The carrier’s duty to investigate
An insurer’s failure to completely investigate a claim is a crucial part of any bad-faith case
Insurance carriers have a duty to investigate all claims. This duty is the same regardless of the kind of insurance at issue. This duty applies to first-party claims – that is, when a policyholder has submitted a claim to her insurance carrier, such as a claim under a homeowner’s policy or a disability policy. This duty also applies to third-party claims – that is, when a policyholder asks her liability carrier to provide her with a defense when she has been named as a defendant in a lawsuit.
The duty to investigate is an affirmative duty. A carrier cannot simply sit back and wait for the insured to provide the information necessary to establish coverage. For instance, a carrier cannot request an insured to submit an estimate for a property claim. The carrier has the obligation to get its own as part of its on-going duty to investigate. The same is true for carriers investigating whether they are obligated to provide a defense to a lawsuit. In a third-party situation, a carrier has an affirmative obligation to find coverage even if it is not readily apparent from the allegations in the underlying complaint.
A carrier’s failure to fully and completely investigate a claim at its submission can result in the imposition of bad-faith damages in a subsequent lawsuit. This is true even if coverage is eventually afforded, if the delay in payment can be linked to a carrier’s failure to immediately and fully investigate the claim. Accordingly, an insured should always focus on proving that a carrier did not fully investigate a claim in all bad-faith lawsuits.
Full, fair and thorough investigation
Insurance companies have the obligation to conduct a full, fair and thorough investigation of a claim. In every insurance policy there is an implied obligation of good faith and fair dealing that neither the insurance company nor the insured will do anything to injure the right of the other party to receive the benefits of the agreement. (Comunale v. Traders & Gen. Ins. Co. (1958) 50 Cal.2d 654, 658; CACI 2332.) “Among the most critical factors bearing on the insurer’s good faith is the adequacy of its investigation of the claim.” (Shade Foods, Inc. v. Innovative Products Sales & Mktg., Inc. (2000) 78 Cal.App.4th 847, 879.) Indeed, insurance companies have “special obligations” to promptly investigate claims. (McCormick v. Sentinel Life Ins. Co. (1984) 153 Cal.App.3d 1030, 1048.) If the insurance company fails to promptly investigate claims, usually within 40 days of receipt of notice of claim, it can be subject to liability in tort for bad faith. (Waller v. Truck Ins. Ex., Inc. (1995) 11 Cal.4th 1, 36; 10 C.C.R. § 2695.7(b).)
Failure to investigate can constitute bad faith
Failure to conduct a full, fair, and thorough investigation can be the sole basis for a finding of bad faith. Because the duty to investigate is so critical, it is possible to win a bad-faith case simply by showing a lack of investigation. For an insurance company to fulfill its obligation of good faith and fair dealing, it must not impair the right of the insured to receive the benefits of the agreement, and must give at least as much consideration to the interests of the insured as it gives to its own interests. (Egan v. Mut. of Omaha Ins. Co. (1979) 24 Cal.3d 809, 818.)
In other words, a one-sided investigation is not sufficient to meet the carrier’s obligation to investigate, because the carrier is not giving the interests of the insured the proper consideration. An example of a one-sided investigation would be if a carrier fails to interview all available witnesses. This is especially true if one of the ignored witnesses had information relevant to coverage, but the carrier refused to interview them. Because courts have placed such a high importance on a carrier’s duty to investigate, an insured’s ability to show that he told a carrier that a third-party witness had information bearing on coverage and the carrier ignored him, can be a very persuasive piece of evidence in a bad-faith case.
As is true in every bad-faith case, the insured must show that the insurance company acted unreasonably or without proper cause in withholding benefits. (Egan, supra, 24 Cal.3d at 817.) An insurance company acts unreasonably or without proper cause if it fails to conduct a full, fair, and thorough investigation of all the bases of the plaintiff’s claim. (Jordan v. Allstate Ins. Co. (2007) 148 Cal.App.4th 1062, 1066.) Thus, a reasonable and proper investigation into the claims of the insured must always be full, fair, and thorough. (Ibid.)
In fact, juries are properly instructed that a carrier must both diligently investigate a claim and look for evidence that supports coverage. (CACI 2332.) Specifically, CACI 2332 states that a: “Carrier acted unreasonably or without proper cause if it failed to conduct a full, fair, and thorough investigation of all of the bases of the claim. When investigating plaintiff’s claim, carrier had a duty to diligently search for and consider evidence that supported coverage of the claimed loss.” The duty to investigate is the only obligation of a carrier that has its own bad-faith instruction. The other obligations are jointly listed in CACI 2337. This demonstrates the level of importance that California has placed on a carrier’s obligation to investigate.
Failue to investigate defeats “genuine dispute” defense
Failure to investigate can defeat the “genuine dispute” defense. When an insurance company chooses to deny coverage, yet a reasonable investigation would have brought forth facts evidencing that the claim was covered under the policy, the insurance company’s failure to investigate breaches its implied covenant. (Jordan, 148 Cal.App.4th at 1074.) If the carrier seeks to discover evidence that supports its position by relying only on one expert and ignoring the opinion of the insured’s expert, the insurance company cannot claim that there existed a genuine dispute regarding coverage. (Id. at 1066.)
A common defense to a bad-faith case is the “genuine dispute” doctrine, which allows a carrier to seek summary adjudication of the bad faith cause of action if the carrier hires an independent expert to “investigate” the claim. However, if the carrier’s expert ignores evidence that supports the insured’s position or fails to explore all available evidence, then the carrier cannot rely on the expert, because the carrier has an independent duty to investigate. (Jordan, 148 Cal.App.4th at 1074.) Moreover, by failing to investigate, the insurance company has deprived itself of the ability to make a full and fair evaluation of the claim. (Ibid.) There can be no application of the “genuine dispute” defense without evidence of a fair and full investigation by the carrier.
Investigate all grounds for coverage
The insurance company must investigate all possible grounds for coverage. In order to perform a reasonable and proper investigation, insurance companies must also investigate all bases for the insured’s claim. (Egan, 24 Cal.3d at 819 [“to protect [an insured’s] interests it is essential that an insurer fully inquire into possible bases that might support the insured’s claim”].) California courts have held that in order to perform a reasonable and proper investigation, insurance companies should neither selectively choose which facts to investigate nor should they ignore contrary information which may support the insured’s claim. (Wilson v. 21st Century Ins. Co. (2007) 42 Cal.4th 713, 720-21.) The California Supreme Court held that, “a trier of fact may find that an insurer acted unreasonably if the insurer ignores evidence available to it which supports the claim.” (Ibid.) Insurance companies must search for and consider evidence that supports coverage for the claim. Thus, insurance companies cannot close their eyes to evidence that supports coverage and focus solely on the evidence that denies coverage.
Too narrow a focus of investigation?
It is bad faith for a carrier to focus its investigation solely on evidence that might avoid or eliminate coverage. California courts have consistently held that insurance carriers may not exclusively focus on information and facts that provide evidence for the denial of a claim. (Wilson, at 721.) “When investigating a claim, an insurance company has a duty to diligently search for evidence which supports its insured’s claim. If it seeks to discover only the evidence that defeats the claim it holds its own interest above that of the insured.” (Mariscal v. Old Republic Life Ins. Co. (1996) 42 Cal.App.4th 1617, 1620; Wilson, 42 Cal.4th at 721 [“the insurer may not just focus on those facts which justify denial of the claim”].) Moreover, an insurance carrier acts in bad faith not only when it fails to investigate, but when it puts its own interests above those of the insured. The insurance company cannot ignore evidence in support of the claim or elect to focus on just those facts it contends support denial. (Wilson, 42 Cal.4th at 721.)
Insurance carriers cannot put restrictions on their adjusters that limit their ability to fully investigate a claim. Adjusters must be taught and trained by insurance carriers to look for coverage, not ways to defeat coverage. (See Downey Savings & Loan Assoc. v. Ohio Casualty Ins. Co. (1987) 189 Cal.App.3d 1072, 1097-99.) In Downey, the insurance carrier had instructed its claims adjusters to focus on ways to defeat claims. The court held that the insurance company’s conduct placed their own interests above that of the insured, and awarded punitive damages.
Conducting discovery into the training of claims adjusters is critical in proving a lack of investigation by the insurance carrier. For instance, if a claims adjuster is trained to try to reach an insured three times, but is allowed to record all three attempts within one hour, then you can prove that the insurance company is trying to create the illusion of an investigation without actually conducting one. Clearly, attempting to contact an insured, without any intention of actually interviewing the insured, is not a sufficient investigation.
Another example of insurance carriers teaching their adjusters to create an illusion of an investigation without really conducting one, is a carrier requesting all of an injured party’s medical records without any intention of actually having a proper expert review them. Once you can pierce the illusion of an investigation by showing there was no real attempt to gather information, proving the bad-faith case becomes much easier.
Evidence that might establish coverage
A carrier must consider all evidence that might establish coverage. Denying a claim on a basis unfounded in the facts, or contradicted by facts known to the insurance company, is unreasonable. (Wilson, 42 Cal.4th at 721.) Once an insurance carrier is in possession of evidence that supports coverage, the carrier must act on that evidence. Therefore, any discovery in a bad- faith case should focus on creating timelines of the insurance company’s investigation. Questions should elicit responses showing when an insurance company knew a fact that supported coverage that the carrier ignored. In the alternative, if facts supporting coverage were discovered later, then the discovery should focus on proving how easy it would have been for the insurer to get access to the evidence supporting coverage.
California courts have held that an insurance company can breach the covenant of good faith simply for objectively unreasonable conduct, regardless of the actor’s motive. (Bosetti v. United States Life Ins. Co. in City of N.Y. (2009) 175 Cal.App.4th 1208, 1236.) In other words, a carrier’s failure to conduct a full and fair investigation does not have to be on the grounds that the carrier has ill will towards the insured, but simply because the carrier failed to properly review all of the records in its possession or interview all available witnesses. In fact, “if the insurer denies benefits unreasonably (i.e., without any reasonable basis for such denial), it may be exposed to the full array of tort remedies, including possible punitive damages.” (Jordan, 148 Cal.App.4th at 1073.) Therefore, a failure to investigate is sufficient to support a finding of punitive damages.
There are only a couple of caveats to a carrier’s almost absolute duty to investigate. For example, the duty to perform a reasonable and proper investigation arises only after the insured has substantially complied in good faith with the policy’s notice provisions. (Cal. Shoppers, Inc. v. Royal Globe Ins. Co. (1985) 175 Cal.App.3d 1, 57 [“without actual presentation of a claim by the insured in compliance with claims’ procedures contained in the policy, there is no duty imposed on the insurance company to investigate the claim”].) In other words, a carrier does not have an obligation to investigate a claim that it does not have knowledge of from the insured. However, the insurance company must acknowledge receipt of notice from the insured within 15 days and must begin its investigation within that 15-day period. (10 C.C.R. § 2695.5(b) & (e).)
The insurance carrier must accept or deny the claim for coverage, either in whole or in part, within 40 days of notice. (10 C.C.R. § 2695.7(b).) Therefore, the insurance company is supposed to complete its investigation within 40 days, but this rarely happens and the carrier is allowed to extend the 40 days with notice to the insured that it is still investigating the claim. (10 C.C.R. § 2695.7(b).) But if the carrier continues its investigation for too long after the 40 days, an insured may be able to use that fact in a subsequent bad-faith case as evidence of intentional delay by the carrier.
The second caveat is that the reasonableness of the insurance company’s decisions and actions must be evaluated based on the information that was available at the time the decision was made. (Jordan, 148 Cal.App.4th at 1063.) If a carrier could not legitimately have learned a crucial piece of information at the time it denied the claim, then it cannot be responsible for failing to conduct a full investigation. However, the carrier has an on-going obligation to its insureds, so once it is made aware of the information that affords coverage, the carrier has obligation to re-open the claim and its investigation. If the carrier refuses to re-open its investigation after being presented with evidence that potentially affords coverage, then the carrier has now breached its duty to investigate.
Carriers must conduct a full, fair, and thorough investigation of all grounds for a claim. The failure to investigate is a crucial part of any bad-faith case. Courts have repeatedly found the failure to investigate not only supports a finding of bad faith but also punitive damages. An insurance company’s failure to investigate can be as obvious as not reviewing all records or interviewing all witnesses. However, sometimes more thorough discovery is needed to prove the lack of an investigation because the insurance company has successfully created an illusion of an investigation. Proving an insurance company’s failure to investigate should always be one of the main objectives of a bad-faith lawsuit.
Michael L. Cohen
Michael L. Cohen is a principal at Cohen McKeon LLP. Cohen received his J.D. in 1992 from Harvard Law School, and was a member of the Harvard Law Review. He devotes a substantial part of the practice to representing policyholders in cases involving insurance coverage.
Heather M. McKeon
Heather M. McKeon is a principal at Cohen McKeon LLP. McKeon graduated in 1996 with honors from Georgetown Law Center. She devotes a substantial part of the practice to representing policyholders in cases involving insurance coverage.
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