Opinion ID: 706879
Heading Depth: 1
Heading Rank: 3

Heading: Trial issues regarding the bad faith negotiation claim

Text: 21
22 The Aceveses took two claims to trial--a breach of contract claim on the policy and what remained of their bad faith claim after the district court entered partial summary judgment on that claim. Our ruling that Allstate was entitled to summary judgment on the contractual claim does not require us to rule that it is entitled to judgment on the bad faith claim. Therefore, we still review the Aceveses' appeals from several trial rulings that excluded evidence of Allstate's bad faith. We review the court's evidentiary rulings for abuse of discretion and prejudice. Roberts v. College of the Desert, 870 F.2d 1411, 1418 (9th Cir.1988). To the extent that the district court applied California law to rule on these questions, we review its application of California law de novo. See Salve Regina College v. Russell, 499 U.S. 225, 231, 111 S.Ct. 1217, 1220, 113 L.Ed.2d 190 (1991). 23 Before we consider the Aceveses' claims on appeal, however, we explain the precise nature of the bad faith claim that went to trial, a bad faith negotiation theory. When the district court ruled on Allstate's motion for summary judgment, it divided the Aceveses' bad faith claim into two separate theories. The first theory, bad faith denial, alleged that Allstate ultimately denied the Aceveses' coverage claim in bad faith in 1990. The district court granted summary judgment on this theory. 827 F.Supp. at 1486. The second, bad faith negotiation, alleged that Allstate stalled negotiations for five years from 1985 to 1990, until it could find a coverage opinion with a plausible legal reason why it could deny coverage. The district court denied summary judgment on this theory. Id. at 1486-88. 24 The district court held that Allstate was entitled to summary judgment on the bad faith denial theory because Prudential, Becker, and other cases gave Allstate a good faith basis to argue that the Aceveses' coverage claim was time-barred. Id. at 1485-86. However, the district court's ruling that Allstate did not deny the Aceveses' claim in bad faith still allowed the possibility that Allstate acted in bad faith in other respects. The ruling left open the possibility that Allstate might be liable for having negotiated in bad faith to stall a final settlement, until it could find a reason allowing it to argue in good faith that the Aceveses were not entitled to coverage: Such bad faith conduct [could not have been] excused by the discovery of a case [namely, Prudential,] that provide[d Allstate] with an after-the-fact justification for its prior behavior. 1 Id. The district court described the cutoff date between Allstate's actions in furtherance of negotiation and its actions in furtherance of denial of the Aceveses' coverage claim as the date when the company first relied on legal advice that the Aceveses' coverage claim was probably time-barred. See id. at 1487. The partial summary judgment ruling precluded the Aceveses from arguing at trial that Allstate denied them coverage unreasonably, but allowed them to prove that Allstate investigated the claim inadequately, stalled settlement negotiations, and undervalued the loss during negotiation from 1985 to 1990. See id. This distinction is central to the first set of evidentiary rulings that the Aceveses challenge. 25
26 inadmissible 27 The district court ruled after trial that Allstate did not negotiate in bad faith. The Aceveses argue that the court excluded their best evidence of Allstate's bad faith negotiation, the way in which Joyce Almeida, their adjuster from August 1989 until denial, handled their claim. They assert that she received a coverage letter in January 1990 opining that Allstate could not invoke the one-year suit limitation as a defense, but stalled negotiations to buy time for a more favorable coverage letter, which she received in July 1990. This evidence, they argue, would have constituted evidence that Allstate's representative negotiated in bad faith. 28 The district court excluded the evidence because it found that all of the acts alleged and attributed to Almeida occurred after the cutoff date. To be relevant to the bad faith negotiation theory rather than the bad faith denial theory, Almeida's conduct needed to have occurred before the cutoff date. See Fed.R.Evid. 401. 29 In determining the negotiation-denial cutoff date, the district court, consistent with its earlier grant of partial summary judgment, as affirmed on reconsideration, looked to when Allstate first began to rely on outside legal advice that it could legally deny the Aceveses coverage because of the one-year suit limitation. See 827 F.Supp. at 1487-88. In other words, the relevance of Almeida's conduct to Allstate's bad faith negotiation depended on when Allstate first relied on the advice of counsel. See Fed.R.Evid. 104(b). Since the suit was tried without a jury, the district court made the factual determination as to when Allstate started to rely on advice about the suit limitation, and we review its finding for clear error. See Fed.R.Civ.P. 52(a). 30 The trial record indicates that Allstate first received the advice of counsel about the suit limitation on January 12, 1990. The outside counsel's letter advised that Allstate has a very good chance of ultimately prevailing on the insureds' claim based on the one year policy limitation. 2 The district court did not clearly err when it determined that January 12, 1990, was the cutoff date between Allstate's bad faith negotiation conduct, on which the district court had denied summary judgment, and its bad faith denial conduct, on which it had granted summary judgment. 31 All of the Aceveses' evidence regarding Almeida's conduct falls on or after January 12, 1990. Thus, the district court did not abuse its discretion in excluding evidence along this line of inquiry as irrelevant to whether Allstate stalled negotiations with the Aceveses in bad faith until it could find a plausible reason to deny them coverage. 32
33 faith 34 The Aceveses sought to introduce evidence of Allstate's negligent handling of their claim. They first sought to introduce evidence indicating that Allstate claims adjusters were inadequately trained to investigate earth movement claims. Later, they sought to establish a standard of care for adjusters for maintaining an original claim file. Later still, they sought to establish a standard of care regarding responsiveness to settlement offers by the insured. 35 We conclude the district court did not abuse its discretion or misapply state law in excluding the evidence as irrelevant to the level of intent necessary to prove bad faith. In California, mere negligence is not enough to constitute unreasonable behavior for the purpose of establishing a breach of the implied covenant of good faith and fair dealing in an insurance case. National Life & Accident Ins. Co. v. Edwards, 119 Cal.App.3d 326, 339, 174 Cal.Rptr. 31, 39 (1981). The district court found that all three pieces of testimony, had they been admitted, would have established either a negligence standard of care or suggested a breach of such a standard. The district court did not abuse its discretion in excluding the evidence as irrelevant. 36
37 claims adjuster 38 Last, the Aceveses sought to introduce evidence that the standard of care that Allstate claims adjusters owed to the Aceveses did not depend on whether they were represented by counsel. This evidence would have helped them show that Allstate's adjusters improperly withheld information that Allstate should have disclosed, and relied instead on the Aceveses' counsel to disclose it to them. 39 The district court held the adjuster to the correct standard of care. Allstate owed the Aceveses a duty of good faith and fair dealing, to settle their claim without injuring their right to receive the benefits of their policy. See Egan, 24 Cal.3d at 818, 169 Cal.Rptr. at 695, 620 P.2d at 145. The Aceveses' evidence would only be relevant if Allstate, to fulfill its duty, needed to disclose the same information to them irrespective of whether they were represented by counsel. California law is not entirely clear on whether Allstate's standard of care depended on the Aceveses' representation by counsel. In such situations, a federal court is bound to consider all the available data and use its best judgment to rule as it thinks the California Supreme Court would rule. See State Farm Mut. Auto. Ins. Co. v. Davis, 937 F.2d 1415, 1418 (9th Cir.1991), appeal after remand, 7 F.3d 180 (9th Cir.1993). 40 We think the district court correctly interpreted the available data, California appellate court decisions and state insurance statutes, as indicating that the duty did vary. The California Insurance Code relieves insurers of certain duties during claim investigation and negotiation when the insured is represented by counsel. See, e.g., Cal.Ins.Code Secs. 2070.1 (requiring the insurer of a corrosive-soils loss to notify the insured thirty days before the expiration of the statute of limitations), 11580.2(k) (imposing the same duty on the insurer of an uninsured-motorist loss). There are also some circumstances in which an insured may not establish estoppel if represented by counsel, but may successfully prove estoppel if not represented. See, e.g., Wilhelm v. Pray, Price, Williams & Russell, 186 Cal.App.3d 1324, 1332, 231 Cal.Rptr. 355, 358 (1986). Under these circumstances, it was more prudent for the district court to predict that the California Supreme Court would not impose a fixed standard of conduct on insurers negotiating with represented and unrepresented insureds than to predict the opposite. 41 Having set the correct legal standard, the district court did not abuse its discretion in ruling the Aceveses' evidence was irrelevant. All the evidence the Aceveses sought to introduce would have shown that Allstate was less forthcoming to them after they hired an attorney. Allstate's conduct after the Aceveses retained counsel did not constitute a breach of its standard of care. 42 In short, we conclude the district court did not abuse its discretion in its ruling on all of the rejected evidence from which the Aceveses appeal. These appeals are the only challenges the Aceveses bring against the district court's post-trial findings and conclusions on the bad faith negotiation claim. We thus affirm this judgment by the district court. 43