Beware of Insurance Bad Faith

In exchange for policyholders paying insurance premiums, insurance companies have a legal duty to provide coverage, uphold the terms of the policy and pay valid claims. When a claim is made, the insurance company will evaluate the claim and determine coverage.  If coverage is denied for an invalid reason or the payment offer is not reasonable a policy holder can claim that the insurance company is acting in “bad faith.”  In such instances the policy holder can take legal action against the insurance company, arguing that the insurance company failed to uphold its end of the bargain on the insurance contract. In California, the following acts and conduct can qualify as bad faith: unreasonable denial of policy benefits, misrepresenting facts or policy, failing to respond or act promptly, not having reasonable standards for the prompt investigation and processing of claims, and refusing to make a good faith effort to settle claims when liability is reasonably clear. 

The first appellate district court of Mendocino County recently reversed a judgement relating to insurance bad faith. The Fadeeff’s (Plaintiffs) home and personal property were damaged by the 2015 Valley Fire that burned in Northern California. Their home insurance provider and defendant, State Farm General Insurance Company, covered building loss and personal property under their homeowners policy. The Fadeeffs reported the damage caused by the wildfire and shortly thereafter.

State Farm inspected the Fadeeff’s property on October 3, 2015. The adjuster noted that the home was well maintained and that all damage is related to smoke and soot. State Farm paid for cleaning, repairs and some living expenses totaling $50,000. The Fadeeffs then hired a public adjuster and submitted supplemental claims for further repairs totaling $75,000. State Farm then sent an independent, non-licensed adjuster who claimed that he could not find smoke damage. A Forensic Analytical Consulting Service (FACS) and HVAC company were also called to inspect the home, however, neither abided by the insurance companies Operations Gide. State Farm denied the supplemental demand for additional repairs.

The Fadeeff’s sued State Farm for bad faith, claiming a breach of the implied covenant of good faith and fair dealing in their property policy.  They sought not only the actual damages claimed for repairs but additionally punitive damages to punish the insurance company for their purported improper actions.  State Farm moved for summary judgement on the ground that the “genuine dispute” doctrine defeats the ad faith claim where an insurer reasonably relies upon an expert.  Under the “genuine dispute” doctrine, an insurer is entitled to summary judgment on a bad faith claim if “there is a genuine issue” as to existence of coverage.

State Farm argued that the retention of FACS and HVAC companies demonstrated its good faith effort and showed that there was a genuine dispute as to damages entitling them to summary judgement.  The trial court agreed and granted State Farm’s motion for summary judgement.

On appeal the judgement was reversed, the court finding that the actions of the non-licensed adjuster and inspectors, which were not in conformance with State Farm’s Operations Guide, did not create the genuine dispute necessary to support the summary judgment motion.

As this case demonstrates, bad faith disputes are complex.  If you feel your insurance company is not properly addressing a claim retention of an expert who can assist is warranted as failure to follow timelines and procedures can impact your claim.