A California Court of Appeal has held that negligence is not a viable cause of action against an insurer where, despite an inadequate investigation, the insurer was correct in denying coverage. Benavides v. State Farm General Insurance Company, 39 Cal. Rptr. 3d 650 (2006).
Benavides submitted a claim to State Farm for mold damage to her condominium unit and additional living expenses. Citing a mold exclusion, State Farm denied coverage. Relying on an exception to the exclusion, Benavides sued for breach of contract. She also asserted a cause of action for negligence, alleging that State Farm had inadequately investigated her claim. The jury found no breach of contract but did find negligence and awarded Benavides $260,000 in damages.
Reversing the judgment, the Court of Appeal noted that an insurer’s tort liability, if any, typically arises out of the implied covenant of good faith and fair dealing. There is no breach of that covenant—and thus, typically no tort liability—unless an insurer unreasonably withholds policy benefits due. As the jury had found, State Farm owed no policy benefits to Benavides. Thus, regardless of whether its investigation was adequate, State Farm could not be liable in tort on a “bad faith” theory.
The court saw no reason why a “negligence” theory should be any more viable under the circumstances. “The same logic,” the court stated, “that precludes imposition of damages for breach of the implied covenant in the absence of coverage in this case also rules out recovery in negligence.” Thus, “absent coverage, there is no tort liability for improperly investigating a first-party insurance claim whether the insurer’s conduct is characterized as an implied covenant breach or negligence.”
Benavides does not necessarily foreclose all negligence claims against insurers. The court repeatedly tethered its opinion to the jury’s finding of no coverage. Policyholders may argue that where coverage is found—or at least, so long as coverage has not been ruled out—a negligence claim may lie. Others may argue that the court’s extensive review of bad faith law and negligence law implicitly rules out negligence as a viable alternative or supplement to a bad faith claim in all cases.
Whether a policyholder sues on a bad faith theory, negligence theory, or both makes little practical difference with respect to the damages that may be awarded. Under California law, bad faith opens the door to all tort remedies, including consequential economic loss, emotional distress, and punitive damages. Thus, where a policyholder can prove bad faith, a negligence claim is probably superfluous. For this reason, some may find Benavides to be of little more than academic interest.
However, a negligence claim could make a practical difference where a policyholder cannot prove bad faith. Most courts have required proof of something more than mere negligence to support a bad faith claim. A negligence claim, if viable, affords a policyholder an opportunity to recover tort damages based on a lesser showing of unreasonable conduct. Thus, negligence claims are not necessarily innocuous. With the aid of Benavides, insurers should attack such claims at the earliest opportunity.