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By Patrick A. Calhoon

Insurers often attempt to defend their claims decisions by relying on the advice and opinions of hired experts. As if it’s a force-field that protects bad claim decisions from any legal recourse, the so called “genuine dispute doctrine” defense will be vigorously raised. The genuine dispute doctrine applies to both legal and factual disputes and provides that “where there is a genuine issue as to the insurer’s liability under the policy for the claim asserted by the insured, there can be no bad faith liability imposed on the insurer for advancing its side of that dispute.” Chateau Chamberay Homeowners Ass’n v. Associated Int’l Ins. Co. (2001) 90 Cal. App. 4th 335, 347. In other words, if the insurer can prove that it fairly and reasonably relied on an expert opinion regarding its coverage position; it may dodge liability for insurance bad faith. However, as the recent decision of Zubillaga v. Allstate Indemnity Company (2017) 12 Cal. App. 5th 1017 highlights, an expert’s testimony will not automatically insulate an insurer from a bad faith claim.

Ms. Zubillaga’s Uninsured Motorist Claim

In Zubillaga v. Allstate Indemnity Company, Ms. Zubillaga had an automobile policy with Allstate that included UIM coverage with a $50,000 per person limit. Ms. Zubillaga was in a serious car accident in which the other driver ran a red light and struck her car. The police determined the other driver was at fault. Id. at *1021.

According to the police report, Ms. Zubillaga reported pain to her chest and left arm immediately after the accident. She walked from her car to a gurney, and was then transported by ambulance to the hospital. The hospital records showed she complained of pain to her face and arm, and said the pain “does not radiate.” She reported no back injury or back pain, exhibited no spinal tenderness, and had a full range of motion in her back. Id.

Over the next four months Ms. Zubillaga sought treatment from a chiropractor 39 times. She also saw an osteopath who recommended that she get an MRI of her spine, continue her chiropractic treatment, and take over-the-counter pain medications as necessary. The osteopath noted, “[a]n MRI of the cervical spine was reviewed indicating multiple disc protrusions. An MRI of the lumbar spine was reviewed indicating a disc protrusion at the L5–S1 level measuring 3 mm with neuroforaminal narrowing.” It was also noted that, “[d]ue to the fact that there is significant disc protrusion seen in both the cervical and lumbar spines, this patient will most probably require future medical treatment. This could include more therapy, medications for pain, and cervical/ lumbar epidural steroid injections.” Id.

Ms. Zubillaga’s attorney sent Allstate a demand for $35,000, based on medical bills totaling $17,645.44 and that she would have lower back pain for the remaining 52 years of her life expectancy. Ms. Zubillaga had settled with the other driver for $15,000, so the $35,000 demand represented the full amount of her remaining UIM policy coverage. Id. at *1022. 

Shortly after receiving the demand letter, Allstate wrote to Ms. Zubillaga’s attorney and stated, “although the claim’s value is in dispute, we are willing to settle the matter for $9,367.00.” Allstate arrived at that figure by determining what it felt was the reasonable and customary amount of plaintiff’s medical bills ($14,367), then adding $10,000 in general damages, and finally subtracting the $15,000 settlement from the other driver. Id.

Ms. Zubillaga’s attorney served a formal offer to compromise (Code Civ. Proc., § 998) for $35,000. However, he did not otherwise respond to Allstate’s $9,367 settlement offer for more than four months, even though Allstate wrote five follow-up letters requesting such a response.

Eventually, Ms. Zubillaga’s counsel formally rejected Allstate’s $9,367 offer and again demanded $35,000. Id.

Along with the Section 998 offer, Allstate was provided evaluations of plaintiff by a board certified orthopedic surgeon. The orthopedic surgeon’s evaluation stated that Ms. Zubillaga could benefit from anti-inflammatory medication, physical therapy, and weight loss. This increased plaintiff’s medical expenses by $1,200, but made no mention of any need for epidural steroid injections. At that juncture, Allstate increased its evaluation of plaintiff’s claim to $25,000 since she still had complaints of back pain. Consequently, Allstate increased its settlement offer to $10,000 ($25,000–$15,000). Id. 

A month later, Ms. Zubillaga’s counsel rejected Allstate’s $10,000 settlement offer, renewed her $35,000 demand, demanded arbitration, and requested that Allstate assign counsel to handle the claim. Allstate promptly assigned counsel and served written discovery. Id. at *1023.

Ms. Zubillaga’s responses to written discovery referenced care from a board certified pain management specialist and anesthesiologist who had seen her for a consultation. The responses further notified Allstate that her physicians “have opined [she] will require epidural injections, anti-inflammatory and pain medications, and physical therapy.” Ms. Zubillaga’s attorney also sent Allstate medical records which revealed she had complained of radiating back pain and that she was diagnosed with, among other things, “[l]umbar disc herniation at L5–S1 3mm, per MRI.” Her physician’s report stated that it was his opinion that Ms. Zubillaga’s symptoms were caused by the accident. Id.

Ms. Zubillaga’s physician explicitly recommended, “lumbar epidural steroid injection … at L4–L5 and L5–S1.” Ms. Zubillaga’s attorney advised Allstate, “the cost of such injections … may range from an additional $15,000 to $20,000 if she has only one, to $45,000 to $60,000 if she has three epidurals.” In response, Allstate increased its valuation of plaintiff’s claim to $27,084, and offered her $12,084 ($27,084–15,000).

Thereafter, Allstate retained a board certified orthopedic surgeon to conduct a defense medical examination (DME) of plaintiff, review her medical records, and determine whether epidural injections were appropriate. Allstate’s doctor saw Ms. Zubillaga, and prepared a report the same day, before he reviewed any of her medical records. The next day he prepared another report, after he reviewed some of her medical records. He attempted to counter Ms. Zubillaga’s physician’s recommendations in almost every respect. Specifically, he stated, “[w]hile she was recommended epidural steroid injections at … L4/5 and L5/S1, there is no indication for such injections. She does not have radicular symptoms, nor is there any evidence that she ever had radicular symptoms in the past. Furthermore, there are no abnormalities at L4/5.” Id. at *1024.

A few months later, Allstate received a letter from Ms. Zubillaga’s counsel enclosing medical records to support an additional claim of $6,850 in medical expenses for “a lumbar epidural steroid injection” plaintiff had received from a pain management physician. The records consisted of an “Operative Report” and a $1,050 bill representing charges for the treatment. With this additional charge, the medical bills incurred by plaintiff totaled $26,455.44. In response, Allstate offered plaintiff $14,500. Id.

Ms. Zubillaga’s attorney then sent Allstate a report from her pain management physician which explained his opinion that Ms. Zubillaga would need additional steroid injections over a six month period in conjunction with her physical therapy. He estimated the cost of each of the epidural steroid injections would be $12,000 (combined physician and surgery center), that medications would cost approximately $6,000 per year, and the likely cost of physical therapy would be $6,000 per year. Id. at *1025.

But, Allstate never had their expert review Ms. Zubillaga’s pain management physician’s report supporting the lumbar epidural steroid injection treatments and recommendations. Allstate did, however, increase its valuation of plaintiff’s claim to $30,584, and offered her $15,584 ($30,584–$15,000). Id.

The matter was submitted to arbitration. The arbitrator found for Ms. Zubillaga and awarded her $35,000 ($21,205 in economic damages and $13,795 in noneconomic damages), the full amount of her remaining UIM policy limits demand. Allstate paid the arbitration award. Id.

The UIM Bad Faith Action

Ms. Zubillaga sued Allstate for breach of contract and bad faith, claiming it did not fairly investigate her claim and should have paid her the UIM policy limits sooner. The court granted Allstate’s motion for summary judgment on plaintiff’s bad faith cause of action, “based on the genuine dispute doctrine.” It explained:

“The DME report indicates Plaintiff saw a chiropractor who ordered MRIs of the cervical and lumbar spines and mentioned a possible epidural steroid injection. The report notes that Plaintiff saw another physician who told her, her obesity was causing her pain. The report then notes that Plaintiff was seen by an orthopedist who recommended an epidural steroid injection. Although [Allstate’s expert] admits to not having yet reviewed her medical records, he opines that ‘she describes treatment far in excess of any that might reasonably have been necessary to lessen or resolve any symptoms resulting from her accident.’ In addition he states, ‘While by history an epidural steroid injection has been recommended, neither from her history or examination, does she show any problem for which an epidural steroid injection would be appropriate.’” Id. at *1026.

Accordingly, the court believed Allstate was permitted to rely on its expert’s opinion, who had a history of all of Ms. Zubillaga’s treating doctors to determine that her treatment was excessive and she did not need the expensive steroid injections.

The court also noted that after reviewing a report suggesting Plaintiff get the epidural injection, Allstate offered $27,084 (including the $15,000 Plaintiff had already received). However, then, after reviewing the DME report, Allstate concluded it did not have any basis to increase its valuation of Plaintiff’s claim. Id.

Letting Allstate off the hook, the court then stated that the decision to not offer any more money was based on the DME’s determination that Plaintiff did not need expensive epidural injections. According to the court, Allstate was entitled to rely on this expert report and therefore had legitimate bases for disputing Ms. Zubillaga’s claim in regards to the need for future epidural shots. The court stated, “[t]his was not a case where Allstate was simply unwilling to pay off on a policy; rather, on the table was an offer for $12, 084…. It does not appear unreasonable that Defendant did not offer up the entire $35,000 at this point since Defendant’s [DME] concluded Plaintiff’s treatment thus far had been excessive and epidural injections were unnecessary.” Id. at *1026.

Based thereon, the court granted summary judgment in favor of Allstate.

The Appeal

The Appellate Court explained that the 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. Nor does the rule alter the standards for deciding and reviewing motions for summary judgment. ‘The genuine issue rule in the context of bad faith claims allows a [trial] court to grant summary judgment when it is undisputed or indisputable that the basis for the insurer’s denial of benefits was reasonable—for example, where even under the plaintiff’s version of the facts there is a genuine issue as to the insurer’s liability under California law. (internal citations omitted.) On the other hand, an insurer is not entitled to judgment as a matter of law where, viewing the facts in the light most favorable to the plaintiff, a jury could conclude that the insurer acted unreasonably. Id. at *1028.

The Appellate Court cautioned that under the genuine dispute doctrine, an expert’s testimony will not automatically insulate an insurer from a bad faith claim. Rather, a case-by-case analysis is required. Id.

The Appellate Court concluded that the genuine dispute defense failed because Allstate’s expert’s opinions were rendered prior to the new report from Ms. Zubillaga’s pain management physician, but Allstate continued to rely on them through the arbitration, without ever consulting with their own expert again or conducting any further investigation. In the meantime, Ms. Zubillaga had received one lumbar steroidal epidural injection that cost $6,850, and had been recommended three more, if drug therapy proved ineffective. Her physician estimated these injections would each cost $12,000, and the medications and physical therapy would each cost $6,000 per year.

The Appellate Court stated that because Allstate never asked its expert to review the epidural treatments and recommendations, the continued reliance upon its early expert opinions as the basis for disputing the medical necessity or reasonable value of those treatments and recommendations may have been unreasonable.

The Appellate Court made clear, however, that Allstate was not obliged to accept Ms. Zubillaga’s treatments and recommendations “without scrutiny or investigation.” citing, Wilson v. 21st Century Ins. Co. (2007) 42 Cal.4th 713, *722.  To the extent it had good faith doubts, Allstate had the right to further investigate the basis for plaintiff’s claim by having its own expert reexamine his earlier opinions, having another physician review all of plaintiff’s medical records and offer opinions, or, if necessary, having plaintiff further examined by its expert or another defense doctor. Zubillaga at * 1029.

According to the court, what Allstate could not do, consistent with the implied covenant of good faith and fair dealing, was to ignore the treatments and recommendations, without adequately investigating them. Id. Therefore, the trial court was found to have erred by granting summary judgment based upon the genuine dispute doctrine. “Again, the genuine dispute rule does not relieve an insurer from its obligation to thoroughly and fairly investigate the insured’s claim, and a genuine dispute exists only where the insurer’s position is maintained in good faith and on reasonable grounds.” Id. at * 1030.

Lessons to be learned

The genuine dispute doctrine is raised as a defense in almost every bad faith action, especially where there is a dispute between expert opinions. However, Zubillaga makes clear that insurers wishing to invoke the genuine dispute doctrine cannot blindly rely on their expert’s earlier report in the face of new information. Insurers have a continuing duty to thoroughly investigate new information supporting a claim. When the insurer relies on a stale and out-of-date expert opinion to support a claim denial, the genuine dispute doctrine will not be available as a defense.