Insurance Bad Faith


California Insurance Bad Faith

What is insurance bad faith in California?  When consumers and insurance companies enter into an insurance contract, there is an actual and implied agreement taking place.  The consumer promises to pay premiums to the insurance company, and in exchange the insurance company must treat the insured fairly, must indemnify the consumer for their negligent acts, and must not put the insurance company’s financial interests before those of the consumer.   

In real life, it is rarely that simple. Insurance companies regularly deny coverage without valid reason, take unreasonable investigate steps with the underlying motive of denying legitimate claims, attempt to avoid settling claims, and generally put their own interests before those of the insureds who dutifully pay monthly premiums to the insurance company and expect to be treated fairly when something bad happens.  

There are numerous way and means by which an insurance company can act in bad faith, including the denial of a valid claim, only paying part of the sums that should be paid, refusing to pay the cost of defense of a third party claim, refusing to settling with another party, failing to properly investigate a claim, undue delay in the claims handling process, and canceling a policy in an attempt to avoid paying the claim, among others. All of these examples of insurance bad faith are based on the same motive shared by many insurance companies – to avoid making payments.

Far too often in the auto accident context as well as in other injury claims, insurance companies refuse to settle claims made against their insureds, even when it is clear that their insured is at fault. By doing so, the insurance company is forcing the injured party, called the “plaintiff”, to sue the insured, called the “defendant.” 

Fortunately, California law provides consumers with a remedy when their insurance company puts their own interests before those of the insured, which often means that the insurance carrier is breaching their duty of good faith and fair dealing to their insured when the carrier refuses without proper cause to compensate its insured for a loss covered by the policy, or fails to settle claims against their insured resulting in the insured being sued.  

Why Do Insurance Companies in California Engage in Bad Faith Conduct?

The short answer is because they view your premium dollars as “their money” and not your money that they are holding to protect you, the consumer, when something bad happens.  If insurance companies actually handled claims fairly and properly, there would be no need for plaintiff bad faith lawyers, such as those in our office.  If insurance companies paid fairly, on time, and honored their duty of good faith and fair dealing, then lawyers wouldn’t be needed! 

What Is a First Party Insurance Bad Faith Claim?

A first party claim is when an insured brings an action against their own insurance company for breach of contract and for breach of the covenant of good faith and fair dealing.  

“It is well settled that if an insurer, in discharging its contractual responsibilities, ‘fails to deal fairly and in good faith with its insured by refusing, without proper cause, to compensate its insured for a loss covered by the policy, such conduct may give rise to a cause of action in tort for breach of an implied covenant of good faith and fair dealing.’ Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 574 [108 Cal.Rptr. 480, 510 P.2d 1032].

When such a breach occurs, the insurer is ‘liable for any damages which are the proximate result of that breach.’ (Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910, 925 [148 Cal.Rptr.389, 582 P.2d 980].)

When an insurer’s tortious conduct reasonably compels the insured to retain an attorney to obtain the benefits due under a policy, it follows that the insurer should be liable in a tort action for that expense. The attorney’s fees are an economic loss – damages-proximately caused by the tort. (Mustachio v. Ohio Farmers Ins. Co. (1975) 44 Cal.App.3d 358, 118 Cal.Rptr. 581.

Here is an example of a common situation where an insurance company engages in bad faith:

An insured, who carries a $100,000 Uninsured/Underinsured Policy with ABC Insurance Company is involved in a car crash where the other driver was at fault. It turns out that the other driver only carried the California state minimum amount of coverage, which is only $15,000 in California. The insured was injured, incurred $50,000 in medical bills, underwent months of rehabilitative treatment, and lost income.  After settling with the liable driver’s insurance company, called the “3rd party driver” for their policy limits of $15,000, the insured then tenders the claim to their own insurance company, which is now a 1st party claim.  The insured expects their insurance company to step up and properly pay the claim, as they should.  But it doesn’t always turn out that way, because the insurance company wants to keep the insured’s money, even if doing so hurts the insured. 

Since California is a “non-stacking” state, the insured can recover up to $85,000 more from their own insurance company. Remember, the insured’s own policy is $100,000 and they received $15,000 from the 3rd party, leaving a balance of $85,000 more that the insured can collect.  However, despite receiving the medical records, the bills, the wage loss proof, and despite the insurance company being aware that they are contractually obligated to make their insured whole – they either deny the claim, come up with some excuses as to why they cannot property evaluate the claim, or make some ridiculous settlement offer – let’s say $1,000.  

That’s right, despite being aware that their insured was injured, despite being aware that their insured missed work and lost money, and despite being aware that their insured incurred $50,000 in medical bills, the insured’s own insurance company offers $1,000, and says “You already received $15,000 from the other party, we’ll pay you $1,000, we think you’ve been made whole.”  

How can they do this, you might ask?  The answer is that you can never underestimate an insurance company’s abilities to come up with baseless and unfair reasons for claim denials.  They might say that the insured had “degenerative” or “preexisting” issues and that their theory is that the medical treatment was not car crash related, rather it was due to those “hidden and underlying issues.”  They might claim that the insured’s doctors cannot be trusted and that the insured needs to be evaluated by the insurance company’s own doctor, the one the insurance company pays a million dollars a year to for the purpose of rejecting claims.  

How Does the Insured Establish the Insurance Company’s Bad Faith?

The insured must show that the insurer withheld benefits due under the policy and that the withholding was unreasonable or without proper cause.  

The actionable withholding of benefits may consist of the denial of benefits due; it may consist of paying less than was due; or it may consist of unreasonably delaying payments due. See [Major v. Western Home Ins. Co. (2009) 169 Cal.App.4th 1197, 1209 [87 Cal.Rptr.3d 556]. 

The Elements of a First Party Bad Faith Claim for Failure to Properly Investigate

California Civil Jury Instruction 2332 spells out the elements needed to prove first party bad faith for failure to properly investigate a claim.

Claim—Essential Factual Elements

[Name of plaintiff] claims that [name of defendant] acted unreasonably, that is, without proper cause, by failing to conduct a proper investigation of [his/her/its] claim. To establish this claim, [name of plaintiff] must prove all of the following:

1. That [name of plaintiff] suffered a loss covered under an insurance policy issued by [name of defendant];

2. That [name of plaintiff] properly presented a claim to [name of defendant] to be compensated for the loss;

3. That [name of defendant], failed to conduct a full, fair, prompt, and thorough investigation of all of the bases of [name of plaintiff]’s claim;

4. That [name of plaintiff] was harmed; and

5. That [name of defendant]’s failure to properly investigate the claim was a substantial factor in causing [name of plaintiff]’s harm.

When investigating [name of plaintiff]’s claim, [name of defendant] had a duty to diligently search for and consider evidence that supported coverage of the claimed loss.

Sources and Authority

“[A]n insurer may breach the covenant of good faith and fair dealing when it fails to properly investigate its insured’s claim.” (Egan v. Mutual of Omaha Insurance Co. (1979) 24 Cal.3d 809, 817 [169 Cal.Rptr. 691, 620 P.2d 141].)

“To fulfill its implied obligation, an insurer must give at least as much consideration to the interests of the insured as it gives to its own interests. When the insurer unreasonably and in bad faith withholds payment of the claim of its insured, it is subject to liability in tort. And an insurer cannot reasonably and in good faith deny payments to its insured without fully investigating the grounds for its denial.” (Frommoethelydo v. Fire Insurance Exchange (1986) 42 Cal.3d 208, 214–215 [228 Cal.Rptr. 160, 721 P.2d 41], internal citation omitted.)

“When investigating a claim, an insurance company has a duty to diligently search for evidence which supports its insured’s claim. If it seeks to discover only the evidence that defeats the claim it holds its own interest above that of the insured.” (Mariscal v. Old Republic Life Ins. Co. (1996) 42 Cal.App.4th 1617, 1620 [50 Cal.Rptr.2d 224].)

“[The insurer], of course, was not obliged to accept [the doctor]’s opinion without scrutiny or investigation. To the extent it had good faith doubts, the insurer would have been within its rights to investigate the basis for [plaintiff]’s claim by asking [the doctor] to reexamine or further explain his findings, having a physician review all the submitted medical records and offer an opinion, or, if necessary, having its insured examined by other physicians (as it later did). What it could not do, consistent with the implied covenant of good faith and fair dealing, was ignore [the doctor]’s conclusions without any attempt at adequate investigation, and reach contrary conclusions lacking any discernable medical foundation.” (Wilson v. 21st Century Ins. Co. (2007) 42 Cal.4th 713, 722 [68 Cal.Rptr.3d 746, 171 P.3d 1082], original italics.)

Types of California Insurance Bad Faith Claims

California Insurance Code §790.03 lists as unfair methods of competition and unfair and deceptive acts or practices of insurance companies: 

(h) Knowingly committing or performing with such frequency as to indicate a general business practice any of the following unfair claims settlement practices:

(1) Misrepresenting to claimants pertinent facts or insurance policy provisions relating to any coverages at issue.

(2) Failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies.

(3) Failing to adopt and implement reasonable standards for the prompt investigation and processing of claims arising under insurance policies.

(4) Failing to affirm or deny coverage of claims within a reasonable time after proof of loss requirements have been completed and submitted by the insured.

(5) Not attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear.

(6) Compelling insureds to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by the insureds, when the insureds have made claims for amounts reasonably similar to the amounts ultimately recovered.

(7) Attempting to settle a claim by an insured for less than the amount to which a reasonable person would have believed he or she was entitled by reference to written or printed advertising material accompanying or made part of an application.

(8) Attempting to settle claims on the basis of an application that was altered without notice to, or knowledge or consent of, the insured, his or her representative, agent, or broker.

(9) Failing, after payment of a claim, to inform insureds or beneficiaries, upon request by them, of the coverage under which payment has been made.

(10) Making known to insureds or claimants a practice of the insurer of appealing from arbitration awards in favor of insureds or claimants for the purpose of compelling them to accept settlements or compromises less than the amount awarded in arbitration.

(11) Delaying the investigation or payment of claims by requiring an insured, claimant, or the physician of either, to submit a preliminary claim report, and then requiring the subsequent submission of formal proof of loss forms, both of which submissions contain substantially the same information.

(12) Failing to settle claims promptly, where liability has become apparent, under one portion of the insurance policy coverage in order to influence settlements under other portions of the insurance policy coverage.

(13) Failing to provide promptly a reasonable explanation of the basis relied on in the insurance policy, in relation to the facts or applicable law, for the denial of a claim or for the offer of a compromise settlement.

(14) Directly advising a claimant not to obtain the services of an attorney.

(15) Misleading a claimant as to the applicable statute of limitations.

How Do You Make a First Party Insurance Bad Faith Claim Against Your Own Insurance Company?

Following the example above, you would demand arbitration once your insurance company refuses to make a settlement offer or makes an unreasonably low settlement offer.  Then the case proceeds to arbitration, which is like a mini trial conducted before an arbitrator in a conference room, as opposed to a full trial conducted before a jury and a judge in a black robe.  

Then, you would hire counsel to pursue a bad faith action against your insurance company for breach of contract and for their actions in failing to investigate the claim, for delaying the claim, for denying the claim, for failing to state the basis for rejecting your claim, and for their breach of their duty of good faith and fair dealing.  If the insurance company refuses to honor the medical payments on your policy, then that could be additional grounds for a bad faith action. 

Insurer Has to State Basis for Rejecting First Party Claim: 10 CCR 2695.7(b)

Where an insurer denies or rejects a first party claim, in whole or in part, it shall do so in writing and shall provide to the claimant a statement listing all bases for such rejection or denial and the factual and legal bases for each reason given for such rejection or denial which is then within the insurer’s knowledge. Where an insurer’s denial of a first party claim, in whole or in part, is based on a specific statute, applicable law or policy provision, condition or exclusion, the written denial shall include reference thereto and provide an explanation of the application of the statute, applicable law or provision, condition or exclusion to the claim. Every insurer that denies or rejects a third party claim, in whole or in part, or disputes liability or damages shall do so in writing. See 10 CCR 2695.7(b)(1).

What Types of Damages Are Recoverable Against Your Insurance Company Acting in Bad Faith in California?

You can recover damages for breach of contract and breach of convent of good faith and fair dealing including attorney fees, punitive damages, damages to compensate for the actual loss, damages for failure to pay medical payments, and for emotional distress, among other damages.  

The California Supreme Court has held that when an insurer’s tortious conduct reasonably compels the insured to retain an attorney to obtain the benefits due under a policy, the insured should recover that expense as damages. Brandt v. Superior Court (1985) 37 Cal.3d 813, Supreme Court of California In Bank.

In some cases, the bad faith action can prove to be far more valuable than the underlying claim denied by the insurance company to begin with!  

The Maslo v. Ameriprise Auto & Home Insurance Case is Instructive 

Under Section 790.03(h)(5) of California’s Insurance Code, it is an unfair claim settlement practice not to attempt in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear.

That statutory provisions applies to all persons engaged in the business of insurance. (§790.01) Thus, in California, an insurer has the same duty to act in good faith in the uninsured motorist context as it does in any other insurance context.

Maslo filed a claim seeking the $250,000 limit on his policy’s uninsured motorist coverage. In response the insurer demanded arbitration. After being awarded approximately $164,000, Maslo filed a second amended complaint against the insurer, alleging that the insurer breached the implied covenant of good faith and fair dealing by forcing the  insured to arbitrate his claim without fairly investigating, evaluating and attempting to resolve it.

After the trial court sustained the insurer’s demurrer, the appellate court concluded that the complaint adequately stated a claim for bad faith when it alleged that he insurer, presented with evidence of a valid claim, failed to investigate or evaluate the claim, insisting instead that its insured proceed to arbitration.

We reject the insurer’s argument that its right to resolve a disputed claim through arbitration relieves it of its statutory and common law duties to fairly investigate, evaluate and process the claim. We further reject the suggestion that in the absence of a genuine dispute arising from an investigation and evaluation of the insured’s claim, the insurer may escape liability for bad faith simply because the amount ultimately awarded in arbitration was less than the policy limits or the insured’s initial demand. Finally, we conclude that the complaint adequately alleged causation where, as pled, the conduct of the insurer made arbitration inevitable and settlement impossible. Accordingly, we reverse the trial court’s judgment of dismissal following its order sustaining the demurrer.

Maslo v. Ameriprise Auto & Home Ins. (2014) 227 Cal.App.4th 626, 630 [173 Cal.Rptr.3d 854, 856], as modified (July 22, 2014)

While an insurer has no duty to settle every claim asserted by an insured, it does have a duty to investigate a submitted claim and to attempt in good faith to effectuate a prompt and equitable settlement of a claim for which liability has become reasonably clear, which would include investigating the claim, negotiating in good faith and, in the appropriate situation, paying or denying the claim. Cal. Ins. Code § 790.03(h)(5).

An insurer may be liable for bad faith in failing to attempt to effectuate a prompt and fair settlement (1) where it unreasonably demands arbitration, or (2) where it commits other wrongful conduct, such as failing to investigate a claim. Cal. Ins. Code § 790.03(h)(5).

Breach of the Covenant of Good Faith and Fair Dealing

“The law implies in every contract, including insurance policies, a covenant of good faith and fair dealing. ‘The implied promise requires each contracting party to refrain from doing anything to injure the right of the other to receive the agreement’s benefits. To fulfill its implied obligation, an insurer must give at least as much consideration to the interests of the insured as it gives to its own interests. When the insurer unreasonably and in bad faith withholds payment of the claim of its insured, it is subject to liability in tort.’ ” (Wilson v. 21st Century Ins. Co(2007) 42 Cal.4th 713, 720 [68 Cal.Rptr.3d 746, 171 P.3d 1082] (Wilson ), quoting Frommoethelydo v. Fire Ins. Exchange (1986) 42 Cal.3d 208, 214–215 [228 Cal.Rptr. 160, 721 P.2d 41] (Frommoethelydo ).) Thus, “[a]n insurer’s obligations under the implied covenant of good faith and fair dealing with respect to first party coverage include a duty not to unreasonably withhold benefits due under the policy. [Citation.] An insurer that unreasonably delays, or fails to pay, benefits due under the policy may be held liable in tort for breach of the implied covenant. [Citation.]” (Rappaport–Scott v. Interinsurance Exchange of the Automobile Club (2007) 146 Cal.App.4th 831, 837 [53 Cal.Rptr.3d 245] (Rappaport–Scott ).)

Moreover, “[w]hile an insurance company has no obligation under the implied covenant of good faith and fair dealing to pay every claim its insured makes, the insurer cannot deny the claim ‘without fully investigating the grounds for its denial.’ ” (Wilson, supra, 42 Cal.4th at pp. 720–721, 68 Cal.Rptr.3d 746, 171 P.3d 1082, quoting Frommoethelydo, supra, 42 Cal.3d at p. 215, 228 Cal.Rptr. 160, 721 P.2d 41.) “By the same token, denial of a claim on a basis unfounded in the facts known to the insurer, or contradicted by those facts, may be deemed unreasonable. ‘A trier of fact may find that an insurer acted unreasonably if the insurer ignores evidence available to it which supports the claim. The insurer may not just focus on those facts which justify denial of the claim.’ ” (Wilson, at p. 72168 Cal.Rptr.3d 746, 171 P.3d 1082, quoting Mariscal v. Old Republic Life Ins. Co(1996) 42 Cal.App.4th 1617, 1623 [50 Cal.Rptr.2d 224].) “An insurer’s good or bad faith must be evaluated in light of the totality of the circumstances surrounding its actions.” (Idat p. 723, 68 Cal.Rptr.3d 746, 171 P.3d 1082.)

Maslo v. Ameriprise Auto & Home Ins. (2014) 227 Cal.App.4th 626, 634 [173 Cal.Rptr.3d 854, 859], as modified (July 22, 2014)

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