Sometimes an insurer declines coverage in either a first- or third-party context, and later, a court determines that this declination was in error and that coverage existed. Not infrequently in such circumstances, the policyholder asserts that the insurer did not conduct a thorough investigation prior to the declination and thus breached the implied covenant of good faith and fair dealing.

When an insurer fails to conduct an investigation that would have uncovered facts supporting the possibility of coverage, the insurer may be imputed with knowledge of those facts. Safeco Ins. of America v. Parks, 170 Cal. App. 4th 992 (2009). Interesting questions are presented where, during discovery in the ensuing bad faith litigation, the insurer discovers new facts that tend to support the denial of coverage. In such event, can an insurer rely on these new facts in arguing that its denial was reasonable and in good faith? The law is not entirely clear, and insurers and insureds – not surprisingly – may reach different conclusions.

Click here for the complete article previously published in The Recorder.