United States: Paslay v. State Farm General Insurance Company

In Paslay v. State Farm General Insurance Company, 248 Cal.App.4th 639 (2016), the California Second District Court of Appeal reversed the trial court's entry of summary judgment in favor of State Farm with respect to plaintiffs', Clayton and Traute Paslay ("the Paslays"), claims of breach of contract, bad faith and elder abuse arising out of State Farm's adjustment of a water damage claim tendered by the Paslays under the first party property damage coverage afforded by a State Farm homeowner's policy. The Court of Appeal affirmed the trial court's entry of judgment in favor of State Farm in connection with plaintiffs' claims of bad faith and elder abuse based on the genuine dispute doctrine. However, the Court of Appeal found that there was a triable issue of fact with respect to plaintiffs' claim of breach of insurance contract.

The parties' dispute arose out of a water damage claim related to a December 17, 2010 rainstorm, wherein a roof drain on the Paslays' home failed, causing water to enter their home's master bedroom through the ceiling. The water also damaged other parts of the Paslays' home. In response to the Paslays' tender of the water damage claim under their homeowners' policy, State Farm made payments exceeding $248,000, including $122,770.98 for repairs to the Paslays' home. However, State Farm denied coverage of alleged water damage related to the master bathroom and for the removal of drywall throughout the home, purportedly in connection with remediating asbestos. State Farm took the position that the asbestos could have been remediated by scraping the material containing asbestos from the drywall.  In response, the Paslays contended that the removal of the drywall and remodel of the bathroom were required due to hidden water damage.

In concluding that the trial court erred in granting summary adjudication with respect to the Paslays' claim for breach of insurance contract, the Court of Appeal noted that the Paslays introduced evidence sufficient to raise triable issues regarding the existence of water damage in the master bathroom for which State Farm failed to pay the cost of repair. The Court of Appeal also noted that the Paslays submitted sufficient evidence to raise triable issues relative to whether State Farm is obligated to pay for the replacement of the removed drywall ceilings throughout the home based on the possibility that such removal was necessary in order to repair hidden water damage in the home.

As respects the Paslays' claim of bad faith, the Court of Appeal noted as follows in affirming the trial court's entry of summary adjudication in favor of State Farm:

To establish bad faith, the Paslays must demonstrate misconduct by State Farm more egregious than an incorrect denial of policy benefits. "The law implies in every contract, including insurance policies, a covenant of good faith and fair dealing." (Wilson v. 21st Century Ins. Co. (2007) 42 Cal.4th 713, 720 [68 Cal.Rptr. 746, 171 P.3d 1082] (Wilson).) The obligation imposed on the insurer under the covenant "'is not the requirement mandated by the terms of the policy itself . . . It is the obligation . . . under which the insurer must act fairly and in good faith in discharging its contractual responsibilities.'" (California Shoppers, Inc. v. Royal Globe Ins. Co. (1985) 175 Cal.App.3d 1, 54 [221 Cal. Rptr. 171], italics omitted, quoting Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 573–574 [108 Cal. Rptr. 480, 510 P.2d 1032].) In the context of a bad faith claim, "an insurer's denial of or delay in paying benefits gives rise to tort damages only if the insured shows the denial or delay was unreasonable." (Wilson, supra, 42 Cal.4th at p. 723.)

Under this standard, "an insurer denying or delaying the payment of policy benefits due to the existence of a genuine dispute with its insured as to the existence of coverage liability or the amount of the insured's coverage claim is not liable in bad faith[,] even though it might be liable for breach of contract." (Chateau Chamberay Homeowners Assn. v. Associated Internat. Ins. Co. (2001) 90 Cal.App.4th 335, 347 [108 Cal.Rptr.2d 776] (Chateau Chamberay Homeowners Assn.).) That is because "whe[n] there is a genuine issue as to the insurer's liability under the policy for the claim asserted by the insured, there can be no bad faith liability imposed on the insurer for advancing its side of that dispute." (Ibid., italics omitted.) An insurer may thus obtain summary adjudication of a bad faith cause of action "by establishing that its denial of coverage, even if ultimately erroneous and a breach of contract, was due to a genuine dispute with its insured." (Bosetti v. United States Life Ins. Co. in City of New York (2009) 175 Cal.App.4th 1208, 1237 [96 Cal. Rptr. 3d 744] (Bosetti).)

The genuine dispute doctrine "does not relieve an insurer of its obligation to thoroughly and fairly investigate, process and evaluate the insured's claim. A genuine dispute exists only where the insurer's position is maintained in good faith and on reasonable grounds." (Wilson, supra, 42 Cal.4th at p. 723, italics omitted.) Those grounds include reasonable reliance on experts hired to estimate repair benefits owed under the policy. (Chateau Chamberay Homeowners Assn., supra, 90 Cal.App.4th at p. 348; Fraley v. Allstate Ins. Co. (2000) 81 Cal.App.4th 1282, 1292–1293 [97 Cal.Rptr.2d 386] (Fraley).) The reasonableness of the insurer's decision is assessed by reference to an objective standard (Bosetti, supra, 175 Cal.App.4th at pp. 1238–1240; see Brehm v. 21st Century Ins. Co. (2008) 166 Cal.App.4th 1225, 1238–1240 [83 Cal. Rptr. 3d 410].) The application of the genuine dispute doctrine "becomes a question of law where the evidence is undisputed and only one reasonable inference can be drawn from the evidence." (Chateau Chamberay Homeowners Assn., supra, 90 Cal.App.4th at p. 346.)

We conclude that the Paslays' bad faith claim fails under the genuine dispute doctrine. The only triable issues relating to unpaid policy benefits concern the work in the master bathroom and the replacement of drywall ceilings. Regarding those benefits, the record discloses only a genuine dispute regarding the extent of the damage and required repairs. "Where the parties rely on expert opinions, even a substantial disparity in estimates for the scope and cost of repairs does not, by itself, suggest the insurer acted in bad faith." (Fraley, supra, 81 Cal.App.4th at p. 1293.) The evidence shows only that Gillespie, State Farm's expert, promptly examined the master bathroom and drywall ceilings, assessed the extent and type of damage, and estimated the costs of the appropriate repairs.

In addition, the Court of Appeal affirmed the trial court's entry of summary adjudication with respect to plaintiffs' claim of elder abuse. The Court of Appeal held as follows:

Subdivision (b) of section 15610.30 imposes an additional requirement beyond the existence of improper conduct, namely, that "the person or entity knew or should have known that this conduct is likely to be harmful to the elder . . . adult." (Italics added.) In statutes and other legal contexts, the italicized phrase ordinarily conveys a requirement for actual or constructive knowledge. (E.g., Castillo v. Toll Bros., Inc. (2011) 197 Cal.App.4th 1172, 1196 [Labor Code, § 2810, subd. (a), which bars a person from entering into enumerated contracts when the person "'knows or should know'" that specified contract condition is absent, imposes requirement for actual or constructive knowledge].) Generally, constructive knowledge, "means knowledge 'that one using reasonable care or diligence should have, and therefore is attributed by law to a given person' [and] encompasses a variety of mental states, ranging from one who is deliberately indifferent in the face of an unjustifiably high risk of harm [citation] to one who merely should know of a dangerous condition [citation].)" (John B. v. Superior Court (2006) 38 Cal.4th 1177, 1190–1191, quoting Black's Law Dict. (7th ed. 1999) p. 876.) The existence of constructive knowledge is assessed by reference to an objective  "reasonable person" measure, "since there is no other way to measure it." (New v. Consolidated Rock Products Co. (1985) 171 Cal.App.3d 681, 690.)

Here, our focus is on the deprivation of property due an elder under a contract. In that context, the italicized phrase imposes a requirement in addition to the mere breach of the contract term relating to the property, as the existence of such a breach ordinarily does not hinge on the state of mind or objective reasonableness of the breaching party's conduct. (See Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 373.)  In view of the italicized phrase, we conclude that under subdivision (b) of section 15610.30, wrongful conduct occurs only when the party who violates the contract actually knows that it is engaging in a harmful breach, or reasonably should be aware of the harmful breach.

The evidence before the court did not raise a triable issue whether those circumstances obtain here. As explained above, notwithstanding the existence of triable issues regarding policy benefits due the Paslays, there is no evidence that State Farm acted in subjective bad faith or unreasonably in denying additional benefits. Traute's elder abuse claim thus fails in light of the evidence supporting the application of the genuine dispute doctrine to the Paslays' bad faith claim.

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