California Insurance - “Genuine Dispute” Over Insured’s Misrepresentations During Insurer’s Claim Investigation Bars Bad Faith Liability Based on Insurer’s Subsequent Denial of Coverage
Stecz v. State Farm Mut. Auto. Ins. Co., No. C 05-01171 CRB (N.D. Cal. April 24, 2006).
In a case involving an insured’s claim for theft of an automobile, the United States District Court for the Northern District of California granted summary judgment to the insurer on the issue of bad faith and punitive damages,
holding that where the insurer raised a “genuine dispute” as to whether the insured had made material misrepresentations in connection with the insurer’s investigation of the claim, there can be no bad faith
when the insurer denies the claim. The court also found that a negligent investigation of a claim would not amount to bad faith and that bad faith necessarily implies a level of dishonesty, fraud and concealment on the part
of the insurer.
The plaintiff, an insured under an auto policy issued by State Farm, reported the insured vehicle as stolen after he had left it at a bar overnight when he had been too intoxicated to drive the vehicle home. The car was later
recovered in a warehouse, significantly stripped. After an investigation (which included State Farm’s expert examining the stolen vehicle and opining that only a correctly cut key could have operated the car and that
there were no circumstances consistent with normal theft of a car), State Farm concluded that the insured had made material misrepresentations regarding the circumstances of the alleged theft and in his examination under oath, thus
voiding his coverage under the policy’s fraud and concealment provision. The insured then sued for breach of contract and bad faith, and State Farm moved for summary judgment. State Farm alternatively moved for
judgment as a matter of law on the bad faith claim, on the ground that it acted reasonably in denying coverage because there was a genuine dispute as to whether it had any coverage obligations.
The insured, although admitting inconsistencies in his version of events, alleged that the misrepresentations were not material to State Farm’s investigation. Those inconsistencies included misrepresentations about which
friend drove the insured home from the bar, whether the insured had ever tried to sell the vehicle, the amount the insured still owed on the vehicle, and about the appearance of the car. Finding that there were disputes about
whether a “reasonable person” might find some or all of the misrepresentations to be material to State Farm’s investigation, the court denied the insurer’s motion for summary judgment on the insured’s
breach of contract claim.
On the bad faith claim, however, the court stated that “[a] defendant is entitled to summary judgment if it can show that there was a genuine dispute as to coverage, such that the denial could be termed reasonable.”
The court further stated that “a defendant insurer may raise the genuine dispute doctrine where the insurer denies a claim based on the opinion of experts” and also noted that the genuine dispute doctrine extends
to both legal and factual disputes. The court found that the insured made numerous inconsistent statements during the investigation that legitimately raised suspicion. The court also noted that State Farm had relied on
the advice of legal counsel in denying coverage. The insured argued that State Farm could not raise that defense because it had not provided discovery regarding that counsel or its advice, but the court found the insurer’s
refusal to do so had no bearing on whether the coverage denial was made in good faith.
The insured also argued that State Farm was biased in its investigation and destroyed evidence. The court disagreed, finding that “[n]egligence in conducting the investigation is not sufficient to rise to the level of
bad faith. Bad faith implies dishonesty, fraud and concealment.” The court also stated that an insurer does not commit bad faith when it relies on its own expert and not the insured’s expert. The court
also found that State Farm’s investigation was adequately thorough, although it could have taken steps to improve that investigation.
Because there was no bad faith claim, the court also granted summary judgment to State Farm on the issue of punitive damages.