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With two Justices dissenting, the California Supreme Court affirmed a judgment of the Court of Appeal, Second Appellate District, reversing summary judgment in favor of an underinsured motorist ("UIM") insurer in a bad faith action. The Supreme Court concluded triable issues of fact existed as to whether the insurer thoroughly investigated and fairly evaluated the insured's claim.
Reagan Wilson was a college student involved in an accident with a drunk driver. The other driver's insurer paid Wilson its policy limit of $15,000. Wilson carried UIM coverage with 21st Century Insurance Company.
Wilson made a demand for $85,000, the amount of the UIM limit after taking an offset for the other insurer's payment. Wilson provided medical reports, x-rays and an MRI report. An orthopedist had concluded Wilson exhibited cervical spine and degenerative disk changes due to the accident.
Wilson's counsel advised 21st Century's claim examiner that Wilson had made a long-planned trip to Europe after the accident which had been ruined by her injuries. He advised that Wilson, who was studying in Australia at the time of the demand, was still experiencing pain on a regular basis. Given Wilson's young age and her physician's conclusions she had degenerative disk changes from the accident, Wilson's attorney contended her general damages were in excess of the UIM limits.
Without attempting to speak with Wilson's physician or consult with any medical practitioners, the examiner drafted a memo recommending rejection of Wilson's claim. The examiner wrote that Wilson had a preexisting condition and the MRI results did not support either the extent of injury claimed by Wilson or that it was attributable to the accident. The examiner also noted Wilson was on "vacation" in Australia which undermined her attorney's contentions of pain and suffering.
21st Century rejected Wilson's UIM claim in a letter noting her x-rays were "normal" and 21st Century had concluded Wilson suffered soft tissue injuries superimposed over pre-existing degenerative disk disease.
Wilson initiated arbitration. 21st Century learned during discovery that an orthopedic surgeon had recommended Wilson for surgery but that a neurologist had disagreed with that recommendation.
21st Century retained its own physicians to examine Wilson and review her records. One of the retained physicians concluded Wilson's neck pain was attributable to the accident and required surgery. Following receipt of this physician's report, 21st Century paid Wilson $85,000.
Wilson sued 21st Century alleging breach of the covenant of good faith and fair dealing ("bad faith") based on its initial rejection of her claim and the resulting two-year delay in payment. 21st Century moved for summary adjudication of the bad faith cause of action on the ground its initial rejection of the claim was reasonable as a matter of law. The Superior Court granted 21st Century's motion but the Court of Appeal reversed, holding there were triable issues of fact as to whether 21st Century had thoroughly investigated and fairly evaluated Wilson's claim.
The Supreme Court affirmed the Court of Appeal's judgment. The Supreme Court observed that while an insurer has no obligation to accept every claim, an insurer acts unreasonably when it ignores evidence that supports the claim and focuses solely on facts justifying denial.
The Supreme Court concluded Wilson had demonstrated a triable issue whether 21st Century's initial denial was unreasonable and in bad faith. 21st Century offered no medical evidence that would have allowed it to ignore Wilson's physician's conclusion that the probable source of her injuries was the accident. The Supreme Court also was troubled by the claims examiner's mischaracterization of Wilson's trip to Australia as a vacation when she was there to study.
The Supreme Court noted an insurer's good faith must be evaluated under the totality of the circumstances rather than according to general rules regarding the extent and type of investigation required. However, the facts raised a dispute whether 21st Century should have conducted further investigation before it initially rejected Wilson's claim.
21st Century argued its denial rested on a genuine dispute as to the true value of Wilson's claim. Under this doctrine, an insurer that delays or denies a claim due to the existence of a genuine dispute about the existence or amount of coverage is not liable for bad faith even when it is in breach of contract. The doctrine applies to factual disputes as well as to disputes over policy interpretation. However, the Supreme Court held the doctrine only applies when an insurer has discharged its obligation to thoroughly investigate and fairly evaluate a claim.
The Supreme Court criticized statements made by some courts (including the Court of Appeal in Delgado v. Interinsurance Exchange of the Automobile Club (2007) 152 Cal.App.4th 671, 691, which is currently pending for review by the Supreme Court) which employ language appearing to draw a distinction between conduct that is reasonable and that which is based on a "legitimate dispute." In the bad faith context a dispute is not legitimate unless it is based in reason.
Two Justices dissented. They disagreed the totality of the circumstances would allow a jury to conclude 21st Century's had acted unreasonably, especially because Wilson's own physicians disagreed about the extent of her injuries.
This opinion is not final. It may be modified by the Supreme Court or rehearing could be granted. These events would render the opinion unavailable for use as legal authority.
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