In 501 East 51st Street etc. v. Kookmin Best Ins. Co., Ltd. (No. B293605, filed 4/2/20, ordered pub. 4/16/20), a California appeals court affirmed summary adjudication and dismissal of a bad faith claim based on the genuine dispute doctrine.
501 East 51st Street Long-Beach-10, LLC (501) was the owner of a 10-unit apartment complex, insured by Kookmin Best. In 2017, an underground water main alongside the building burst which, according to 501, caused the building to move and crack. 501 made a claim and supplied a geotechnical report finding cracks in the foundation walls, cracks in the stucco and significant floor deformation and tilting near the water leak. The engineer’s opinion concluded that that “existing building distress was substantially contributed to by the water main break. The water introduced to the soil medium appears to have triggered differential foundation movement causing the stress features to develop.”
Kookmin retained its own engineers to investigate, who returned an opinion that the leak had exacerbated long-term pre-existing settlement which would continue. Under the policy, damage to the building caused by earth movement and settlement were excluded, but water damage resulting from an “accidental discharge” of water was covered. Kookmin then obtained an opinion from coverage counsel, who opined that only damage allocable to the water leak would be covered.
Kookmin sought further investigation and testing, which uncovered evidence of prior repairs. And a geotechnical engineer gave Kookmin an opinion that the pipe leak did not contribute to the building tilting or cracks. In addition, a pre-purchase inspection report from five years earlier contained references to stucco, slab and drywall cracks. Based on the additional reports, Kookmin’s coverage counsel gave an opinion that the efficient proximate cause of the loss was long-term soil movement, excluded from coverage. Kookmin then denied coverage.
In the following bad faith lawsuit, Kookmin moved for summary adjudication of plaintiff’s claim for breach of the covenant of good faith and fair dealing arguing that the “genuine dispute doctrine” provided a complete defense to a finding of bad faith.
In opposing, 501 pointed out that Kookmin’s experts had originally agreed that some damage was caused by the leak, from which it could be inferred that Kookmin sought further opinions in a bad faith effort to deny the claim. Also, claim file notes indicated an initial decision to pay for certain of the damage. And 501 argued that a follow-up report from Kookmin’s original experts had been changed in its phrasing to emphasize preexisting damage. Finally, 501 argued that the summary adjudication motion should be denied based on section 437c(h) of the summary judgment statute, which authorizes denial or continuances of summary judgment motions if it appears facts may exist to oppose the motion but cannot be presented. (Code Civ. Proc., § 437c(h).) 501 argued that Kookmin company witnesses had been instructed not to answer 53 questions in deposition, which answers would have led to admissible evidence to oppose the motion.
The trial court granted summary adjudication and the appeals court affirmed. The appeals court first recited the rule that “If a loss was caused by more than one occurrence, including covered and not-covered events, then the insurer is liable only if the ‘efficient proximate cause’ or the ‘predominate’ cause was a covered risk.” (Citing City of Carlsbad v. Insurance Co. of State of Pennsylvania (2009) 180 Cal.App.4th 176, 183.) The 501 court then explained the genuine dispute doctrine, stating:
“’Where there is a genuine issue as to the insurer’s liability under the policy for the claim asserted by the insured, there can be no bad faith liability imposed on the insurer for advancing its side of that dispute.’… [¶] ‘The ‘genuine dispute’ doctrine may be applied where the insurer denies a claim based on the opinions of experts.’… Reliance on an expert… ‘will not automatically insulate an insurer from a bad faith claim based on a biased investigation.’… Although an insurer may rely on experts, summary judgment on a bad faith claim must be denied where the evidence shows ‘the insurer dishonestly selected its experts[,] the insurer’s experts were unreasonable[,] [or] the insurer failed to conduct a thorough investigation.’” (Quoting McCoy v. Progressive West Ins. Co. (2009) 171 Cal.App.4th 785, 793.)
The 501 court rejected the argument that evidence of uncertainty as to cause and origin or “unknowns” in the course of the claim investigation raised an inference of bad faith, stating:
“We agree with the trial court’s assessment that none of plaintiff’s evidence raised a triable issue that this was not a genuine coverage dispute. There is no dispute that defendants based their claim denial on the final expert report, and there is no evidence that report was contrived or false. As the trial court aptly stated, ‘Initial opinions are often superseded by further investigation.’”
The 501 court also rejected the section 437c(h) argument because there was no explanation how the supposedly missing evidence would have changed the result: “Counsel’s supporting declaration was very general, and did not explain why the answer to any of the questions at the PMK deposition was essential to opposing the summary adjudication motion. The only testimony that plaintiff complains it was unable to obtain was an opinion about whether denial of the claim was ‘appropriate,’ and we see no reason to conclude the PMK’s opinion, whether yes or no, would be a material fact, or that it was essential to oppose the motion.”