## Facts

- Jerome Gruenberg owned and operated a Los Angeles cocktail lounge and restaurant, insured against fire loss for $35,000 total by Aetna, Yosemite, and American.
- A fire occurred on November 9, 1969; after an argument with an arson investigator, Gruenberg was arrested.
- The insurers retained P. E. Brown & Co. to investigate; its adjuster, Carl Busching, inspected the premises and later authorized debris removal.
- Gruenberg was criminally charged with arson and insurance fraud; the insurers retained outside counsel (Cummins) regarding the fire loss claim.
- The policies required an examination under oath upon request; while the criminal case was pending, the insurers demanded such an examination.
- Gruenberg refused to submit to an examination under oath while criminal charges were outstanding but stated he would cooperate after the criminal matter ended.
- Gruenberg alleged the insurers and their agents accused him of arson and fraud without probable cause, collaborated to bring about his prosecution to deprive him of policy benefits, and used his refusal to appear for an examination under oath as a pretext to deny the claim.
- The criminal charges were later dismissed; Gruenberg sued insurers, adjusters, and insurer-retained counsel for tortious breach of the implied covenant of good faith and fair dealing, seeking economic and emotional-distress damages.
- Defendants demurred; the trial court sustained the demurrers with leave to amend, Gruenberg declined to amend, and judgment of dismissal was entered.

## Issues

1. Whether the complaint stated a tort claim against the insurers for breach of the implied covenant of good faith and fair dealing in investigating, processing, and denying a first-party fire-loss claim.
2. Whether the same bad-faith tort claim could be maintained against non-insurer defendants (independent adjusters and the insurers’ attorneys) who were not parties to the insurance contracts.
3. Whether causation and damages were adequately pleaded where the denial was formally based on the insured’s refusal to submit to an examination under oath.

## Decision

- The dismissal was reversed as to the insurer defendants: the complaint stated a tort claim for breach of the implied covenant of good faith and fair dealing.
- The dismissal was affirmed as to the non-insurer defendants (adjusting firm, individual adjuster, and insurer-retained law firm): they were not subject to direct liability for breach of the implied covenant because they were not contracting parties.
- The allegations were sufficient at the pleading stage to treat the stated policy-condition ground for denial as pretext and to plead causation and damages.

## Legal Principles

- Every insurance contract includes an implied covenant of good faith and fair dealing requiring the insurer to investigate, process, and evaluate claims fairly and to refrain from unreasonable or malicious claim denial.
- A breach of the implied covenant by an insurer may sound in tort and support consequential damages beyond policy benefits, including economic loss and emotional-distress damages, when adequately caused by the bad-faith conduct.
- An insurer may not create, instigate, or exploit circumstances that impede the insured’s ability to satisfy policy conditions and then rely on the insured’s resulting noncompliance as a forfeiture ground.
- The implied covenant duty arises from the contractual insurer-insured relationship; non-insurer adjusters and insurer-retained attorneys, as nonparties to the policy, are not directly liable for tortious breach of that covenant (though their conduct may be attributable to the insurer under agency principles).

## Conclusion

The court held that an insured may pursue a tort claim against insurers for bad-faith claim handling and denial where the complaint alleges malicious conduct and a pretextual reliance on policy conditions, but the same implied-covenant tort claim does not lie directly against independent adjusters or insurer-retained counsel who lack contractual privity with the insured.


Gruenberg v. Aetna Ins. Co., 510 P.2d 1032 (Cal. 1973)