Jordan v. Allstate Insurance Company (2007)
__Cal.App. 4th __ (March 22, 2007)

"Reasonable Dispute Doctrine" Did Not Compel Finding That Denial Of Inadequately Investigated Claim Was Reasonable

The California Court of Appeals, Second Appellate District, reversed a trial court Judgment dismissing an insured's complaint against her insurance company for breach of the implied covenant of good faith. The court held it was error for the trial court to grant the insurance company's motion for summary adjudication as there were several triable issues of fact with respect to the insurance company's investigation of the insured's claim. The court concluded that despite the fact the insurance company's interpretation of its policy language that led to a denial was reasonable, the denial could not be justified absent a full, fair and thorough investigation of all the bases of the insured's claim.

Allstate Insurance Company ("Allstate") issued a homeowner's policy to Mary Jordan ("Jordan") in August of 2000. The policy excluded losses consisting of or caused by "rust or other corrosion, mold, wet or dry rot" and a loss of covered property consisting of or caused by collapse. The policy further provided an exception to the collapse exclusion under a section entitled "additional coverage" which covered the "entire collapse" of a building structure and "entire collapse" of part of a covered building structure that was "a sudden and accidental direct physical loss caused by hidden decay."

In December of 2000 Jordan discovered a window had fallen out of her living room wall and floorboards were giving way. DeLaCruz Wood Preservation Services, who Jordan retained to conduct an investigation, concluded the damage was caused by a water conducting fungus known as Meruliporia Incrassate ("Poria"). On December 26, 2000, Jordan submitted a claim to Allstate after learning about the Poria. Allstate retained its own experts to inspect the property, who reached the same conclusion.

On January 19, 2001, Allstate denied Jordan's claim on the grounds coverage was precluded under the exclusion for losses caused by wet or dry rot. Jordan requested that Allstate reconsider its decision as Poria fungus was not "wet or dry rot." Allstate replied on February 5, 2001 reinstating its initial denial. Jordan filed a previous action against Allstate ((Jordan v Allstate Ins. Co. (2004) 116 Cal.App.4th 1206 ("Jordan I"))claiming that the Poria did not constitute wet or dry rot and the exclusion did not apply and even if it did, there was still coverage under the collapse exception in the additional coverage section. In Jordan I, the trial court granted Allstate's motion for summary judgment on the grounds that (1) the "wet or dry rot" exclusion included a fungal infestation and (2) the coverage for collapse did not extend to an "imminent collapse."

In Jordan I, the Court of Appeals reversed the trial court's ruling after concluding the policy language at issue, specifically the "additional coverage" provisions providing coverage for an "entire collapse" of all or part of the dwelling caused by "hidden decay," was in conflict with the exclusion relied upon by Allstate and that the provision provided a basis for coverage independent of the exclusion. As a result of this provision being contradictory and confusing it created an ambiguity, which the Court resolved in the insured's favor. Thus, Jordan I was remanded to allow Jordan an opportunity to prove that an actual collapse had occurred and resulted in her claimed damages. Upon return to trial court, Allstate moved for summary adjudication of Jordan's allegations of bad faith based on the court's conclusion in Jordan I that Allstate's interpretation of its policy had been reasonable, even though erroneous, preventing a claim for bad faith. Based on this argument, the trial court granted Allstate's motion and Jordan brought the current appeal.

Jordan now argues that despite Allstate's interpretation of its policy being reasonable it does not preclude her claim for bad faith, if Allstate did not conduct a full, fair and thorough investigation of her claim. To prevail on a claim of bad faith, the insured must demonstrate not only that the insurer acted in bad faith for its delay or denial in the payment of policy benefits, but that the insurer acted unreasonably or without proper cause. To negate an insured's claim that the insurer acted unreasonably or without proper cause, the insurer can demonstrate the existence of a "genuine dispute" regarding coverage or the amount or extent of insured's claimed loss. If the insurer can demonstrate the denial or delay of payment of benefits was based on the existence of a "genuine dispute" the insurer is not liable for bad faith as to the existence of coverage or amount of the insured's claim, however, it still may be liable for breach of contract. (Chateau Chamberay Homeowners Assn. v. Associated Internat, Ins. Co., (2001) 90 Cal.App.4th 335, 347)

The court held that an insurer owes a duty to its insured to investigate all of the possible bases of an insured's claim. "An insurance company may not ignore evidence which supports coverage. If it does so, it acts unreasonably towards its insured and breaches the covenant of good faith and fair dealing." (Mariscal v. Old Republic Life Ins. Co. (1996) 42 Cal.App.4th 1617, 1624). In the instance an insurer denies coverage but a reasonable investigation would have disclosed facts showing the claim was covered, the insurer's failure to investigate breaches its implied covenant. Chateau Chamberay Homeowners Assn., supra, 90 Cal.App.4th 335. In such cases, the insurer cannot claim a "genuine dispute" regarding coverage because by failing to investigate it has deprived itself of the ability to make a fair evaluation of the claim. Id. at 348-349. Thus the court held that Allstate had a duty to investigate Jordan's coverage claim based on the "additional coverage" provisions relating to an "entire collapse," even though Allstate's interpretation of a policy exclusion was reasonable.

The court reversed the trial court's ruling and remanded the matter for further proceedings to determine whether Jordan can establish coverage providing a basis for her allegations that Allstate acted in bad faith in denying her claim.

This opinion is not final. Though it has been certified for publication, it may be withdrawn from publication, modified on rehearing, or granted review by the California Supreme Court. Should any of these events occur, the opinion would be unavailable for use as authority in other cases.

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