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then contacted their homeowners’ insurance company, Allstate
Insurance Co. (Allstate), to make a claim for coverage. Allstate
advised petitioners that they were covered for property damage
caused by a third party.
The first repair estimate was approximately $102,000 to
$104,000. The repair costs, however, increased as further damage
occurred and was discovered. Due to disagreements with Allstate
regarding the repair cost estimates and Allstate’s alleged delay,
petitioners hired an attorney to aid in further negotiations with
Allstate.
In July 1988, petitioners filed suit against Allstate for
damages, including punitive damages, for Allstate’s alleged
breach of contract and breach of the statutory duty of good faith
and fair dealing under the California Insurance Code. The
parties then agreed to go through the arbitration process
provided for in the homeowners’ policy. In September 1990, the
arbitrator submitted an interim award. At that time, the
arbitrator ruled that petitioners’ home’s replacement cost value
was $128,084. He ordered Allstate to pay that amount minus the
cash discount and credit for payments previously made. He also
found that neither Allstate nor its employees had acted in bad
faith and ordered that further litigation on this matter should
cease. By stipulation, the parties agreed that no final award
would be entered at that time. Allstate proceeded to pay
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