Gruenberg v. Aetna Insurance Company: A Look Back at a Landmark California Bad Faith Insurance Case

The fact that insurance companies cannot deny claims unreasonably or otherwise act in bad faith toward their policyholders seems so obvious that one would expect such has always been the case. But the truth is that the concept of bad faith insurance in California is not that old; the concept was still being laid down by the courts within the lifetime of many of you reading this blog, and litigation continues to this day clarifying and reinforcing the principle of good faith and fair dealing in insurance contracts. In this post we take a look back at one of the seminal cases in California bad faith insurance law – Gruenberg v. Aetna Insurance Company. If you have a California health insurance or life insurance claim that was unreasonably denied, or if your insurer is acting toward you in bad faith, contact Gianelli & Morris in Los Angeles to explore your options with a team of leading California insurance law attorneys.

Background of the Case

Gruenberg v. Aetna Insurance Company was decided by the Supreme Court of California on June 11, 1973. The case involved a bar and restaurant owner who filed an insurance claim when his property was damaged by fire. According to the policyholder, the insurers falsely implied to law enforcement that the owner had a motive to commit arson. This led to criminal charges being brought against the insured, which in turn prevented him from appearing for examination on the loss as required by the terms of the insurance policies, which provided the insurers with a basis to deny his claim. Such was the entire purpose behind the insurance companies’ allegations of possible arson, according to the restaurant owner, who filed a lawsuit against the three insurers, as well as an adjusting firm and one of its adjusters, and a law firm and its attorney/employee, of conspiring to deny his claim through these wrongful actions.

Procedural History and Proclamation of “Insurance Bad Faith”

Before trial, the defendants instituted a procedural move called a demurrer, which is a way of objecting to the pleading, claiming it is insufficient or inadequate. The trial court sustained the demurrer, and since the plaintiff didn’t amend the pleading to fix the complaint, the court dismissed the case.

The plaintiff appealed to the Supreme Court of California, which reversed the trial court and sent the case back, telling the trial court to overrule the demurrer. Although the state’s high court recognized deficiencies in the plaintiff’s complaint, the court held that “…it does allege in substance a breach on the part of defendant insurance companies of their duty of good faith and fair dealing which they owed the plaintiff.”

A footnote defending the court’s rationale noted that the insurance companies’ “…alleged scheme to avoid liability under the policies…” would be “in breach of an implied duty of good faith and fair dealing…” In fact, the phrase “good faith and fair dealing” was used 35 times by the California Supreme Court in its opinion. The court stated repeatedly throughout its ruling that such a duty is implied in every insurance contract.

The main issue for the court in Gruenberg focused on the defendants who were not insurance companies, i.e., the agent, adjusting firm, law firm and attorney. The court held that these defendants were not parties to the insurance contract and therefore did not owe a duty of good faith and fair dealing to the plaintiffs as was owed by the insurance companies. Once again, in ruling the noninsurance parties did not owe this duty of good faith, the court reinforced the duty owed by insurance companies.

Only one justice dissented from the majority ruling, and even that dissenting opinion “…does not deny that lack of good faith and fair dealing by an insurer in disposition of a contractual obligation exposes it to tort liability.” The dissent felt that the plaintiff’s complaint did not correctly put forward a cause of action for the court to decide, but the judge had no issue with finding an implied covenant of good faith and fair dealing in the insurance contract.

The Upshot

Gruenberg v. Aetna therefore stands strong for the position that a policyholder does have a legal cause of action in tort for an insurance company’s breach of the covenant of good faith and fair dealing implied in every insurance contract. That was 50 years ago, and although the requirement to treat policyholders fairly and in good faith has been reinforced in countless cases since then, insurance companies continue today to act in bad faith and deny valid claims for invalid reasons. When they do, Gianelli & Morris is here to take them on and hold them accountable for the damage done.

If your health or life insurance claim has been unreasonably delayed or wrongfully denied for improper reasons, call Gianelli & Morris at 213-489-1600 for a free consultation to review your case with a seasoned California insurance law attorney ready to fight for justice on your behalf.