What constitutes a genuine dispute?

This blog post examines the “genuine dispute” doctrine.  The genuine dispute doctrine comes into play when an insurance carrier defends a bad faith claim.   Under the “genuine dispute” doctrine, the insurance carrier will not be liable if there was a genuine dispute with the policyholder about the existence or amount of coverage.  This doctrine can be invoked when an insurance carrier makes a reasonable mistake as to the benefits due on a policy.

The genuine dispute rule was originally used by the court in cases when there was a dispute over policy interpretation.  However, California courts have recently applied this rule to cases where there is a factual dispute. For example, the case of Wilson v. 21st Century, the California Supreme Court looked at whether a dispute based on an unreasonable position could be considered a genuine dispute.

In Wilson, a 21 year old woman was injured in a car accident.  Her treating physician determined that the accident caused a disk injury that was atypical for the victim’s age and that she suffered degenerative disk changes.   Wilson, through her attorney, made a claim under her underinsured motorist coverage for neck and back injuries.  Subsequently, her insurance carrier denied her claim for benefits.  This was because the insurance carrier’s claims examiner determined that Wilson’s injuries were not severe and only constituted soft tissue injuries.   Importantly, the investigator made this determination without asking Wilson’s doctor or any other medical examiner about her condition.

After her claim under the policy was denied, Wilson initiated arbitration about the denial of her benefits.  During the course of arbitration, the insurance carrier retained its own independent physician to review Wilson’s medical records.  The insurer decided to revise its initial assessment of Wilson’s injuries when a new orthopedic surgeon assigned to her case recommended that Wilson undergo surgery for injuries incurred during the car accident. Eventually, Wilson was granted her full benefits under the underinsured motorist policy.

Following this arbitration, Wilson initiated suit against the insurer for breach of the covenant of good faith and fair dealing for the insurer’s failure to investigate and evaluate her underinsured motorist claim.  At superior court, the insurance carrier won its motion for summary judgment after claiming that the denial of the claim was reasonable given the facts available at the time the claim was made.  The Court of Appeal reversed this decision stating that there were triable issues as to whether the insurance carrier investigated Wilson’s claim in enough detail before denying the claim.

On appeal, the California Supreme Court looked at two issues: (1) whether the insurance carrier met its duty to investigate and evaluate the claim, and (2) the genuine dispute rule.

With respect to the genuine dispute rule, the Court first explained that the genuine dispute rule is only available to insurance carriers when the position they take on a claim is in good faith and based on reasonable grounds.   Next, the Court looked at the specific facts of Wilson’s case. The Court found that the insurer lacked any factual basis for its conclusions that Wilson’s injuries were not caused by the accident. The Court also refuted the insurers other claims that Wilson’s vacation taken after the accident and her initial medical bills were proof that the injury was not serious.   In the end, the Court found that the insurance carrier could not hide behind the genuine dispute rule and that the superior court erred in granting summary judgment for the insurer.

The Court found that the insurance carrier could not rely on the genuine dispute rule because they failed to properly investigate the claim and their actions were not reasonable.  Policyholder should be aware of this rule and know that insurers are under an obligation to use good faith and reasonable investigation before denying claims.