The Court of Appeal’s decision makes it clear that expert testimony does not automatically insulate an insurer from bad faith claims and that questions of whether an expert’s inspection was biased are to be decided by a jury. To be clear, it does not resolve the Fadeeff’s claim; it simply keeps it alive long enough to get to trial.
What happened to the Fadeeff’s home
In September 2015, the Valley Fire in Lake County caused smoke damage to the Fadeeffs’ property, which they reported to their insurance carrier, State Farm. With State Farm’s approval, the Fadeeffs retained ServPro to assist with smoke and soot mitigation and cleaning. State Farm limited ServPro to washing the exterior siding of the home to clean smoke, soot and ash. The Fadeeffs had also reported interior smoke contamination and damage.
State Farm made a series of payments in October, November and December totaling about $50,000. The Fadeeffs hired a public adjuster and submitted supplemental claims for further interior repairs and contents replacement in January 2016. The supplemental claims totaled approximately $75,000.
State Farm used a different independent adjuster (James Carpenter) to investigate the supplemental claims. Carpenter was not a licensed adjuster in California, nor was he licensed in any building trade. He inspected the Fadeeffs’ property in March 2016 and stated he could not find smoke damage.
State Farm also retained Forensic Analytical Consulting Services (FACS) to inspect the Fadeeffs’ home and a company called HVACi to inspect the Fadeeffs’ HVAC system. Contrary to its own internal operating procedures, State Farm did not give any guidance to Carpenter, FACS or HVACi about issues to be addressed in their inspections. The reports issued by those experts supported State Farm’s denial of the supplemental claim.
The Fadeefs ultimately brought a bad faith insurance denial lawsuit, claiming that State Farm had violated its implied covenant of good faith and fair dealing. State Farm argued that its denial was reasonable, given their reliance on the investigations and reports done by Carpenter, FACS and HVACi.
State Farm moved for summary judgment. The Mendocino County Superior Court granted the motion, citing the “genuine dispute” doctrine. The Fadeeffs then appealed.
Duty of fair dealing versus genuine dispute rule
Under the common law of contracts, an insurance company owes a policyholder an implied covenant of good faith and fair dealing. That duty obligates the insurer to investigate, process, and evaluate the insured’s claim promptly, thoroughly, and fairly.
Denying any claim for coverage, including a claim arising from wildfire damage, may constitute a breach of contract and bad faith. An insurance company may be in bad faith for any number of reasons, including:
- Failing to promptly acknowledge the claim and act reasonably;
- Failing to thoroughly investigate the reports that support its denial;
- Failing to settle disputes quickly;
- Failing to adhere to and implement reasonable standards; or
- Attempting to resolve a claim by the policyholder for much less than the amount covered.
According to the genuine dispute doctrine, however, an insurer who denies or delays payment of policy benefits is immune from bad faith claims so long as there is a genuine dispute about the existence of coverage or the amount. The genuine dispute doctrine has played an outsized role in in cases involving homes that have been damaged but not destroyed in wildfires across California.
Clipping the wings of the genuine dispute rule
READ MORE BAD FAITH INSURANCE LEGAL NEWS
The Court of Appeal made clear that an insurer is not entitled to judgment where a jury reviewing the same facts might conclude that the insurer acted unreasonably. In addition, an expert’s testimony will not automatically insulate an insurer from a bad faith claim if the investigation was biased. Nor may an insurer insulate itself from liability for bad faith conduct by the simple expedient of hiring an expert for the purpose of manufacturing a ‘genuine dispute.’ These are questions properly left to a jury.