The California Court of Appeal has held that a first-party insurer can have no liability for the negligent investigation of a first-party property claim where the policy did not cover the cause of the damage. (Benavides v. State Farm General Ins. Co. (2006) 39 Cal.Rptr.3d 650)
Facts
Magda Benavides owned a condominium unit that she insured through State Farm. Mold developed inside Benavides’ condominium unit, and she asserted that plumbing leakage from a neighbor’s unit was the cause of the damage.
State Farm’s all-risk policy contained an exclusion for mold, but the exclusion contained an exception that provided “[t]his exclusion does not apply if the loss is caused by peril which is not otherwise excluded.” The policy also excluded damage caused by leakage and seepage that occurred “over a period of time.”
After Benavides’ doctor advised her to move out of unit, she submitted a claim to State Farm for additional living expense. State Farm’s policy provided coverage for additional living expense only if a covered cause rendered the unit uninhabitable.
State Farm hired a civil engineer to investigate, and State Farm ultimately denied the claim on the grounds that its policy excluded the mold and all of the potential causes of the mold. Benavides sued both her neighbor and State Farm. At trial, the jury found that the leakage from the neighbor’s unit was not the predominant cause of the mold. Although the jury determined that a covered peril had not caused the mold, the jury nonetheless found that State Farm had negligently investigated the claim and, on that basis, the jury awarded Benavides damages of $260,000.
Holding
The Court of Appeal reversed and held that, as a matter of law, State Farm could not be liable for the negligent investigation of the claim if the policy did not cover the cause of the damage. The Court held that, where no benefits are due, a negligent investigation does not frustrate the insured’s right to the benefits of the contract. In other words, an insured who is not entitled to insurance proceeds has not suffered an injury because of the manner in which the insurer conducted its investigation.
Comment
California courts previously have held that, if a policy does not provide coverage, the insurer cannot be held liable for bad faith. This case holds that, if a policy does not provide coverage, the insurer cannot be liable for the negligent investigation of the claim.
Thus, whether a policyholder characterizes an insurer’s conduct as “bad faith” or “negligent,” the insured’s cause of action generally will fail if the policy does not provide coverage.