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July 2014

Insured Adequately Stated Bad-Faith Claim by Alleging Insurer Did Not Investigate Insured’s First-Party Claim Before Demanding Arbitration

In its June 27 opinion in Maslo v. Ameriprise Auto & Home Insurance, the California Court of Appeal for the Second Appellate District held an insured adequately stated a claim for breach of the implied covenant of good faith and fair dealing by alleging the insurer failed to investigate and evaluate a first-party claim and, instead, demanded arbitration. 

The insured, Ted Maslo, maintained an auto policy with the insurer, Ameriprise Auto & Home Insurance, which provided uninsured motorist coverage.  Maslo sustained bodily injury resulting from an auto accident in which an uninsured motorist was at fault. Maslo made a policy limits demand of $250,000, to which Ameriprise did not respond. Ameriprise demanded arbitration, which resulted in a $164,120.91 award to Maslo. Maslo subsequently filed suit against Ameriprise alleging a single cause of action for bad faith. 

Following the trial court’s granting of Ameriprise’s demurrer with leave to amend, Maslo filed a Second Amended Complaint (SAC). The SAC alleged, in relevant part, that Ameriprise failed to investigate Maslo’s claim; failed to respond in good faith to Maslo’s settlement demand; failed to make its own settlement offer; refused to accept Maslo’s offer to mediate; and provided no explanation for withholding payment.

Ameriprise also demurred to the SAC, which the trial court sustained without leave to amend. Ameriprise timely appealed and the Court of Appeal reversed. On appeal, Ameriprise raised four principal arguments, all of which were rejected.

First, relying on Utah authority, the insurer argued that an insurance company does not have the same duty to act in good faith in the uninsured motorist context as it would in other contexts. In Lyon v. Hartford Accident and Indem. Co. (Utah) 480 P.2d 739, 745, the Utah Supreme Court held that the duty of good faith and fair dealing applied in the third-party insurance context, but not in the first-party insurance context. 

The court rejected Lyon, finding it contrary to California law. In particular, the court found that California Insurance Code section 790.03(h)(5) provides that it is an unfair claims handling practice not to attempt in good faith to “effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear.” The court found that the California Insurance Code did not provide an exception for uninsured motorist claims and, therefore, an insurer in California has the same duty to act in good faith in the uninsured motorist context as it would in any other context.

Second, the court rejected Ameriprise’s genuine dispute defense based on the disputed value of the claim. The court recognized the genuine dispute doctrine precludes bad-faith liability where there is a genuine dispute as to the amount of the insured’s claim. However, the court found a genuine dispute only exists where the insurer’s position is maintained in good faith and on reasonable grounds. The court held that, at least at the pleadings stage, Ameriprise could not rely on the genuine dispute doctrine because the SAC alleged it failed to adequately and fairly investigate, process, and evaluate Maslo’s claim.

Third, Ameriprise argued it could not be liable for bad faith because it had a statutory right to demand arbitration. Citing Hightower v. Farmers Insurance Exchange (1995) 38 Cal.App.4th 853 and an insurance treatise summarizing the same, Ameriprise argued that, in the uninsured motorist context, an insurer can only be liable for bad faith if (1) the insured makes a claim for which liability is clear; (2) damages plainly exceed policy limits; and (3) the insurer unreasonably refuses to pay. Ameriprise contended that, because the arbitrator’s award did not exceed policy limits, the second Hightower element was not met and it could not be liable for bad faith.

The court recognized that, under California Insurance Code section 11580.2, an insurer does have a right to demand binding arbitration when the insurer and the insured disagree over the extent of coverage. However, the court rejected Ameriprise’s argument, finding that Hightower did not hold that bad faith could not be found under other circumstances. Moreover, the Hightower court held that an insurer cannot absolve itself of bad-faith liability for failing to investigate a claim by demanding arbitration.

Finally, Ameriprise argued Maslo failed to allege that he would have settled for anything less than his initial policy limits demand and, therefore, arbitration was inevitable. The court rejected this argument, finding that Ameriprise had made no offer to resolve Maslo’s claim and that the SAC alleged Maslo offered to mediate the claim and that Ameriprise refused this offer.

To read the opinion, click here

This opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. These events would render the opinion unavailable for use as legal authority in California state courts.

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