Argument Over Scope of Loss not Bad Faith
Sometimes, when adjusting a property claim, no good deed goes unpunished. Insurers are obligated, under the terms and conditions of a first party property insurance policy to pay indemnity for the losses the policy promised to pay for and to refuse to pay for losses not agreed to be paid by the policy. When a loss occurs common sense seems to disappear, the insurer becomes an adversary, and the insured sues because the insured did not receive everything they asked the insurer to pay.
In Paslay v. State Farm General Insurance Company, — Cal.Rptr.3d —– , 2016 WL 3524086, 16 Cal. Daily Op. Serv. 6896, Court of Appeal, (June 27, 2016) the California Court of Appeal, was faced with a claim that adjustment of the claim presented by the Paslays was bad faith conduct allowing the Paslays to recover damages not covered by the policy and tort damages, including punitive damages, because the Paslays were not satisfied with the insurer’s adjustment of their claim.
Clayton and Traute Paslay asserted claims for breach of insurance contract, bad faith, and elder abuse against State Farm General Insurance Company (State Farm), and requested an award of punitive damages. The trial court granted summary adjudication in State Farm’s favor on each claim and on the request for punitive damages.
RELEVANT FACTUAL BACKGROUND
In December 2010, the Paslays’ house in Pacific Palisades was insured under a homeowners policy issued by State Farm. On December 17, 2010, during a period of heavy rain, a roof drain failed, causing water to enter the house’s master bedroom through the ceiling, and damage other parts of the house. The Paslays reported the incident to State Farm, which arranged for them to live in a rented residence while their house was being repaired. At the end of October 2011, the Paslays resumed living in their house. State Farm made payments under the policy exceeding $248,000, including $122,770.98 for repairs to the house, but denied coverage for certain items, including work undertaken in the master bathroom, replacement of drywall ceilings, and installation of a new electrical panel.
In December 2012, the Paslays sued State Farm. Their second amended complaint (SAC), filed January 15, 2014, contained claims for breach of an insurance contract and bad faith, alleging that State Farm had violated the policy in numerous ways, including refusing to pay for repairs to the master bathroom, refusing to pay for replacement of certain drywall ceilings and the electrical panel, and “[p]rematurely forcing [the Paslays] to move out of temporary rental housing.” The SAC also contained a claim by Traute for elder abuse predicated on allegations that she was 80 years old when the house suffered water damage.
Granting State Farm’s summary judgment motion the trial court concluded that summary adjudication was proper with respect to each claim in the SAC and the request for punitive damages because there were no triable issues whether State Farm failed to pay benefits owed under the policy and forced the Paslays to move prematurely back to their house. On May 19, 2015, the court entered a judgment in favor of State Farm dismissing the entire action with prejudice.
In seeking summary adjudication on the Paslays’ claims, State Farm submitted evidence supporting the following version of the underlying events: On December 17, 2010, when rain water leaked through the ceiling of the house’s master bedroom, Traute contacted Clayton, who was then in Texas. After reporting the loss to State Farm and arranging for temporary repairs, Clayton told State Farm that his general contractor would prepare a damage estimate. State Farm assigned a field adjuster to the claim and hired Andrew Gillespie, a general contractor, to assist with its investigation.
On May 9, 2011, State Farm informed the Paslays that it disputed coverage for the demolition and reconstruction of the master bathroom, the proposed new electrical panel, and the replacement of undamaged ceiling drywall. State Farm later set forth its coverage positions relating to the disputed scope-of-repair issues.
In opposing the motion for summary adjudication or judgment, the Paslays maintained there were triable issues regarding numerous aspects of State Farm’s conduct with respect to their claim.
In view of the evidence presented by the insureds there are triable issues regarding coverage for replacement of the removed drywall ceilings. Clayton’s and MacDonald’s testimony, if credited by the fact finder, establish that only removal and replacement of the ceilings (including their undamaged portions) would result in code-compliant ceilings of a “similar construction.”
The Paslays contend there are triable issues whether State Farm was obliged to pay the costs of replacing their 100 amp electrical panel with a 200 amp panel, even though the former was not damaged by the leak in the master bedroom. The panel’s replacement was not due to repair-related enforcement of the building code, and thus constituted an independent upgrade to the house.
State Farm submitted evidence that in January 2011, it paid for a six-month lease for a residence through Klein, its housing vendor. After July 2011, when the initial six-month lease expired, State Farm authorized payment of the Paslays’ rent on a monthly basis. Although State Farm authorized payment of the rent through the end of November 2011, the landlord rented the residence to a new tenant, effective October 31, 2011.
Under the policy State Farm was obliged to pay “the reasonable and necessary cost to repair” subject to policy coverage, not the actual costs of repair the Paslays incurred. As insurers may properly rely on independent experts to assist in determining repair benefits due under an insurance policy State Farm did not breach the contract merely by relying on Gillespie’s repair estimates.
As there are triable issues regarding unpaid policy benefits due the Paslays related to the work in the master bathroom and the replacement of drywall ceilings summary adjudication was improperly granted with respect to the claim for breach of insurance contract.
To establish bad faith, the Paslays must demonstrate misconduct by State Farm more egregious than an incorrect denial of policy benefits. Under this standard, an insurer denying or delaying the payment of policy benefits due to the existence of a genuine dispute with its insured as to the existence of coverage liability or the amount of the insured’s coverage claim is not liable in bad faith, even though it might be liable for breach of contract.
The genuine dispute doctrine does not relieve an insurer of its obligation to thoroughly and fairly investigate, process and evaluate the insured’s claim. A genuine dispute exists only where the insurer’s position is maintained in good faith and on reasonable grounds. Those grounds include reasonable reliance on experts hired to estimate repair benefits owed under the policy. The application of the genuine dispute doctrine becomes a question of law where the evidence is undisputed and only one reasonable inference can be drawn from the evidence.
The Paslays’ bad faith claim fails under the genuine dispute doctrine. The only triable issues relating to unpaid policy benefits concern the work in the master bathroom and the replacement of drywall ceilings. Regarding those 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 estimates for the scope and cost of repairs does not, by itself, suggest the insurer acted in bad faith.
On this record, there are no triable issues regarding the adequacy of State Farm’s investigation, as the Paslays removed the damaged property before State Farm had an opportunity to conduct a full assessment of the Paslays’ proposals and contentions. The record shows only that State Farm did what it could to assess the claimed losses before denying them. In the court’s view, even if those denials were mistaken, nothing suggests that State Farm acted in bad faith. Summary adjudication was therefore proper on the bad faith claim.
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.
Punitive damages are thus unavailable in connection with the Paslays’ breach of insurance policy claim, notwithstanding the existence of triable issues regarding unpaid policy benefits due the Paslays.
Furthermore, as the claims for bad faith and elder abuse fail for want of a triable issue of fact, the Pasleys have asserted no tort cause of action capable of supporting an award of punitive damages. Accordingly, summary adjudication was properly granted with respect to the Paslays’ request for punitive damages.
Bad faith does not exist when the only dispute is over the extent of damage when both sides rely on experts whose opinions are diverse. It is not bad faith for an insurer to disagree with an insured over the extent of coverage or the extent of the loss. That dispute could have been resolved by appraisal but the insureds preferred, rather than resolve the dispute, to file suit and hope for the windfall of tort and punitive damages. The genuine dispute doctrine trashed their hopes of turning an insured loss into a profit making exercise.
Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
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