The “Genuine Dispute” Game – how insurers rely on biased vendors, game the system, and rob you blind.

n 2015 a giant wildfire called the “Valley Fire” ripped through Mendocino County doing billions in damage. A couple of the nicest retired school teachers you’ll ever meet—Patricia and Leonard Fadeeff—evacuated. When they drove back to their Hidden Valley Lake home, at first they figured they were among the lucky ones—the house was standing. But it didn’t turn out that way.

Insurers love to talk about “smoke damage” because it sounds inconsequential. You know, you leave your popcorn pot on the stove a bit too long, the house gets smokey, you open a couple of windows, wipe down the kitchen cabinets, and you’re good. No insurance help needed.

But when a wildfire torches and vaporizes your neighbors’ homes, if you’re lucky and your house doesn’t burn, all of their stuff—half-used paint cans, televisions, half-eaten pizzas, drywall, used diapers—ends up in your house--in your HVAC, your insulation, inside your light fixtures and plugs and flooring. That’s not smoke—that’s toxic fire debris that requires tear out of parts of your house, and professional cleaning, which costs a bundle.

The Fadeeffs were insured by State Farm, which paid a bit to clean the house. But nowhere nearly enough., especially because the Fadeeffs are older and have some health issues. The house was making them sick. When the Fadeeffs made an additional claim, State Farm hired an “expert” to come over and give them a report. The expert, which State Farm hires all the time, always says the same thing: the real problem you have is that you like candles and you have a barbeque out back. In other words, the damage at the Fadeeffs’ house wasn’t the giant wildfire; the damage to their house was their own fault.

State Farm paid their vendor to give them a report which justified avoiding paying the Fadeeffs another $100,000. The report cost the insurer about $2500. And State Farm figured it could rest easy about being sued because how could it have been unreasonable? It relied on an expert—in other words, it had a “genuine dispute” with the Fadeeffs, so it could not have been in bad faith.

Good for State Farm. Not so good for the Fadeeffs.

Now some good news for California policyholders: the California Court of Appeal said no. Read their opinion and some great coverage on the case. Insurers should not be able to avoid liability for cheating customers by hiring biased vendors.