California Court Holds “Genuine Dispute Rule” Not Proper Basis for Motion to Dismiss

In its recent decision titled Essex Marina City Club, L.P. v. Continental Casualty Co., 2011 U.S. Dist. LEXIS 97382 (N.D. Cal. Aug. 30, 2011), the United States District Court for the Northern District of California addressed an insurer’s argument that California’s “genuine dispute rule” warranted dismissal of an insured’s bad faith claim.

The insured, Essex Marina, had sought a defense and indemnification under a professional liability policy issued by Continental for an underlying lawsuit.  At issue in the Essex Marina’s lawsuit was Continental’s handling of the claim following the initial tender.  The matter passed hands through five different claims adjusters and was the subject of numerous requests for information from Continental to Essex Marina, prompting the court to characterize Continental’s conduct as a game of “hot potato.”  In all, it took Continental over two years before it finally denied coverage to Essex Marina during which time Essex Marina allegedly incurred hundreds of thousands of dollars in attorneys’ fees in the underlying litigation.  

Essex Marina later sued for a declaration of coverage as well as for bad faith on the basis that Continental “consciously and unreasonably … failed to make a timely ruling on its claim [and] failed to properly investigate its claim.”  Citing to Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009), Continental moved to dismiss the bad faith cause of action on the basis that it was not a plausible claim.  Continental argued, among other things, that such a claim was negated by California’s “genuine dispute rule,” which “operates as an exception to the general rule that an unreasonable delay in payment of benefits due under an insurance policy gives rise to tort liability.”  The court held that while there may have been a genuine dispute as to the validity of Essex Marina’s bad faith claim, “this is an intensely factual issue not suitable for resolution on a Rule 12(b)(6) motion.”