[EDIT: On 7/5/11 the court issued an opinion superseding this one, apparently in response to the insurers’ Motion for Reconsideration. It differs subtly from the original discussed in this blog but not in any way the import of which is obvious or which makes it a better opinion.]
The question is whether an insurer had a reasonable basis for denying coverage just because a court ruled that it had no coverage.
When Lennar was sued by a bunch of its homebuyers it tendered the defense to its insurers, who filed for declaratory judgment to determine coverage; Lennar counterclaimed for breach of contract and bad faith. The insurers won summary judgment on the coverage claim in 2003 but CA1 reversed in 2007. The insurers then moved for summary judgment on the bad faith claim, arguing that the trial court’s ruling on summary judgment established that they at least had a reasonable basis for denying coverage. The trial court granted it. The Court of Appeals reverses.
“Whether the reasonableness of an insurer’s coverage position may be determined as a matter of law depends on the nature of the dispute and other factors, including whether extraneous evidence bears on the meaning of the contested policy language,” the court tells us. In other words, whether it’s a matter of law is a question of fact. Among the things to be considered are what the trial court ruled, what the Court of Appeals ruled (four years later), and – when, as here, the policy is a standard form – whatever any other court in the country has ruled, on the theory that other rulings create an “industry standard” or affect what other companies thought about the language. (Shades of the old debate in products cases; if anybody loses any case anywhere for any reason, that may now be the standard.)
(The court then helpfully goes on to point out to Lennar several more bad-faith issues that it can argue on remand.)
Returning to earth, the court holds that good-faith duties regarding investigation and claims-handling apply until the DJ action is resolved. This is not quite so bad since the law is already clear that the insurer denies at its own risk. The insurers had tried to argue that they also had causation defenses that they basically never tried to investigate.
But the court just can’t bring itself to end without lamenting how this “saga” illustrates, apparently, the evil that insurers do and, impliedly, that taking years to resolve an insured’s appeals is the insurers’ fault. We prefer that opinions at least make a pretense of impartiality.
(link to opinion)