related to the reasonableness of Allstate's conduct.
For the reasons that follow, however, the court holds that defendant's reliance on the court's certification for interlocutory review is improper. Although the court takes full responsibility for the language in the prior order, the order was prepared by the parties. Moreover, the order simply used the "magic" language required by the Ninth Circuit for certification of interlocutory appeals. Having conducted the review at the time the certification was requested, the court is in the best position to determine the reliance, if any, that should be placed on the prior determination. Of note, the determination was made in a somewhat perfunctory manner, the court was influenced by other pertinent factors in agreeing to certify the petition (such as the fact that a contrary determination would resolve the case in its entirety), and the court did not take into account the collateral consequences that such a determination might have on plaintiffs. The simple fact is that the legal conclusion defendant wants to believe the court made earlier was not made by the court at that time.
Moreover, even if the court's prior ruling were to hold what defendant desires, as indicated previously, such a ruling is interlocutory in character and may be revisited prior to the entry of final judgment. See 1B Moore's Federal Practice §§ 0.404 and 0.404[4.-1] (1992). Given the consequences of this determination (namely dismissal of a portion of a claim), the court will review de novo the issue of whether there is a genuine dispute that would justify Allstate's conduct.
C. There Is A Genuine Issue on Waiver of The Policy Limitations Period In This Instance
The primary issue presented is whether, at the time defendant denied coverage, there existed a genuine dispute under California law on the issue of whether or not there can be a waiver of the one-year policy limitation period after the limitations period had expired. In determining whether any dispute in fact was genuine, the court also examines whether Allstate's reliance on any dispute was reasonable.
1. Allstate's Conclusion that Law 1990 Required Detrimental Reliance to Support Contention of Waiver
As indicated previously in this order, the court believes that Allstate misinterpreted the waiver doctrine. Although the court explained why it distinguished various cases cited by Allstate, see infra, the court cannot say that there was not a genuine dispute on this issue at the time Allstate made its decision to deny coverage, even in light of persuasive authority in major treatises and a basic understanding of the doctrine of waiver. It is unnecessary to rehash each of these opinions in detail. A case such as Magnolia Square Homeowners Assn. v. Safeco Insurance Co., 221 Cal. App. 3d 1049 (1990), for example, represents the unfortunately all-too-regular confusion between the doctrines of waiver and estoppel. Although the court believes that a close and careful reading of Magnolia Squares suggests that the court only addressed an estoppel argument, the opinion is clearly ambiguous. 221 Cal. App. 3d at 1063. Standing alone, this case would not have warranted Allstate's denial of coverage. But the case is not alone. Indeed, in footnote five of Prudential-LMI Com. Ins. v. Superior Court, 51 Cal.3d 674, 274 Cal. Rptr. 387, 798 P.2d 1230 (1990), the California Supreme Court, in dicta, favorably referred to the argument made by amicus curiae that conduct by an insurer after a time limit has run "cannot, as a matter of law, amount to a waiver." Id. at 690 n.5. The mere existence of the language, even as dicta, could be sufficient to protect Allstate from an allegation of bad faith. See, e.g., Opsal v. U.S.A.A., 2 Cal. App. 4th 1197, 1203 (1991) (although court declined to follow dicta in footnote of California Supreme Court decision, the court felt "constrained to say the Supreme Court's footnote suggestion was not 'unreasonable' and provided 'proper cause' to support [defendant's] denial of coverage"). Moreover, Allstate also had federal cases such as Becker v. State Farm Fire and Cas. Co., 664 F. Supp. 460, 461-62 (N.D. Cal. 1987), and Lally v. Allstate Ins. Co., 724 F. Supp. 760 (S.D. Cal. 1989), affirmed, 930 F.2d 28 (9th Cir. 1991), that clearly supported Allstate's position. Because these federal cases are not binding on California courts, they alone would not have provided a basis for Allstate's decision to deny coverage. Again, however, Allstate did not have any one of these cases alone. Instead, Allstate had all of these cases together.
Despite the abundance of authority to the contrary, especially in the carefully reasoned analyses that correctly distinguish between waiver and estoppel, Allstate did have before it several cases that taken together support the argument that, as a matter of law, there cannot be a waiver after the limitations period has expired. Given the contrary authority, none of Allstate's cases alone might be sufficient to justify Allstate's conduct in denying coverage. However, taken together, these cases (the confusion of Magnolia Squares, the dicta in the Prudential-LMI footnote, and the holding in the federal opinions of Becker and Lally), require the finding that, at a minimum, it was not unreasonable for Allstate to decide that there could not be a waiver.
2. Subsequent Development of the Law Supports Finding that Allstate's Reasonably Believed Waiver Required Detrimental Reliance
In addition to the review of the law at the time Allstate made its decision to deny coverage, the Ninth Circuit's opinion in Intel provides further support for the contention that there was, at a minimum, a genuine dispute in the law at the time Allstate made its decision. Because the court will not apply a "hindsight" test, the mere fact that subsequent cases, such as Intel, have held that Allstate's decision now represents the law does not automatically mean that the defendant's position was reasonable when taken at that time. Similarly, had Intel reached the completely opposite result, it would not automatically mean that Allstate's decision was unreasonable. At the same time, the fact that less than two years later a panel of the Ninth Circuit came to the same conclusion as Allstate lends support to Allstate's argument that it correctly interpreted an unfortunate trend in insurance law. Although this court continues to believe that both Allstate and the Ninth Circuit have misinterpreted the waiver doctrine in insurance cases, the proper focus of the bad faith claim is on whether there was a reasonable basis for the decision, not on whether the decision was correct.
3. Belief That There Had Not Been Detrimental Reliance Was Not Unreasonable
Recognizing that there was a genuine dispute on the issue of whether an insurance waiver requires detrimental reliance, the secondary issue is whether it was reasonable for Allstate to believe that there had not been such reliance. Notably, Allstate has not presented any evidence that it made such an inquiry or even considered the possibility that the passage of time and the change in law had prejudiced plaintiffs to their detriment. It is clear from Allstate's position that it generally did not believe such detriment to be present. Under the circumstances, the court cannot find such a belief to be unreasonable, although again, this order indicates that the court does find such a belief to be erroneous. Importantly, Allstate takes the position that Intel did not change the law, but merely restated the law as it had previously existed. The court does not believe this to be a correct statement of the development of waiver law in insurance cases, but it does comport with the position taken by Intel. Accordingly, the court holds that it was not unreasonable for Allstate to conclude that the law had not been changed, but instead had for some time refused to recognize the waiver doctrine in insurance cases. As a result, it was also not unreasonable for Allstate to believe that plaintiffs suffered no prejudice as a result of the denial of coverage. Despite the error of its ways, the law does not punish Allstate for such good faith beliefs. Accordingly, the court must grant Allstate's request for summary judgment on the bad faith claim, but only to the extent the claim relates to Allstate's ultimate denial of coverage.
V. The Scope of Defendant's Conduct Goes Beyond the Prior Inquiry
Even though the court has concluded that a genuine dispute existed on the issue of whether there can be a waiver after the policy limitations period expired, such a ruling does not preclude a finding of bad faith entirely. Importantly, plaintiffs' complaint alleged such conduct as inadequate investigation of the claim, failure to attempt to reach a prompt, faithful and equitable settlement, unreasonable valuation of the loss, and failure to provide a prompt explanation for the denial. This list is not exhaustive of the allegations that remain, but illustrative of alleged conduct that occurred prior to the existence of a genuine dispute on the waiver issue, and certainly prior to Allstate's reliance on such a theory. For example, whether Allstate's offers made during the negotiation period were so unreasonably low that they constituted bad faith negotiations is an issue that is not resolved by the court's determination that Allstate began relying on a genuine dispute in law in 1990. As a result, even though the issue of waiver is sufficiently in dispute to excuse defendant's assertion of the defense from the point in time that defendant relied on the dispute, Allstate's negotiation conduct from 1985 to 1990 is not, as a matter of law, excused by the after-the-fact discovery of a genuine dispute.
Importantly, the reasonableness rule the drives the good faith / bad faith analysis rests on the principle that where a defendant relies on a reasonable interpretation of the law, such conduct will not later be determined to be in bad faith. For example, in Gruenberg v. Aetna Ins. Co., 9 Cal.3d 566, 108 Cal. Rptr. 480, 510 P.2d 1032 (1973), the California Supreme Court stated that where an insurer, in discharging its contractual duties, "fails to deal fairly and in good faith with its insured by refusing, without proper cause, to compensate its insured for a loss covered by the policy, such conduct may give rise to a cause of action in tort for breach of an implied covenant of good faith and fair dealing." Id. at 574 (emphasis added). Restated, did the insurer have "proper cause" when it made the decision to engage in the conduct in question? Specifically, the reasonableness of an insurer's conduct must be determined based on the basis of the information known to it at the time of denial. See, e.g., Austero v. National Cas. Co., 84 Cal. App. 3d 1, 32, 148 Cal. Rptr. 653 (1978) ("In evaluating the evidence to see if there was any unreasonable conduct by the [insurer], it is essential that no hindsight test be applied. The reasonable or unreasonable action by the [insurer] must be measured as of the time it was confronted with a factual situation to which it was called upon to respond.").
If an insurer is attempting, albeit in error, to comply with the law, the insurer will not be found in bad faith. This analysis, however, is dramatically altered when there is no reliance on specific case law. For example, if an insurer purposely acted in bad faith (i.e., an insurer, without justification, intentionally refused coverage it believed was legitimate), the insurer's intent at the time the insurer acted does not magically change simply because of a later determination or belief that coverage was not in fact required. Such bad faith conduct cannot be excused by the discovery of a case that provides an insurer with an after-the-fact justification for the its prior behavior.
Understandably, it may be difficult in many instances to prove such intent, especially when it is unclear what the insurer relied on in discharging its contractual obligations. And the court offers no opinion on whether plaintiffs can make such a showing in the instant case. It is clear, however, that Allstate did not rely on the "there can be no waiver as a matter of law" argument until some point in 1990. The court knows this partly because the cases Allstate relied on were not previously published (Magnolia Squares was published in 1990, Prudential-LMI was published in 1990, and Lally was published in 1989), and partly because of the court's review of the two coverage letters written in 1990. As there are allegations of bad faith conduct prior to 1990, partial summary judgment cannot be granted on the issue of bad faith prior to Allstate's reliance on a genuine dispute of law in 1990.
IT IS HEREBY ORDERED that even if plaintiffs are now required to prove detrimental reliance as explained in Intel, plaintiffs have shown sufficient detrimental reliance on Allstate's confirmation of coverage so that Allstate's conduct constitutes a waiver.
IT IS HEREBY FURTHER ORDERED that defendant Allstate's motion for partial summary adjudication is GRANTED in part. The court did not rely on its earlier certification of the waiver issue for interlocutory review, but instead conducted a complete review of the case law. This review requires the conclusion that at the time Allstate denied coverage in 1990, there was a genuine dispute on the issue of whether there can be a waiver of the policy limitations period after the period has expired. Accordingly, Allstate's denial was not unreasonable.
IT IS HEREBY FURTHER ORDERED that defendant Allstate's motion to dismiss the tort claim entirely is DENIED. Despite the existence of a genuine dispute on the waiver issue, plaintiffs' claim for bad faith should not be dismissed. Allstate did not rely upon this genuine issue of dispute until 1990, and accordingly, Allstate's prior conduct could have been in bad faith. As to this issue of whether Allstate's conduct prior to the denial of claim was in bad faith, there remains a factual dispute which cannot be resolved at this time.
IT IS SO ORDERED.
May 21, 1993
GORDON THOMPSON, JR.
United States District Judge