Opinion weighs in on 'genuine dispute' doctrine

Paslay v. State Farm General Insurance Co., 2016 DJDAR 6479 (June 27, 2016), reversed the trial judge's rulings completely in favor of State Farm only with respect to the breach of contract cause of action. Paslay notably concluded "that the bad faith claim fails under the genuine dispute doctrine, and that the evidence supporting the application of that doctrine precludes the existence of triable issues regarding the elder abuse claim."

The opinion gives additional life to the genuine dispute doctrine after its scope was limited by Wilson v. 21st Century Insurance Co., 42 Cal. 4th 213 (2007), and subsequent case law. Of further interest is the opinion's dismissal of the elder abuse claim, an infrequent cause of action in bad faith litigation.

Background

After a heavy rain, the Paslays' roof drain failed and water poured into their home. To fix it, they spent $164,093.86 more than the $248,000 State Farm paid them in policy benefits. While that in itself did not breach the insurance policy, the court observed that, notwithstanding the trial judge's views, triable issues of fact existed regarding additional coverage with respect to the "amount of the water damage" relating to the Paslays' master bathroom and drywall ceilings.

State Farm maintained that a significant portion of the bathroom expenditures were in effect a remodeling - not a repair of covered water damage. But the court said characterization as a "remodel" did not address whether such work was covered by the policy. That turned on a key policy provision: State Farm's duty to pay benefits for "the reasonable and necessary cost to repair or replace with similar construction and for the same use on the premises ... the damaged part of the property."

The Paslays asserted that, aside from asbestos abatement, the ceilings' removal was fueled by their search for water damage. Such evidence, if credited by the fact finder, could establish that removal (including the undamaged portions) was covered. And, State Farm said they could scrape asbestos off the ceilings. Hence, the court concluded, triable issues of fact existed with respect to unpaid policy benefits for the ceilings.

The court rejected the Paslays' other breach of contract claims, for instance, a new electrical system and additional living expenses. State Farm was just obliged to pay "the reasonable and necessary cost to repair," not to satisfy the Paslays' arguments.

Bad Faith

Summary adjudication of the tort claims was proper because the Paslays raised no triable issues of fact regarding whether State Farm "unreasonably" refused to pay additional policy benefits. When the insured seeks tort remedies regarding an insurer's denial or delay in paying benefits, a genuine dispute is present, the court said, "only where the insurer's position is maintained in good faith and on reasonable grounds." In that context, the presence of a genuine dispute "becomes a question of law where the evidence is undisputed and only one reasonable inference can be drawn from the evidence."

Even with respect to the unpaid policy benefits, "the record discloses only a genuine dispute regarding the extent of the damage and required repairs. 'Where the parties rely on expert opinions, even a substantial disparity in estimate for the scope and cost of repairs does not, by itself, suggest the insurer acted in bad faith.' The evidence shows only that Gillespie, State Farm's expert, promptly examined the master bathroom and drywall ceilings, assessed the extent and type of damage, and estimated the costs of the appropriate repairs."

The court said an insurer "may properly rely on independent experts to assist in determining repair benefits due under an insurance policy .... The reasonableness of the insurer's decision is assessed by reference to an objective standard." (While a "genuine dispute" may be based on expert opinions, such reliance does not preclude a bad faith claim if based upon a biased investigation, e.g., the insurer selected an inappropriate expert, or the insurer failed to conduct a thorough investigation. See generally McCoy v. Progressive West Ins. Co., 171 Cal. App. 4th 785, 793 (2009), and Brehm v. 21st Century Ins. Co., 166 Cal. App. 4th 1225 (2008).)

Generally, the reasonableness of an insurer's conduct "must be evaluated in light of the totality of the circumstances surrounding its actions." Significantly, the Paslays, before submitting their estimates to State Farm, took the master bathroom down to its framing and removed all drywall ceilings. Although sent photographs, State Farm had no opportunity to conduct an adequate assessment of those claims. This led to State Farm's appropriate assertion that it had been prejudiced. Notably, "the adequacy of the insurer's claims handling is properly assessed in light of conduct limiting the insurer's investigation by parties with an interest in policy benefits."

State Farm did what it could to assess those claims before denying them. "In our view, even if those denials were mistaken, nothing suggests that State Farm acted in bad faith." In sum, the existence of a genuine dispute meant no tort liability.

Elder Abuse Claim

With respect to the separate claim of Traute Paslay, who was 80 years old, "the focus of our inquiry is on whether there are triable issues regarding the existence of financial abuse." Nothing suggested State Farm acted "with an intent to defraud or by undue influence. The key question thus concerns the existence of triable issues regarding [State Farm's] 'wrongful use' of policy benefits."

An incorrect denial of policy benefits does not itself constitute a "wrongful use" within the meaning of the elder abuse statute. "[O]nly when the party who violates the contract actually knows that it is engaging in a harmful breach, or reasonably should be aware of the harmful breach." All things considered, "notwithstanding the existence of triable issues regarding policy benefits due the Paslays, there is no evidence that State Farm acted in subjective bad faith or unreasonably in denying additional benefits. Traute's elder abuse claim thus fails in light of the evidence supporting the application of the genuine dispute doctrine to the Paslays' bad faith claim."

Future

Paslay affirmed an insurer's victory with reference to the genuine doctrine. The same logic applied to the elder abuse claim.

The reach of Paslay, though, may be circumscribed by the court's emphasis on the alteration of the insureds' home before State Farm could thoroughly investigate. Such a scenario is not common - thus, a path to distinguish the court's holdings. On the other hand, the court's willingness to analyze in detail the record to support the bad faith dismissal is encouraging for insurer counsel. Consequently, such counsel will likely "push" the opinion in the quest to strike the tort causes of action.

An elder abuse claim presumably "protects" the elderly. Should that statutory protection be extended to a bad faith lawsuit, a long-standing staple of California insurance litigation? How does the addition of such a claim, when extant, impact such a lawsuit? Is it advisable or worthwhile? Will this claim extend to other areas of litigation, especially as our population ages?

Paslay's legacy may be its demonstration of an appellate court "digging into" the record to support the trial judge, particularly in these days of limited court funding. In other words, where "should the line be drawn" with reference to the force of CCP Section 437c (the summary judgment statute)?

Stay tuned.