An attorney from another law firm asked me whether an insurer is obligated to investigate facts supporting coverage in a property insurance coverage dispute. It is common for colleagues to share information and help when they can. It seems that the more one shares, the more one receives –usually with compound interest.
Currently my favorite case on the topic of an insurer’s obligation to investigate fully for facts supporting coverage (rather than facts supporting only denial) is Jordan v. Allstate Ins. Co., 148 Cal. App. 4th 1062 (Cal. App. 2d Dist. 2007). The case has language which seems very even handed. Indeed, defense attorneys often cite this case. The facts and legal history are a little confusing. However, the "Readers Digest" version is that a claim was submitted for water related damages including fungus, wet rot, dry rot, and collapse caused by hidden decay. On the coverage issue, the Court found:
"First, we could conclude that a collapse due to ‘hidden decay’ would be covered, but not if such decay was caused by ‘wet or dry rot’; or, second, we could conclude that coverage for a collapse due to ‘hidden decay’ was provided, but noncollapse damage caused by ‘wet or dry rot’ was excluded. Each of these constructions of the policy language is reasonable. The first is consistent with Allstate’s contention that the exclusion for ‘wet or dry rot’ precludes coverage irrespective of whether there is a basis for coverage under the exception to the collapse exclusion. On the other hand, the second interpretation is advanced by Jordan and supports her claim for coverage under the collapse provisions of the ‘additional coverage’ section of the policy. Thus, when read in the context of the entire policy, particularly the provision granting coverage for a collapse caused by ‘hidden decay,’ the effect and application of the exclusion for a loss caused by wet or dry rot is not at all clear.”…
Applying settled principles of policy construction, we resolved this ambiguity by looking to the insured’s objectively reasonable expectations and construed the policy language against Allstate and in favor of Jordan…. This meant that Jordan could demonstrate the existence of coverage for her loss if she could show that an “entire collapse” had occurred. Because the record was unclear on this issue, we remanded the matter back to the trial court to give Jordan an opportunity to prove that an actual collapse had occurred and had resulted in her claimed damage."
After reading that, most of you can imagine why I sometimes take an afternoon for a little wine. Yes, I read this all day, and it sometimes seems that what I am reading is in the Choctaw language with logic from Jimmy Hendrix. Admittedly, I enjoy it; I am a little bit of a nerd.
But, the point Jordan was making is that Allstate should have been looking for facts supporting a collapse loss which was covered. In deciding the issue, the Court first provided some general rules regarding good faith investigative obligations:
"An insurer is said to act in “bad faith” when it not only breaches its policy contract but also breaches its implied covenant to deal fairly and in good faith with its insured. “A covenant of good faith and fair dealing is implied in every insurance contract…. The implied promise requires each contracting party to refrain from doing anything to injure the right of the other to receive the agreement’s benefits. To fulfill its implied obligation, an insurer must give at least as much consideration to the interests of the insured as it gives to its own interests. When the insurer unreasonably and in bad faith withholds payment of the claim of its insured, it is subject to liability in tort. And an insurer cannot reasonably and in good faith deny payments to its insured without fully investigating the grounds for its denial…. Indeed, in Egan v. Mutual of Omaha Ins. Co… the Supreme Court emphasized that, in order to protect the interests of its insured, it was “essential that an insurer fully inquire into possible bases that might support the insured’s claim.”
…[I]t must be remembered that “an insurer is not required to pay every claim presented to it….Such a practice inevitably would prejudice the insurance seeking public because of the necessity to increase rates, and would finally drive the insurer out of business. Indeed, analysis of the leading first party cases demonstrates that a rule has never been applied which holds under any circumstances that an insurer which refuses to pay benefits claimed to be due under the policy did so at its own risk. Clearly, both logic and good policy dictate that no such rule ever be applied in first party cases.”
Then, the Court explained the legal ramifications for failing to fully investigate the claim:
"…an insurer owes a duty to its insured to investigate all of the possible bases of an insured’s claim. The insurer’s duty to give as much consideration to the insured’s interests as it does to its own obligates it to investigate a claim thoroughly. An insurer must fully inquire into the bases for the claim; indeed, it “cannot reasonably and in good faith deny [benefits] to its insured without thoroughly investigating the foundation for its denial…. An insurance company may not ignore evidence which supports coverage. If it does so, it acts unreasonably towards its insured and breaches the covenant of good faith and fair dealing…see also Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc. (2000) 78 Cal.App.4th 847, 882 [93 Cal. Rptr. 2d 364] [the record “suggests that [the insurer] looked the other way when confronted with facts revealing the possibility of first party coverage, resisting both reasonable interpretation of policy language and a compelling history of negotiation to secure this coverage”]; Amadeo v. Principal Mut. Life Ins. Co. (9th Cir. 2002) 290 F.3d 1152, 1163 [even assuming the insurer’s interpretation of its policy was not adopted in bad faith, its failure to investigate the facts surrounding the claim was evidence of bad faith].)
…where an insurer denies coverage but a reasonable investigation would have disclosed facts showing the claim was covered, the insurer’s failure to investigate breaches its implied covenant. The insurer cannot claim a “genuine dispute” regarding coverage in such cases because, by failing to investigate, it has deprived itself of the ability to make a fair evaluation of the claim….Thus, although Allstate’s interpretation of a policy exclusion was reasonable, it also had a duty to investigate Jordan’s coverage claim that was based on the “additional coverage” provisions relating to an “entire collapse,” which we held, in Jordan I, was also reasonable and consistent with Jordan’s objectively reasonable expectations."
The Jordan case is not over. The Court sent it back again for trial. It looks like some damage may be covered and some not, but the facts are not fully developed. However, the Court correctly noted that every adjuster has a good faith obligation to fully and honestly investigate all facts: those supporting coverage and those suggesting no or limited coverage.