Review of the Basics of California's Bad Faith Insurance Law
Insurance companies in the state of California have a legal duty to defend their policyholders. Put simply, when someone makes a claim for a covered risk, they are required to act in a reasonable amount of time and investigate the claim in good faith.
If the claim is covered under your insurance policy, they must provide you with a defense. If they fail to defend their policy holder, then it could be considered in “bad faith” by the insurer.
In other words, California insurance companies breach the implied covenant of good faith and fair dealing, known as acting in “bad faith,” when they unreasonably deny benefits under an existing and enforceable insurance policy on a valid claim.
When you purchase an insurance policy, you are entering into a contractual agreement with the insurance company issuing that insurance.
In return for your payment of premiums, the insurance company has a legal duty to provide coverage fairly as detailed in the policy terms.
But ironically, insurance companies seek to be profitable by paying out as little as possible—unfortunately, that means they look for reasons to deny legitimate claims or pay far less than the claim is worth.
When they violate the terms of their policies or basic good faith standards, we say, as noted above, that the insurance company is acting in bad faith.
Insurance bad faith practices can be devastating for policyholders as well as third parties, such as personal injury accident victims who file claims against another driver's insurance company.
Fortunately, the state of California has strict laws that regulate the practices of insurers. If your insurance company refuses or fails to pay on time, you have the right to file a bad faith lawsuit against the company.
Our Los Angeles personal injury lawyers are providing a closer look below.
Bad Faith Insurance and California Law
California has developed an extensive code of laws overseeing the business practices of insurance companies, but the laws dealing specifically with bad faith practices began with the passage of the Unfair Insurance Practices Act (UIPA), Cal. Ins. Code § 790, in 1959.
Since then, the UIPA has been expanded and clarified by subsequent legislative actions and court cases over the years. In 1972, the legislature further clarified the UIPA by enacting Insurance Code § 790.03(h), which outlines 16 specific unfair claims practices that constitute bad faith business practices by insurance companies.
These unfair practices include, but are not limited to:
- Denying policy benefits without a reasonable cause;
- Failing to provide a clear reason for denial of a claim;
- Failure to communicate with policyholder about the claim;
- Failure to adequately explain the denial of the claim;
- Misrepresenting facts or policy benefits;
- Breach of the insurance contract;
- Refusing to pay full value of the claim;
- Failure to conduct a prompt and fair investigation in claims process;
- Failure to respond to a claim promptly;
- Failing to establish reasonable standards for how a claim is processed;
- Failing to approve or deny a claim in a reasonable amount of time once all proof of the claim is submitted (i.e., a "stall tactic");
- Forcing to claimant into litigation by failing to make a settlement offer;
- Deliberately "low-balling" their settlement offer when the claimant has provided legitimate proof that the claim is worth much more;
- Forcing the policyholder to go through unnecessary medical tests (another "stall tactic");
- Failure to comply with California's “Fair Claims Settlement Practices Regulations;”
- Failure to authorize necessary medical treatment you are entitled to receive under a health insurance policy.
Numerous other unfair practices are detailed in the law, but they all effectively have the same result: the insurance company fails to make good on its legal obligation to pay the claim.
In order to determine whether a risk is covered, the exact language in the insurance policy will be reviewed. The court will decide what is the insured's “reasonable expectation” based on the language in the policy.
Types of Bad Faith Insurance Lawsuits in California
When you file a legitimate claim with an insurance company, and they fail to pay, or find ways to delay paying unnecessarily, California law gives you the right to file a bad faith insurance lawsuit against them to ask the courts to force them to pay.
Most bad faith insurance lawsuits fall into one of two categories: First-party claims and third-party claims.
- First-party bad faith claims: This is when you, as the policyholder, file a suit against your own insurance company. For example, if your house burns down and your homeowner's insurance fails to give you anywhere close to what the house was worth, or if your uninsured motorist insurance fails to pay for your car repairs or injuries in a no-fault accident. (First-party claims are by far the most common.)
- Third-party bad faith claims: This is when you file a suit against another party's insurance policy for failing to pay a claim that benefits you. The most common example of a third-party claim is when you are an injury victim (e.g., in a car accident), and the at-fault driver's liability insurance denies the claim or provides an unfair "low-ball" settlement offer.
What Damages Can Be Recovered in a Bad Faith Insurance Lawsuit?
There are several types of damages for bad faith breach of the “duty to defend” in California. In most states, bad faith insurance practice lawsuits fall under that state's common tort laws.
However, thanks to California's UIPA law, victims of bad faith can file both statutory breach-of-contract and tort lawsuits against an insurance company that illegally denies payment of a claim.
The types of damages that may be recovered include:
- Payment of the claim itself (i.e., the amount of the loss incurred);
- Attorney fees/court costs (to cover the lawsuit itself);
- Emotional distress damages (covering the added pain and suffering for denying your claim);
- Punitive damages (additional monies the court awards you as a punishment to the insurance company for breaking faith with you, practicing gross negligence, etc.).
There is not a fixed standard for determining the amount of damages for emotional distress in a bad faith lawsuit. Typically, an award is any reasonable amount that is deemed appropriate.
In the most serious cases, although rare, the insured might be able to recover punitive damages for bad faith breach of the duty to defend.
Put simply, if your California insurance company handles your insurance claim in bad faith, then you are entitled to all the damages that were caused by this bad faith conduct, including lost income, lost opportunity, emotional distress, attorney fees, interest, and other types of damages listed above.
Why Insurance Companies Try to Avoid Bad Faith Lawsuits
Insurance companies try to avoid bad faith lawsuits for one reason: the money.
Simply put, a successful bad faith lawsuit costs the insurance companies much more than if they had simply paid the claim, usually due to the punitive damages added on.
A skilled attorney can usually negotiate with resistant insurance companies to avoid bad faith lawsuits.
Still, if the insurance company continues to resist, bad faith insurance lawsuits can be quite complicated, and it requires the help of an experienced bad faith insurance attorney to navigate them successfully.
If you suffered damages due to your insurance company's bad faith, then contact us to review all the details and legal options.
Injury Justice Law Firm is based in Los Angeles County and we offer a free case consultation by calling (818) 781-1570, or fill out our contact form.