What Is The Genuine Dispute Doctrine In A Bad Faith Lawsuit?

A covenant to act in good faith and deal fairly with the insured is implied in every insurance contract, even if not written in it. This covenant requires insurers to treat insureds fairly, to consider the insured's interests equal to the company's, to fully investigate all bases for coverage, to pay claims that are owed, and more.  When an insurer withholds an insured’s policy benefits “unreasonably” or “without proper cause,” it is acting in bad faith.  If the jury agrees, the insured may be entitled to additional monies beyond the policy benefits, including attorney fees in suing the insurer, emotional distress damages, consequential damages, and in certain instances, punitive damages.  

The tort of "bad faith" is unique to insurance, because courts recognize insurance is a take-it-or-leave-it, modern-day necessity, and insureds are paying for little more than a promise to be taken care of when the worst of the worst happens.  Because of this, courts know insurers need an extra "incentive" to stay honest.

However, if an insurer can establish that there is a genuine dispute as to whether there is coverage for the claim, it typically will not be held liable for bad faith. To take advantage of this defense, insurers often will rely on the advice and opinions of experts. But insurers are not insulated from liability merely because their expert gave an opinion in their favor.  If they should have known their experts' opinions were unreliable, biased, or flawed in some other manner, the doctrine does not apply.  

Recently, a California State Court of Appeal confirmed the limits of the genuine dispute doctrine.  In Zubillaga v. Allstate Indemnity Co., 2017 WL 2627997 (June 19, 2017), the insured was injured in an accident with an underinsured motorist. After submitting a claim for the costs of her injuries, Allstate offered her much less than she demanded. The insured presented Allstate with evidence to support her claim, but Allstate disputed the necessity of some of her medical treatments based on the opinions of its own expert. The insured then offered an additional report by another physician to support her claim. Allstate never had its expert review the new report. Instead, it continued to rely on the expert's previous opinion.

The insured sued Allstate for breach of contract and bad faith. The trial court granted summary judgment in favor of Allstate finding that it relied on its expert’s opinion and thus had a “genuine dispute” as to the insured’s necessary medical treatment. The Court of Appeal reversed, holding that it was unreasonable for Allstate to continue to rely on its expert's opinion after receiving new information.  Allstate had a duty to investigate the new information but failed to do so.

This case confirms that expert opinions must be reasonable, and an insurer’s reliance upon them must also be reasonable. Insurers cannot simply obtain an expert opinion and continue to rely on it in the face of new information.  They must evaluate the new information received.  Insurers must give at least as much consideration to the interests of the insured as they give to their own interests and perform their obligations in good faith.