After denying claims, insurers sometime seek to avoid bad faith liability by taking their chances that a court will rule in their favor, and then, if the court rules otherwise, immediately tendering the monies owed under the insurance policy to the insured.

A recent unpublished California appellate decision reaffirmed that an insurer cannot avoid bad faith liability by attempting to belatedly pay what is owed under the insurance policy.1

In Saddleback Inn v. Certain Underwriters at Lloyd’s London, Saddleback Inn (“Saddleback”) sought an insurance policy naming it as the named insured and naming JK Properties, Inc. as an additional insured. Instead, when the policy was issued by Certain Underwriters at Lloyd’s London (“Lloyds”), Saddleback was
replaced as the named insured with J.K. Properties, so that the policyholder was listed as J.K. Properties dba Saddleback Inn. Saddleback did not identify the mistake when the policy was issued.

The insured property was damaged by a fire. Saddleback submitted a claim to Lloyds for $2.15 million in damages. Lloyds denied the claim on the basis that Saddleback owned the hotel and J.K. Properties, the named insured, did not have an insurable interest in the property.

Saddleback sued Lloyds for breach of contract and bad faith. Through the litigation Saddleback sought to reform the insurance policy to meet the original intentions of the parties to name Saddleback as the named insured.

In the first phase of the trial, the Superior Court reformed the policy after finding that Saddleback and Lloyds had intended that Saddleback be named as the insured under the policy. Before the second phase of the trial (addressing liability for bad faith) began, Lloyds paid Saddleback $2.9 million for the fire damage and interest.

In the second phase of the trial, a jury determined Lloyds had acted in bad faith by unreasonably denying coverage and awarded Saddleback $50,000 in punitive damages.

On appeal, one of Lloyds’ arguments regarding bad faith was that its payment to Saddleback for money owed under the insurance policy (plus interest) for the fire damage negated its bad faith liability. The Court of appeal disagreed, finding that:

Ultimately, a claim for bad faith liability hinges on whether the insurer’s refusal to pay policy benefits was reasonable at the time. (R & B Auto, supra, 140 Cal.App.4th at p. 354.) The insurer must fully investigate the claim and then evaluate the investigation’s outcome objectively. (Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 817-819.) The jury’s finding [that Lloyds] failed to act reasonably by denying Saddleback’s claim was supported by substantial evidence. Such evidence included the following: [The coverage attorney for Lloyds] did not include the insurance application and related documents that showed an intent of the parties to insure Saddleback in his denial letter; [the underwriter] placed the risk based on the application listing the named insured as Saddleback; [the coverage lawyer] failed to investigate [the underwriter’s] intent in underwriting the policy or interview her regarding the application process; and [the coverage attorney] failed to interview [the insured’s broker].

1 Saddleback Inn v. Certain Underwriters at Lloyd’s London, 2017 WL 1180419 (Cal. Ct. App. Mar. 30, 2017).