Death of the Genuine Issue Doctrine
The “Genuine Issue” or the “Genuine Dispute” doctrine, has been the battle cry of the insurance bad faith defense industry since the publication of Chateau Chamberay Homeowners Assn. v. Associated Internat. Ins. Co. (2001) 90 Cal.App.4th 335. The argument went, “If there is a genuine issue of any kind, there can be no bad faith.” Left undefined, this literally gave the insurance company a defense verdict unless the plaintiff could establish bad faith as a matter of law. After all, if the plaintiff were to bring a motion for summary judgment on bad faith, which was denied because of an issue of fact, one could argue that there was a “genuine issue” of some sort. Otherwise, the motion would have been granted. This is exactly what insurers argued to the courts and what they wanted in the jury instructions so that they could argue that, if there was any genuine issue, bad faith cannot be found. This was a significant misinterpretation of the doctrine as set forth in Chateau Chamberay. Yet, Courts were repeatedly accepting the argument and either throwing out bad faith claims on summary judgment or permitting genuine issue jury instructions.
I am glad to report that the Genuine Issue doctrine is now dead. However, it is important to understand what it means in order to prevent its ugly head reappearing either at trial or on appeal.
The Genuine Issue doctrine had its genesis in a Ninth Circuit case, Safeco Ins. Co. of American v. Guyton (9th Cir. 1982) 692 F.2d 551. That Court held that where an insurance claim presented a genuine issue of law and an insurer could not be found in bad faith by adopting a reasonable legal interpretation that favored its denial. In Opsal v. United Services Auto. Assn. (1991) 2 Cal.App.4th 1197, 1206, the California Courts imported the doctrine. This was not much of a sore point because it merely held that, where there was a reasonable dispute as to what the law was, an insurer could not be held in bad faith for adopting an erroneous legal position. This was a pretty unusual situation and thus, was not of major concern.
In Chateau Chamberay, however, the doctrine picked up considerable steam when Justice Croskey held that the genuine issue doctrine was also applicable to factual disputes. “While many, if not most, of the cases finding a genuine dispute over an insurer’s coverage liability have involved legal rather than factual disputes, we see no reason why the genuine dispute doctrine should be limited to legal issues.” 90 Cal. App. 4th at 348. However, the Court could not define what a genuine issue was or when it could be applied. It merely held that it was possible to find a genuine issue and that “the genuine dispute doctrine may [not] properly be applied in every case involving purely a factual dispute between an insurer and its insured. This is an issue which should be decided on a case-by-case basis.” Id.
If a genuine dispute can only be applied on a case-by-case basis, which cases does it apply to and which doesn’t it apply? Chateau Chamberay, suggested that it could be applied where the insurer was relying on the advice and opinions of “independent experts” (whatever that means. Does that mean anyone not actually an employee of the insurer no matter how many times he was retained?) It then provided a partial list of some kinds of case in which it would not apply, such as instances where there were misrepresentations made by the insurer, insurer employees lied in deposition or where there was an inadequate investigation. However, nothing further was provided as to when or how it could be applied. As a result, Courts naturally assumed that it could be applied in all other cases because there was little or no authority saying when it could not be applied. Worse, many courts were inclined to give a genuine issue instruction and let the jury decide the issue without defining what constitutes a genuine issue.
The problem was basic to bad faith law and presented a potentially fundamental change in the law of bad faith. As the Chateau Chamberay, Court explained, bad faith was the delay or denial of benefits unreasonably or without proper cause. Id at 347. (It is beyond the scope of this article to address the question of whether there is a difference between “unreasonable” and “without proper cause”. In short, the answer is that there is no difference) So did that mean now that any time there was any sort of “genuine issue” the denial could not be unreasonable? In other words, what was the difference between a “genuine issue” and simply the unreasonable denial of benefits. If they were the same thing, then what purpose would the genuine issue doctrine serve if applied to factual disputes. The only factual dispute was whether the denial was unreasonable or without proper cause. Genuine issue has no part in that factual determination. If “genuine issue” and an unreasonable denial were different, then the “genuine issue” doctrine was considerably narrowing the tort of bad faith by permitting insurers to escape through a huge exception to bad faith.
The Chateau Chamberay court actually answered that question later in the opinion wherein it said, “It is only necessary for us to determine that, in light of the record as a whole, [the insurer’s] position with respect to the disputed points was reasonable or that [the insurer] had proper cause to assert the positions that it did. 90 Cal. App. 4th at 350.(emphasis added.)In other words, the only question is whether the insurer’s conduct, in light of the entire record, was unreasonable or without proper cause. Whether there was any kind of genuine issue is not the question.
This is precisely what the Court held in Amadeo v. Principal Mut. Life Ins. Co. (9th Cir. 2002 )290 F.3d 1152, 1161-62.
The genuine issue rule in the context of bad faith claims allows a district court to grant summary judgment when it is undisputed or indisputable that the basis for the insurer’s denial of benefits was reasonable, for example, where even under the plaintiff’s version of the facts there is a genuine issue as to the insurer’s liability under California law. Safeco Ins. Co. of Am. v. Guyton, 692 F.2d 551, 557 (9th Cir.1982). In such a case, because a bad faith claim can succeed only if the insurer’s conduct was unreasonable, the insurer is entitled to judgment as a matter of law. On the other hand, an insurer is not entitled to judgment as a matter of law where, viewing the facts in the light most favorable to the plaintiff, a jury could conclude that the insurer acted unreasonably.
However, Amadeo was a Ninth Circuit case and therefore not binding on the California Courts. When the CACI instructions were drafted there was a significant effort from the insurance industry to include a genuine issue instruction in the CACI bad faith instructions. Fortunately Wilson v. 21st Century Ins. Co. (2007) 42 C4th 713 was then pending before the California Supreme Court and it was anticipated that the Court would address genuine issue in that case. Thus, the CACI committee agreed to await the decision in Wilson before making a determination about whether or not to include a genuine issue instruction.
Wilson was an uninsured motorist case in which the insurer essentially argued that it could not be in bad faith because there was a genuine factual issue which it was entitled to have resolved at arbitration. Wilson was very ably argued by a bad faith appellate specialist, Jeff Ehrlich from Claremont, California on September 5, 2007 and the opinion was issued (as modified) on December 19, 2007. Wilson asked and answered the fundamental question: What is a “genuine issue” and is it anything other than another way of saying unreasonable denial? And the Court concluded essentially, that there is no such thing as a “genuine issue” of fact, because the one and only question at issue is whether the denial was in bad faith – i.e. unreasonable or without probable cause – and the question of “genuine issue” is entirely irrelevant to that issue. The Court explained what the “genuine issue” rule means in the context of a factual dispute. IT IS MERELY A SHORT-HAND WAY FOR A COURT TO DETERMINE ON SUMMARY JUDGMENT THAT THERE IS NO BAD FAITH AS A MATTER OF LAW. NOTHING FURTHER. It held,
[I]t has been said that “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.) This “genuine dispute” or “genuine issue” rule was originally invoked in cases involving disputes over policy interpretation, but in recent years courts have applied it to factual disputes as well. (See id. at p. 348, 108 Cal.Rptr.2d 776; Fraley v. Allstate Ins. Co. (2000) 81 Cal.App.4th 1282, 1292-1293, 97 Cal.Rptr.2d 386; Guebara v. Allstate Ins. Co. (9th Cir.2001) 237 F.3d 987, 992-994.)
The genuine dispute rule does not relieve an insurer from 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. ( Chateau Chamberay Homeowners Assn. v. Associated Internat. Ins. Co., supra, 90 Cal.App.4th at pp. 348-349, 108 Cal.Rptr.2d 776; Guebara v. Allstate Ins. Co., supra, 237 F.3d at p. 996.) FN7 Nor does the rule alter the standards for deciding and reviewing motions for summary judgment. ” The genuine issue rule in the context of bad faith claims allows a [trial] court to grant summary judgment when it is undisputed or indisputable that the basis for the insurer’s denial of benefits was reasonable, for example, where even under the plaintiff’s version of the facts there is a genuine issue as to the insurer’s liability under California law. [Citation.] … On the other hand, an insurer is not entitled to judgment as a matter of law where, viewing the facts in the light most favorable to the plaintiff, a jury could conclude that the insurer acted unreasonably.” ( Amadeo v. Principal Mut. Life Ins. Co. (9th Cir.2002) 290 F.3d 1152, 1161-1162.) Thus, an insurer is entitled to summary judgment based on a genuine dispute over coverage or the value of the insured’s claim only where the summary judgment record demonstrates the absence of triable issues ( Code Civ. Proc., § 437c, subd. (c)) as to whether the disputed position upon which the insurer denied the claim was reached reasonably and in good faith.
FN7. In this connection, we find potentially misleading the statements in some decisions that under the genuine dispute rule bad faith cannot be established where the insurer’s withholding of benefits ” ‘is reasonable or is based on a legitimate dispute as to the insurer’s liability.’ ” ( Century Surety Co. v. Polisso (2006) 139 Cal.App.4th 922, 949, 43 Cal.Rptr.3d 468; see also Chateau Chamberay Homeowners Assn. v. Associated Internat. Ins. Co., supra, 90 Cal.App.4th at p. 346, 108 Cal.Rptr.2d 776 [” ‘if reasonable or if based on a legitimate dispute’ “]; Tomaselli v. Transamerica Ins. Co. (1994) 25 Cal.App.4th 1269, 1281, 31 Cal.Rptr.2d 433 [same].) In the insurance bad faith context, a dispute is not “legitimate” unless it is founded on a basis that is reasonable under all the circumstances.
42 Cal. 4th at 723-24.(Emphasis added.)
That buried the genuine issue doctrine. But insurers continued to raise it and, because Wilson did not flatly state that it never should exist in the first place, insurers continued to contend that there still was such a doctrine. However, the CACI committee thereafter agreed that there should not be a genuine issue instruction.
The next significant case was Brehm v. 21st Century Ins. Co. (2008)166 Cal.App.4th 1225. This was a UIM case. The insured demanded $90,000, the insurer offered 5,000 and the award was $90,000. The insured then sued for bad faith and the insurer defended claiming that there was a genuine issue because the insurer relied on the evaluation of an “independent” doctor. The court said
21st Century’s summary of the governing case law fails to acknowledge an important limitation on the genuine dispute rule or to recognize the significance of the trial court’s dismissal of Brehm’s bad faith claim while it was still at the pleading stage. In Wilson, supra, 42 Cal.4th 713, 68 Cal.Rptr.3d 746, 171 P.3d 1082 the Supreme Court emphasized the genuine dispute rule cannot be invoked to protect an insurer’s denial or delay in payment of benefits unless the insurer’s position was both reasonable and reached in good faith: “The genuine dispute rule does not relieve an insurer from 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.” ( Id. at p. 723, 68 Cal.Rptr.3d 746, 171 P.3d 1082; see id. at p. 724, fn. 7, 68 Cal.Rptr.3d 746, 171 P.3d 1082[“[i]n the insurance bad faith context, a dispute is not ‘legitimate’ unless it is founded on a basis that is reasonable under all the circumstances”].)
That case put the nail in the coffin of the genuine issue doctrine. Then along came McCoy v. Progressive West Insurance Co. (2009) 171 Cal.App.4th 785, which dug up the coffin, put a few more nails in it and then reburied it. McCoy was a case in which the insured submitted a claim for a stolen Mustang and the insurer was convinced it was a fraudulent claim. The jury found that it was legitimate but the insurer argued that there were many suspicious facts, which created a “genuine issue” as to whether the claim was fraudulent. The insurer unsuccessfully sought a jury instruction on genuine issue. This presented the issue which is the crux of the problem. The only relevant question is whether the denial was unreasonable or without proper cause. What then would be the relevance of a jury instruction on genuine issue. The McCoy court held simply that “Progressive has cited no applicable authority, nor have we found any, which would compel such instruction.” 171 Cal. App. 4th 785, 794. It then held that the CACI instructions, which by now deliberately did not include a genuine issue instruction, sufficiently instructed the jury on bad faith. Amen.
So the question now is how seriously will defendants continue to raise the genuine dispute doctrine? Language from Chateau Chamberay was cited in all three of these case, although the cases clearly rejected any notion that there is a “genuine issue” doctrine any longer. The short answer to the question is that Wilson relegates the genuine issue doctrine to a buzz-word for determining that there is no bad faith as a matter of law. McCoy and the absence of any genuine issue instructions in CACI establish that no genuine issue instructions are proper. And if a genuine issue instruction is still being considered by the court, how does it answer the question: What then is a genuine issue if not simply whether the conduct was unreasonable or without proper cause? The answer is that there is no difference and thus the CACI instructions are sufficient.