The California Appellate Court recently ruled in a published opinion that an insurer cannot escape liability for a breach of the implied covenant of good faith and fair dealing claim (bad faith), because its coverage position was based an outside consultant’s findings. In the case, Fadeeff v. State Farm General Insurance Company,1 the court considered State Farm’s bold contention that an insurer should automatically be considered to have acted in good faith if its claim decision is based on an independent expert’s conclusions.

In Fadeef, the insured’s home suffered smoke and soot damage caused by the 2015 Valley Fire. After State Farm paid $50,000 for damage, the insured hired a public adjuster who submitted a claim for an additional $75,000 in damages. State Farm then retained Forensic Analytical Consulting Services to conduct an inspection of the claimed damage and determine if additional repairs/remediation were necessary. Forensic Analytical subsequently determined, predictably, that no additional cleaning was needed to address the insured’s smoke and fire damage. State Farm relied on Forensic Analytical’s report to deny the insured’s supplemental claim.

The Fadeeffs then sued State Farm for breaching the implied covenant of good faith and fair dealing in their property policy, commonly known as insurance bad faith.

State Farm filed a summary judgment motion asking the trial court to find that it did not adjust the insured’s claim in bad faith. The trial court granted State Farm’s motion for summary judgment and the Fadeeffs appealed.

In support of its position, State Farm contended that it could not have not acted in bad faith because its conclusion that there was no coverage for the $75,000 supplemental claim was based on the findings of Forensic Analytical, a so called “independent” expert retained to determine whether or not there was merit to the claim. State Farm argued that since it reasonably relied on Forensic Analytical, its claim decision was essentially not a product of its conduct. State Farm further relied on law holding that insurer opinions based on an outside expert may be a basis to avoid bad faith liability. The appellate court focused on the word may and concluded that mere reliance on an outside expert does not automatically save an insurer from committing bad faith. The reliance on an outside expert, instead, is only one factor in weighing whether the insured adjusted a claim in bad faith.

In this case, the appellate court instructed that all the factors relating to the insurer’s conduct must be examined, not just the retention of independent consultant, when determining bad faith conduct. Here, the court also considered that: (1) State Farm initially found that all claimed damage was caused by the fire, yet a new adjuster for the supplemental claim contended some of the earlier claimed damage was now considered to be from wear and tear; (2) State Farm failed to consider that some damage in the supplemental claim was damage that occurred during power washing, which was State Farm’s suggested cleaning for the initial claim; (3) State Farm should not have reasonably relied on Forensic Analytical’s finding because it was apparent from the report that Forensic Analytical did not conduct a thorough investigation; and (4) State Farm took inconsistent coverage positions in its adjustment of the initial and subsequent claim. The appellate court reversed the trial court dismissal of the insured’s bad faith claim.

An important takeaway from the court ruling is not only that State Farm’s reliance on an outside expert did not automatically protect it from bad faith claims, but that the reliance was, instead, actually a factor demonstrating its bad faith conduct. State Farm failed to explain why its reliance on the consultant was justified. Thus, it is not the hiring of an expert that determines the reasonableness of an insurer’s conduct. The insurer’s conduct should be judged on whether it was reasonable to rely on the expert’s findings. Essentially, an insurer has a duty to review and consider a consultant’s findings to the best of its ability. If there is any doubt as to the consultant’s findings, the doubt should be made in the insured’s favor. Many insurers just place a rubber stamp on an expert report, deny the claim and call it a day. Under Fadeef, it should be argued that this conduct is evidence of bad faith.

This case also limits the reach of the “genuine dispute doctrine” as a shield to bad faith claims. This will be discussed in an upcoming blog post.
1 Fadeeff v. State Farm General Ins. Co., No. 155691, 2020 WL 3053659 (Cal. Ct. App., May 22, 2020).