The California Court of Appeal has held that an insurer’s alleged inadequate investigation of a first-party fungus/collapse claim exposed the insurer to possible bad faith liability, and that the evidence of bad faith was sufficient to create a triable issue of fact. ( Jordan v. Allstate Insurance Co. (2007) WL 852632)
Facts
Mary Ann Jordan purchased a homeowner’s policy from Allstate Insurance Company. The policy provided “all-risk” coverage subject to certain exclusions. Among other things, the policy excluded coverage for loss caused by or consisting of (1) “wet or dry rot” or (2) “collapse.” However, the “collapse” exclusion was subject to an exception that provided coverage for “the entire collapse of a covered building structure” and “the entire collapse of a part of a covered building structure,” if caused by various perils, including “hidden decay of the building structure.”
Jordan discovered that a window had fallen out of the wall of her living room and that the floorboards in the corner of the living room were “giving way.” She hired an expert, who concluded that the damage was caused by a fungus known as poria incrassata . Jordan submitted a claim, which Allstate denied based on the exclusion for “wet or dry rot.” Jordan then sued Allstate for breach of contract and bad faith, but the trial court entered summary judgment in favor of Allstate.
On Jordan’s first appeal, the Court of Appeal concluded that, although Allstate’s interpretation of the policy was reasonable, the “wet or dry rot” exclusion and the additional coverage for “collapse” caused by “hidden decay” were contradictory and confusing, thus creating an ambiguity. Thus, the Court of Appeal concluded that Jordan could demonstrate the existence of coverage for her loss if she could establish the occurrence of an “entire” (meaning “actual,” not “imminent”) collapse.
Upon return of the case to the trial court, Allstate moved for summary adjudication of Jordan’s cause of action for bad faith, arguing that since the Court of Appeal already had concluded that Allstate’s interpretation of its policy was reasonable (even though erroneous), Allstate had not acted in bad faith as a matter of law. The trial court was persuaded by that argument and granted Allstate’s motion.
Holding
On Jordan’s second appeal, the Court of Appeal held that although Allstate’s interpretation of the policy was reasonable as a matter of law, there were numerous questions of fact regarding whether Allstate’s investigation of Jordan’s claim was adequate. For example, Jordan submitted evidence of the following: (1) Allstate made no attempt to interview Jordan or her expert; (2) Allstate did not hire a structural engineer until long after Jordan filed suit, even though some of Allstate’s own experts previously had recommended that Allstate hire an engineer; (3) Allstate allowed its claim adjusters to determine if a collapse had occurred, despite the fact that the adjusters had no credentials or background in structural engineering; (4) Allstate’s adjusters recognized that the collapse coverage applied where there was “hidden decay,” but never made any attempt to inspect the inner walls or sub‑flooring of Jordan’s house.
Comment
This case reinforces the principle that, in order to rely upon the “genuine dispute” doctrine to defeat a claim for bad faith, the insurer first must establish that it conducted a reasonable investigation of the claim. In addition, this case reinforces the principle that even after an insured files suit, the insurer has a continuing obligation of good faith, which includes a continuing duty to investigate the insured’s claim.