Southern District of California Denies Motion to Dismiss Bad Faith Claim in Homeowners Policy Dispute

Eastman v. Allstate Ins. Co., No. 14cv0703, 2014 WL 5355036 (S.D. Cal. Oct. 20, 2014)

Southern District of California denies motion to dismiss bad faith claim in connection with coverage dispute under homeowners policy.

Plaintiffs suffered severe fire damage to their home and submitted a claim to Allstate Insurance Company under a Deluxe Plus Homeowners Policy.  Plaintiffs alleged that Allstate “caused significant delays in handling and resolution of Plaintiffs’ claim and . . . generally mishandled the claim,” by failing “to immediately assign an experienced adjuster” and delaying “in acknowledging, recognizing, or classifying Plaintiffs’ loss as a major claim or major loss.”  Plaintiffs also charged Allstate with failing “to conduct a prompt, full and complete investigation of the facts and circumstances giving rise to Plaintiffs’ claims,” and “[u]sing improper standards to deny Plaintiffs’ claims.” 

Plaintiffs claimed that Allstate initially “grossly undervalued” their loss, and as a result, the parties entered into a Stipulation providing that a neutral appraiser would determine a binding cost of repair of Plaintiffs’ loss.  The neutral expert prepared a report concluding a total loss of $718,613.  Allstate allegedly only tendered to Plaintiffs the sums of $348,888 and $191,147, and paid Plaintiffs’ storage fees of $1,000 per month “for a time, and then without notice, ceased payment.”

Plaintiffs brought eight causes of action against Allstate, including claims for breach of the covenant of good faith and fair dealing related to the Policy (characterized as bad faith breach of the Policy) and breach of the covenant of good faith and fair dealing related to the Stipulation (characterized as bad faith breach of the Stipulation).  Allstate moved to dismiss several of Plaintiffs’ claims, including the claim for bad faith breach of the Stipulation.  Allstate argued that “Plaintiffs cannot maintain a bad faith claim for breach of the Stipulation because bad faith claims against an insurer are limited to bad faith breaches of an insurance policy.”  Plaintiffs countered that “the Stipulation is an insurance contract, and insurers can be liable in tort for bad faith breaches of insurance contracts other than insurance policies.”

The court examined the Stipulation, which provided that the “scope and cost of repair of fire-related damages [determined by the neutral expert] is binding as to all parties and may be introduced into evidence at any Court or arbitration proceedings,” and that “Allstate will tender the covered cost of repair of fire-related damages up to the covered policy limits, minus previously paid policy benefits, within fourteen days.”  The court determined that “[w]hether the [S]tipulation is construed as a modification of the Policy or a separate settlement agreement between insurer and insured, the Stipulation is an alleged contract, which imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement” (internal quotations omitted).  Allstate had not offered any authority “for the proposition that tort damages are limited to bad faith breaches of insurance policies in their original form and do not extend to bad faith breaches of other contracts between insurer and insured.”  The court explained that “[a]ll insurance contracts contain an implied covenant of good faith and fair dealing which requires each contracting party to refrain from doing anything to injure the right of the other to receive the benefits of the agreement” (internal quotations omitted) (emphasis in original).  The court also noted the public policy underlying its ruling:  “If tort liability was limited to bad faith breaches of original insurance policies, insurers could avoid tort liability by simply entering into modified contracts with the insured.”

After finding that Allstate could be held liable for a bad faith breach of the Stipulation, the court proceeded to analyze whether Allstate could be found to have acted in bad faith under the facts alleged.  “[B]efore an insurer can be found to have acted tortiously (i.e., in bad faith), for its delay or denial in the payment of policy benefits, it must be shown that the insurer acted unreasonably or without proper cause” at the time the claim was delayed or denied (emphasis in original).  The court concluded that the complaint stated a plausible claim for bad faith breach of the Stipulation by alleging that Allstate “agreed to a neutral evaluator that would determine a binding cost of repair, but inexplicably reneged on its promise after the neutral evaluator determined a binding cost of repair.”  As a result, the court denied Allstate’s motion to dismiss Plaintiffs’ claim for bad faith breach of the Stipulation.