The California Court of Appeals has held that an insurer’s failure to fully investigate a policyholder’s alternate theory of coverage under an all-risk homeowners’ property insurance contract may constitute bad faith, even though the insurer reasonably believed coverage was barred by other provisions in the contract — Jordan v. Allstate Ins. Co., no. B1887706 (Cal. Ct. App. March 22, 2007). In so holding, the court found that a triable issue of fact existed as to whether the insurer committed bad faith when it declined coverage under the “wet or dry rot” exclusion without also determining whether coverage may have been afforded for an “entire collapse” under a different portion of the contract.
The Policyholder had purchased an “All Risk” homeowners contract from Allstate Insurance Company, and filed a claim when she discovered that a window had fallen out of a wall in her home and that the floor had begun to soften. The damage was ultimately linked to water-bearing mold, and Allstate disclaimed coverage based on the “wet or dry rot” exclusion. The Policyholder sued, and Allstate moved for summary judgment, which the trial court granted. On appeal, the California Court of Appeals found an ambiguity in the contract. A provision of the contract unrelated to wet or dry rot excluded damage consisting of or caused by “collapse” but re-extended coverage for an “entire collapse” of all or part of the structure due to a “hidden defect.” Based on this, the court remanded the case for a determination of whether an entire collapse had occurred. Allstate then moved for summary judgment on the Policyholder’s bad faith claims because the appellate court had determined that Allstate’s interpretation of the contract had been reasonable. The trial court granted the motion, and the Policyholder appealed.
The Appellate Court’s Decision
On appeal, the Policyholder argued that her bad faith claim should survive because Allstate had failed to conduct a full and fair investigation of her claim. Had Allstate done so, she argued, the insurer may have determined that an entire collapse had occurred and that she was actually entitled to coverage. The Appellate Court agreed, reversing the trial court’s grant of summary judgment.
The Court explained that the duty of good faith and fair dealing required an insurer to “give as much consideration to the interests of the insureds as it gives to its own.” Likewise, “an insurer cannot … deny payments … without fully investigating the grounds for the denial,” and must “fully inquire into possible bases that might support the insured’s claim.” The Court, however, noted that in order for the bad faith claim to stand, there must be a find ing that the insurer was unreasonable in its actions. Likewise, if there is a “genuine issue” as to coverage there can be no bad faith liability, even if the insured is later determined to be entitled to coverage.
In this context, Allstate argued that a genuine issue existed regarding whether coverage was excluded by the rot exclusion. Because the Court had previously found Allstate’s interpretation to be reasonable, the insurer argued, Allstate could not have acted in bad faith.
The Court rejected Allstate’s argument because the policyholder had also made a claim for an “entire collapse.” This required the insurer to investigate whether an “entire collapse” occurred, even if the insurer believed that another exclusion may have barred coverage, and Allstate was not entitled to ignore evidence that may have resulted in coverage. Based on this rule, the Court found sufficient evidence in the record to require the trial court to determine whether the evidence supported the Policyholder’s claims that Allstate had unreasonably failed to investigate the claim properly. The Court cautioned that even though sufficient evidence existed to allow the bad faith claim to continue, the Policyholder would also have to prove that she was actually entitled to coverage, i.e. that an “entire collapse” had occurred, before the insurer could be found liable.
Insurers that handle claims in California should take note of this decision because it provides a potential pitfall in circumstances where a policyholder presents multiple theories of coverage. Under the rule presented by this case, an insurer should be sure to fully investigate each theory, even if the insurer reasonably believes that the claim may be precluded based on an unrelated exclusion. Failure to do so may result in a claim that the insurer unreasonably ignored or failed to investigate a claim for coverage, and could result in damages for bad faith.