Introduction

The genuine dispute doctrine provides a defense to a bad faith claim. An insurer that denies policy benefits because a genuine dispute exists is liable for breach of contract, but is not guilty of bad faith if undisputed fact demonstrate that as a matter of law, its failure to pay was prompted by an honest mistake, bad judgment or negligence and not by a conscious and deliberate act. The genuine dispute may focus on an issue of fact or an issue of law and has been invoked in first party and third party claims.

However, the genuine dispute doctrine does not apply to the duty to defend. The duty to defend is triggered by a showing of “potential” coverage. To defeat the duty to defend, the insurer must show that there is no possibility that a judgment may be covered by the policy. “Facts merely tending to show that the claim may not be covered are insufficient.”[1] “Any doubt as to whether the facts establish the existence of the defense duty must be resolved in the insured’s favor.”[2] Thus, a genuine coverage dispute does not justify an insurer to refuse to defend. If the law were otherwise, every insurer that issues reservation of right could wrongfully refuse to defend with impunity.

Summary of Bad Faith Law

The genuine dispute doctrine may negate bad faith liability because bad faith is defined as the unreasonable failure to pay policy benefits, and a genuine dispute as to liability or the amount of damage may render a failure to pay reasonable.

“In addition to the duties imposed on contracting parties by the express terms of their agreement, the law implies in every contract a covenant of good faith and fair dealing. The implied promise requires each contracting party to refrain from doing anything to injure the right of the other to receive the benefits of the agreement. The precise nature and extent of the duty imposed by such an implied promise will depend on the contractual purposes. [T]he extent of the duties imposed [is] that the insurer must give at least as much consideration to the welfare of its insured as it gives to its own interests. The governing prudent insurer standard is premised on the insurer’s obligation to protect the insured’s interests. [W]hen the insurer unreasonably and in bad faith withholds payment of the claim of its insured, it is subject to liability in tort. For the insurer to fulfill its obligation not to impair the right of the insured to receive the benefits of the agreement, it must give at least as much consideration to the latter’s interests as it does to its own. The insured seeks protection against calamity. The purchase of insurance provides peace of mind and security in the event [of a covered loss]. [A]n insurer cannot reasonably and in good faith deny payments to its insured without thoroughly investigating the foundation for its denial.”[3]

Genuine Dispute Doctrine

“[A]n insurer’s denial of or delay in paying benefits gives rise to tort damages only if the insured shows the denial or delay was unreasonable. As a close corollary of that principle, it has been said that ‘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.’ This ‘genuine dispute’ or ‘genuine issue’ rule was originally invoked in cases involving disputes over policy interpretation, but in recent years courts have applied it to factual disputes as well. The genuine dispute rule does not relieve an insurer from 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. [fn. 7 In the insurance bad faith context, a dispute is not ‘legitimate’ unless it is founded on a basis that is reasonable under all the circumstances.] Nor does the rule alter the standards for deciding and reviewing motions for summary judgment. ‘The genuine issue rule in the context of bad faith claims allows a [trial] court to grant summary judgment when it is undisputed or indisputable that the basis for the insurer’s denial of benefits was reasonable. On the other hand, an insurer is not entitled to judgment as a matter of law where, viewing the facts in the light most favorable to the plaintiff, a jury could conclude that the insurer acted unreasonably.’ Thus, an insurer is entitled to summary judgment based on a genuine dispute over coverage or the value of the insured’s claim only where the summary judgment record demonstrates the absence of triable issues as to whether the disputed position upon which the insurer denied the claim was reached reasonably and in good faith.”[4]

The Legal Test Distinguishes Between an Honest Mistake and a Conscious and Deliberate Act

The legal test to bar tort damages distinguishes an honest mistake from a conscious and deliberate act. “A breach of the implied covenant of good faith and fair dealing involves something beyond breach of the contractual duty itself, and it has been held that bad faith implies unfair dealing rather than mistaken judgment, prompted not by an honest mistake, bad judgment or negligence but rather by a conscious and deliberate act, which unfairly frustrates the agreed common purposes and disappoints the reasonable expectations of the other party thereby depriving that party of the benefits of the agreement. Just what conduct will meet these criteria must be determined on a case by case basis. The ultimate test of [bad faith] liability in the first party cases is whether the refusal to pay policy benefits [or the alleged delay in paying] was unreasonable. While the reasonableness of an insurer’s claims-handling conduct is ordinarily a question of fact, it becomes a question of law where the evidence is undisputed and only one reasonable inference can be drawn from the evidence. Thus, before an insurer can be found to have acted tortiously (i.e., in bad faith), for its delay or denial in the payment of policy benefits, it must be shown that the insurer acted unreasonably or without proper cause. However, where there is a genuine issue as to the insurer’s liability under the policy for the claim asserted by the insured, there can be no bad faith liability imposed on the insurer for advancing its side of that dispute. While an insurer must give as much consideration to the interests of its insured as it does to its own it is not required to disregard the interests of its shareholders and other policyholders when evaluating claims. In other words, an insurer is entitled to give its own interests consideration when evaluating the merits of an insured’s claim. It is now settled law in California that 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. It is equally clear that this issue may be resolved as a matter of law in a proper case. That does not mean, however, that the genuine dispute doctrine may properly be applied in every case involving purely a factual dispute between an insurer and its insured. This is an issue which should be decided on a case-by-case basis.[5]

The No Hindsight Rule

“[T]he reasonableness of the insurer’s actions and decision to deny benefits [may not be] made with the benefit of hindsight”[6] “[T]he reasonableness of the insurer’s decisions and actions must be evaluated as of the time that they were made; the evaluation cannot fairly be made in the light of subsequent events that may provide evidence of the insurer’s errors.”[7] “(O)therwise an insurance carrier could refuse to defend its insured on the slightest provocation and then resort to hindsight for the justification.”[8]

A Court’s Erroneous Ruling Does Not Establish Reasonableness

“[T]he fact that a court had interpreted that law in the same manner as did the insurer, whether before or after, is certainly probative of the reasonableness, if not necessarily the ultimate correctness, of its position.”[9] However, a trial court’s erroneous ruling, later reversed on appeal, does not establish that an insurer’s decision was reasonable as a matter of law. “We certainly have great faith in the sagacity and reasonableness of trial judges, but we decline to impute infallibility to any court”[10]

An Insurer’s Good Faith Must Be Objectively Reasonable

“If the conduct of the insurer in denying coverage was objectively reasonable, its subjective intent is irrelevant.”[11] However, “an expert’s testimony will not automatically insulate an insurer from a bad faith claim based on a biased investigation.”[12]

The Genuine Dispute Doctrine is Not Applicable to the Duty to Defend

There is no reported California opinion “that appl[ies] the genuine dispute doctrine to the duty to defend and our research has not disclosed any.”[13] The rational is that the duty to defend is triggered even when coverage is disputed. “To prevail, the insured must prove the existence of a potential for coverage, while the insurer must establish the absence of any such potential. In other words, the insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot. Facts merely tending to show that the claim is not covered, or may not be covered, but are insufficient to eliminate the possibility that resultant damages (or the nature of the action) will fall within the scope of coverage, therefore add no weight to the scales. Any seeming disparity in the respective burdens merely reflects the substantive law.”[14] “[F]or an insurer, the existence of a duty to defend turns not upon the ultimate adjudication of coverage under its policy of insurance, but upon those facts known by the insurer at the inception of a third party lawsuit. Hence, the duty ‘may exist even where coverage is in doubt and ultimately does not develop.’”[15]

A Failure to Investigate is No Defense

“The genuine dispute rule does not relieve an insurer from 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. Our Supreme Court has made clear that there can be no genuine dispute in the absence of a thorough and fair investigation. [A]n inadequate investigation and dilatory claim handling procedures, the genuine dispute rule provides no basis for sustaining the demurrer.”[16]