The California Court of Appeal has ruled that the “genuine dispute” rule does not bar a complaint for bad faith where the insured alleges, in detail, that the insurer knowingly conducted a biased and incomplete investigation for the specific purpose of minimizing the insured’s claim. ( Brehm v. 21st Century Insurance Company (2008) 166 Cal.App.4th 1225)
Facts
Stuart Brehm filed a bad faith suit against 21st Century Insurance Company arising out of 21st Century’s handling of a claim for underinsured motorist (UIM) benefits. Brehm’s parents were named insureds (and Brehm qualified as an insured) on a policy issued by 21st Century. The 21st Century policy provided underinsured motorist (UIM) benefits of $100,000 per person.
Brehm alleged that he, his father and his mother all were injured in a traffic accident caused by a third party, who had liability insurance with a limit of $30,000 per accident. The third party’s insurance carrier exhausted its limit by paying $10,000 to Brehm, $10,000 to Brehm’s father and $10,000 to Brehm’s mother.
In addition, Brehm alleged he made a UIM claim against 21st Century, and submitted medical reports, bills and diagnostic test results that showed he had suffered “a severe shoulder injury that would require costly surgery and related costs and expenses.” Brehm further alleged that he initially demanded $85,000 under the UIM coverage and that, in response, 21st Century arranged for a biased doctor, who was a professional expert witness, to examine Brehm. According to Brehm, 21st Century’s expert concluded that Brehm had only suffered “soft tissue” injuries and that surgery was not necessary. Based on this examination, 21st Century offered to pay Brehm only $5,000 under the UIM coverage.
Brehm also alleged that he then submitted to “a truly independent medical examination” by another doctor. That doctor concluded that Brehm had indeed suffered a shoulder injury and that it was “more likely than not” that Brehm would require surgery. Based on this report, Brehm demanded that 21st Century pay $90,000 (i.e., the $100,000 UIM limit less the $10,000 the third party’s insurer had paid). However, Brehm alleged, 21st Century again offered only $5,000. Brehm ultimately obtained an arbitration award of $90,000, which 21st Century paid.
The trial court ruled that, at most, the allegations in Brehm’s complaint showed the parties’ experts had differing views regarding the extent of Brehm’s injuries, and that there was a “genuine dispute” about the issue. Thus, the trial court sustained 21st Century’s demurrer to Brehm’s complaint and entered judgment in favor of 21st Century. Brehm appealed.
Holding
The Court of Appeal reversed, holding that Brehm’s allegations, although not yet proven, were sufficient to at least state a cause of action for bad faith. Among other things, the Court reiterated that “[t]he genuine dispute rule does not relieve an insurer from its obligation to thoroughly and fairly investigate, process and evaluate the insured’s claim,” and that “an expert’s testimony will not automatically insulate an insurer from a bad faith claim based on a biased investigation.” In essence, the Court held that, if Brehm could actually prove that 21st Century had knowingly selected a biased expert for the specific purpose of minimizing the amount Brehm could collect, then the “genuine dispute” rule would not apply.
Comment
Although the existence of a “genuine dispute” about coverage or damages often negates “bad faith,” the dispute must in fact be genuine. In this case, the insured alleged that the insurer knowingly chose a biased expert for the specific purpose of minimizing the insured’s claim. Among other things, this case reinforces the notion that insurers must honestly and fairly select their experts, must reasonably evaluate their experts’ opinions and must otherwise conduct thorough investigations.