CALIFORNIA APPELLATE COURT ISSUES IMPORTANT RULING PRECLUDING CLAIMS OF RETROACTIVE BAD FAITH

On June 9, the Court of Appeal issued an important decision clarifying that an insurer whose policy does not afford coverage cannot be liable in tort for a bad faith denial of coverage, even if the policy is later reformed to provide coverage. (R&B Auto Center, Inc. v. Farmers Group, Inc. (June 9, 2006, G032371) ___ Cal.App.4th ___ [2006 WL 1575411].) A link to the opinion can be found here: http://www.courtinfo.ca.gov/opinions/documents/G032371A.PDF

The case involves a used car dealer that claimed an agent and field underwriter for an insurer promised a policy that included coverage for Lemon Law claims. In fact, the Lemon Law coverage applied only to lawsuits arising out of the sale of new cars. When a customer sued for a Lemon Law violation, the insurer refused to defend the lawsuit because it arose out of the sale of a used car. The dealer then sued its insurer for misrepresentation, reformation, breach of contract, bad faith and unfair competition.

The Court of Appeal ruled that the used car dealer could not pursue claims for breach of contract and bad faith. The court ruled there was no potential for coverage under the policy because the policy, as written, clearly did not provide coverage for Lemon Law claims arising out of the sale of used cars. The court then held the bad faith cause of action failed as well. The court explained that an insurer is reasonable as a matter of law in denying a claim not covered under the plain language of the policy even if the policy could later be reformed to include previously promised coverage: "When an insured submits a claim to an insurer and there is no potential for coverage of that claim under the policy, the insurer has no duty to defend and it may reasonably deny the claim. (Waller v. Truck Insurance Exchange (1995) 11 Cal.4th 1, 36) Since it is reasonable to deny the claim at the time, if the policy is later reformed to provide retroactive coverage, the insurer may not be held liable for bad faith for failing to have the foresight to know that the policy would be reformed." (Slip op., at p. 31.)

Horvitz & Levy LLP represented the defendant Truck Insurance Exchange on appeal in this case.

If you have any questions, please call Lisa Perrochet or Jason Litt at (818) 995-0800, or by e-mail at lperrochet@horvitzlevy.com or jlitt@horvitzlevy.com.

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