INSURANCE BAD FAITH

In California, the general rule is that an insurance company has an obligation to deal with their insureds fairly, in good faith, and deal upon presentation of a claim. In every insurance policy there is an implied obligation of good faith and fair dealing that neither the insurance company nor the insured will do anything to injure the right of the other party to receive the benefits of the agreement. To fulfill its implied obligation of good faith and fair dealing, an insurance company must give at least as much consideration to the interests of the insured as it gives to its own interests.

Under the law, to breach the implied obligation of good faith and fair dealing, an insurance company must unreasonably or without proper cause act or fail to act in a manner that deprives the insured of the benefits of the policy. It is not a mere failure to exercise reasonable care. For the insurance company to be liable, it is not necessary for the insurer to intend to deprive the insured of the benefits of the policy.

If the insurer denies benefits unreasonably (i.e., without any reasonable basis for such denial), it may be exposed to the full array of tort remedies, including possible punitive damages. Deceptions and evasions violate the obligation of good faith in performance, even though the insurance company employee believes his conduct to be justified. But the obligation goes further: bad faith may be overt or may consist of inaction, and fair dealing may require more than honesty. A complete catalogue of types of bad faith is impossible, but the following types are among those which have been recognized in judicial decisions: evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of a power to specify terms, and interference with or failure to cooperate in the other party's performance.

Some examples of insurance company bad faith may assist in making the law more clear. In the case of an automobile insurance policy, if an insurance company provides uninsured motorist coverage for their insured and an accident occurs involving an uninsured motorist, the insured is entitled to fair and prompt compensation under the policy. If the insurer disputes the value of the insured’s injury and then withholds paying any benefits, the insurance company may well be liable for bad faith, even though they eventually pay the claim. An insurer may commit bad faith by unreasonable delay in the payment of a claim. Where this sometimes occurs is a situation in which the insurer forces their own insured into an arbitration hearing even though the value of the claim truly exceeds the policy limit. The payment is then delayed and payment of the policy proceeds comes only after an unnecessary and delayed arbitration hearing and award.

Another example of insurance bad faith occurs when an insurance company bases its denial of a claim (for life insurance benefits, property damage, etc.) on an unreasonable interpretation of the policy. Where this sometimes happens is in a situation involving policy interpretation where the definition of a condition or prerequisite to coverage is not specifically found in the policy. The insurance company is then left to its own devices to define or interpret the policy language. When they ignore a word’s plain meaning or fail to give their insured’s interpretation of the policy its deserved weight, the insurer can be liable for bad faith. It is important to keep in mind that any ambiguity found in the policy language is generally construed against the party drafting the contract: the insurer. Additionally, exclusions in a policy must be conspicuous, plain and clear, and the general rule is that exclusions in a policy are interpreted narrowly against the insurer.

While the law generally favors the insured in bad faith cases, it should be understood that an insurance company is not required to pay every claim presented to it. Besides the duty to deal fairly with the insured, the insurer also has a duty to its other policyholders and to the stockholders (if it is such a company) not to dissipate its reserves through the payment of meritless claims. Such a practice inevitably would prejudice the insurance seeking public because of the necessity to increase rates, and it would finally drive the insurer out of business.

Assuming bad faith can be shown, the amount of damages to which the insured is entitled must include compensation for all harm that was caused, even if the particular harm could not have been anticipated. The insured must prove the amount of their damages. However, the insured does not have to prove the exact amount of damages that will provide reasonable compensation for the harm. Damages in these cases may include compensation for mental suffering, anxiety, humiliation, and emotional distress. An insured may also be entitled to the cost of attorney fees incurred in an effort to recover the insurance policy benefits. As referenced above, punitive damages may be awarded in an appropriate case.

Every insurance bad faith case is unique and the potential claims for damages almost endless. An experienced trial attorney can help you find your way through the facts and the law to reach a fair result.

About the Author:

For 15 years, Paul W. Ralph has been helping people battle insurance companies for the compensation owed to them. As an insurance benefits lawyer and Orange County wrongful death lawyer, Paul has beaten back the insurance companies and won many successful cases for his clients. He is also an dog bite attorney in Orange County and vehicle accident attorney.