FEBRUARY 2016 BAD FAITH CASES: NO BAD FAITH WHERE INSURER’S DENIAL OF COVERAGE WAS REASONABLE (Western District)
In Reginella Construction Company v. State Farm Fire & Casualty Company, the insured claimed the insurer acted in bad faith by failing to conduct a reasonable investigation, and by misinterpreting the policy terms. The insurer responded by claiming that the case was really about the policy interpretation, and an incorrect but reasonable interpretation cannot be the basis for bad faith. The court agreed.
An insured must prove bad faith by clear and convincing evidence, showing (1) that there was no reasonable basis to deny policy benefits; and (2) that the insurer knowingly or recklessly disregarded that fact. In this case, the insurer’s position was based upon a plain reading of the policy, “and was in accordance with the law regarding coverage under occurrence-based policies.” Thus, there was a reasonable basis to deny coverage.
However, as this was at the motion to dismiss stage, and even though the court did not believe it likely that the complaint could be remedied to adequately plead claims against the insurer, “to the extent [the insured] determines that it can remedy the deficiencies identified herein, the Court will give it the opportunity to file an Amended Complaint.”