause.  In August 2009, the plaintiff sent his insurer a copy of that report, together with $64,000 in medical bills, and demanded a settlement at the policy limit of $250,000.  The insurer allegedly did not respond, and allegedly declined thereafter either to participate in mediation or to make a counter-offer.  Pursuant to Cal. Ins. Code § 11580.2, the plaintiff’s policy provided that the amount of the plaintiff’s recovery should be decided by agreement of the parties or by arbitration.  Before the arbitration hearing, the parties conducted discovery, but the insurer did not schedule any depositions or conduct a medical examination; instead, it stipulated to the amount of plaintiff’s medical expenses.

It appears, therefore, that the only issue for the arbitration was the amount of “general damages.”  The arbitrator awarded $100,000, which made the total award significantly less thanthe plaintiff’s original demand—especially in light of the relatively small, stipulated amount of special damages.

The Trial Court Dismisses the Bad Faith Claim

The plaintiff filed an action against his insurer in California Superior Court.  In his Second Amended Complaint, he sought $25,000 for the costs of the arbitration, as well as additional attorneys’ fees.  He alleged that the insurer had violated Cal. Ins. Code § 790.03(h)(5), by failing to “attempt in good faith to effectuate [a] prompt, fair, and equitable settlement of [a] claim in which liability ha[d] become reasonably clear.”

The trial court dismissed the complaint, without leave to replead, on the ground that the plaintiff could not establish causation:  he could not show, that is, that the arbitration and its attendant costs had been caused by the insurer’s failure to make an offer, rather than by the excessive amount of his own demand.  Because it sustained the demurrer on this basis, the court did not reach the insurer’s second argument—that it could not be liable for bad faith if there was a “genuine dispute” over the amount due under the policy, and that the result of the arbitration established such a dispute.

Court of Appeal:  Make Him an Offer He Can Refuse

The Court of Appeal reversed, ruling that the plaintiff had stated a claim for bad faith.

To begin with, the court declared that an insurer has “a duty to investigate a submitted claim and to attempt in good faith to effectuate a prompt and equitable settlement” if liability has become “reasonably clear.”  The fact that a California insurer has a statutory right to resolve claims through arbitration, the court held, does not “abrogate” that duty.  And it found that the “genuine dispute rule” simply does not apply where the insurer is guilty of “inadequate investigation and dilatory claim handling procedures.”

At least as important as these legal conclusions is the manner in which they were applied to the allegations in the plaintiff’s complaint.  Although the amount of special damages—the amount of medically necessary costs incurred as a result of the accident—was not in dispute in this case, the court found that the insurer’s failure to “interview [plaintiff’s] treating physicians, [or] conduct its own medical examination” could still establish a breach of its duty to investigate the claim.

Additionally, the fact that the plaintiff’s demand for general damages—reimbursement for pain and suffering—was nearly twice what the arbitrator would ultimately award did not preclude a finding of bad faith failure to settle.  In the court’s estimation, the insurer could still be liable, based on the plaintiff’s allegations that “it failed to respond in good faith to [the plaintiff’s] settlement demand, made no settlement offer, failed to provide a reason for withholding payment, refused appellant’s offer to participate in mediation, and provided appellant no opportunity to negotiate a settlement.”

Maslo suggests, therefore, that an insurer must try to help its insured avoid arbitration, even if the insured’s demands appear extreme or unreasonable.  As a practical matter, the court seems to demand that the insurer make somedefensible offer of settlement before arbitration, even if it is likely to be rejected.  Failure to make such an offer will not necessarily lead to a finding of bad faith—the Maslo case has not yet proceeded beyond the motion stage—but it will significantly increase the insurer’s risk of incurring additional litigation expense.

Of course, the same court that decided Maslo has also held that insurers may be liable for bad faith if they make “low ball” offers of settlement.  E.g., Rigby v. 20th Century Ins. Co., 2004 WL 1941229 (Cal. App., 2 Distr. 2004).  Exactly how an insurer is supposed to rescue a policyholder from arbitration, in the face of his or her own intransigence, must therefore be resolved on a case-by-case basis.

UIM Claims are First Party Claims

One additional issue that the appellate court addressed in Maslo was the insurer’s assertion that claims under uninsured motorist coverage are subject to a different good-faith standard from ordinary first-party claims.  Because UIM claims put the insurer in the shoes of the liability carrier for the uninsured tortfeasor, the insurer’s relationship with its insured may be considered analogous to the one that governs third-party claims.  Maslo rejected that argument, however, citing a 40-year-old decision of the California Supreme Court, Gruenberg v. Aetna Ins. Co., 9 Cal.3d 566 (1973)—a case that did not, in fact, involve a UIM claim.

In a footnote, the Maslo court described the holding in Gruenberg in this way:

[A]n insured may bring a tort action against an insurer who fails to bargain in good faith in a “first-party” situation, that is, a situation where the insurer agrees to pay claims submitted to it by its insured for losses suffered by the insured.

Using that definition, the court found it was “undisputed that the instant case is a first-party insurance action,” to which the first-party standards of good faith apply.

Image source: Seattle Municipal Archives (Flickr)

Topics:  Arbitration, Auto Insurance, Bad Faith, Car Accident, Insurers, Uninsured and Under-Insured Motorists

Published In: Alternative Dispute Resolution (ADR) Updates, Civil Procedure Updates, Civil Remedies Updates, Insurance Updates, Personal Injury Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Carlton Fields Jorden Burt | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »