There Is A Duty To Investigate And Defend Claims With Good Faith

This newsletter has discussed cases on prior occasions that refer to an employer’s or carrier’s duty to investigate. An appeals court has commented again on this area.

State Compensation Insurance Fund (SCIF) appealed a judgement against it by an employer for $300,000.00 for breaching the implied covenant of good faith and fair dealing by refusing to permit the insured access to claims files, etc. They lost at the appellate level and the court discussed several causes of action that may be maintained against carriers.

SCIF contended that they could not be liable for breach of an express contract.

When an insured takes out a policy of worker’s compensation with an insurance company this is an express contract. This court found that where SCIF did not follow up on claims or failed to deny claims timely this was a breach of the express provisions of the contract.

The court then discussed the implied covenant of good faith and fair dealing. There were different allegations as to SCIF breaching this covenant. One of the allegations was that SCIF was over reserving. SCIF was reserving to the “maximum probable potential”. The court found this policy gave no consideration to the interests of the insured. The Insurance Code section 923.5 discusses reserves. The court indicated that SCIF’s policy meant the adjuster would reserve the case at the absolute most SCIF would have to pay. The court indicated this is not in the best interest of the insured. SCIF was attempting to get guaranteed profits through a no risk business enterprise without disclosing the change in their reserve policy to the insured.

The court found this was a breach of the implied covenant of good faith and fair dealing. SCIF also attempted to argue that they did not improperly handle claims. The appellate court would not listen to this argument because it would be a reweighing of the evidence. Appellate courts will not reweigh the evidence.  The court would not listen to SCIF’s argument as to damages and found that damages in this instance are proper. SCIF also appealed as to the trial courts finding on denial of the insured to inspect their claim files.  The appellate court agreed with the trial court that as a matter of law despite any privacy interests the indiscriminate refusal to deny access was a breach of the implied covenant of good faith and fair dealing. The court then addressed the issue of damages awarded by the trial court and found the damages were not excessive.

Case: Macgregor Yaht V. SCIF

Harvey Brown
3501 Jamboree Rd. Suite 602
Newport Beach, CA 92660

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