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A Closer Look at Insurance Bad Faith in California

Insurance bad faith can be a complicated subset of insurance law to understand – and with every state having different regulations and statutes on it, this confusion can quickly become compounded.

This comprehensive look at insurance bad faith aims to be the authoritative source on bad faith law in California, including answers to some of the most frequently asked questions in insurance bad faith.

What is Insurance Bad Faith?

Insurance bad faith refers to an insurance providers’ actions after you file a claim to recover damages. Insurance policies exist to provide financial protection to someone in case of an accident or unplanned event. We pay into a policy, with the hopes that if an accident occurs, we can file a claim to recoup some of the financial damages that resulted from that accident.

If an insurance provider denies your claim and fails to provide a valid reason, it is then said that the company is acting in bad faith.

First-Party Claims vs Third-Part Claims

In talking about insurance, it’s important to consider whether your claim is a first-party claim or a third-party claim.

First Party-Claim

Is one that you make with your own personal insurer. So, for example, if an accident resulted in damages to your house, you would contact the company who holds your homeowners’ insurance policy to file a claim.

Third Party-Claim

Is one that another party makes with you, the insured. A car accident is the ideal example: if you were found to be at fault, the other party files a claim against you. It is then the duty of the company insuring you to providing compensation to the other party.

This differentiation is especially important in issues regarding bad faith, as the requirements differ between first-party and third-party claims.

Which is the more Common Bad Faith Claim: First-Party or Third-Party Claims?

Generally, first-party bad faith claims are more common than third-party bad faith claims. That is why most information about insurance bad faith mainly discusses first-party claims.

Third-party bad faith claims do occur, but because the circumstances are more complex, it can be a difficult case to litigate.

Legitimate Reasons an Insurance Company May Deny Your Claim

There Are Multiple, Valid reasons that an insurance company may deny your claim

You may be liable for some of the damages

Depending on liability laws in your state, you may not have the right to pursue damages if you shared some of the fault in the accident (or at least 51 percent).

The statute of limitations may have passed

There are strict deadlines for filing a claim following an accident. If you fail to file your claim within that time period, you may not be able to secure compensation for your damages.

You may not be current on your policy

Typically, insurance providers will not be able to provide any financial support if you have failed to fully pay into your policy by the time of the accident.

Your accident may fall outside the policy

Many insurance policies have specific provisions for circumstances that typically aren’t covered. For example, some basic homeowner policies will not cover flooding or fire damage – otherwise known as “an act of god.”

You may have violated a law at the time of the accident

This may be a concern in cases such as car accidents or premises liability accidents. If you were driving under an invalid license and you were in an accident, your claim may be denied.

Failure to verify your damages

In some cases, an insurance company may request medical records or some other substantiating evidence in order to process your claim. If this is not submitted, your claim may be rightfully denied.

How Can I Determine
Insurance Bad Faith Occurred?

The elements for insurance bad faith depend on the type of claim that is disputed.

For a first-party claim, bad faith revolves around the insurance company’s ability to process your claim in a reasonable matter. Generally, this involves:

  • Conducting a proper investigation into the claim
  • Providing valuation that is reasonable, and a settlement offer that is fair
  • Approving all valid claims, and denying any questionable claims with an explanation that is reasonable
  • Paying any approved claims without issue
  • Doing all of the above in a prompt, timely manner, without delays

For a third-party claim, bad faith focuses on the insurance company’s role in representing the financial best interests of the insured. If someone files a claim against you for their injuries, your insurance company has a contractual duty to defend the suit with your best interests at heart. Third-party bad faith cases typically fall under three categories:

  • Failure to defend. Your insurance company has a duty to provide an adequate defense on your behalf in lawsuit. Failure to do so can be considered bad faith.
  • Failure to settle. Your provider has a duty to pay for any damages of which you are found liable in lawsuits. If they refuse to pay, they may be acting in bad faith. Additionally, insurance companies must settle a suit if it’s clear that the final judgement may exceed the policy limits. If a company does not settle and allows the insured to retain excess liability, this can be considered bad faith.
  • Negligent handling of the case. An insurance company who does not defend your suit to the best of their ability may be negligent and could be liable to bad faith.

Failing to fulfill any of these responsibilities in a first-party claim
may indicate bad faith

The Insurance Bad Faith Claims Process

Can You Sue an Insurance Company for Bad Faith?

If you believe an insurance company has acted in bad faith by rejecting your claim, you may have a right to file a lawsuit again the company. It is highly advised that you consult an experienced insurance attorney first before proceeding with a lawsuit.

In most states, you can typically proceed with a lawsuit on the basis of one or both circumstances:

  • Breach of Contract. An insurance company is obligated to pay what it owes a claimant according to the terms of his or her policy. But unreasonably refusing to do so, they breached a contract – and may be liable for damages as a result.
  • Tort. If the refusal of the claim resulted in some sort of harm to you, you may also pursue a tort claim against the insurance company.

How do I File an Insurance Bad Faith Claim?

Filing a bad faith claim takes a lot of preparation, planning, and drafting of proper paperwork and documents.

  1. Collect all relevant documentation

    This includes the initial claim made for the accident, along with any police reports, medical records, bills, or other information relevant to your case.

  2. Review/document your policy

    It is recommended to do this before filing a claim, to understand what is and isn’t covered under your policy – and to confirm that your denial was indeed made in bad faith. It may be worthwhile to make a copy of your policy as well: some insurance companies are known for revising policies on claimants without prior notification.

  3. Document the denial of the claim

    Having proof of the denial is important to your case, as some insurance companies may later revise your denial to make it seem as if there was reasonable cause.

  4. Request a review of your case

    Your claim may have been denied erroneously due to a mistake, so it’s always recommended to appeal your denial first before escalating it into a potential lawsuit. As mentioned above, document every step of this process, including any conversations (email or otherwise) that take place between you and your provider.

  5. Write a demand letter to the insurance company

    If the insurance provider upholds their denial, then you can escalate the claim by writing a demand letter to the company. This is a summary of your accident, your claim, and why you believe it should not have been denied. It should include specific details about the event, the reasons for submitting a claim, and any evidence that supports the validity of your claim. You may also indicate a time limit in which the insurance provide must respond (anywhere from 15-60 days is recommended), with the threat of filing a lawsuit if no response is heard. However, that is not always the best course of action, and it is always recommended to consult with an experienced attorney before suggesting taking legal action. At this point, it is important to note that you cannot file a lawsuit until the insurance company responds (or fails to respond) within the allotted time.

  6. File complaint with state’s Department of Insurance

    Filing a complaint with your state’s Department of Insurance allows them to conduct their own investigation into your case, and recommend the proper course of action. Although your state’s Department of Insurance cannot demand that an insurance provider pay you the damages you are due, their word on the matter can be a compelling piece of evidence again the company during a lawsuit.

  7. File a claim against the insurance company

    At this point, if the insurance company has failed to respond to your letter or has responded in an unsatisfactory way, you may proceed with a lawsuit. If you have not done so already, at this point it is highly recommended to retain the services of a lawyer experienced in insurance law. With decades of prior experience, they understand what it takes to secure compensation on your behalf, while allowing you to be on equal ground with an insurance company and their team of corporate attorneys.

Recovering Compensation
from Insurance Bad Faith

What Can I Recover From
An Insurance Bad Faith Claim?

When filing a bad
faith claim, you may
be eligible to recover
the following damages:

Compensatory

The original amount the policyholder is due for their original claim

Emotional Distress

In tort actions, these are any damages that arose due to the initial claim being denied

Attorneys Fees

In some cases, this may also be recovered

Other Economic Losses

Other losses as a result of the denial

Punitive Damages

In California, punitive damages may be rewarded to claimants in cases of bad faith conduct that is “willful, egregious, and widespread.” For example, an insurance company who consistently acts in bad faith to all of its customers may be subject to punitive damages

Insurance Bad Faith Laws

In the United States, insurance bad faith is enforced in two ways: common law bad faith and statutory bad faith.

Common Law Bad Faith

Common law bad faith is established by the precedence stemming from case law. Although the interpretation of common law varies from state to state, it generally requires that that claimant prove two basic elements:

  • That the benefits due under the policy in question were withheld. You must establish that you had a valid claim under the terms of your policy, and that it was denied by the insurer.
  • The reason for withholding these benefits was generally unreasonable. The terms to determine whether the denial was reasonable or not is generally evaluated on a case-by-case, state-by-state basis.

Most, if not all, states follow common law bad faith practices – but all states interpret these case results differently, resulting in different interpretations of what constitutes bad faith. For example, some states may impose narrow restrictions on the definition of bad faith in order to weed out any claims that may be questionable or otherwise invalid.

Statutory Bad Faith

Statutory bad faith is established by any specific legislation regarding bad faith that was passed in your state. These laws explicitly point out the grounds on which a claim denial is considered to be in bad faith. Most states employ the principles set forth in the Unfair Claims Settlement Practices Act, a model act developed by the National Association of Insurance Commissioners (NAIC) as a starting point for all statutory bad faith law.

Insurance Bad Faith Laws in California

In California, insurance bad faith falls under the Fair Claims Settlement Practices Regulations – a version of the NAIC’s aforementioned model act. These statutes detail exactly what constitutes good conduct by insurance providers, and what must be done to ensure that they are acting in good faith to their policyholders.

Specifically, Section 2695.7 details the state’s “Standards for Prompt, Fair, and Equitable Settlements” that insurance providers must comply with to confirm that they are acting in good faith to their policyholders.

What is the statute of limitations for insurance bad faith claims in California?

The statute of limitations on bad faith claims in California depends on the type of claim brought forth in the courts.

  • If the bad faith claim is a tort claim, you have 2 years from the date you believe you were denied in bad faith.
  • If the bad faith claim is a breach of contract claim, you have 4 years from the date you believe you were denied.

Signs That Your Insurance Company May Be Acting in Bad Faith

If you are corresponding with your insurance provider over any matters surrounding an existing claim or your policy, watch for these tactics that may indicate bad faith.

Lack of communication

An insurance company that fails to respond to phone calls, letters, or e-mails in a prompt fashion may not be working in your best interests. At best, they are inattentive and have poor service – and at worst, they may be acting in bad faith.

Making lowball settlement offers

Insurance companies will often respond to claims with quick settlements that are far lower than what you are entitled to. In California, this is a violation of the Fair Claims Settlement Practices Regulations.

Delaying payment of a claim you have a right to collect

After a claim has been processed and a compensation amount has been determined, an insurance company is legally obligated to tender payment within a state-regulated period of time. In California, this is no more than 30 calendar days from the date of acceptance of the claim. Insurance companies acting in bad faith will commonly delay the payment with no discernible reason.

Making unreasonable demands for documentation

Insurance companies may withhold a claim until they receive documentation that they declare is required for payment. Although this may be within their rights, any unreasonable demands (such as extraneous forms or medical record requests) may be in bad faith.

Revising your policy without notification

Insurance companies are required to notify you of any changes they make to your policy. They have a right to deny claims on the basis of your policy coverage – but sometimes, they revise your policy without prior notification in order to exclude the circumstances of your claim.

Misleading you about the terms of your policy

An insurance company you can trust will explain your coverage in a manner that is clear and easy to understand. Any provider who attempts to explain why your claim was denied in overly complicated legalese may likely not be acting in good faith.

Disclaimer: As a boutique law firm specializing in intricate bad faith insurance cases, we are unable to assist with smaller claim denials.
If one or more of these instances occurs, its is highly recommended to consult an experienced insurance lawyer in San Diego for advice.