Opinion ID: 1734436
Heading Depth: 1
Heading Rank: 11

Heading: bad faith theory

Text: The second assignment of error asserts the district court nonetheless wrongly ruled that Auto-Owners did not act in bad faith in failing to defend and indemnify Markel Ford. In order to claim bad faith in Auto-Owners' failure to defend or indemnify it, Markel Ford must show an absence of a reasonable basis by Auto-Owners for denying Markel Ford the benefits of the insurance contract and must prove Auto-Owners' knowledge or reckless disregard of a lack of a reasonable basis for the denial. See, Ruwe v. Farmers Mut. United Ins. Co., 238 Neb. 67, 469 N.W.2d 129 (1991); Braesch v. Union Ins. Co., 237 Neb. 44, 464 N.W.2d 769 (1991). As established in part IV(1) above, Auto-Owners had a reasonable basis for refusing to indemnify Markel Ford; thus, it did not act in bad faith in that regard. However, as Markel Ford points out, an insurer's duty to defend is broader than its duty to indemnify. See, Union Ins. Co. v. Land and Sky, Inc., 247 Neb. 696, 529 N.W.2d 773 (1995); Allied Mut. Ins. Co. v. State Farm Mut. Auto. Ins. Co., 243 Neb. 779, 502 N.W.2d 484 (1993). An insurer has a duty to defend its insured whenever it ascertains facts which give rise to the potential of liability under the policy. Allstate Ins. Co. v. Novak, 210 Neb. 184, 313 N.W.2d 636 (1981). More specifically, as suggested by one writer, under Novak, an insurer is obligated to defend if (1) the allegations of the complaint, if true, would obligate the insurer to indemnify, or (2) a reasonable investigation of the actual facts by the insurer would or does disclose facts that would obligate the insurer to indemnify. Robert Works, Nebraska Property & Liability Insurance Law § 11.2.2 (1985). See, Union Ins. Co., supra (insurer has duty to defend its insured whenever it ascertains facts which give rise to potential of liability under policy). As Auto-Owners had no duty to indemnify Markel Ford and as a reasonable investigation of the facts would have added nothing to what was contained in the complaint of the Iowa lawsuit, Auto-Owners was under no duty to defend Markel Ford in the Iowa lawsuit. In Seaboard v. Williams' NW Chrysler, 81 Wash.2d 740, 504 P.2d 1139 (1973), the attorney general of Washington brought suit against an automobile dealer, seeking to enjoin alleged unfair methods of competition and unfair or deceptive acts or practices and to secure a judgment for penalties as provided by statute. The insurer of the automobile dealer then brought a declaratory judgment action, seeking a judicial determination that it had no duty to defend the suit brought by the attorney general. The insurance contract provided that the insurance company would pay on behalf of the automobile dealer any sums which the automobile dealer was obligated to pay as the result of a final judgment for money damages resulting from, inter alia, unfair competition. The insurer also undertook to defend any suit seeking damages for unfair competition, even if such suit was groundless, false, or fraudulent. The Supreme Court of Washington held that the insurer was under no duty to defend the automobile dealer, as the suit by the attorney general was not one for unfair competition and thus did not come within the coverage of the policy. In A-Mark Fin. v. CIGNA Prop. & Cas.INA, 34 Cal.App.4th 1179, 40 Cal.Rptr.2d 808 (1995), an insured alleged that its insurer had a duty to defend it in a lawsuit which the insured claimed involved unfair competition. The insured argued that as Bank of the West v. Superior Court, 2 Cal.4th 1254, 833 P.2d 545, 10 Cal.Rptr.2d 538 (1992), which held that the type of suit the insured was involved in did not constitute unfair competition, was decided after its suit had commenced, a potential of liability existed, triggering the insurer's duty to defend. The California Court of Appeal disagreed, stating: In State Farm, for example, coverage turned on the interpretation by the court of a policy term. The insured argued that State Farm had a duty to defend because the term `accident' was ambiguous, giving rise to potential liability. ... The court disagreed, holding that [a]ppellants misapprehend the notion of `potential liability.' Potential liability deals with whether the insurer owes coverage to the insured based upon the facts known to the insurer or facts pleaded in the complaint, even if false.... Here, any potential for liability did not arise from disputed facts, but hinged on resolution of a legal question, i.e., whether the undisputed facts constituted an `accident' during the policy period. We know of no case suggesting that an insurer has a duty to defend where the only potential for liability turns on resolution of a legal question. ... . . . . We agree with the authorities cited above that a potential for indemnity cannot be based on an unresolved dispute concerning a purely legal question or question of policy interpretation when the question is resolved favorably to the insurer. To hold otherwise would put the insurer in an untenable position. Rarely has a legal issue arising in the context of a coverage dispute been resolved with absolute finality. Thus, the insurer would be required to provide a defense every time a demand was made, no matter how implausible the theory on which it was based. (Citations omitted.) A-Mark Fin., 34 Cal. App.4th at 1191-92, 40 Cal.Rptr.2d at 815-16. Accordingly, the district court did not err in concluding as a matter of law that Auto-Owners did not act in bad faith in refusing to defend or indemnify Markel Ford.