California Insurance - Insurer Has No Tort Liability For “Negligent Claim Investigation” Absent Coverage
Magda Benavides v. State Farm General Insurance Company, No. B179028 (Cal. Ct. App., February 23, 2006)
An insurer cannot be held liable for negligently investigating its insured’s claim in the absence of coverage, according to a recently published decision from California’s Second Appellate District (Los Angeles).
Magda Benavides discovered mold contamination in her condominium unit and was required to move out while the contamination was being remediated. She submitted a claim for additional living expense to her homeowners’
insurer, State Farm, which denied the claim because mold was an excluded loss. Benavides later sued State Farm for negligently investigating her claim, resulting in an erroneous coverage decision. Even though the jury
found that there was no coverage and no breach of the insurance contract, it found that State Farm negligently investigated Benavides’s claim, resulting in $260,000 in damages.
The Court of Appeal reversed the jury’s award. To determine whether State Farm could have tort liability for negligently investigating Benavides’s claim, the court first examined California law regarding
the requirements for breach of the implied covenant of good faith and fair dealing. California decisions have uniformly held that while an insurer’s breach of the implied covenant can give rise to tort liability, a predicate
to tort liability is the existence of an otherwise covered loss.
The court reasoned that the same logic that precludes the imposition of tort damages for a breach of the implied covenant absent coverage likewise rules out recovery for negligence. “Bad faith” liability
is based on an insurer’s unreasonable withholding of policy benefits. But, when it turns out that no benefits are due, an insurer’s negligent investigation does not frustrate the insured’s rights under
the contract. The court recognized that outside of the insurance context, California’s Supreme Court has permitted tort recovery for the breach of a contractual obligation, but only in very limited circumstances –
i.e., where the breach is accompanied by an independent tort, or the means of committing the breach are tortious, or where there is an intentional breach that is intended to and does cause harm. Because Benavides’s negligence
claim did not arise out of any of these narrow circumstances, the court refused to permit tort recovery.