Low, Ball & Lynch’s

WEEKLY LAW RESUME

August 25, 2005 Issue   By: Ray Coates

Bad Faith – Genuine Dispute Doctrine – Punitive Damages

CalFarm Insurance Co. v. Krusiewicz

  Court of Appeal, Fourth District

(July 22, 2026)

The Genuine Dispute Doctrine protects insurers from general damages and punitive damages when they are wrong in a coverage decision.  This case examines its application.

Tadeusz and Betty Krusiewicz hired Laynescape, Inc. to perform landscaping work on their property, including construction of retaining walls.  The walls did not prevent moisture intrusion due to the failure of Laynescape to apply the proper number of coats of sealant to the back of the walls.  To prevent the damage from reoccurring, the back of the walls had to be resealed, which required removing back-filled soil and landscaping and replacing the soil and landscaping.  The damages claimed were $712,844, which included $533,762 to remove and replace the back-fill and landscaping. 

The Krusiewiczes sued Laynescape and CalFarm agreed to defend Laynescape.  CalFarm did so under a reservation excluding coverage for damage to the work product of the insured and costs for repairing the insured’s defective work.  During the litigation, CalFarm contended there was coverage for damage to the paint on the exterior of the wall but no coverage for repair or replacement of the wall.  An issue arose as to the cost of removing the soil and landscaping and replacing it in order to make repairs.  CalFarm obtained a coverage opinion which said such damages were not covered.  In settlement discussions thereafter, the attorney retained by CalFarm suggested to the Krusiewiczes’ attorney that they agree to binding arbitration with a general award for damages.  He advised him that this would require CalFarm to pay the entire amount.  As a result, the Krusiewiczes agreed.

At arbitration, a lump sum of $475,000 was awarded for the damages.  Judgment was entered on the arbitration award.  CalFarm paid the Krusiewiczes $80,000, based upon the cost of sandblasting and repainting the exterior wall and then filed a declaratory relief action to adjudicate the remainder of the award.  The Krusiewiczes and Laynescape filed cross-complaints against CalFarm for breach of contract and breach of the covenant of good faith and fair dealing.  The trial court ruled all of the costs were covered.  In addition, the court found CalFarm in bad faith and awarded punitive damages of approximately $1,457,000.

On appeal to the Court of Appeal, the judgment was affirmed except for the award of punitive damages.  The Court found that the statements made by defense counsel during the settlement conference bound CalFarm to pay the full amount of the arbitration award.  The attorneys’ representations that CalFarm would have no choice but to pay the arbitrator’s award if it was made in the form of a  general verdict constituted a non-ambiguous promise to pay the full  amount of the award.  However, the statement did not support an award of punitive damages.  That had to be based upon the breach of the contract.

The Court concluded that CalFarm’s decision to not pay for the cost of removal and replacement of back-fill and landscaping was objectively reasonable because the law in this regard was unsettled.  The Court stated that where there is a genuine issue as to an insurer’s liability, there is no bad faith imposed on the insurer.  The question in this case was whether the costs associated with removing the back-filled dirt and landscaping to gain access to the backside of the retaining wall, as well as replacing the dirt and landscaping, was part of the covered damages.  The Court stated that, under the current state of the law, reasonable minds could disagree on the answer.  Because the case law did not clearly resolve the issue one way or the other, CalFarm could reasonably take the position that the cost of removing and replacing the back-filled dirt and landscaping was not covered.  Their decision was objectively reasonable.  As such, CalFarm could not be liable for bad faith breach of the insurance policy. 

The court therefore affirmed that CalFarm was liable for the entire arbitration award but was not liable for the punitive damages, which portion of the decision was reversed.

COMMENT

A dissent asserted that the removal of the back-fill and landscaping and replacement was covered and that therefore CalFarm should be liable for bad faith.  This is an interesting case which warrants watching to see if it is further reviewed.

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