In California, an insurance bad faith claim is a claim that an insured has against his or her insurance company resulting from the insurance company’s bad acts. These claims usually arise from actions an insurance company takes, or fails to take, after incidents like a motor vehicle accident or property damage. Insurance bad faith is a complicated area of law, but one that can provide outsized monetary benefits for accident victims.
In general, insurance companies owe a duty of “good faith and fair dealing” to their customers—that is, to people who buy the insurance they sell. If the insurance company violates this duty, for example, by denying an insurance claim that it should have covered (and therefore not dealing in “good faith and fair dealing”) the insured may have a claim against the insurance company known as an insurance bad faith claim. However, whether an insurance company has violated this duty can be a complicated legal determination based on an exploration of the facts of what occurred, the behavior of the insurance company, the insurance policy, and the state of the law at the time. California combines both statutory law and judge made “common law” in evaluating an insurance company’s behavior, requiring a skilled attorney to have an extensive understanding of the current state of the law. The various complexities of this area of law and options available for victims will be briefly explored below.
There are two types of insurance bad faith claims: so-called “first party” insurance bad faith, and “third party” insurance bad faith claims. A first party insurance bad faith claim arises when an insured’s own insurance company either fails to pay an insurance claim brought to them without a reasonable basis, or, even if the insurance company had a reasonable basis to deny the claim, failed to investigate it. See generally Gruenberg v. Aetna Ins. Co., 510 P.2d 1032 (Cal. 1973). For example, if a homeowner had a fire destroy her home, she might make a claim on her homeowner’s insurance policy. If that insurance company then fails to investigate this claim whatsoever and does not pay out on the policy, or denies her claim without a reasonable basis—for example, by claiming that the homeowner herself started the fire, without any evidence—the homeowner will likely have a first party insurance bad faith claim against her insurance company. These claims are relatively simple, and are frequently settled out of court. The insured may be able to recover for the amount of the insurance coverage she should have obtained, as well as for her legal costs, and any consequential damages that resulted from the insurance company’s actions.
Third party insurance bad faith claims are more complex. In general, in California, an insurance company owes three distinct duties in this context: first, the insurance company has a duty to defend a claim or lawsuit brought against its customer, even if the claims brought in the lawsuit might exceed the policy limits under the insurance policy, or the cost of defending the lawsuit might exceed the policy limits. For example, if a motorist injures a passenger in another car during a traffic accident, that passenger likely has a claim against the motorist for the injuries. The motorist’s car insurance company is required to defend the motorist against all of the passenger’s claims, even if only one of the passenger’s claims would be covered by the policy, even if the total value of the claim or claims would far exceed the policy limits, and even if the passenger’ claims are blatantly false, groundless, or fraudulent. If the car insurance company fails to defend the motorist in the subsequent lawsuit—for example, by refusing to appear in court—a claim for insurance bad faith may arise, in addition to breach of contract claims.
Second, an insurance company owes a duty of indemnification to its customers/the insured. This means that the insurance company must “indemnify” its customer—that is, pay on its customer’s behalf, up to the limits of the coverage, to a third party. For example, if the injured passenger in the previous example successfully is owed money under the motorist’s policy—for example, because the motorist was at fault in the car accident—and the insurance company refuses to pay, the passenger him or herself may have an insurance bad faith claim against the motorist’s insurance company.
Finally, an insurance company also owes a duty to settle a “reasonably clear claim” against its customer/the insured, so long as this claim is within the policy limits. For example, if the motorist in the previous example has a $100,000 policy limit for injuries such as those suffered by the passenger, and the passenger agrees to settle her “reasonably clear” claim for $50,000, the insurance company must agree to settle this claim prior to litigation. Whether a claim is reasonably clear is a legal determination, and frequently insurance companies exercise latitude in attempting to negotiate more favorable settlement terms, resulting in confusion (and litigation) about what constitutes a reasonably clear claim in this context.
In California, insurance bad faith claims may also be transferred among parties involved in an accident, creating additional complexity. For example, if the motorist’s insurance company fails to defend the motorist (therefore giving rise to an insurance bad faith claim that could be brought by the motorist), the motorist and the injured passenger may reach a special agreement, in which the injured passenger sues the motorist and prevails (or they both reach a settlement favorable to the passenger), but the passenger agrees not to actually collect on the successful judgment or settlement. Instead, the passenger will be transferred the motorist’s bad faith claim against the insurance company, and the passenger will pursue this bad faith claim directly against the insurance company. See Comunale v. Traders & General Ins. Co., 328 P.2d 198 (Cal. 1958).
These sorts of transfers are common because an insurance bad faith claim can results in outsized recoveries for the party bringing the lawsuit. If an insured brought a simple breach of contract action against his or her insurance company—for example, arguing that the insurance company breached its contractual agreement by failing to defend the insured in a lawsuit—the amount of damages that can be recovered are almost always limited by the terms of the contract. This is not an “insurance bad faith” claim but, instead, an action for breach of the insurance company’s contract with its customer. However, in an insurance bad faith claim arising from the insurance company’s same bad actions, an insured can potentially obtain punitive damages (essentially damages intended to punish the insurance company), and consequential damages that far exceed the contractual limits. As a result, if a bad faith claim is possible, it can be extremely lucrative.
Insurance bad faith claims can be very complex, yet are very important. California has among the most developed and favorable insurance bad faith laws in the country, and a California attorney experienced in insurance law and working closely with insurance companies can evaluate whether a bad faith claim has arisen, and how to obtain maximum recovery under the claim.