Insurance Bad Faith Claims — The Basics

In California, and throughout the United States at-large, insurers generally try to avoid paying out for their liabilities where possible. For example, if you are injured in a motor vehicle accident, then your auto insurer may argue that your injuries are not particularly severe and may undervalue your claim.

Wrongful denial, delay, and mishandling of your legitimate insurance claims are quite common in California. Fortunately, if your insurer has engaged in such conduct, you may be entitled to sue and recover damages pursuant to a bad faith claim.

Insurers are beholden to a duty of good faith towards their policyholders (and others). As such, they must act fairly. By engaging in conduct that takes advantage of policyholders and otherwise undermines a legitimate benefits claim, the insurer may expose themselves to significant liability.

What Qualifies as Bad Faith Behavior?

Bad faith involves unreasonable acts by the insurer. What constitutes an "unreasonable" act or decision is fundamentally dependent on the circumstances. Common forms of bad faith in the insurance context include, but are not necessarily limited, to:

  • Wrongful denial (with sufficient justification)
  • Failure to pay out full benefits (i.e., undervaluing a claim)
  • Unreasonable delay in claim processing
  • Failure to complete payout
  • Failure to comprehensively investigate claim for benefits
  • Refusal to defend policyholder in a covered lawsuit
  • And more

It can be challenging to show that the insurer has acted "unreasonably," but as a general rule, it will be supported by the total circumstances - for example, the insurer's attitude towards your claim may be dismissive, which could (in combination with their refusal to consider all the facts when investigating your benefits claim) point to bad faith conduct.

Types of Bad Faith Claims

There are different types of bad claims, but the most important distinction is between first-party and third-party claims. Let's take a quick look at what they are and how they differ from one another.

First Party Claims

First-party bad faith claims are brought against your own insurer. For example, if you have had a healthcare claim wrongfully denied by your healthcare insurer, then your bad faith lawsuit against the insurer would qualify as a "first party" claim.

Importantly, insurers may have duties beyond just paying out benefits - this is frequently misunderstood by bad faith claimants. Suppose, for example, that you run a retail business and a slip-and-fall accident takes place on your premises. You have liability insurance, but during the lawsuit, the insurer refuses to step in and defend you. Under the terms of your insurance policy, however, the insurer is required to step in and defend you against such claims. You would therefore have a first-party bad faith claim against the insurer.

Third Party Claims

Third-party bad faith claims, by contrast, are brought against another person's insurer. Third-party bad faith claims often arise in personal injury scenarios where the defendant's insurer acts in bad faith to avoid a settlement, despite the facts clearly demonstrating the legitimacy of your injury claim. For example, suppose that you are injured in a car accident. You sue the defendant for negligence. The defendant's auto insurer steps in to defend them in the lawsuit, but they do not make reasonable efforts to reach a settlement compromise with you - even in the fact of overwhelming evidence that your claims are legitimate and correct.

Insurers have a duty to settle (if the circumstances demand it). Failure to reach a reasonable settlement - without justification - could give rise to bad faith liability.

Damages for Insurer Bad Faith

In the insurance bad faith context, damages may be quite different from case-to-case (as circumstances can vary substantially). In situations where the insurer engaged in malicious conduct and the intent to defraud is supported by the evidence, the court may not only award you the benefits to which you were initially entitled, but may also award damages for other economic and non-economic losses, such as financial losses and mental anguish. The court may also choose to award punitive damages if the insurer's conduct is deemed sufficiently egregious to justify such damages.

Contact an Experienced San Jose Insurance Attorney for Further Assistance

Insurers are sometimes so intent on reducing their liabilities that they become "bad actors" and violate their duty of good faith (owed to their policyholders and others). If you are involved in a dispute with your insurer, or with a third-party insurance company, then you may be entitled to significant damages as compensation for their bad faith conduct.

Attorney Brian J. O'Grady has more than three decades of experience litigating a range of personal injury and breach of contract claims, including those that involve disputes with insurers who refuse to act in accordance with their duties under California law. Attorney O'Grady spent the earlier part of his career working as a trial litigator on behalf of insurance companies, and as such, is well-positioned to understand and counter the strategies employed by insurers who make efforts to avoid paying out benefits.

Call (650) 318-6131 or submit an online claim form to schedule a free consultation with an experienced San Jose insurance attorney today. In our initial consultations, we will evaluate your claims and work with you to begin the process of securing the benefits that you're rightfully owed.