COURT OF APPEAL ISSUES IMPORTANT DECISION ON INSURER DUTY TO DEFEND

In Delgado v. Interinsurance Exchange of the Auto. Club of So. Cal. (Case No. B191272), Auto Club's insured was sued for intentional battery and negligent use of excessive force in self defense. When Auto Club declined the defense, the insured settled with the plaintiff, agreeing to a stipulated judgment and an assignment of the insured's rights against Auto Club. Plaintiff then sued Auto Club for breach of contract and insurance bad faith, but the trial court sustained Auto Club's demurrer.

The Court of Appeal reversed with directions, holding that Auto Club's duty to defend was triggered by the negligent self-defense allegation in the underlying complaint, and Auto Club's refusal to defend was unreasonable -- and therefore in bad faith -- as a matter of law.

The Court of Appeal's holding at the demurrer stage that Auto Club acted in bad faith forecloses any opportunity for Auto Club to present evidence regarding what investigation it did before denying the defense, and what that investigation disclosed, in order to show why its conduct was reasonable. At the same time, the Delgado opinion strengthens an insurer's right to dispute legal issues without incurring bad faith liability. The court said:

In the case of a legal coverage dispute, whether the insurer's refusal to defend is in bad faith will depend on the objective reasonableness of its legal position on the coverage issue (i.e., whether its position with respect to the coverage issue was objectively reasonable and legitimate.) This is a matter to be resolved by the court (not a jury) and the applicable standard seems analogous to the "objective legal tenability" standard that governs the "probable cause" analysis in malicious prosecution cases. (Typed opn., p. 21, fn. 15, emphasis added.)

Click here to read the Court of Appeal's May 24 published opinion. For additional information, contact H. Thomas Watson at (818) 995-0800 or send an e-mail to Tom at htwatson@horvitzlevy.com.

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