Alcaraz v. Steadfast Ins. Co. CA2/3 ( 2024 )

Filed 2/28/24 Alcaraz v. Steadfast Ins. Co. CA2/3
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION THREE
HECTOR ALCARAZ, B324365
Plaintiff and Appellant, (Los Angeles County
Super. Ct. No. 21STCV39169)
v.
STEADFAST INSURANCE
COMPANY,
Defendant and Respondent.
APPEAL from a judgment of the Superior Court of
Los Angeles County, William Fahey, Judge. Reversed and
remanded with directions.
Downtown L.A. Law Group, Igor Fradkin, Daniel Ezizi;
Joseph Socher for Plaintiff and Appellant.
Cozen O’Connor, Maria Cousineau and Angel Marti for
Defendant and Respondent.
‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗
Plaintiff and appellant Hector Alcaraz was injured in a car
accident with an underinsured driver. He presented a claim to
his insurer, defendant and respondent Steadfast Insurance
Company (Steadfast). After unsuccessful attempts to settle,
Alcaraz demanded arbitration. The arbitrator awarded Alcaraz
$532,220. Steadfast paid the arbitration award in full.
Alcaraz then filed the underlying action alleging Steadfast
breached the implied covenant of good faith and fair dealing by
unreasonably withholding policy benefits. He appeals from a
judgment of dismissal entered after the trial court sustained
Steadfast’s demurrer without leave to amend. Alcaraz contends
the trial court erred in accepting Steadfast’s arguments,
including that the complaint failed to state a claim because there
was a genuine dispute regarding the amount owed on the claim.
We agree that the complaint was sufficient to withstand the
demurrer. Accordingly, we reverse the judgment of dismissal.
FACTUAL AND PROCEDURAL BACKGROUND1
In October 2021, Alcaraz filed the underlying complaint
against Steadfast alleging two causes of action: breach of contract
1 We draw our facts from the allegations in Alcaraz’s
complaint. Consistent with the standard of review, we assume
the truth of the properly pleaded factual allegations and do not
assume the truth of contentions, deductions, or conclusions of
law. (People ex rel. Allstate Ins. Co. v. Discovery Radiology
Physicians, P.C. (2023) 94 Cal.App.5th 521, 532 (Discovery
Radiology Physicians).)
2
and breach of the covenant of good faith and fair dealing.2
Alcaraz’s insurance policy with Steadfast provided up to
$1 million in coverage for bodily injury due to a collision with an
underinsured driver. This policy was in effect in August 2017
when an underinsured driver failed to stop at a stop sign and
collided with Alcaraz’s vehicle. As a result of the accident,
Alcaraz suffered a “left shoulder curved acromion, mild
supraspinatus tendinosis and disc protrusions in the cervical
spine.” To treat his injuries, he required neck injections, anterior
cervical discectomy surgery, and disk replacement surgery. In
January 2019, Alcaraz settled with the underinsured driver’s
insurance company for the third party policy limit of $15,000.
In March 2019, Alcaraz submitted an underinsured
motorist demand to Steadfast for his remaining policy limit
amount of $985,000. The demand had an expiration date of April
15, 2019, but Steadfast did not respond until May 1, 2019, when
it counteroffered with $7,000. Alcaraz immediately rejected
Steadfast’s offer and again demanded $985,000, with a response
due May 6, 2019. This demand “again did not elicit any response
from [Steadfast].” The complaint alleges that “on or about May
31, 2019, after [Steadfast] made an unreasonably low and
unjustifiable settlement offer,” Alcaraz demanded arbitration.
On July 2, 2019, Alcaraz again demanded the $985,000
policy limit, with a deadline of July 26, 2019. Steadfast
responded on August 9, 2019, with an offer of $151,000. Alcaraz
rejected the offer and, on January 20, 2020, sent another policy
limit demand with a deadline of February 7, 2020.
2 Alcaraz does not challenge the trial court’s ruling on his
breach of contract claim.
3
In May 2020, Steadfast made a Code of Civil Procedure
section 998 (section 998) offer to settle for $403,000. Alcaraz
rejected the offer. On December 1, 2020, Steadfast lowered its
offer to $250,000. Alcaraz responded on December 2, 2020, with
a section 998 offer of $549,000, inclusive of his costs. The parties
did not settle and proceeded to arbitration.
Following a hearing, the arbitrator issued an award in
favor of Alcaraz for $547,200. Once the $15,000 third party
settlement was credited, the total award due from Steadfast was
$532,200, not including Alcaraz’s costs. With costs, the amount
Steadfast owed exceeded Alcaraz’s section 998 offer.
According to the complaint, at all relevant times, Alcaraz
provided Steadfast information sufficient to establish that (1) the
underinsured driver was 100 percent at fault for causing the
accident; (2) Alcaraz’s injuries were serious and permanent;
(3) his medical expenses already exceeded $285,000, and he
would require further treatment; and (4) he had a claim for past
and future pain and suffering. Steadfast also had information
regarding Alcaraz’s specific injuries and the medical treatment
he required.
The complaint alleges Steadfast breached the implied
covenant of good faith and fair dealing by failing to make a
“prompt, careful, and reasonable assessment of his injuries and
damages” caused by the accident; disregarding the evidence in
support of Alcaraz’s claim; making unreasonably low settlement
offers; failing to promptly respond to his settlement offers; and
engaging in “delay tactics” by not responding to Alcaraz’s calls
and correspondence. The complaint further asserts Steadfast
was obligated to “obtain medical records, reports and bills to
fairly evaluate the nature and extent of Mr. Alcaraz’s injuries,”
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and to have Alcaraz “objectively examined by a doctor of
[Steadfast’s] choice, if necessary, to assist it in making a good
faith, objective, and fair determination of the nature and extent
of his accident-related injuries and damages . . . .”
In July 2022, Steadfast demurred to Alcaraz’s complaint.
It asserted Alcaraz could not state a cause of action for breach of
the implied covenant of good faith and fair dealing because it
paid the arbitration award in full and was permitted to arbitrate
under the Insurance Code. Steadfast further argued Alcaraz’s
claim failed because there was a genuine dispute regarding the
policy benefits owed. The trial court sustained Steadfast’s
demurrer without leave to amend and issued a judgment of
dismissal. Alcaraz timely appealed.
DISCUSSION
On appeal, Alcaraz argues he sufficiently alleged a cause of
action for breach of the implied covenant of good faith and fair
dealing. Steadfast counters there was a genuine dispute between
the parties as to the value of the underinsured motorist claim,
thus Alcaraz’s bad faith claim fails as a matter of law. Steadfast
also contends Alcaraz did not state a valid claim because it paid
the arbitration award in full; Alcaraz did not claim breach of any
specific contract provision; submitting to arbitration cannot be
bad faith; and Alcaraz failed to adequately allege causation
because only his unreasonable demands rendered the arbitration
necessary. We agree with Alcaraz that the complaint states a
valid cause of action.
I. Standard of Review
“ ‘ “On appeal from an order of dismissal after an order
sustaining a demurrer, the standard of review is de novo: we
exercise our independent judgment about whether the complaint
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states a cause of action as a matter of law. [Citation.] First, we
give the complaint a reasonable interpretation, reading it as a
whole and its parts in their context. Next, we treat the demurrer
as admitting all material facts properly pleaded. Then we
determine whether the complaint states facts sufficient to
constitute a cause of action. [Citation.] [¶] We do not, however,
assume the truth of contentions, deductions, or conclusions of
law. [Citation.]” ’ ” (Discovery Radiology Physicians, supra, 94
Cal.App.5th at p. 532.)
II. The Complaint Sufficiently Alleges Breach of the
Implied Covenant of Good Faith and Fair Dealing
A. Applicable legal principles
“ ‘The law implies in every contract, including insurance
policies, a covenant of good faith and fair dealing. “The implied
promise requires each contracting party to refrain from doing
anything to injure the right of the other to receive the
agreement’s benefits. To fulfill its implied obligation, an insurer
must give at least as much consideration to the interests of the
insured as it gives to its own interests.” ’ ” (Maslo v. Ameriprise
Auto & Home Ins. (2014) 227 Cal.App.4th 626, 633 (Maslo),
quoting Wilson v. 21st Century Ins. Co. (2007) 42 Cal.4th 713, 720
(Wilson).)
“An insurer that unreasonably delays, or fails to pay,
benefits due under the policy may be held liable in tort for breach
of the implied covenant. [Citation.] The withholding of benefits
due under the policy may constitute a breach of contract even if
the conduct was reasonable, but liability in tort arises only if the
conduct was unreasonable, that is, without proper cause.”
(Rappaport-Scott v. Interinsurance Exchange of the Automobile
Club (2007) 146 Cal.App.4th 831, 837 (Rappaport-Scott).) “[T]he
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reasonableness of the insurer’s decisions and actions must be
evaluated as of the time that they were made; the evaluation
cannot fairly be made in the light of subsequent events . . . .”
(Chateau Chamberay Homeowners Assn v. Associated Internat.
Ins. Co. (2001) 90 Cal.App.4th 335, 347.)
In addition, “[w]hile an insurance company has no
obligation under the implied covenant of good faith and fair
dealing to pay every claim its insured makes, the insurer cannot
deny the claim ‘without fully investigating the grounds for its
denial.’ [Citation.] To protect its insured’s contractual interest in
security and peace of mind, ‘it is essential that an insurer fully
inquire into possible bases that might support the insured’s
claim’ before denying it. [Citation.] By the same token, denial of
a claim on a basis unfounded in the facts known to the insurer, or
contradicted by those facts, may be deemed unreasonable. ‘A
trier of fact may find that an insurer acted unreasonably if the
insurer ignores evidence available to it which supports the claim.
The insurer may not just focus on those facts which justify denial
of the claim.’ [Citations.]” (Wilson, supra, 42 Cal.4th at pp. 720–
721.)
“An insurer’s good or bad faith must be evaluated in light of
the totality of the circumstances surrounding its actions.”
(Wilson, supra, 42 Cal.4th at p. 723.)
B. The complaint sufficiently pleads bad faith
The complaint’s allegations that Steadfast unreasonably
failed to investigate his insurance claim, and unreasonably
delayed payment of policy benefits, are sufficient to state a cause
of action.
According to the complaint, at all relevant times Steadfast
knew: Alcaraz was in an accident with an underinsured driver
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who was 100 percent at fault; because of the accident, Alcaraz
suffered injuries requiring injections and surgery; Alcaraz
incurred more than $285,000 in medical expenses; and Alcaraz
would require further treatment.
The complaint further alleges that Steadfast ignored this
information and failed to conduct any investigation necessary to
make a reasonable assessment of his claim. Taking the
complaint’s allegations as true, Steadfast made its initial $7,000
settlement offer without first obtaining Alcaraz’s medical records
or otherwise attempting to evaluate the nature of Alcaraz’s
injuries. As a result, the $7,000 offer lacked a factual basis and
was substantially less than Alcaraz’s already incurred medical
expenses of $285,000. These allegations would support a finding
that Steadfast unreasonably failed to conduct a “prompt, careful,
and reasonable assessment of [Alcaraz’s] injuries and damages”
as alleged in the complaint. “[D]enial of a claim on a basis
unfounded in the facts known to the insurer, or contradicted by
those facts, may be deemed unreasonable.” (Wilson, supra, 42
Cal.4th at p. 721; Brehm v. 21st Century Ins. Co. (2008) 166
Cal.App.4th 1225, 1239–1240 (Brehm).) Where, as is alleged
here, an insurer ignores medical evidence in its possession and
reaches its decision about the amount owed without contacting
the insured’s doctors, having its medical expert review the
evidence, or arranging for the insured to be evaluated by an
objective physician, an insurer’s delay in paying a claim may be
unreasonable. (Wilson, at p. 721.)
Likewise, the complaint also alleges Steadfast engaged in
other conduct that unreasonably delayed the payment of benefits.
According to the complaint, Steadfast did not respond to Alcaraz’s
calls and correspondence, thus failing to engage in settlement
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discussions in good faith. It did not make a settlement offer
sufficient to cover Alcaraz’s already-incurred medical expenses
until a year after Alcaraz demanded arbitration and 14 months
after he made his initial claim. (Rappaport-Scott, supra, 146
Cal.App.4th at p. 837 [insurer must not “unreasonably” delay
payment]; Wilson, supra, 42 Cal.4th at pp. 718–720 [two-year
delay from demand letter with documentation to payment of full
policy limit could be found unreasonable by jury].)
The allegations of Steadfast’s inadequate investigation, its
disregard of evidence regarding Alcaraz’s injuries and already-
incurred medical expenses, its settlement offers that were
unreasonably low in light of the information available to it, and
the related delay in payment of policy benefits, were sufficient to
state a cause of action for breach of the implied covenant of good
faith and fair dealing.
C. Genuine dispute
We reject Steadfast’s assertion that Alcaraz’s claim fails as
a matter of law because the complaint establishes a genuine
dispute regarding the amount owed.
Under the genuine dispute rule, “ ‘an insurer denying or
delaying the payment of policy benefits due to the existence of a
genuine dispute with its insured as to the existence of coverage
liability or the amount of the insured’s coverage claim is not
liable in bad faith even though it might be liable for breach of
contract.’ [Citation.]” (Wilson, supra, 42 Cal.4th at p. 723.)
However, “[t]he genuine dispute rule does not relieve an insurer
from its obligation to thoroughly and fairly investigate, process
and evaluate the insured’s claim. A genuine dispute exists only
where the insurer’s position is maintained in good faith and on
reasonable grounds.” (Ibid.)
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As detailed above, the complaint alleges Steadfast failed to
appropriately and timely investigate, process, and evaluate
Alcaraz’s claim, such that Steadfast’s initial counteroffers were
not made in good faith. These allegations prevent the conclusion
that the genuine dispute rule forecloses Steadfast’s bad faith
liability as a matter of law.
Two cases are instructive. In Rappaport-Scott, a panel of
this court concluded an arbitration award that is substantially
lower than the insured’s claimed damages may demonstrate the
existence of a “genuine dispute.” (Rappaport-Scott, supra, 146
Cal.App.4th at p. 839.) The insured in Rappaport-Scott asserted
the insurer breached the implied covenant by making only low
settlement offers that unreasonably failed to resolve her claim.
(Id. at pp. 837, 839.) The court held “the vast difference between
the $346,732.34 in losses claimed by Rappaport-Scott and the
$63,000 in actual losses as determined by the arbitrator
demonstrates, as a matter of law, that a genuine dispute existed
as to the amount payable on the claim.” (Id. at p. 839, italics
omitted.)
In Maslo, the complaint’s allegations led to a different
result. In Maslo, there was also a substantial difference between
the insured’s demand and the arbitrator’s eventual award.
(Maslo, supra, 227 Cal.App.4th at p. 636.) However, the
complaint alleged the insurer “failed to comply with its common
law and statutory obligations to thoroughly and fairly
investigate, process, and evaluate [the] appellant’s claim.” (Ibid.)
The complaint asserted that although the insurer had
information establishing that an uninsured motorist was solely at
fault, as well as information documenting the nature and costs of
medical treatment the appellant had received, it did not
10
interview the appellant’s treating physicians or conduct its own
investigation into his injuries. The complaint further alleged the
insurer did not respond in good faith to the appellant’s settlement
demand, did not provide a reason for withholding payment,
refused an offer to participate in mediation, and made no
settlement offer. (Ibid.)
The Maslo court thus rejected the insurer’s reliance on the
genuine dispute rule, explaining “there can be no genuine dispute
in the absence of a thorough and fair investigation.” (Maslo,
supra, 227 Cal.App.4th at p. 637.) The court further
distinguished Rappaport-Scott, since the insurer in that case
“fairly investigated, processed and evaluated the insured’s claim,”
made a settlement offer, and participated in mediation prior to
arbitration. (Ibid.)
Here, as in Maslo, and unlike in Rappaport-Scott, the
complaint alleges Steadfast did not conduct a thorough and fair
investigation. While in Rappaport-Scott the insured’s bad faith
claim appeared to be based exclusively on the insurer’s alleged
failure to make a reasonable settlement offer, here, as in Maslo,
the complaint alleges Steadfast’s failure to meaningfully
investigate or fairly handle Alcaraz’s claim demonstrated its bad
faith.
Maynard v. State Farm Mutual Automobile Insurance
Company (C.D.Cal. 2007) 499 F.Supp.2d 1154, is inapposite. In
Maynard, the federal district court granted summary judgment
in the insurer’s favor. The insured did not attempt to refute the
insurer’s argument based on Rappaport-Scott that the difference
between the damages claimed and the arbitrator’s award was
evidence of a genuine dispute that was fatal to the insured’s bad
faith claim. (Id. at p. 1161.) With the benefit of evidence
11
proffered in connection with the summary judgment motion, the
court further concluded the insured could not dispute that there
was a “reasonable and legitimate basis” for the insurer to
question the insured’s claim. (Id. at pp. 1165, 1162–1164.)
In contrast, we consider only whether Alcaraz’s allegations
were sufficient to state a cause of action. The complaint alleges
Steadfast breached the implied covenant in ways other than
failing to make a reasonable settlement offer. It further alleges
Steadfast’s settlement position was not maintained in good faith
or on reasonable grounds. (Wilson, supra, 42 Cal.4th at p. 723.)
At this preliminary stage of the proceedings, the genuine dispute
rule does not defeat Alcaraz’s bad faith claim as a matter of law.
D. The complaint sufficiently alleges causation
Steadfast additionally argues the complaint fails to
sufficiently allege its conduct caused Alcaraz’s damages. It
asserts arbitration was necessary because of Alcaraz’s
unreasonable demands for the full policy limit, and not because
Steadfast made an unreasonable settlement offer or failed to
adequately investigate the claim.
That Alcaraz may have made unreasonable settlement
demands does not establish as a matter of law that Steadfast was
not to blame for the delay in the payment of policy benefits.
Steadfast’s contention ignores the complaint’s allegations, which,
at this stage, must be accepted as true. An insufficient
investigation, and therefore a baseless counteroffer or refusal to
settle, may be the legal cause of damages in a bad faith action.
(Wilson, supra, 42 Cal.4th at p. 721; Brehm, supra, 166
Cal.App.4th at pp. 1232, 1240.)
Further, the complaint alleges Steadfast made its
counteroffer of $7,000 without a good faith basis. Even after
12
Alcaraz requested arbitration, it took Steadfast a year to offer a
sum large enough to account for his past medical expenses alone.
When Alcaraz made a section 998 offer that was only $2,000 more
than the arbitrator’s eventual award, Steadfast did not accept it
or make a counteroffer even approaching that amount. The
complaint alleges that Steadfast engaged in a pattern of
unreasonable conduct and did not participate in meaningful
settlement discussions. It does not allege that Alcaraz would not
have accepted anything less than the policy limit. Instead, the
complaint alleges that “at all relevant times, [Alcaraz] was
amenable to, and expressly indicated a willingness to reach an
amicable settlement of his underinsured motorist claim[s] for an
amount within the policy limits.”
The Maslo court considered and rejected a similar
causation argument. The insurance company argued that its
failure to investigate the claim could not be the legal cause of the
insured’s damages because the complaint did not allege the
insured would have settled for less than his initial, high demand,
thus “arbitration was inevitable.” (Maslo, supra, 227 Cal.App.4th
at p. 639.) The Maslo court reasoned it was not the insured’s
initial demand that made arbitration inevitable, rather it was the
insurance company’s refusal to investigate the claim and that it
offered nothing. (Ibid.) We find this reasoning persuasive.
While Steadfast made several settlement offers, the complaint
adequately alleges they were unreasonably low because Steadfast
made them without conducting any investigation, it already knew
Alcaraz had incurred over $285,000 in medical expenses, and it
also had information indicating the other driver was at fault.
The complaint sufficiently alleges causation.
13
E. Neither Steadfast’s payment of the arbitration
award nor Alcaraz’s failure to allege breach of a
specific contract provision precludes his claim
Finally, we reject Steadfast’s arguments that its prompt
payment of the arbitration award eliminated any potential
liability for bad faith and that Alcaraz was required to plead that
Steadfast breached a specific contractual provision to state a
cause of action for breach of the implied covenant.
It is well established that an insured may maintain a cause
of action for breach of the covenant of good faith and fair dealing
even when the insurer has paid all benefits due under the policy.
(Wilson, supra, 42 Cal.4th at pp. 720–721 [bad faith action based
on delay in payment and insufficient evaluation of claim after
insurer ultimately paid full policy limit]; Maslo, supra, 227
Cal.App.4th at pp. 634, 638 [bad faith action after insurer paid
arbitration award]; Brehm, supra, 166 Cal.App.4th at pp. 1232,
1241–1242 [same]; Hightower v. Farmers Ins. Exchange (1995) 38
Cal.App.4th 853, 857, 861–862 (Hightower) [same].)
Steadfast fails to recognize this precedent and asserts that
because it promptly paid the arbitration award, it never withheld
benefits, so it cannot have acted in bad faith. For this
proposition, it vaguely cites “the policy” and Insurance Code
sections “11580.2” and “11580.26.”3
3 Steadfast appears to implicitly rely on Insurance Code
section 11580.2, subdivision (f), which provides that “[t]he policy
or an endorsement added thereto shall provide that the
determination as to whether the insured shall be legally entitled
to recover damages, and if so entitled, the amount thereof, shall
be made by agreement . . . .” It also appears that Steadfast relies
on Insurance Code section 11580.26, subdivision (b), which
14
As we understand its argument, Steadfast contends these
provisions establish it cannot be held liable for bad faith because
it was not required to pay Alcaraz any policy benefits until either
the parties agreed as to the amount owed, or the arbitrator
issued an award. Yet, this argument ignores the insurer’s duty to
act in good faith in responding to its insured’s claim before it
ultimately pays a claim. (See, e.g., Wilson, supra, 42 Cal.4th at
pp. 720–721, 723; Rappaport-Scott, supra, 146 Cal.App.4th at
p. 837.)
Moreover, several courts have rejected Steadfast’s
argument that an insurer’s right to arbitrate extinguishes its
duty to respond in good faith to the insured’s claim. (Maslo,
supra, 227 Cal.App.4th at pp. 638–639; Brehm, supra, 166
Cal.App.4th at p. 1244; Hightower, supra, 38 Cal.App.4th at
pp. 862–863 [Insurance Code section 11580.26].) For example, in
Brehm, the court held that the insurer’s contractual right to
arbitrate did not relieve it from its duty to interact with its
insured in good faith. The court reasoned there was an “implied
obligation to honestly assess Brehm’s claim and to make a
reasonable effort to resolve any dispute with him as to the
amount of his damages before invoking that right [to
arbitration].” (Brehm, at p. 1242.) The court also held that
Insurance Code section 11580.26, subdivision (b), which states
that no cause of action can be brought against either the insurer
or insured for demanding arbitration, did not “immunize” the
insurer from tort liability for its handling of a claim. (Id. at
p. 1243.) Citing Hightower, the court held that an insurer could
states: “No cause of action shall exist against either an insured or
insurer from exercising the right to request arbitration of a claim
under this section or Section 11580.2.”
15
not use its right to pursue arbitration as a means to
“ ‘ “stonewall” ’ ” or “ ‘shield . . . dilatory conduct.’ ” (Id. at
p. 1244, citing Hightower, at p. 863.) We find the Brehm court’s
reasoning equally applicable here.
Steadfast also summarily asserts, without citation to any
legal authority or explanation, that the complaint fails to state a
claim because Alcaraz does not allege it breached a specific
contract term. This contention lacks merit. The covenant of good
faith and fair dealing is implied in every insurance contract.
(Maslo, supra, 227 Cal.App.4th at p. 633.) Thus, the breach of an
express contract term is not required to maintain an action for
breach of the implied covenant of good faith and fair dealing.
(Brehm, supra, 166 Cal.App.4th at pp. 1235–1236.)
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DISPOSITION
The judgment of dismissal is reversed. The case is
remanded with directions to the trial court to vacate its order
sustaining the demurrer in its entirety and to enter a new order
overruling the demurrer to the breach of the covenant of good
faith and fair dealing cause of action. Alcaraz shall recover his
appellate costs.
NOT TO BE PUBLISHED IN THE OFFICIAL
REPORTS
ADAMS, J.
We concur:
EDMON, P. J.
EGERTON, J.
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