A federal court in California recently denied AMCO’s request to enter judgment in its favor and dismiss a policyholder’s allegations of bad-faith in the handling of a business income loss claim. In A-1 Transmission Automotive Technology, Inc. v. AMCO Insurance Company, No. 10-8496, 2012 WL 1534466 (C.D.Cal., April 27, 2012), the Plaintiff’s auto garage location sustained a substantial. AMCO commenced a claim investigation a $25,000 advance to compensate for business personal property. The garage owners commenced emergency shoring and repairs required by authorities to allow entry to the red-tagged building and to provide temporary power.

Ten (10) days after the loss, the President of the Company gave a recorded statement and informed AMCO that the business grossed approximately $1 million annually. AMCO advanced $50,000 under the Business Income coverage and obtained an agreed scope of repair. AMCO retained the services of a CPA to evaluate the merits of the business income claim. AMCO requested various financial documents that could support Plaintiff’s Business Income claim.

Ten (10) months after the loss, the garage owners submitted a formal business income loss claim requesting an additional $143,099.94 for the loss of income sustained over a six-month period of time. The owners also requested $120,378.84 in Extra Expenses which included $68,000 incurred in additional security for the premises. AMCO renewed its request for financial documents including Plaintiff’s general ledgers for 2007 and 2008.

Over the course of a year, the Parties exchanged multiple e-mails and letters, in which Plaintiff sent certain documents to Defendant, and Defendant asked for more documents. AMCO then sent a letter to Plaintiff stating that it did not have sufficient documentation to accurately determine Business Income loss and as a result, it could only estimate the Business Income loss at $29,181.

The garage owners hired an attorney and a CPA who concluded that Plaintiff’s Business Income loss was $373,462, in addition to the $120,378.84 in Extra Expenses.

California law recognizes in every contract, including insurance policies, an implied covenant of good faith and fair dealing, which means that the insurer should refrain from injuring its insured’s right to receive the benefits of the insurance agreement. In order to state a claim for bad faith, a plaintiff has the burden of showing that (1) the insurer withheld policy benefits, and (2) the delay or denial was unreasonable and without proper cause. Love v. Fire Ins. Exch., 221 Cal.App.3d 1136, 271 Cal.Rptr. 246 (1990).

In general, a court may grant summary judgment on bad faith claims where it is undisputed that the basis for the insurer’s decision was reasonable, but if there is a question as to whether the insurer acted unreasonably, the court will let the jury determine the reasonableness of the insurer’s conduct.

In this case, AMCO argued that as a matter of law, it cannot be liable for bad faith if it reasonably relied on an expert’s opinion to calculate the $29,181 in Business Income loss.

In denying AMCO’s summary judgment, the court stated:

Defendant’s reliance on its CPA’s opinion does not automatically insulate Defendant from bad faith liability. Reliance on an unreasonable expert opinion or failure to conduct a thorough investigation can still subject an insurance company to liability. Guebara v. Allstate Ins. Co., 237 F.3d 987, 995.

[…] Plaintiff originally estimated Business Income loss at $243,099.94, and now, through an expert, has calculated this income loss at $373,462 (with supporting documents). The Court finds that, at this stage, it cannot determine which of these business income loss calculations was correct, let alone whether Defendant had a reasonable basis for choosing the significantly lower estimate.

The case for the garage owners is certainly not over, but they will have an opportunity to present evidence before the jury and obtain an determination on whether AMCO acted unreasonably and in the adjustment of this claim.