Low, Ball & Lynch’s

WEEKLY LAW RESUME

March 9, 2026 Issue  By: Ray Coates

Bad Faith - Negligent Investigation and Handling

Magda Benavides v. State Farm General Insurance Company

 (February 23, 2006)

Court of Appeal, Second District

California case law has long held that there is no liability for bad faith where there is no coverage. This case addressed the issue of whether there is liability for negligent handling of a claim where there is no coverage.

Magda Benavides owned a ground floor condominium in Santa Monica, California. Mold was found in the exterior walls of the property, including the walls adjacent to her unit. Mold was subsequently found inside her unit. Ms. Benavides was advised to move out of her unit. She submitted a claim for additional living expenses to State Farm General Insurance Company. State Farm investigated the claim, and denied it based upon a mold exclusion.

Ms. Benavides sued State Farm and an upstairs neighbor for damages. A jury found there was no coverage and no breach of the insurance contract. However, it also found that State Farm negligently investigated the claim and caused Ms. Benavides $260,000 in damages.

State Farm appealed.

The Court of Appeal reversed the judgment on the jury verdict. The Court noted that the State Farm insurance policy issued to the plaintiff contained a mold exclusion. However, if the mold developed due to water from the neighbor’s upstairs unit, the loss was covered. The issue of whether the plaintiff’s loss was caused by mold as a result of water from the upstairs unit was submitted to the jury for determination. The jury found that water from the upstairs unit was not the predominant cause of mold in the plaintiff’s unit. No covered efficient proximate cause of the loss was proven.

The Court stated that tort liability to an insured only lies where there has been a breach of the implied covenant of good faith and fair dealing. An insured, to establish a breach of the covenant of good faith and fair dealing, must first show benefits were due under the policy, and the benefits were withheld without proper cause. A claim for breach of the implied covenant does not exist absent a covered loss. Thus, if an insurer’s investigation of a loss results in a correct conclusion of “no coverage,” no tort liability arises for breach of the covenant of good faith and fair dealing.

Furthermore, there is no tort liability for improperly investigating a first-party insurance claim where there is no coverage. Where no benefits are due, a negligent investigation does not frustrate the insured’s right to benefits of the contract. An insured who is not entitled to insurance proceeds has suffered no injury, no matter how the investigation was conducted. Conduct amounting to breach of contract becomes tortious only when it violates a duty independent of the contract arising from principles of tort law. The negligence claim of Ms. Benavides did not constitute a claim other than the contractual duty owed to her. Thus, her negligence verdict and judgment were reversed. The Court stated that other decisions holding that there might be liability independent of coverage had not considered recent Supreme Court decisions limiting tort liability in a breach of contract situation.

The judgment, in favor of Ms. Benavides and against State Farm, was reversed.

COMMENT        
       
This is a very important decision for its holding that, absent extenuating circumstances, there is no bad faith liability independent of coverage. The decision is well written and worthy of review for those handling such problems.

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