Insurance Law Alert: Excess Award Not Required for Uninsured Motorist Bad Faith

In Maslo v. Ameriprise Auto & Home Insurance Co. (No. B249271, filed 7/22/14), a California appeals court held that even if damages do not plainly exceed uninsured motorist policy limits, an insurer may nonetheless be liable for bad faith in failing to investigate and attempt to settle reasonably clear damages within the limits.

In Maslo, the insured was rear-ended by an uninsured motorist and absolved of liability in the police report. He suffered severe injury and underwent orthopedic surgery. He tendered all medical records, bills and police reports to his insurer and demanded the policy’s $250,000 uninsured motorist limit. Five months went by with no response. After six months the insured retained counsel and demanded arbitration. In addition, the insured offered to mediate the claim, but the insurer refused.

Discovery ensued, with the insured supplying all documents. According to the insured, the insurer never sought to depose any treating physicians, never sought to conduct an independent medical examination or even obtain a defense medical record review. The parties stipulated that the medical special damages totaled $64,120.91. The arbitrator awarded a further $100,000 in general damages for a total award of $164,120.91.

In the subsequent bad faith lawsuit, the insured alleged that the failure to make any offer of settlement before arbitration violated Insurance Code section 790.03(h)(5), which requires an “attempt in good faith to effectuate a prompt, fair, and equitable settlement of claims in which liability has become reasonably clear.” The insured claimed that he was forced to go to arbitration and to incur costs as well as attorney’s fees. He prayed for compensatory and consequential damages for the delay and withholding of benefits, for reimbursement of all costs and attorney fees, for general damages, punitive damages, all costs of suit, and for interest.

The insurer responded by arguing that a genuine dispute existed, precluding any bad faith. Specifically, the insurer argued that bad faith required showing: (1) a claim for which liability was clear, (2) damages plainly exceeding the uninsured motorist coverage limits, and (3) an unreasonable refusal to pay. As the damages did not plainly exceed $250,000, there was no bad faith. The trial court agreed, sustaining the insurer’s demurrer on the ground that the arbitration award did not establish that damages had exceeded the policy limit and, therefore, there was no causation.

The appeals court reversed, finding that the insured had adequately pled bad faith. Citing Wilson v. 21st Century Ins. Co. (2007) 42 Cal.4th 713, the Maslo court said that the genuine dispute rule does not relieve an insurer from its obligation to thoroughly and fairly investigate, process and evaluate a claim. The court said that the insurer could not rely upon the genuine dispute rule because the insured alleged the failure to comply with common law and statutory obligations to thoroughly and fairly investigate, process, and evaluate the claim.

Specifically, the insured alleged that the insurer was promptly apprised of the claim, provided with the police report showing the uninsured motorist solely responsible, and provided with medical documentation of the injuries sustained by appellant and the nature and cost of his medical treatment. Further, the insured alleged that the insurer neither interviewed treating physicians, nor conducted a medical examination or review. In addition, the insured alleged that the insurer failed to respond to the settlement demand, made no settlement offer, failed to provide a reason for withholding payment, refused to participate in mediation, and provided no opportunity to negotiate a settlement. Thus, the appeals court found the genuine dispute rule inapplicable.

While acknowledging some authority for the proposition that damages must exceed the policy limit to demonstrate bad faith, the court held it is not an absolute rule. The court agreed that a leading treatise listed excess damages as an element of uninsured motorist bad faith, but pointed out the treatise, in relying on Hightower v. Farmers Insurance Exchange (1995) 38 Cal.App.4th 853, was only summarizing the decision. The Maslo court pointed out that Hightower also said “an insurer cannot shield other dilatory conduct, such as failing to investigate a claim, by the mere act of requesting uninsured motorist arbitration.” Thus, beside the three points cited in the treatise:

“[A]n insurer may be liable for bad faith in failing to attempt to effectuate a prompt and fair settlement (1) where it unreasonably demands arbitration, or (2) where it commits other wrongful conduct, such as failing to investigate a claim. An insurer’s statutory duty to attempt to effectuate a prompt and fair settlement is not abrogated simply because the insured’s damages do not plainly exceed the policy limits. Nor is the insurer’s duty to investigate a claim excused by the arbitrator’s finding that the amount of damages was lower than the insured’s initial demand. Even where the amount of damages is lower than the policy limits, an insurer may act unreasonably by failing to pay damages that are certain and demanding arbitration on those damages.”

This document is intended to provide you with general information about insurance law developments. The contents of this document are not intended to provide specific legal advice. This communication may be considered advertising in some jurisdictions.

July 24, 2014