The Genuine Article by ghkgkyyt


									                                                             by John C. Keith


               ARTICLERecent court decisions have more
                  clearly defined when insurers can invoke
                         the genuine dispute doctrine
               SINCE ITS CREATION IN 2001, the genuine dispute doctrine has afforded a partial defense to some insurance
               bad faith claims. The doctrine holds that an insurer that denies or delays payment of policy benefits because of
               a genuine dispute with its insured regarding coverage or the amount of the claim is not liable for bad faith.1 As
               insurers have sought to spread its application, however, its boundaries have lost definition. In Howard v.
               American National Fire Insurance Company,2 the California Court of Appeal for the First District inched the
               doctrine toward clarity, but the California Supreme Court has denied review of genuine dispute cases, leaving
               practitioners without a comprehensive definition.
                   Over the past decade, insurers have increasingly used the doctrine to contest claims for tortious breach of
               the duty of good faith and fair dealing, commonly referred to as bad faith. Because extracontractual damages
               may be available for insurance bad faith, insurers have sought to use the genuine dispute doctrine to contest all
               bad faith claims. Howard rejects this approach, holding that one must look to the nature of the insurance cov-
               erage at issue (whether first party or third party) and the nature of the duty (e.g., to settle or indemnify) the insurer
               is alleged to have breached. Howard clarifies that the doctrine affords no defense to an insurer’s refusal to set-
               tle a third-party claim based on a coverage dispute. Arguably, the case also indicates that the doctrine does not
               apply to a refusal to defend based on a coverage dispute.
                   The law imposes a variety of duties upon insurers. Which duties apply in a specific case depends in part upon
               whether the policy provides first-party or third-party coverage. A first-party insurance policy covers loss or dam-
               age directly sustained by the insured. Examples include disability, health, theft, and fire insurance policies. Under
               a first-party policy, policy benefits are paid directly to the insured for the insured’s loss. The insurer’s fundamental
                                                                                                                                          AMANE KANEKO

               duty under first-party policies is to indemnify the insured for the loss.
                            John C. Keith is an associate at Peitzman, Weg & Kempinsky LLP in Los Angeles, where he maintains
                                                          a broad-based business litigation practice.

18 Los Angeles Lawyer April 2011
    A third-party insurance policy also entails     Chamberay and subsequent cases have treated        minimize its exposure and will face a much
a duty to indemnify the insured—but against         the genuine dispute doctrine as largely in         greater risk of personal liability.18 Together,
the insured’s liability to a third party rather     keeping with settled insurance law, courts         these third-party insurance principles require
than the insured’s own loss. The policy indem-      have had difficulty in reconciling the doc-        that an insurer, in order to avoid the risk of
nifies the insured for harm (e.g., bodily injury,    trine with two countervailing and equally          tort damages, accept a defense whenever
property damage, or professional malpractice)       settled principles of third-party insurance        there is even a bare potential for coverage, and
suffered by a third party. Third-party policies     law.                                               accept a reasonable settlement within policy
generally obligate the insurer to defend the             The first of the countervailing principles     limits notwithstanding a good faith belief
insured against third-party claims or to reim-      is that the duty to defend is broader than         that there is no coverage.
burse the insured’s defense costs. Examples         the duty to indemnify and is triggered by              As a result, these principles are not read-
include commercial general liability, direc-        any suit that potentially seeks damages within     ily squared with the genuine dispute doc-
tors and officers, and errors and omissions         the coverage of the policy.11 The defense duty     trine. It is not surprising, then, that in the
policies. Courts have also inferred an addi-        is a continuing one, arising on tender of          years following Chateau Chamberay courts
tional duty: to settle—or, more precisely, to       defense and lasting until the underlying law-      have usually resisted the efforts of insurers to
accept a reasonable settlement demand within        suit is concluded or until it has been shown       extend the doctrine to third-party cases. In
policy limits.                                      that there is no potential for coverage.12 A key   Century Surety Company v. Polisso,19 decided
                                                    rationale for giving the duty to defend a          five years after Chateau Chamberay, the
The Genuine Dispute Doctrine                        broad scope is that many insureds are unable       Third District noted that the doctrine had
Chateau Chamberay Homeowners Associa-               to defend themselves effectively against third-    been applied primarily in first-party coverage
tion v. Associated International Insurance          party claims. If the insurer does not provide      cases, and that while the doctrine had also
Company, a 2001 first-party coverage case,           a defense, insureds may face liability (in the     been applied in a third-party indemnity case,20
is often cited as the source of the genuine dis-    form of a judgment or settlement in excess of      it had not been applied in any duty-to-defend
pute doctrine.3 In describing the doctrine,         policy limits) that could have otherwise been      case.21 The court declined to decide whether
however, Chateau Chamberay cites earlier            avoided. The supreme court has described           the doctrine applies in duty-to-defend cases,
cases.4 The supreme court has also explicitly       this rationale: “The insured’s desire to secure    holding that even if the doctrine were avail-
noted that the genuine dispute doctrine is a        the right to call on the insurer’s superior        able in theory, the defendant had failed to
close corollary of the basic principle govern-      resources for the defense of third-party claims    show it applied under the facts of the case.22
ing bad faith claims, which is that an insur-       is, in all likelihood, typically as significant a   The Howard court noted recently that it has
er’s denial of or delay in paying benefits gives     motive for the purchase of insurance as is the     never been held that an insurer in a third-party
rise to tort damages only if the insured shows      wish to obtain indemnity for possible liabil-      case may rely on a genuine dispute over cov-
the denial or delay was unreasonable.5 As dis-      ity,” and so the “[i]mposition of an immedi-       erage to refuse settlement.23
cussed in Chateau Chamberay and subse-              ate duty to defend”—even before all facts              Shortly before Polisso skirted the issue, the
quent cases, the genuine dispute doctrine can       relevant to coverage have become settled—“is       Fifth District addressed, in an unpublished
fairly be viewed as a logical extension of          necessary to afford the insured what it is         opinion, whether the genuine dispute doctrine
existing, settled insurance law.                    entitled to: the full protection of a defense on   applies to the duty to defend. The court did
    The doctrine has its origin in cases involv-    its behalf.”13                                     not explicitly foreclose application of the
ing disputes over policy interpretation, but             The second countervailing principle is:       doctrine to the duty to defend, but that con-
courts have applied it to factual disputes as       “An insurer who denies coverage does so at         clusion is implicit. In Perez v. Fire Insurance
well.6 Generally, insurers have invoked the         its own risk.” As held in Comunale v. Traders      Exchange, the court rejected the insurer’s
doctrine when seeking summary judgment              and General Insurance Company, the insurer         argument that because its interpretation of the
or summary adjudication of bad faith claims.7       incurs this risk even if “its position may not     policy—that a motor vehicle exclusion pre-
The court in McCoy v. Progressive West              have been entirely groundless.” If the denial      cluded coverage of a third-party claim—was
Insurance Company affirmed the denial of the        is found to be erroneous, then the insurer is      reasonable, its refusal to defend its insured
insurer’s request for a separate jury instruc-      liable for all damages proximately caused by       could not subject it to bad faith liability.24 The
tion on the doctrine, holding that it was sub-      the breach, even in excess of policy limits.14     court found that the insurer’s reliance on
sumed within the general instructions pro-               For example, an insurer that erroneously      CalFarm Insurance Company v. Krusiewicz25
viding that bad faith requires that the insurer     declines to defend and that refuses to accept      was misplaced, because that case involved a
acted unreasonably.8 McCoy indicates that the       a reasonable settlement within policy limits       breach of the duty to indemnify, not the duty
only utility of the genuine dispute doctrine        is liable for the entire judgment against the      to defend.26 The court reasoned that, even
may be at summary judgment. However, the            insured, even if it exceeds the policy limits.15   assuming there were genuine issues regarding
doctrine does not change the standards for          The insurer's good faith belief there is no        coverage at the time of tender, all the insured
granting summary judgment, which are still          coverage is not a defense.16 Courts have           needed to show was a potential for coverage
that the insurer demonstrate the absence of         described the measure of damages provided          to be entitled to a defense.27 Or, as the court
triable issues about whether the disputed           for by Comunale and its progeny alternately        stated, “[E]ven if [the insurer’s] interpretation
position on which the insurer denied the            as sounding in tort or as sounding in both         of the motor vehicle exclusion was reasonable,
claim was reached reasonably and in good            contract and tort.17 As recognized by the          it was unreasonable for [the insurer] to fail to
faith.9                                             supreme court more than 50 years ago, the          recognize the possibility” that it was mis-
    The genuine dispute doctrine emerged out        logic behind awarding damages in excess of         taken.28
of, and has been applied primarily in, first-        policy limits is much the same as that behind          Two years after Perez, the Second District
party coverage cases.10 Howard suggests that,       giving the duty to defend a broad scope. The       reached a different conclusion in the short-
in third-party cases, the application of the doc-   insured is often unable to defend itself in        lived Delgado v. Interinsurance Exchange of
trine is limited to the duty to indemnify,          court or to fund a settlement. If the insurer      the Automobile Club of Southern Cal-
which is the only duty common to first-party         fails to discharge its defense or settlement       ifornia.29 The court remarked in dicta that in
and third-party coverage. Although Chateau          duties, the insured will miss opportunities to     the case of a legal dispute over the insurer’s

20 Los Angeles Lawyer April 2011
duty to defend, the genuine dispute                                                                            whether, or the extent to which,
doctrine probably would apply.                                                                                 the genuine dispute doctrine might
Delgado was reversed on different                                                                              apply to a refusal to defend based
grounds, but in the interim, a U.S.                                                                            on a coverage dispute. However,
district court in California, in                                                                               that the doctrine does not apply
Harbison v. American Motorists                                                                                 can be inferred from the court’s
Insurance Company, remarked on                                                                                 holding. Among other things, the
Delgado and questioned whether the                                                                             court affirmed (with immaterial
doctrine could ever properly apply to                                                                          modifications) the trial’s court judg-
a dispute over coverage, whether                                                                               ment finding American liable for
legal or factual.30                                                                                            bad faith for its refusal to defend,
    In Griffin Dewatering Corpora-                                                                             settle, and indemnify.37 Supporting
tion v. Northern Insurance Compa-                                                                              the inference is the court’s explicit
ny of New York, the Fourth District                                                                            distinguishing of Chateau Cham-
held that an insurer could not be                                                                              beray as a first-party case and the
held liable for bad faith for denying                                                                          court’s explicit caution that a court
coverage and refusing to defend its                                                                            must be mindful of the different
insured based on a reasonable,                                                                                 purposes of first-party and third-
though ultimately incorrect, inter-                                                                            party insurance in determining the
pretation of the policy’s “total pol-                                                                          scope of the insurer’s obligations.
lution exclusion.”31 Although a later                                                                          Finally, the immediate juxtaposi-
supreme court case made it clear that                                                                          tion in the court’s opinion of the
the coverage exclusion did not apply,                                                                          statement that, in first-party cases,
the only two court of appeal cases on                                                                          an insurer may raise a reasonable
point at the time supported the insur-                                                                         dispute over coverage without being
er’s position. The court held, there-                                                                          guilty of bad faith, with the state-
fore, that it was not bad faith for                                                                            ment that the genuine dispute rule
the insurer to advance its legal posi-                                                                         does not apply in all bad faith insur-
tion on the issue. The court disclaimed any        Chateau Chamberay, that its refusal to settle     ance contexts, corroborates the inference that
reliance on or opinion about the genuine dis-      was prompted by a genuine dispute concern-        the court would apply the genuine dispute
pute doctrine. The court treated the doctrine      ing coverage. The court held that American’s      doctrine only to alleged breaches of the duty
as distinct from what it viewed as the real        reliance on Chateau Chamberay was mis-            to indemnify.
issue: whether the denial of coverage was          placed, observing that Chateau Chamberay
objectively reasonable.32 Despite the dis-         was a first-party coverage case and explaining     The Duty to Indemnify
claimer, however, practitioners may still con-     that a court must be mindful of the differences   If the Howard court did in fact conclude that
sider how Griffin addresses issues presented       between first-party and third-party policies       the genuine dispute doctrine should be lim-
by the genuine dispute doctrine, as do prior       when determining the scope of an insurer’s        ited to the duty to indemnify, whether in a
holdings that describe the doctrine as a close     duty of good faith.34 Application of the gen-     first-party or third-party case, that would be
corollary of, or as even subsumed within,          uine dispute doctrine to American’s refusal to    a logical conclusion. An insurer’s refusal to
the general principles underlying the bad          settle would, the court held, contravene the      indemnify its insured for a third-party judg-
faith doctrine.33                                  longstanding rule that a belief that the policy   ment against it will have much the same
                                                   does not provide coverage should not affect       effect as a refusal to indemnify for a first-party
Howard                                             the decision about whether a settlement offer     loss suffered by the insured. In both cases, the
Howard offers perhaps the clearest state-          is reasonable. The only permissible consid-       loss has, in effect, become settled, and there
ment yet in a published California opinion         eration is whether, in light of the victim’s      are no further prophylactic measures that
that the genuine dispute doctrine does not         injuries and the probable liability of the        the insurer can take to minimize the loss. At
apply in all bad faith cases and that its avail-   insured, the ultimate judgment is likely to       that point, the question becomes one of actual
ability in third-party cases is far more limited   exceed the amount of the settlement offer.        coverage—i.e., whether or not the policy in
than in first-party cases. However, Howard          Ultimately, the court held that while “[i]n       fact provides for indemnification of the loss.
explicitly discusses only the doctrine’s appli-    first party cases an insurer may raise a rea-      The insured having only bargained for indem-
cation to the duty to indemnify and the duty       sonable dispute over coverage without being       nification of actually covered losses, and the
to settle. It is arguably implicit in the case,    guilty of bad faith,” the “genuine dispute        insurer having only agreed to provide as
however, that the doctrine is inapplicable to      rule does not apply in all bad faith insur-       much, the insurer should in fairness be able
the duty to defend.                                ance contexts.”35                                 to advance a reasonable, genuine dispute
    Howard arose from child molestation                The Howard court also recognized, on          about coverage without being subjected to the
cases brought against the Catholic Church.         the other hand, that applying the doctrine to     risk of additional liability for bad faith.
The defendant insurer (American) had denied        a refusal to indemnify can be consistent with         The situation is entirely different when the
coverage and refused to defend or to con-          bad faith principles. The court held that         insured’s loss has not yet become settled.
tribute to the settlement of claims brought        American also acted in bad faith in refusing      When faced with either a request for a defense
against the Bishop of Stockton for negligent       to indemnify the bishop after judgment was        or a request to settle within policy limits, the
retention of a molesting priest. The trial court   entered against him, but that, in the context     insurer can, by accepting that request, mini-
ruled against American for bad faith failure       of indemnification, “an insurer’s genuine dis-     mize the insured’s exposure to a potentially
to defend, to settle, and to indemnify.            pute as to coverage may negate bad faith.”36      greater loss down the road. The insurer should
    On appeal, American argued, citing                 The court did not explicitly discuss          therefore do so, notwithstanding any dis-

                                                                                                                          Los Angeles Lawyer April 2011 21
putes regarding coverage and unless the pol-           Putting aside whether Scottsdale was                  4th 498 (2010).
                                                                                                             3 Chateau Chamberay Homeowners Ass’n, 90 Cal.
icy clearly affords no potential for coverage      decided correctly, Delgado and Griffin extend
                                                                                                             App. 4th at 347.
under the facts and the applicable law. This       that case beyond its context to hold that an              4 Id. at 347-48.
is especially so given that the insurer can        insurer that uses an erroneous legal position             5 Wilson v. 21st Century Ins. Co., 42 Cal. 4th 713, 723

later seek reimbursement of costs advanced         to deny defense faces no risk of bad faith                (2007).
under a reservation of rights.38                   liability as long as its position is reasonable.          6 Id.
                                                                                                             7 See id. at 724; Amadeo v. Principle Mut. Life Ins. Co.,
                                                   While the insurer in Scottsdale sought to
Legal or Factual Dispute                           recoup its defense costs after the fact, it at least      290 F. 3d 1152, 1160-61 (9th Cir. 2002).
                                                                                                             8 McCoy v. Progressive West Ins. Co., 171 Cal. App.
No court appears to have extended the gen-         minimized its insured’s exposure to an adverse            4th 785, 792-94 (2009).
uine dispute doctrine to third-party cases         judgment by taking the prophylactic mea-                  9 Wilson, 42 Cal. 4th at 724.

involving the duty to defend or the duty to set-   sure of providing the insured a defense under             10 See Century Surety Co. v. Polisso, 139 Cal. App. 4th

tle, despite numerous invitations to do so. This   a reservation of rights. In contrast, an insurer          922, 951 (2006).
                                                                                                             11 Montrose Chem. Corp. of Cal. v. Superior Court, 6
supports the notion that the doctrine should       that denies a defense, as in Delgado and
                                                                                                             Cal. 4th 287, 295 (1993).
be confined to the duty-to-indemnify con-           Griffin, will often leave its insured significantly        12 Id.
text in which it developed. A possible excep-      exposed to a potentially sizeable adverse                 13 Id. at 295-96.

tion is whether the doctrine can apply to a        judgment.43 It therefore seems hard to justify            14 Comunale v. Traders & Gen. Ins. Co., 50 Cal. 2d

legal, rather than factual, dispute over the       allowing an insurer to avoid liability for bad            654, 660-61 (1958); Johansen v. California State Auto.
duty to defend. Cases that address this point      faith based on a coverage dispute—even a                  Ass’n Inter-Ins. Bureau, 15 Cal. 3d 9, 18 (1975).
                                                                                                             15 Comunale, 50 Cal. 2d at 661.
include Perez and Harbison (which hold that        genuine one—at the time of tender.                        16 Johansen, 15 Cal. 3d at 12-13.
the doctrine would not apply), Delgado                 This conclusion follows regardless of                 17 Shade Foods, Inc. v. Innovative Prods. Sales &

(which holds that it probably would), and          whether the dispute can be characterized as               Marketing, Inc., 78 Cal. App. 4th 847, 879 (2000);
Griffin (which, though not strictly a gen-         legal or factual. Put another way, it makes no            Johansen, 15 Cal. 3d at 18.
                                                                                                             18 See Comunale, 50 Cal. 2d at 660-61.
uine-dispute case, holds that it is not bad        difference to the undefended insured that the
                                                                                                             19 Century Surety Co. v. Polisso, 139 Cal. App. 4th 922
faith for an insurer to advance a reasonable,      denial of coverage is based on unsettled law
though erroneous, legal position in support        rather than unsettled facts; it is left without           20 Dalrymple v. United Servs. Auto. Ass’n, 40 Cal.

of its refusal to defend).                         a defense, and the resulting increase in its              App. 4th 497, 523 (1995).
     The Delgado court based its conclusion on     exposure is the same, either way. Neither                 21 Polisso, 139 Cal. App. 4th at 951.
                                                                                                             22 Id.
an arguable misreading, or else a misguided        should it make a difference to the insurer
                                                                                                             23 Howard v. American Nat’l Fire Ins. Co., 187 Cal.
extension, of Scottsdale Insurance Company         that the claim presents a legal, as opposed to
                                                                                                             App. 4th 498, 530 (2010).
v. MV Transportation.39 Griffin also relies        factual, coverage defense; the underlying                 24 Perez v. Fire Ins. Exch., 2005 WL 3193848, at *19
heavily on Scottsdale. However, Scottsdale         claim is not altered. If anything, an insurer can         (Cal. App. 5th Dist. Nov. 30, 2005).
does not hold that the genuine dispute doc-        more quickly and inexpensively resolve a                  25 CalFarm Ins. Co. v. Krusiewicz, 131 Cal. App. 4th

trine would apply to a legal dispute over the      legal coverage dispute than a factual one.                273 (2005).
                                                                                                             26 Perez, 2005 WL 3193848, at *19 n.9.
duty to defend. Moreover, it involves neither      Moreover, it imposes no undue burden on the               27 Id. at *19.
an insurer’s refusal to defend nor a claim for     insurer to require that it defend its insured,            28 Id.
bad faith. Scottsdale involved an insurer that     subject to a reservation of rights, as the price          29 Delgado v. Interinsurance Exch. of the Auto. Club

defended its insured under a reservation of        of avoiding the risk of bad faith liability.              of So. Cal., 152 Cal. App. 4th 671 (2007), rev’d, 47
rights. The case, properly limited, stands for     Typically, the insurer is better equipped to              Cal. 4th 302 (2009).
                                                                                                             30 Harbison v. American Motorists Ins. Co., 636 F.
no more than the proposition that, if it is sub-   bear the burden of defense than its insured—
                                                                                                             Supp. 2d 1030, 1040 (E.D. Cal. 2009). The court fur-
sequently determined as a matter of law that       and, as Scottsdale makes clear, if the insurer
                                                                                                             ther found that the existence of a genuine dispute
no potential for coverage arose, an insurer        is later proved correct that no potential for             implicitly reflects a potential for coverage sufficient to
defending under a reservation of rights may        coverage ever arose, it is entitled to recoup all         trigger the insurer’s duty to defend.
obtain reimbursement of its defense costs          defense costs advanced under a reservation of             31 Griffin Dewatering Corp. v. Northern Ins. Co. of

advanced under the reservation.40                  rights.                                                   New York, 176 Cal. App. 4th 172 (2009).
                                                                                                             32 Id. at 190.
     Scottsdale does hold that the law gov-            These arguments are subject to legitimate             33 See, e.g., Wilson v. 21st Century Ins. Co., 42 Cal. 4th
erning the insurer’s duty to defend need not       counterarguments in favor of the insurer,                 713 (2007).
be settled at the time the insurer makes its       including that the insured’s other protections            34 Howard v. American Nat’l Fire Ins. Co., 187 Cal.

decision. Instead, subsequent case law can         under the law should be sufficient, without the           App. 4th 498, 530 (2010).
                                                                                                             35 Id.
establish, in hindsight, that no duty to defend    need for a bad faith claim, or that the insured
                                                                                                             36 Id. at 531 (holding that, in any event, American’s
ever existed.41 Scottsdale relied for its hold-    may be judgment-proof and the insurer, prac-
                                                                                                             refusal to indemnify was not reasonable under the
ing on an earlier case, Tamrac, Inc. v. Cal-       tically speaking, unable to recover its defense           facts of the case).
ifornia Insurance Guarantee Association, in        costs. However, these arguments apply equally             37 Id. at 522 (The trial court “did not award damages

which the court distinguished between legal        where the coverage dispute is factual rather              for a contractual breach of the duty to defend but for
or factual uncertainty regarding coverage.42       than legal, and the rationale for treating legal          tortious bad faith breach of American’s multiple duties
With Tamrac, however, the subsequently             coverage disputes differently in the bad faith            to defend, settle, and indemnify.”).
                                                                                                             38 See, e.g., Scottsdale Ins. Co. v. MV Trans., 36 Cal.
decided supreme court case supported the           context seems unconvincing. The California
                                                                                                             4th 643 (2005).
insurer’s position. As a result, the court’s       Supreme Court has denied review of genuine                39 Id. at 655.

holding—that the insured could not recover         dispute cases, including Howard, so that ques-            40 Id. at 649.
                                                                                                             41 Id. at 657-58.
the defense costs that it incurred before the      tion, and the application of the doctrine in gen-
                                                                                                             42 Tamrac, Inc. v. California Ins. Guarantee Ass’n, 63
adverse precedent came down—does not nec-          eral, has yet to be fully delineated.             I
                                                                                                             Cal. App. 4th 751 (1998).
essarily resolve the question of whether, had                                                                43 As Howard noted, this can be the case even if another
the insurer been proved wrong instead of           1 Chateau  Chamberay Homeowners Ass’n v. Associated       insurer is defending the insured. See Howard v.
right, the insured could have maintained a         Int’l Ins. Co., 90 Cal. App. 4th 335, 347 (2001).         American Nat’l Fire Ins. Co., 187 Cal. App. 4th 498,
                                                   2 Howard v. American Nat’l Fire Ins. Co., 187 Cal. App.
claim for bad faith.                                                                                         521-22 (2010).

22 Los Angeles Lawyer April 2011

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