Brehm v. 21ST Century Ins. Co.

• Decision Date: 16 September 2008
• Docket Number: No. B198604.,B198604.
• Citation: 166 Cal.App.4th 1225,83 Cal. Rptr. 3d 410
• Court: California Court of Appeals Court of Appeals
• Parties: STUART BREHM IV, Plaintiff and Appellant, v. 21ST CENTURY INSURANCE COMPANY, Defendant and Respondent.

166 Cal.App.4th 1225

83 Cal. Rptr. 3d 410

STUART BREHM IV, Plaintiff and Appellant, v. 21ST CENTURY INSURANCE COMPANY, Defendant and Respondent.

No. B198604.

Court of Appeals of California, Second District, Division Seven.

September 16, 2008.

As modified October 6, 2008.

Law Offices of Gene J. Goldsman, Gene J. Goldsman, Carson C. Newton; The Ehrlich Law Firm and Jeffrey Isaac Ehrlich for Plaintiff and Appellant.

Horvitz & Levy, David S. Ettinger, Adam M. Flake; Crandall, Wade & Lowe and Victor R. Anderson III for Defendant and Respondent.

OPINION

PERLUSS, P. J.

Stuart Brehm IV appeals from the order of dismissal entered after the trial court sustained without leave to amend 21st Century Insurance Company's demurrer to his second amended complaint for breach of the implied covenant of good faith and fair dealing. Brehm contends the trial court misapplied the genuine dispute rule, which protects an insurer from a bad faith claim when its denial of benefits was asserted in good faith and on reasonable grounds, and neither the express policy provision that authorizes the insurer to arbitrate uninsured motorist (UM) and underinsured motorist (UIM) claims nor Insurance Code section 11580.26, subdivision (b),¹which bars a cause of action for exercising the right to request arbitration of a claim under an insured's UM/UIM coverage, precludes this action based on allegations 21st Century unreasonably failed to make a good faith effort to obtain a prompt, fair and equitable settlement of Brehm's claim for UIM benefits. We agree with Brehm on each of these points and, accordingly, reverse.

FACTUAL AND PROCEDURAL BACKGROUND

1. Brehm's Accident and Demand for UIM Benefits

According to the facts alleged in Brehm's second amended complaint,² Brehm, his father and his mother were all seriously injured in an August 2003 traffic accident caused by Natalie Aguirre, who struck the rear of the Brehm family's 1999 Chrysler Concorde while it was stopped at a red light, waiting to make a left turn. In March 2004 Brehm and his parents settled with Aguirre's insurance carrier for $30,000, her full policy limits; Brehm received $10,000; each of his parents also received $10,000.

In April 2004 Brehm made a written claim to 21st Century under the UIM provision of the automobile insurance policy issued by 21st Century to his parents, which covered the family's 1999 Chrysler Concorde and included Brehm as an additional insured person. The policy, in effect at the time of the August 2003 accident, provided UIM benefits of $100,000 for one person and an additional $5,000 in medical benefits. Brehm submitted medical reports and assessments, bills and diagnostic test results to 21st Century that showed, as a result of the accident with Aguirre, he had suffered among other injuries, "a severe shoulder injury that would require costly surgery and related costs and expenses."

After the parties failed to reach an agreement on Brehm's claim—the issue apparently only being the extent of his injuries and thus the amount to which he was entitled—an arbitration was scheduled for November 2004. On September 9, 2004 Brehm made a statutory demand for $85,000 plus medical payments pursuant to Code of Civil Procedure section 998. 21st Century rejected the demand on October 27, 2004 and made a counteroffer of $5,000 plus previously paid medical benefits. In rejecting Brehm's demand, 21st Century stated its position, based on an evaluation conducted by its medical expert, Dr. Joseph S. Swickard, was that Brehm's injuries were limited to soft tissue and the surgeries recommended by Brehm's medical provider (Dr. Hafezi) "are not necessary." In his report Dr. Swickard asserted Brehm had only "subjective complaints with no objective evidence of injury or problem."

To persuade 21st Century to pay a reasonable settlement, in mid-October 2004 Brehm submitted to "a truly independent medical examination" by a highly credentialed board-certified orthopedic surgeon, Dr. Ronald Glousman. Dr. Glousman's report, provided to 21st Century on November 10, 2004 stated Brehm had suffered a cervical strain, lumbar strain and right shoulder rotator cuff strain. Dr. Glousman opined Brehm needed further treatment and concluded it was "more likely than not" that surgery would be required on his right shoulder. Dr. Glousman estimated the surgery would cost $15,575 and postsurgical physiotherapy approximately $3,600.

Following a continuance of the November 2004 arbitration date to allow 21st Century to subpoena and review Dr. Glousman's records, Brehm made a $90,000 policy limit demand ($100,000 less the $10,000 Brehm had recovered from Aguirre), plus $5,000 in medical payments. In response 21st Century offered $5,000 plus the balance of the full policy maximum of $5,000 in medical payments. Brehm rejected the counteroffer. On March 26 2005 Brehm received an arbitration award of $91,186; the award was reduced by stipulation to the $90,000 policy limit. 21st Century paid Brehm the $90,000 shortly after the award was made.

2. Brehm's Lawsuit for Breach of the Implied Covenant of Good Faith

Brehm filed a complaint against 21st Century on January 31, 2006 and, after the court sustained a demurrer, a first amended complaint on July 24, 2006, asserting causes of action for breach of the implied covenant of good faith and fair dealing and breach of contract, alleging 21st Century had unreasonably failed to make a good faith effort to resolve Brehm's UIM claim after its liability for payment of benefits was clear. On November 7, 2006 the trial court sustained 21st Century's demurrer to the first amended complaint with leave to amend, suggesting at the hearing that Brehm needed to plead a sufficient factual basis for asserting the failure to settle his UIM claim was the result of something more than a genuine dispute between the parties as to the amount of damages to which he was entitled.

On November 14, 2006 Brehm filed his second amended complaint for breach of the implied covenant of good faith and fair dealing, breach of contract and fraud. In addition to the factual allegations described above, Brehm alleged the medical evidence in 21st Century's possession at the time it rejected Brehm's policy limit demand and made a $5,000 counteroffer showed its offer was "extremely unrealistic"; 21st Century knew from the information it had received Brehm was entitled to the full policy limits based on the injuries sustained in the accident with Aguirre and also knew any fair arbitration would likely award that sum to Brehm. Nonetheless, 21st Century made an unreasonably low offer to delay paying his legitimate claim and in the hope of compelling him to accept less than the full amount he was due. Brehm further alleged Dr. Swickard, a nonpracticing professional expert witness, was known to the insurance industry to be biased in favor of the defense and was retained, not to objectively and fairly evaluate Brehm's shoulder injury, but with the intent that he minimize its seriousness to make it appear—falsely—there was a genuine dispute about the extent of that injury. Indeed, contrary to Dr. Swickard's conclusion regarding "subjective complaints with no objective evidence of injury or problem," his report actually noted Brehm had demonstrated restricted motion and "occasional crepitus [a grating or crackling feeling or sound] in the right shoulder that was not present on the left." Yet Dr. Swickard and 21st Century deliberately ignored these facts in order to deprive Brehm of his contractual rights.

3. The Trial Court's Ruling Sustaining the Demurrer Without Leave to Amend

21st Century demurred to the second amended complaint, insisting Brehm had simply alleged "a classic `genuine dispute' as to the value of a UIM claim" and arguing under Chateau Chamberay Homeowners Assn. v. Associated Internat. Ins. Co. (2001) 90 Cal.App.4th 335, 347 (Chateau Chamberay) an insurer denying or delaying the payment of policy benefits due to the existence of a genuine dispute with its insured as to the amount of the claim cannot be liable in bad faith. Because 21st Century had relied upon the opinion of its expert to evaluate Brehm's UIM claim, its offer of an additional $5,000 was reasonable as a matter of law— notwithstanding the fact the arbitrator ultimately agreed with Brehm's expert, not 21st Century's. 21st Century also argued it had a right under the policy's express terms to submit to arbitration its dispute with Brehm concerning the damages due on his UIM claim.³ In opposition Brehm argued the genuine dispute rule should not apply at the pleading stage of a case and, in any event, was inapplicable when an insurer selects its expert dishonestly or the expert performs unreasonably, as alleged in the second amended complaint.

The trial court sustained the demurrer without leave to amend in an order that incorporated its written tentative ruling. The court found 21st Century had a contractual right to challenge the amount of loss claimed under its UIM coverage and to submit any dispute with its insured over UIM damages to arbitration. Accordingly, Brehm could not argue 21st Century had breached the contract as a result of properly exercising its rights under the contract. The court further ruled a breach of the covenant of good faith and fair dealing "necessarily requires that there be a breach of the underlying insurance contract." Accordingly, because the court had concluded the breach of contract cause of action was without merit, the claim for breach of the implied covenant necessarily failed as well. Quoting from Chateau Chamberay, supra, 90 Cal.App.4th at page 347, that "there can be no bad faith liability imposed on the insurer for advancing its side of [a genuine] dispute," the trial court also ruled the second amended complaint contained insufficient factual allegations that 21st Century's actions "were done for any malicious reason other than `advancing its side of that...