In Paslay v. State Farm General Insurance Company,1 the California Court of Appeal addressed an issue insureds and public adjusters regularly face: How quickly should you address, remediate, and repair damaged property to comply with your obligation to “mitigate” the damages to the property, without “prejudicing” the insurers investigation?

In Paslay, a roof drain failed during a heavy rain causing water to enter a bedroom ceiling and damage other parts of the house. State Farm arranged for the insureds to live in a rented residence for a period of time, made payments for some of the repairs, but denied coverage for certain repairs in the master bathroom, replacement of drywall ceilings, and installation of a new electrical panel after the insureds repaired those portions of the home without the pre-approval of State Farm. Additionally, a dispute arose over the extent of time that State Farm should be required to pay for the insured to live outside of the home.

When the disputes could not be reconciled, the insureds sued State Farm for breach of contract, bad faith, and elder abuse.

The insured argued that stripping the master bathroom was necessitated by discovery of additional water damage. Regarding the ceiling removal, the insureds claimed to have pointed out other areas of water intrusion damage to State Farm’s adjuster, and claimed that ceiling removal had been required in other places to assess the damage because access was limited. The insureds further contended that the electrical panel was determined as hazardous, and had to be upgraded as a condition to performing the repairs. Regarding alternative living expense and elder abuse claims, the insureds contended that State Farm had prematurely cut off rental payments causing their landlord to re-rent the leased house, forcing them to move back to the insured premises prematurely.

State Farm filed a summary judgment motion arguing that the policy provided no coverage for the additional items in dispute, and that given the “genuine dispute” over the scope of the loss that was covered under the policy, State Farm could not be liable for bad faith or elder abuse. The trial court granted State Farm’s motion in its entirety.

On appeal, although concluding there were triable issues of fact regarding the breach of contract claim, the court concluded that the bad faith claim failed under the genuine dispute doctrine, and that the evidence supporting the application of that doctrine precluded the existence of triable issues regarding the elder abuse claim.

Importantly, the appellate court found that State Farm’s investigation was not unreasonable, and therefore could not be the grounds for a bad faith claim for the following reasons:

Here, the Paslays curtailed State Farm’s ability to investigate the damage in the master bathroom and to the ceilings, notwithstanding the policy provisions regarding their ‘[d]uties [a]fter [l]oss,’ which included an obligation to ‘exhibit’ the damage property ‘as often as [State Farm] … require[d].’ Viewed in the light most favorable to the Paslays, the record shows that … during inspections of the house, the parties discussed asbestos abatement to the damaged ceilings, and [the insured] ‘expressed [his] concern that if water had intruded into the walls of the master bathroom, the potential for the development of mold existed.’ In a letter [the adjuster] noted [the insured’s] ‘feel[ing] there may be a potential for mold,” set forth the $5,000 mold coverage limit, and stated: ‘[W]e are currently in the process of awaiting the estimate from your contractor regarding the asbestos abatement for the ceiling damaged as a result of the water loss.’ …

[B]efore submitting any estimate regarding asbestos abatement, the Paslays removed the ceilings. At approximately the same time, [the insured and his contractor] examined the master bathroom for hidden water damage, and removed cabinets, fixtures, and other parts of the bathroom. [The insured] phoned [the adjuster], learned that he was unavailable, and requested an immediate investigation of the newly discovered damage. By the time [the adjuster] arrived at the house two days later, the debris from the master bathroom had been discarded. At some point, [the adjuster] was sent photographs displaying piles of debris. [The adjuster] subsequently informed the Paslays that the demolition of the bathroom ‘down to the framing’ prior to any agreement on the scope of work was prejudicial to State Farm.

On this record, there are no triable issues regarding the adequacy of State Farm’s investigation, as the Paslays removed the damaged property before State Farm had an opportunity to conduct a full assessment of the Paslays’ proposals and contentions. The record shows only that State Farm did what it could to assess the claimed losses before denying them. In our view, even if those denials were mistaken, nothing suggests that State Farm acted in bad faith. Summary adjudication was therefore proper on the bad faith claim. 

This case serves as an important lesson for policyholders and public adjusters alike—document everything and do not give the insurance company a reason to deny the claim because of an inability to fully evaluate the loss and its cause. Had the insureds properly photographed the damage they uncovered in the bathroom and submitted estimates to the insurer before doing the work, State Farm may have actually agreed to pay for those portions of the loss. And, if State Farm refused to pay despite having legitimate evidence of the damage and an estimate to repair the damage, the insureds would have not only had a viable breach of contract claim, but they would have had a viable bad faith claim.

When homes are damaged it is understandable that owners want to get everything repaired immediately. However, public adjusters can help to ensure not only that the appropriate scope of repairs are completed but that the loss is properly documented to give an insured the best chance at recovering full and fair compensation.

1 Paslay v. State Farm General Ins. Co. (No. B265348, filed 6/27/16).