Insurance Bad Faith Claims
“Bad faith” insurance refers to the tactics that insurance companies use to avoid their contractual obligations to their insureds. All insurance contracts in California contain an implied covenant of good faith and fair dealing. In other words, when a person enters into a contractual agreement with their insurance company, the company is obligated not to do anything that would deprive the insured of the benefits of the contract. The concept to bad faith applies to any type of insurance contract, whether it be disability, long-term care, life, health, automobile, homeowners, etc.
States have enacted laws to protect consumers from insurance companies’ bad faith actions. In California, the Fair Claims Settlement Act (the “Act”) tells insurance companies how they should handle claims and treat their insureds. The California insurance commissioner can penalize insurance companies for violating the Act. Also, conduct in violation of the Act can exposure insurance companies to civil liability to their insureds. California law requires that insurance companies investigate, process, and pay claim fully, promptly and in good faith and deal fairly with its insured at all times. ( California Ins. Code 790.03, 10 Cal Code of Regs 2695.7(g)). “Bad faith” conduct is “unreasonable” conduct. When a person suffers a loss, and an insurance company is being unreasonable in handling a claim which was filed by the insured to seek compensation for their loss, the company is acting in “bad faith.” Insurance companies are required to know and abide by the rules. Nevertheless, companies and their adjusters routinely ignore or violate the rules that dictate how they are to handle claims. When a person suspects that their insurance company is acting unlawfully, it is important to consult with an experienced insurance bad faith attorney to determine if their insurance company is acting in bad faith.
While not an exhaustive list, here are a few rules that if violated, can result in a determination that an insurance company has acted in “bad faith”:
- The insured is entitled to prompt, timely communications from their insurance company. The company (and all its representatives) must respond to communications from the insured “immediately, but in no event more than 15 calendar days” with “a complete response based on the facts then known.” Any question from the insured, and any request that a insured makes to the insurance company must be responded to within 15 calendar days. Furthermore, upon receiving proof of claim, every insurance company shall immediately, but in no event more than forty (40) calendar days later, accept or deny the claim, in whole or in part. (10 Cal Code of Regs 2695.7(b). If more time is required to determine whether a claim should be accepted and/or denied in whole or in part, the insurance company shall provide the claimant, within the time frame specified in subsection 2695.7(b), with written notice of the need for additional time. This written notice shall specify any additional information the insurance company requires in order to make a determination and state any continuing reasons for the company’s inability to make a determination. Thereafter, the written notice shall be provided every thirty (30) calendar days until a determination is made. (10 Cal Code of Regs 2695.7(c)(1). It is not enough to satisfy the rules that an insurance company pay a claim. Companies must be prompt with their claims handling, and if they are not, the company has acted in bad faith.
- Insurance companies act in bad faith when they fail to properly investigate a claim. An insurance company acts unreasonably, that is without proper cause, by failing to conduct a proper investigation of the insured’s claim. California law states that “[e]very insurer shall conduct and diligently pursue a thorough, fair and objective investigation and shall not persist in seeking information not reasonably required for or material to the resolution of a claim dispute.” (10 Cal Code of Regs 2695.7(d).
- An insurance company may not offer or force its insured to accept a settlement offer that is “unreasonably low.” (10 Cal Code of Regs 2695.7(g).
- Insurance companies shall not discriminate in its claim settlement practices because of a claimant’s age, race, gender, income, religion, language, sexual orientation, ancestry, national origin, physical disability, or upon the territory of the property or person insured. (10 Cal Code of Regs 2695.7(a).
If there is a judicial determination in court that an insurance company has acted in bad faith, there are a range of remedies available to the insured:
- Contract Damages: The benefits due under the insurance policy. The insured will also be entitled to prejudgment interest from the date benefits were due (10% per annum if the contract does not stipulate a legal rate of interest per CA Civil Code § 3289(b) ).
- Extra-Contractual Damages for Bad Faith (Breach of the Implied Covenant of Good Faith and Fair Dealing): All damages caused by the insurance company unreasonable delay and/or denial of benefits including both economic loss (i.e., out-of-pocket expenses) and non-economic hardship (i.e., emotional distress, financial hardship). When it has been determined that an insurance company has acted in bad faith, the insured is entitled to recover attorney’s fees pursuant to a California Supreme Court ruling named Brandt v. Superior Court (1985) 37 Cal. 3d 813.In disability cases, If there is a finding that the insurance acted in “bad faith,” that could entitle the insured to future contract damages to be paid in a lump sum on the principle that when an insurance company has acted in bad faith, it cannot be trusted in the future.
- Punitive Damages Pursuant to Civil Code §3294: If there is clear and convincing evidence demonstrating that the insurance company acted with fraud, malice or oppression, California law allows damages to be awarded to punish and deter the insurance company from acting similarly to its insureds in the future.
