California Insurance Bad Faith: What It Is and What To Do Next

Everyone has to follow the rules, and that includes the insurance company. If yours isn't doing what it should to pay your claim or defend you, it might be acting in bad faith.

Is your insurance company ignoring you? Refusing to investigate a claim? It won't defend you against someone else's claim? According to your insurance policy — and the state of California — there are certain things the insurance company is required to do. If yours is hanging you out to dry, it might be a case of insurance bad faith.

Historians credit Benjamin Franklin with the famous quote about nothing being certain except death and taxes. But there's arguably another contender: insurance. Maybe not in Franklin's time, but certainly almost every adult in the U.S. today has some type of insurance policy, whether it's for an automobile, your home, health, or something else.

You might dislike having to pay your insurance premium every month, quarter, or year, but it's there for your protection. If the worst-case scenario happens and you're in an accident or suffer a property loss, you want to know you can rely on a solid insurance policy to protect you from serious financial problems.

But what if your insurance policy doesn't deliver the way you expect it to after an accident?

If your insurance adjuster is ignoring you, deliberately slowing or halting the claims process, or giving you a lowball offer that doesn't come close to covering your losses, you could be a victim of insurance bad faith. Let's take a look at what that means and what to do in that situation.

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What is insurance bad faith?

An insurance policy is a contract between you and the insurance company. You pay an agreed-upon premium to the insurance company, and it agrees to provide payment to you for financial losses covered in your policy.

California sets forth a set of circumstances that would be considered insurance bad faith. There could be bad faith if the insurance company acts in a way that includes:

  • Unreasonable denial of benefits
  • Advising claimant not to hire a lawyer
  • Misrepresenting facts or policy provisions
  • Failure to investigate and process a claim promptly
  • Failure to provide justification for claim denial
  • Failure to approve or deny a claim within a reasonable time after proof of loss was submitted
  • Refusal to make a good faith attempt to settle a claim when liability is clear
  • Failure to settle one portion of a claim in order to influence other parts of a claim
  • Trying to settle for an unreasonable amount as compared to what was advertised when the policy was purchased
  • Providing misleading information about legal deadlines for claims or filing a lawsuit
  • Threatening to appeal arbitration awards so the insured will settle for less than what was awarded in arbitration
  • Altering an application for a claim in a way that would affect settlement

Of course, there are many other ways an insurance company can act in bad faith, too, but these are the most common examples.

Essentially, your insurance company must provide you with the insurance payouts to which you're entitled under the policy. They can't make the process so slow and burdensome that it becomes impossible to collect your settlement, and they can't prevent or dissuade you from consulting a personal injury lawyer for help.

A settlement offer that's lower than you anticipated doesn't necessarily mean your insurance company is acting in bad faith.

An insurance company is a business. If you own or work for a for-profit business, you know that its purpose is to provide a product or service to customers, but also to make money for the owners, employees, and investors or other stakeholders.

Most insurance companies have hundreds of thousands (if not millions) of policyholders. Since people suffer losses every day that lead to insurance claims, yours is only one in a big pile that your adjuster or claims manager must process. The insurance company's objective is to process your claim quickly, pay you a settlement that will cost it as little money as possible, and move on to the next customer.

Your claims adjuster will follow a specific formula to determine what you're owed for a claim. If it's following a car accident, they'll rely on tools like Kelley Blue Book to estimate the value of your car based on its make, model, and year. There are other calculations they use, too. They use their formulas to calculate a settlement and make you an offer. It might not be what you hoped for, but it might align with the actual value of your claim.

You can't expect that an accident that totaled your 10-year-old base model car is going to result in a settlement that would be enough for a brand-new luxury vehicle. The settlement covers what the cost of the accident was, or what the car would be worth if you traded it in or sold it in its current form.

The insurance company's duty to defend

If you've been in an accident or suffered a loss that also involves another person, the insurance company has a couple obligations.

There are usually 4 elements to a California insurance policy. An insurance company has a duty to:

  1. Pay a claim when the policyholder experiences a covered loss
  2. Investigate the claim to determine liability
  3. Provide the policyholder with a legal defense against other parties' claims
  4. Attempt to settle a claim in good faith

A California insurance company is required to defend and indemnify a policyholder. It's required to thoroughly and fairly investigate any claim by another party against the policyholder to determine whether the policyholder is liable.

The insurance company has a duty to defend when it receives notice that the policyholder might be the defendant in a lawsuit regarding a covered liability (in other words, a judgment that the insurance company is required to pay). This duty is triggered as soon as there's potential for a judgment against the policyholder — not after the judgment is handed down.

The insurance company must provide a defense if there's a possibility that they could have to pay a judgment.

California law specifies that the duty to defend is broader than the duty to indemnify. The insurance company has a legal duty to defend the entire lawsuit, even if only one portion of the claim is covered under the insurance policy and there are other claims that aren't covered.

Can an insurance company refuse to defend?

The insurance company can refuse to defend if there's no possibility that the judgment would involve a claim that's covered by the insurance policy. Failure to defend when there's any possibility that the judgment would involve a covered claim would be a breach of contract for the insurance policy and is considered bad faith.

Damages from a refusal to defend

If you bring a claim against your insurance company for failure to defend, you could recover the following damages:

  • The amount you had to pay the injured party
  • The cost of defending yourself in the lawsuit by the other party
  • Legal fees
  • Damages for emotional distress, anxiety, or other psychological injury as a result of the lawsuit
Enjuris tip: If an injured party receives a judgment against you for a claim that should've been covered under your insurance policy, the insurance company can't then appeal the judgment. It wasn't a party to the lawsuit — only named defendants can appeal a court decision.

If you choose to file an insurance bad faith claim, it would only be able to defend itself against that claim. It no longer has relevance to the original claim.

What to do if you suspect your insurance company is acting in bad faith (5 steps)

The key to a bad faith claim might be your ability to show that you acted in good faith — that is, that you did everything right and still can't get satisfaction.

Here's what to do if you might pursue a California insurance bad faith claim:

  1. Read your insurance contract carefully. If you've not done so already, become familiar with the terms of your policy. Before you make a claim, it's crucial that you're sure whatever you're asking to have covered is actually included in your policy. There could be exemptions or exceptions in the fine print, so be aware of those, too. If you don't have a copy of your contract, you can probably access it digitally if you have an online account. You can also call the representative who sold you the policy originally and ask for a copy.
  2. Maintain a record of every correspondence. Phone calls, emails, letters, even messages you left that weren't returned are important. Keep a log of each date and time you called, who you spoke with (or left a message for) and what was said. Also keep records of the documents you sent to the insurance company, including photos, receipts, estimates, or other evidence.
  3. Appeal a claim denial. If you've received a denial of your claim or a settlement offer that you believe is insufficient, you can ask for review by a supervisor. You can refuse to accept a settlement or denial, and it's reasonable to ask for higher review.
  4. Make a demand. If you're not getting satisfaction from your adjuster or a higher level supervisor, a demand letter puts the insurance company on notice that you're going to take legal action if they're unwilling or unable to work with you.
  5. File a complaint. You can file a consumer complaint to the California Department of Insurance.

Damages in a California insurance bad faith claim

If you file a claim for insurance bad faith, you can recover:

  • Damages in excess of policy limits
  • Liability for judgments in excess of policy limits
  • Statutory penalties (fines required by law)
  • Interest
  • Emotional distress damages
  • Costs for economic losses and legal fees
  • Punitive damages

Punitive damages are awarded to a plaintiff as a way to punish a defendant for bad acts, or to deter or set an example for — in this case — other insurance companies. These damages are in addition to the damages already awarded.

When is it NOT bad faith?

Just because your claim is denied, it doesn't necessarily mean the insurance company is acting in bad faith.

The insurance company can deny your claim if:

  • You violated the insurance contract
  • The claim wasn't covered
  • The claim is fraudulent

You'll need to prove that the settlement offer doesn't equal the value of your actual costs from the claim.

Hire a personal injury attorney for your insurance bad faith claim

If you're making an insurance claim, it's because you've already experienced a loss.

Added stress in the situation because the insurance company isn't holding up its end of the deal isn't a good thing for anyone.

A personal injury attorney can work with your insurance company to help defend you in a lawsuit or get your claim covered. Filing a lawsuit is always the last resort — your lawyer will negotiate with your insurance company to attempt to resolve your claim without having to go to court.

If you believe your insurance company is acting in bad faith, feel free to use the Enjuris Personal Injury Law Firm Directory to find a California lawyer near you. Most personal injury lawyers offer a consultation at no cost, which means an attorney can review the facts of your claim and advise whether they provide a solid basis for insurance bad faith.

More resources:

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What does an injury lawyer do?

A personal injury lawyer helps individuals who have sustained injuries in accidents to recover financial compensation. These funds are often needed to pay for medical treatment, make up for lost wages and provide compensation for injuries suffered. Sometimes a case that seems simple at first may become more complicated. In these cases, consider hiring an experienced personal injury lawyer. Read more

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