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Suing your insurer for "bad faith"

Question

I recently heard about a case where an insured person sued his own insurance company for a "bad faith" denial of his claim. In addition to recovering his benefits to which he was entitled, this person recovered an additional $100,000 in punitive damages. What is "insurance bad faith?"

David D.
Almaden Valley

Dear David:

Although most insurance companies normally handle claims properly, "mistakes" sometimes do occur. Those occasional mistakes are merely careless (negligent). However, sometimes the errors are more serious and intentional in nature.

Insurance companies are regulated by statute and must adhere to strict standards. There are many acts which have been prohibited by the State Legislature in Sacramento and by case law developed by the Court of Appeal, including the California Supreme Court.

California Insurance Code Section 790.03 is entitled "Prohibited Acts." Space does not permit a full listing of all such prohibited acts by insurance companies in this article. However, Insurance Code Section 790.03 states very clearly that the following are unfair claim settlement practices:

1. Misrepresenting to claimants pertinent facts or insurance policy provisions relating to any coverages at issue;

2. Failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies;

3. Failing to adopt and implement reasonable standards for the prompt investigation and processing of claims arising under insurance policies;

4. Failing to affirm or deny coverage of claims within a reasonable time after proof of loss requirements have been completed and submitted by the insured;

5. Not attempting in good faith to effectuate prompt, fair, and equitable settlement of claims in which liability has become reasonably clear;

6. Compelling insureds to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by such insureds, when such insureds have made claims for amounts reasonably similar to the amounts ultimately recovered;

7. Attempting to settle a claim by an insured for less than the amount to which a reasonable man would have believed he was entitled by reference to written or printed advertising material accompanying or made a part of an application (be certain to save those "brochures!");

8. Failing to settle claims promptly, where liability has become apparent, under one portion of the insurance policy coverage in order to influence settlements under other portions of the insurance policy coverage;

9. Failing to provide promptly a reasonable explanation of the basis relied on in the insurance policy, in relation to the facts or applicable law, for the denial of a claim or for the offer of a compromise settlement; and

10. Directly advising a claimant not to obtain the services of an attorney.

If a violation of the insured’s rights is particularly serious, it may give rise to a suit for punitive damages. This would be an amount of money sufficiently large to serve as an example for the insurance company’s malice, fraud, oppression or other conduct which is carried on by the insurance company with a wilful and conscious disregard of the rights of others. Punitive damages are in addition to actual damages and serve as damages for the sake of example and by way of punishing the defendant. It is not unusual, in view of the substantial wealth of many insurance companies, for the punitive damage award to be well in excess of $100,000.

As a practical matter, I would suggest always saving copies of insurance policies indefinitely, as well as correspondence and other material, notes of telephone calls, and related items. Every day thousands of claims are handled properly, but one never knows when legal action may be necessary.

Thank you for writing in, David.