Insurance Bad Faith Failure to Investigate

Among the most critical factors bearing on the insurer's good faith is the adequacy of its investigation of the claim. "Yhe covenant of good faith and fair dealing implied in all insurance agreements entails a duty to investigate properly submitted claims . . . ." ( KPFF, Inc. v. California Union Ins. Co. (1997) 56 Cal. App. 4th 963, 973 66 Cal. Rptr. 2d 36; Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal. 3d 809, 817 169 Cal. Rptr. 691, 620 P.2d 141). Though some authority tends to equate a bad faith failure to investigate with negligence, the better view appears to be that it must rise to the level of unfair dealing. ( Critz v. Farmers Ins. Group (1964) 230 Cal. App. 2d 788, 796 41 Cal. Rptr. 401, 12 A.L.R.3d 1142; Croskey et al., Cal. Practice Guide: Insurance Litigation, supra, PP 12:384 to 12:387, 12:417 to 12:423, pp. 12B-41 to 12B-42, 12B-50 to 12B-52). An unreasonable failure to investigate amounting to such unfair dealing may be found when an insurer fails to consider, or seek to discover, evidence relevant to the issues of liability and damages. In Mariscal v. Old Republic Life Ins. Co. (1996) 42 Cal. App. 4th 1617 50 Cal. Rptr. 2d 224, the insurer denied payment on an accidental death policy, stating that the insured died of illness. While a hospital discharge summary appeared to support this position, other medical records and the testimony of the treating physician strongly indicated that the insured's death was due to an automobile accident. Affirming a finding of bad faith, the court stated, "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." (Id. at p. 1624). Similarly, in Hughes v. Blue Cross of Northern California (1989) 215 Cal. App. 3d 832, 846 263 Cal. Rptr. 850, the insurer made no reasonable effort to obtain all medical records relevant to hospitalization of a mentally ill patient in reviewing the medical necessity of the hospitalization. Again, in Betts v. Allstate Ins. Co. (1984) 154 Cal. App. 3d 688 201 Cal. Rptr. 528, the insurer denied payment of a third party liability claim on the basis of the insured's self-serving account of an automobile accident, ignoring a mass of other available evidence indicating the insured's negligence. The insurer's willingness to reconsider its denial of coverage and to continue an investigation into a claim has been held to weigh to favor of its good faith. ( Blake v. Aetna Life Ins. Co. (1979) 99 Cal. App. 3d 901, 922 160 Cal. Rptr. 528). In Austero v. National Cas. Co. (1978) 84 Cal. App. 3d 1, 35 148 Cal. Rptr. 653, reversed on other grounds in Egan v. Mutual of Omaha, supra, 24 Cal. 3d at page 824, footnote 7, the court noted the insurer's "efforts to seek more information from several sources and reconsider plaintiff's claim at various times" and reversed a judgment of bad faith. This authority obviously supports the converse proposition: the insurer's early closure of an investigation and unwillingness to reconsider a denial when presented with evidence of factual errors will fortify a finding of bad faith. A breach of the implied covenant may be predicated on the insurer's breach of its duty to defend the insured, though the insurer's conduct in such cases is commonly coupled with the breach of other aspects of the implied covenant, such as the duty to settle (Croskey et al., Cal. Practice Guide: Insurance Litigation, supra, P 12:620, p. 12B-96) or to investigate ( Tibbs v. Great American Ins. Co. (9th Cir. 1985) 755 F.2d 1370, 1375). The broad scope of the insurer's duty to defend obliges it to accept the defense of "a suit which potentially seeks damages within the coverage of the policy . . . ." (Gray v. Zurich Insurance Co. (1966) 65 Cal. 2d 263, 275 54 Cal. Rptr. 104, 419 P.2d 168; Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal. 4th 1076, 1081 17 Cal. Rptr. 2d 210, 846 P.2d 792). A breach of the duty to defend in itself constitutes only a breach of contract (San Jose Prod. Credit v. Old Republic Life Ins. (9th Cir. 1984) 723 F.2d 700, 703), but it may also violate the covenant of good faith and fair dealing where it involves unreasonable conduct or an action taken without proper cause. ( Amato v. Mercury Casualty Co. (1997) 53 Cal. App. 4th 825, 831 61 Cal. Rptr. 2d 909; California Shoppers, Inc. v. Royal Globe Ins. Co., supra, 175 Cal. App. 3d at p. 54). On the other hand, "if the insurer's refusal to defend is reasonable, no liability will result." ( Campbell v. Superior Court (1996) 44 Cal. App. 4th 1308, 1321 52 Cal. Rptr. 2d 385.) The insurer's duty to defend must be determined on the basis of facts available to the insurer at the time the insured tenders the defense. "If the insurer is obliged to take up the defense of its insured, it must do so as soon as possible, both to protect the interests of the insured, and to limit its own exposure to loss. . . . Yhe duty to defend must be assessed at the outset of the case." ( CNA Casualty of California v. Seaboard Surety Co. (1986) 176 Cal. App. 3d 598, 605 222 Cal. Rptr. 276). It follows that a belated offer to pay the costs of defense may mitigate damages but will not cure the initial breach of duty.