A California appellate court has affirmed a finding that a property insurer acted in bad faith when it searched for a reason to deny coverage for a fire loss and conducted an incomplete and non-objective investigation, even though the carrier subsequently paid the claim. The decision in Saddleback Inn, LLC v. Certain Underwriters at Lloyd’s London, No. G051121 (Cal. App. 4th, Mar. 30, 2017, which can be found here, illustrates the principle that an insurer’s conduct should be determined based on what the carrier knows when it refuses to pay the claim, and that subsequent developments cannot be used to salvage prior bad faith conduct.

In Saddleback Inn, the insurer, Lloyds, hired a lawyer to investigate a fire loss at the Saddleback Inn. Internal communications at Lloyds during the course of the investigation revealed that the insurer was looking for a reason to deny coverage. The attorney investigating the claim acted consistent with those communications and, despite receiving the original insurance application materials and an e-mail indicating the correct parties to be named as insureds under the policy, the lawyer made only a limited inquiry to the underwriter and failed to interview the broker before leading the carrier to deny coverage because the wrong entity had mistakenly been identified as the named insured. Even though the court ultimately reformed the policy based on the parties’ mutual mistake, and even thought the carrier ultimately paid the loss plus interest, the subsequent developments did nothing to erase the carrier’s earlier bad faith conduct.