The Basics of Insurance “Bad Faith” In California

Insurance Bad Faith: California Law Gives Policy Holders Powerful Weapons To Fight Insurance Companies That Unreasonably Deny Policy Benefits

The Basics of Insurance “Bad Faith” In California

The concept of “bad faith” arose in California as a way to punish insurance companies who unreasonably deny policy benefits and treat policyholders unfairly. Insurance policies are contracts. When an insurance company wrongly denies a claim under a policy, the policy is breached, allowing the policyholder to sue for breach of contract.

California’s insurance bad faith law allows policyholders to go a step further than a simple breach of contract lawsuit. If the insurance company’s conduct in denying a claim or the full benefits owed under the policy is unreasonable, the policyholder can recover not only the benefits of coverage that have been wrongfully denied, he or she can also recover attorney fees (which can be significant), compensation for other economic harm and emotional distress damages.

If the insurance company’s conduct is particularly outrageous because it is malicious, fraudulent, or oppressive, the policyholder may also recover punitive damages.

Bad faith law exists in California because without it, insurance companies don’t have proper incentives to pay claims and treat policyholders fairly. An insurance company exists for the purpose of making money. Paying claims directly impacts the bottom line by reducing profits. With bad faith law protecting policyholders, insurance companies know that if they act unreasonably, they could become liable in a bad faith lawsuit for substantially more money than properly paying the claim would cost.

Bad faith is based on the concept of a promise of “good faith and fair dealing” that the law assumes exists in every contract, including insurance policies. When an insurer engages in bad faith, the duty of good faith and fair dealing is breached.

Examples of Bad Faith Insurance Company Practices

Although bad faith can take many forms, the end result is the same: unreasonable denial of benefits to the policyholder. Some common examples of insurance company conduct that may be bad faith include:

• Unreasonable delay in processing or paying a claim.
• Failing to conduct a reasonable investigation of the claim.
• Failure to communicate and promptly respond to correspondence.
• Intentionally and unfairly misinterpreting policy language to avoid paying a claim.
• Failing to promptly acknowledge notice of a claim.
• Unreasonably “lowballing” the value of a covered loss.
• Unsubstantiated and unwarranted accusations of fraud or arson.
• Cancelling a policy after a claim or loss, if the cancellation is not permitted by law or industry standards.
• Making misrepresentations about facts or the law.
• Making unreasonable demands for documents or information in order to delay the claim and discourage the policyholder.
• Refusing to settle a covered claim or lawsuit against the policyholder within policy limits.
• Refusing to defend the policyholder against a lawsuit when some part of the suit would be covered by the policy.

Contact Our Orange County Office Today

If you believe your insurance carrier has denied you or your business benefits owed under an insurance policy and need commercial litigation, contact the Law Offices of Corbett H. Williams today at 949-649-4723. You may also use the contact form below and we will respond promptly.