April 20, 2020

501 East 51st Street, Long-Beach-10 LLC v. Kookmin Best Insurance Co., Ltd. (2020) 47 Cal.App.5th 924

The owners of an apartment complex filed an insurance claim after an underground water main burst. The owners sued their insurers for bad faith after the insurers denied coverage on the ground that the damage was caused by long-term settlement and earth movement, which was not a covered loss under the policy. The trial court granted summary judgment for the insurers.

The Court of Appeal affirmed, holding that the “genuine dispute” doctrine shielded the insurers from liability. Under the “genuine dispute” doctrine, an insurer does not act in bad faith if a genuine dispute exists as to the insurer’s liability under the policy, e.g., where the insurer relies on expert reports to deny coverage, absent a showing that the insurer's investigation was flawed.

The court held there was a “genuine dispute” about the cause of the damage to the complex and that the insurers properly relied on their expert’s final report in denying coverage. The court rejected the plaintiff’s argument that the insurers’ investigations were compromised because their expert initially had concluded the damage might be covered and that the insurers sought additional expert opinions only after learning that the cost of repair would be substantial. The court observed that both sides’ experts initially had noted extensive pre-existing damage to the building and had cautioned that further investigations and testing should be conducted to determine the cause of the damage. The court also rejected plaintiff’s argument that notes in an insurer's claim file referring to potential litigation were evidence of bad faith, rather than normal business practice.