INSURANCE BAD FAITH PRIMER
San Jose Insurance Policy Liability
California Insurance Bad Faith Law—Claims Denials and Insurance Coverage Issues, Including ERISA Preemption Issues
By ALICE WOLFSON and DAVID LILIENSTEIN
D L L A W G R O U P
345 Franklin Street • San Francisco, California 94102
Telephone: 1-888-353-3016 • Facsimile: 415-358-8484
The following are some issues which frequently arise when litigating insurance bad faith cases. This includes claims denials, coverage issues, duty to defend, duty to indemnify, and ERISA preemption law. This primer focuses on insurer conduct that may qualify as bad faith claims handling.
Because statutes change and decisional law on any topic evolves, and because decisions are often subject to multiple interpretations, the reader is cautioned not to rely on the principles set forth without undertaking additional research about San Jose insurance policy liability.
The authors gratefully acknowledge the assistance of Jill Schlichtmann, Esq., and Amy Bach, Esq.
- Q: What general rules of construction apply to the interpretation of insurance policies?
A: The language of an insurance policy is to govern its interpretation if the language is clear and explicit. (Civil Code section 1638; Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 10 Cal.Rptr.2d 538.)
- Any ambiguity or uncertainty in a policy will be resolved against the insurer and in favor of the policy holder. (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 54 Cal.Rptr. 104; Delgado v. Heritage Life Ins. Co. (1984) 157 Cal.App.3d 262, 203 Cal.Rptr. 672.)
- Insurance contracts are to be interpreted to effectuate the “objectively reasonable expectations of the insured.” (AIU Ins. Co. V. Superior Court (1990) 51 Cal.3d 807, 822, 274 Cal.Rptr. 820.)
- Insurance industry publications are particularly persuasive as interpretive aids in determining coverage on behalf of the insured. (Prudential-LMI Commercial Ins. Co. v. Reliance Ins. Co. (1994) 22 Cal.App.4th 1508, 27 Cal.Rptr.2d 841.)
- Indemnity in case of loss should be effectuated rather than defeated. (Insurance Company of North America v. Electronic Purification Co. (1967) 67 Cal.2d 679, 63 Cal.Rptr. 382.)
- Words used in an insurance policy are to be interpreted according to the plain meaning which a layperson would ordinarily attach to them, not as they might be analyzed by an attorney or an insurance expert. (Delgado v. Heritage Life Ins. Co., supra, 157 Cal.App.3d 262, 272; Jones v. Crown Life Ins. Co.(1978) 86 Cal.App.3d 630, 638, 150 Cal.Rptr. 375; Crane v. State Farm Fire & Cas. Co. (1971) 5 Cal.3d 112, 115, 95 Cal.Rptr. 513, 514.)
- Exclusions must be in clear and unambiguous language and will be narrowly construed. (Ins. Code section 11580.1(c); California State Auto Association Inter-Insurance Bureau v. Warwick (1976) 17 Cal.3d 190, 130 Cal.Rptr. 520; State Farm Mut. Auto. Ins. Co. v. Jacober (1973) 10 Cal.3d 193, 110 Cal.Rptr. 1; Reserve Insurance Co. v. Pisciotta (1982) 30 Cal.3d 800, 180 Cal.Rptr. 628.) An exclusionary clause that is not conspicuous will be strictly construed against the insurer. (Merrill & Seeley, Inc. v. Admiral Ins. Co. (1990) 225 Cal.App. 3d 624, 630, 275 Cal.Rptr. 280.)
- Policies are read as a whole with each clause lending meaning to others. (Titan Corp. v. Aetna Casualty & Surety Co. (1994) 22 Cal.App. 4th 457, 27 Cal.Rptr. 2d 476.)
- Q: Is an insurer required to advise claimants of contractual rights under their policy?
A: In many situations, yes. Where an insured’s lack of knowledge may potentially result in the loss of benefits or forfeiture of rights, an insurer is required to bring to the insured’s attention any relevant information to enable the insured to take action to secure rights afforded by the policy. (Sarchett v. Blue Shield of California (1987) 43 Cal.3d 1, 233 Cal.Rptr. 76.)
- Q: Does an insurance agent have a duty to advise a policyholder on the sufficiency of his/her coverage limits?
A: The agent’s general duty of care does not include advising a policyholder on the adequacy of his/her limits. (Jones. v. Grewe (1987) 189 Cal.App. 3d 950, 234 Cal.Rptr. 717.) However, where agents assume additional duties by agreement, or hold themselves out as having specific expertise, a special duty may arise. (Kurtz, Richards, Wilson & Co. v. Insurance Communicators Marketing Corp. (1993) 12 Cal.App.4th 1249, 16 Cal.Rptr.2d 259.) Negligent misrepresentation may lie against an agent whose assurances of proper coverage turn out to be false. (Clement v. Smith (1993) 16 Cal.App.4th 39, 19 Cal.Rptr.2d 676.)
- Q: Can an insured reasonably rely upon an insurance agent’s representations regarding San Jose insurance liability?
A: An insured cannot intentionally remain ignorant as to the terms of his/her policy, but need not independently verify the accuracy of representations made by the agent regarding relevant policy provisions. (Clement v. Smith, supra, 16 Cal.App.4th 39.) If the insured can prove justifiable reliance, an agent may be liable for intentional or negligent misrepresentation. (Eddy v. Sharp (1988) 199 Cal.App.3d 858, 245 Cal.Rptr. 211; Hadland v. NN Inventors Life Ins. Co. (1994) 24 Cal.App.4th 1958, 30 Cal.Rptr.2d 88, rev. denied.)
- Q: Notwithstanding provisions of the policy itself, what are the restrictions on an insurer’s right to cancel?
A: A cancellation must meet the requirements of Insurance Code section 677 which provides that all notices of cancellation must be in writing, and must specify the reason for the cancellation. Insurance Code section 675 et seq. contain additional cancellation requirements applicable to certain types of policies. A cancellation that does not comply with statutory requirements is ineffective. (Lee v. Industrial Indemnity Co. (1986) 177 Cal.App.3d 921, 223 Cal.Rptr. 254.)
- Q: Beyond the possible effect of specific policy provisions, what are the principal restrictions on an insurer’s right to non-renew or effect a reduction in coverage in a policy?
A: The non-renewal of a property and/or liability policy, (excluding auto and worker’s compensation policies) is governed by Insurance Code section 678. A notice of non-renewal or reduction in coverage must be sent to the policyholder at least 45 days before expiration of the policy. If an insurer fails to provide such notice, the prior policy, with no changes in coverage, will remain in effect. If the insurer later complies with the notice provision, the prior policy will remain in effect for 45 days from delivery or mailing of the notice.
- Q: If an insurance policy contains provisions that are extremely one-sided or unfair, what remedies are available?
A: If the court, as a matter of law, finds the contract or any clause of the contract to have been unconscionable at the time it was made, the court may refuse to enforce the contract; enforce the remainder of the contract without the unconscionable clause; or limit the application of any unconscionable clause to avoid an unconscionable result. The basic test is whether the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract, given the general background and the needs of the particular case. (Civil Code section 1670.5; Truta v. Avis Rent-A-Car System, Inc. (1987) 193 Cal.App.3d 802, 238 Cal.Rptr. 806.)
- Q: If two or more policies cover a loss, what remedies are available to the respective insurers?
A: Generally, each can seek contribution from the other. This is true even if the two carriers are not co-insurers and the insured risks are not identical (e.g.: an errors and omissions policy and a comprehensive general liability (“CGL”) policy). (State Farm Fire & Casualty Co. v. Cooperative of American Physicians, Inc. (1984) 163 Cal.App.3d 199, 209 Cal.Rptr. 251; Troost v. Estate of DeBoer (1984) 155 Cal.App.3d 289, 202 Cal.Rptr. 47.) For primary and excess carrier obligations, see Hartford Accident & Indemnity Co. V. Superior Court (1994) 23 Cal.App.4th 1774, 29 Cal.Rptr.2d 32 and Iolab Corp. v. Seaboard Surety Co. (9th Cir. 1994) 15 F.3d 1500.
- Q: In a dispute between two property insurers regarding continuous, progressive and deteriorating damage to covered property which began during policy period #1 but continued until policy #2 was in effect, who is liable?
A: In the absence of enforceable policy language to the contrary, the insurer providing coverage when the damage is first manifest may be liable for all continuing damage even if it “occurs” after the policy period expires. (Snapp v. State Farm Fire & Cas. Co. (1962) 206 Cal.App.2d 827, 24 Cal.Rptr. 44.) Where two insurers’ policies cover successive periods, each insurer can be held jointly and severally liable for the loss. (California Union Ins. Co. v. Landmark Ins. Co. (1983) 145 Cal.App.3d 462, 193 Cal.Rptr. 461.) Note: substantial analytical differences exist between first and third party cases in the area. (Garvey v. State Farm Fire & Casualty Co. (1989) 48 Cal.3d 395, 257 Cal.Rptr. 292; Prudential-LMI Commercial v. Superior Court (1990) 51 Cal.3d 674, 274 Cal.Rptr. 387.)
- Q: Can coverage “evaporate” in the presence of “other insurance” clauses?
A: Public policy disfavors “escape” clauses in insurance policies, whereby coverage purports to “evaporate” in the presence of other insurance. This may also apply to “excess-only” clauses, by which carriers seek exculpation whenever the loss falls within another carrier’s policy limit. When two “excess-only” other-insurance clauses collide, courts will force both carriers to pro-rate, in derogation of the policy language; this rule is based on the fact that if both of the other-insurance clauses were given effect according to their terms, the insured would have no coverage. (CSE Ins. Group v. Northbrook Property & Casualty Co. (1994) 23 Cal.App.4th 1839, 29 Cal.Rptr.2d 120.)
- Q: Can a CGL policy providing standard “advertising liability” coverage provide a defense and/or indemnity for remotely related advertised activities?
A: Not usually. The test for coverage is whether there is a causal connection between the advertising activities and the “advertising injury.” (Bank of the West v. Superior Court, supra, 2 Cal.4th 1254.)
- Q: What are an insured’s remedies where an insurer has used advertising and solicitation materials that are unfair or deceptive as to the coverage that was actually provided?
A: Insurance Code sections 790.03(a) and (b) prevent insurers from engaging in such conduct.
Although there is probably no private right of action in a first party case, these code sections establish standards of conduct for the insurance industry. Violation of these code sections may constitute evidence of bad faith.
- Q: Who bears the burden of proving an excluded risk or condition subsequent which negates an insurance company's insurance liability in San Jose and elsewhere . . . the insured or the insurer?
A: The insurer. (State Farm Mut. Auto Ins. Co. v. Partridge (1973) 10 Cal.3d 94, 109 Cal.Rptr. 811; Maffei v. Northern Ins. Co. of New York (9th Cir. 1993) 12 F.3d 892.)
- Q: What happens when a loss is caused by a combination of a covered and an excluded risk?
A: Coverage will probably be a question of fact. (Howell v. State Farm Fire and Casualty Co. (1990) 218 Cal.App.3d 1446, 267 Cal.Rptr. 708.) The loss should be covered if the covered risk was the triggering or “efficient proximate cause” of the loss. (Garvey v. State Farm Fire & Casualty Co., supra, 48 Cal.3d 395, 402.) The loss is not covered if the covered risk was only a remote cause of the loss, or if the excluded risk was the efficient proximate cause of the loss.
- Q: How does the insurer-insured relationship differ from a traditional contractual relationship?
A: Every insurance contract contains an implied covenant of good faith and fair dealing. This covenant imposes a duty on the insurer to act in good faith and fairly toward its insureds in handling their claims. It further imposes a responsibility on the carrier to meet the reasonable expectations of the policyholder. (Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 108 Cal.Rptr. 480.) In handling claims, an insurer must give at least as much consideration to the financial interests of its insureds as it does to its own. (McCormick v. Sentinel Life Ins. Co. (1984) 153 Cal.App.3d 1030, 200 Cal.Rptr. 732.)
- Q: What is the basic standard or test of liability in an action for breach of the covenant of good faith and fair dealing?
A: “Unreasonable conduct” by the carrier. (California Shoppers v. Royal Globe Ins. Co. (1985) 175 Cal.App.3d 1, 221 Cal.Rptr. 171.) Examples of unreasonable behavior include denial of benefits (McLaughlin v. Connecticut General Life Ins. Co. (N.D.Cal. (1983) 565 F.Supp. 434), paying less than what is owed (Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 157 Cal. Rptr. 482), and delaying payments (Beck v. State Farm Mut. Auto Ins. Co. (1976) 54 Cal.App.3d 347, 126 Cal.Rptr. 602). However, there is no exhaustive list of acts constituting bad faith. Any act breaching the implied covenant of good faith and fair dealing will give rise to a bad faith cause of action.
- Q: Will unreasonable delay in the investigation of a claim alone provide sufficient grounds to support a general and punitive damage award?
A: Yes. (Kanne v. Connecticut General Life Insurance Co. (9th Cir. 1988) 867 F.2d 489.) An insurer has a duty to fully investigate claims, and must inquire into all possible bases that might support an insured’s claim. It cannot deny a claim without thoroughly investigating the basis for its denial. (Egan v. Mutual of Omaha Ins. Co., supra, 24 Cal.3d 809, 820.)
- Q: Does the filing of a lawsuit by an insured terminate the carrier’s duty of good faith and fair dealing for that particular claim in controversy?
A: No. (White v. Western Title Ins. Co. (1985) 40 Cal.3d 870, 221 Cal.Rptr. 509.)
- Q: May an insurer rescind a policy and refuse to honor a claim where the policyholder supplied incomplete or inaccurate information on the original form?
A: Yes, if, (1) the language of the application is clear and unambiguous; (2) no modifications in the application were made by an agent of the carrier; (3) the applicant had present knowledge of the facts sought, and appreciated their significance; (4) the insured intentionally misrepresented or concealed the facts; and (5) the misrepresentation was a material one. The burden of proving misrepresentation lies with the insurer and according to some cases must be proven by clear and convincing evidence. (Thompson v. Occidental Life Ins. Co. (1973) 9 Cal.3d 904, 109 Cal.Rptr. 473.)
- Q: Does payment of bills by the insurance company in a first party case, or eventual acceptance of plaintiff’s demand preclude recovering for bad faith?
A: No. (Sprague v. Equifax, Inc. (1985) 166 Cal.App.3d 1012, 213 Cal.Rptr. 69; Pistorius v. Prudential Life Insurance Co. (1981) 123 Cal.App.3d 541, 176 Cal.Rptr. 660; Fletcher v. Western National Life Insurance Co. (1970) 10 Cal.App.3d 376, 89 Cal.Rptr. 78.)
- Q: If the victim of bad faith dies, are there circumstances under which his or her estate may maintain an action for compensatory, general and punitive damages?
A: Yes. (Carr v. Progressive Casualty Ins. Co. (1984) 152 Cal.App.3d 881, 199 Cal.Rptr. 835.)
- Q: Is evidence of an insurer’s business practices admissible in a bad faith action?
A: Yes, if admitted to “show motive, opportunity, intent, preparation, plan, knowledge, identity or absence of mistake or accident.” (Evid. Code section 1101(b); Sprague v. Equifax, Inc., supra, 166 Cal.App.3d 1012.)
- Q: Must the plaintiff prove that the insurer intended to cause harm in order to prove breach of the covenant of good faith and fair dealing?
A: No. Intent to harm is not a prerequisite to establishing a breach of the insurer’s duty of good faith and fair dealing. (Johansen v. California State Auto. Assn. (1975) 15 Cal.3d 9, 123 Cal.Rptr. 288; Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910, 921, 148 Cal.Rptr. 389.)
- Q: In an action for breach of the covenant of good faith and fair dealing, can the insurer rely on subsequently obtained evidence to show its good faith?
A: Although there is some disagreement on this issue, the general rule is that the reasonableness of an insurer’s actions must be measured at the time the carrier was confronted with a factual situation to which it was called upon to respond. (Austero v. National Casualty Co. (1978) 84 Cal.App.3d 1, 146 Cal.Rptr. 653; Wetherbee v. United Insurance Co. of America (1971) 18 Cal.App.3d 266, 95 Cal.Rptr. 678; McLaughlin v. Connecticut General Life Insurance Co., supra, 565 F.Supp. 434.)
- Q: In a bad faith action, is the insurer presumed to have knowledge of the insured’s emotional distress?
- A: Yes. When a person buys an insurance policy, the very risks insured against presuppose that if a claim is made the insured will be under financial and/or emotional pressure. S/he would therefore be particularly vulnerable to oppressive tactics on the part of the insurance company. An insurance company is presumed to know that a denial of benefits may result in emotional distress to the insured. (Delgado v. Heritage Life Insurance Co., supra, 157 Cal.App.3d 262; Fletcher v. Western National Life Ins. Co., supra, 10 Cal.App.3d 376.)
- Q: Can an insured’s conduct which contributes to an insurer’s delay in investigation or processing a claim constitute grounds for a “comparative bad faith” defense?
A: Yes. (California Casualty General Insurance v. Superior Court (1985) 173 Cal.App.3d 274, 218 Cal.Rptr. 817.) However, comparative bad faith does not apply to punitive damages. (Fleming v. Safeco Ins. Co. (1984) 160 Cal.App.3d 31, 206 Cal.Rptr. 313.)
- Q: Can statutes such as California’s Unfair Claims Practices Act (Ins. Code section 790.03(h)) be used as a basis for establishing liability in either a first or third party case?
A: Yes. Even though California no longer allows a “direct” cause of action by a consumer for violation of the statute (Moradi-Shalal v. Fireman’s Fund Ins. Cos. (1988) 46 Cal.3d 287, 250 Cal.Rptr. 116.), the statute still sets a “standard of care” for insurers. It is also arguable that a “negligence per se” cause of action can be pled in California. It applies whenever there is a violation of a statute intended to protect a class of persons (which includes the plaintiff) and where the damage suffered is of the type which the statue is designed to prevent. (Evid. Code section 669, Vesely v. Sager (1971) 5 Cal.3d 153, 95 Cal.Rptr. 623.)
- Q: Do the same legal standards apply to an insurer’s duty to defend as to its duty to indemnify an insured?
A: No. The duty to defend is much broader than the duty to indemnify. (CNA Casualty Co. of California v. Seaboard Surety Co. (1986) 176 Cal.App.3d 598, 222 Cal.Rptr. 276.) Insurers have a duty to defend all suits which potentially seek covered damages. They have a duty to indemnify only where judgment has been entered on a theory which is actually, not just potentially, covered by the policy. (Collin v. American Empire Ins. Co. (1994) 21 Cal.App. 4th 787, 26 Cal.Rptr.2d 391.)
- Q: What are some examples of fact patterns triggering a duty to defend?
A: At least in the following situations:
- The suit potentially seeks damages within the scope of coverage. (Horace Mann v. Barbara B. (1993) 4 Cal.4th 1076, 17 Cal.Rptr.2d 210; Gray v. Zurich, supra, 65 Cal.2d at 276 & 278, 54 Cal.Rptr. at p. 112.)
- The complaint is capable of being amended to include covered damages. (Ibid.)
- The insurer learns of facts, from any source, which would trigger coverage. (Gray v. Zurich, supra, 65 Cal.App.2d at p. 277.)
- The insured reasonably expects coverage. (Gray v. Zurich, supra, 65 Cal.App.2d at p. 281.)
- If an insurer is required to defend at least one cause of action, they must then defend all causes of action. (Horace Mann, supra, 17 Cal.Rptr.2d at p. 214; City of South El Monte v. Southern California Joint Power Ins. Authority, supra, 28 Cal.App.4th 701.)
- Q: Can an insurer wait until litigation progresses before deciding whether it is obligated to defend its insured?
A: No. An insurer’s duty to defend must be assessed promptly at the outset of a case. (CNA Casualty of California v. Seaboard Surety Co., supra, 176 Cal.App.3d 598.) This does not mean, however, that the insurer must continue to defend even after it becomes certain there is no potential for coverage. (Montrose Chemical Corporation of California v. American Motorists Insurance Company, supra, 6 Cal.4th 287.)
- Q: Can an insurer, defending under a “reservation of rights,” be held liable for breach of the covenant of good faith and fair dealing even if it is ultimately determined that the insurer had no duty to defend or indemnity?
A: Yes, an insurer may be held liable for improperly handling the defense. (Travelers Ins. Co. v. Lesher (1986) 187 Cal.App.3d 169, 231 Cal.Rptr. 791.)
- Q: When the insurer provides a defense under a “reservation of rights,” does the insured have the right to independent counsel?
A: Often. The carrier’s reservation of rights to assert non-coverage at a later date can give rise to the insured’s right to an independent “Cumis” attorney. (San Diego Navy Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358, 208 Cal.Rptr. 494.) Civil Code section 2860 requires that Cumis counsel be qualified and willing to charge reasonable fees. (Center Foundation v. Chicago Ins. Co. (1991) 227 Cal.App.3d 547, 278 Cal.Rptr. 13.)
- Q: Does an insured’s willful wrongdoing in the underlying case necessarily relieve the carrier of its duty to defend or indemnify in a civil damages action?
A: Insurance Code section 533 prohibits a carrier from indemnifying the insured from injury caused by the insured’s “willful act.” (Aetna Casualty & Surety Co. v. Sheft (9th Cir. 1993) 989 F.2d 1105.) However, some umbrella policies, including some State Farm policies and promotional materials, actually represent that intentional torts are covered. Generally coverage depends on the nature of the claim and the allegations being made against the insured. Intentional action by an insured may not automatically relieve an insurer of its duties. (Studley v. Benicia Unified School Dist. (1991) 230 Cal.App.3d 454, 281 Cal.Rptr. 631.) The same is true if the claim against the insured arises out of vicarious liability for the acts of others. (Arenson v. National Auto & Cas. Ins. Co., (1955) 45 Cal.2d 81, 286 P.2d 816; Fireman’s Fund Ins. Co. v. City of Turlock (1985) 170 Cal.App.3d 988, 216 Cal.Rptr. 796; Allstate Ins. v. Gilbert (9th Cir. 1988) 852 F.2d 449 [acts of co-insureds].)
- Q: Must a liability insurer defend an insured against a claim for punitive damages?
A: Often yes, in the absence of a clear and express policy provision to the contrary and/or if it is reasonable for the insured to expect the insurer to do so. (Ohio Casualty Insurance Co. v. Hubbard (1984) 162 Cal.App.3d 939, 208 Cal.Rptr. 806.)
- Q: Can an insured settle with a third party when his/her insurer wrongfully denies coverage and/or improperly refuses to defend against a covered claim?
A: The insured is entitled to make a reasonable settlement and may then maintain an action against the insurer to recover the amount of the settlement as well as appropriate damages for bad faith. (Isaacson v. California Ins. Guarantee Assn. (1988) 44 Cal.3d 775, Cal.App.4th 631, 33 Cal.Rptr. 2d 690.)
- Q: May a third party who has entered into a stipulated judgment with the insured in exchange for an assignment of a cause of action against the carrier with a covenant not to execute, bind the insurer to the agreement?
A: Certainly not if the arrangement is collusive or fraudulent. Even in the absence of collusion, courts question the validity of such agreements. Issues such as the basis for the stipulation, liability, the amount of the settlement and the effect of a covenant not to execute are all potential problems, and attorneys should be very cautious in this area. (Smith v. State Farm Mutual Auto. Ins. Co. (1992) 5 Cal.App.4th 1104, 7 Cal.Rptr.2d 131; Xebec Development Partners, Ltd. v. National Union Fire Ins. Co. (1993) 12 Cal.App.4th 501, 15 Cal.Rptr.2d 726; Roman v. Uniguard Ins. Group (1994) 26 Cal.App.4th 177, 31 Cal.Rptr.2d 501; Wright v. Fireman’s Fund Ins. Companies (1992) 11 Cal.App.4th 998, 14 Cal.Rptr.2d 588; Glenbrook Homeowners Assoc. v. Scottsdale Ins. Co., supra, (N.D. Cal. 1994) 858 F.Supp. 986.)
- Q: Can the third party victim of an insurer’s bad faith refusal to defend take an assignment of the insureds’ claim for general and punitive damages?
A: Probably not. Most general and punitive damage claims cannot be assigned in California and must be reserved and prosecuted by the insured. (Murphy v. Allstate Insurance Co. (1976) 17 Cal.3d 937, 132 Cal.Rptr. 424.)
- Q: What is the scope of damages recoverable for breach of the covenant of good faith and fair dealing?
A: The insured may recover all damages proximately caused by the breach. This includes consequential loss, loss of use of the insurance proceeds, general damages, attorney's fees and in appropriate cases, exemplary damages. (Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 432-434, 58 Cal.Rptr. 13; Brandt v. Superior Court (1985) 37 Cal.3d 813, 210 Cal.Rptr. 211; Egan v. Mutual of Omaha Ins. Co., supra, 24 Cal.3d 809.)
- Q: What is the standard for recovering emotional distress damages in a bad faith case?
A: The damage must have naturally ensued from the insurer’s conduct. (Gruenberg v. Aetna Insurance Co., supra, 9 Cal.3d 566; Sprague v. Equifax, Inc., supra, 166 Cal.App.3d 1012.)
- Q: Can an insurer limit its exposure for damages by terminating coverage while the peril insured against is still active?
A: Not usually. This would defeat the very purpose of the protection for which the premiums were paid. (Ibid.)
- Q: Under what circumstances can an insured recover prejudgment interest in an insurance bad faith case?
A: Rarely. Prejudgment interest under Civil Code section 3291 is generally recoverable in personal injury cases where the defendant fails to accept a C.C.P. section 998 offer and the judgment exceeds that rejected offer. It is not recoverable in bad faith actions. (Gourley v. State Farm Mutual Auto Ins. Co. (1991) 53 Cal.3d 121, 279 Cal.Rptr. 307.)
- Q: Are plaintiffs’ attorney’s fees recoverable in successful bad faith actions?
A: Yes, fees incurred in obtaining wrongfully denied policy benefits are recoverable. (Brandt v. Superior Court, supra, 37 Cal.3d 813.)
- Q: What are the applicable standards for recovery of exemplary damages in a bad faith action?
A: Proof by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice as defined in Civil Code section 3294.
- Q: What must the plaintiff establish in order to obtain punitive damages against an insurance company for the actions of an employee adjuster?
A: That the employee was a “managing agent,” i.e., the employee had the authority to do the things he or she did that formed the basis for the punitive damage claim. (BAJI Nos. 1473, 1473.1, 1474.)
If the employee was not a managing agent, then under Civil Code section 3294(b), a plaintiff must prove that: (1) the employer knew of the employee’s unfitness yet employed him or her in conscious disregard of the rights or safety of others; or (2) the employer ratified the wrongful conduct for which exemplary damages are recoverable; or (3) the employer was personally guilty of oppression, fraud or malice.
- Q: Must a plaintiff introduce evidence of the insured’s financial condition in order to recover punitive damages?
A: Yes. A punitive damage award can be overturned where no meaningful evidence of a defendant’s net financial condition was submitted by the plaintiff.
Evidence of the defendant’s income alone, absent a showing of net worth, may not be sufficient. (Lara v. Cadag (1993) 13 Cal.App.4th 1061, 16 Cal.Rptr.2d 811; Tomaselli v. Transamerica Ins. Co. (1994) 25 Cal.App.4th 1269, 31 Cal.Rptr.2d 4433 [where $11.25 million punitive damage judgment was reversed for an insured’s failure to prove the insurer’s financial condition, despite the insurer’s failure to object], rev. denied).
- Q: Must a plaintiff always prove despicable conduct in order to recover exemplary damages?
A: Not if the plaintiff proves by clear and convincing evidence that the defendant has been guilty of fraud, as defined in Civil Code section 3294(c)(3).
- Q: What is ERISA preemption?
A: ERISA is an acronym for Employee Retirement Security Act of 1974 (29 U.S.C. 1001-1461). ERISA severely limits policyholder benefits as to group insurance offered through an employer. Remedies are limited to those administrative remedies found in the statute if the group insurance is offered as part of a “plan” within the meaning of ERISA. The issue of whether a group insurance policy is governed by ERISA has become a vital question in light of decisions extending ERISA’s preemptive reach and forcing claimants to bring an ERISA enforcement action in federal court, rather than a common law bad faith action in state court. (Kanne v. Connecticut General Ins. Co. (1987) 481 U.S. 41, 107 S.Ct. 1549.)
- Q: What constitutes an ERISA plan?
A: Whether an ERISA plan exists is a factual question. The courts have generally found a “plan” to exist where the employer pays the premiums, even though the employer does not intent to create an ERISA plan and has little involvement in the administration of the benefit program. (Marshall v. Bankers Life & Casualty Co. (1992) 2 Cal.4th 1045, 10 Cal.Rptr.2d 72.)
- Q: When is an employee plan excluded from ERISA?
A: The Ninth Circuit in Kanne v. Connecticut General Ins. Co., supra, held that all the criteria set forth in the Department of Labor regulations must be satisfied before a plan is excluded from ERISA. These are:
- The employer does not endorse the program;
- Employee participation is voluntary;
- Premiums are paid entirely by the employee;
- The employers sole function is to collect premiums and remit the same to the insurer; and,
- The employer must receive no consideration other than reasonable compensation for collecting and remitting premiums.
- Note:State, federal and municipal employees are not governed by ERISA preemption.
- (29 U.S.C. section 1309(b), 1321(b)(2).)
- Q: Who is a “participant” in an ERISA plan?
A: ERISA defines a “participant” as an “employee or former employee”. Plaintiffs who own their businesses or who are independent contractors arguably are not “employees”. The key consideration is whether the hiring party has the right to control the manner and means by which work is done. (Nationwide Mut. Ins. Co. v. Darden (1992) 503 U.S. 318, 112 S.Ct. 1344.)
- Q: What is the statute of limitations in a bad faith case?
A: In most cases, a one-year statute for personal injuries (emotional distress) is applied. (C.C.P. section 340.) A two-year statute governing actions “upon a[n] . . . obligation or liability not founded upon an instrument of writing” (C.C.P. section 339(1)) may also apply. (Smyth v. USAA Property and Casualty Ins. Co. (1992) 5 Cal.App.4th 1470, 7 Cal.Rptr.2d 694.) **CAUTION** If the insurance policy contains a contractual statute of limitations clause see question 52 below.
- Q: Is an insurance policy clause limiting the time “within which the insured must bring an action to recover on the policy” (e.g., one year), enforceable, and if so, how is the time period computed?
A: This issue is complex. The wording of the policy and the facts of the case are important factors. Some insurance policies attempt to require insured to file actions on the policy within a specified period from the occurrence, rather than from the time the claim is denied. (Lawrence v. Western Mutual Ins. Co. (1988) 204 Cal.App.3d 565, 251 Cal.Rptr. 319; Abari v. State Farm Fire & Casualty Co. (1988) 205 Cal.App.3d 530, 252 Cal.Rptr. 565, 567.)
In Prudential – LMI Commercial Insurance v. Superior Court, supra, 51 Cal.3d 674, the California Supreme Court held that the time limitation in the policy was enforceable, but tolled between the period of time that the insured gives notice of the loss and the time the claim was denied. For example: a loss occurs on January 1, 1991 and is reported to the insurer on February 1, 1991; it is denied by the insurer on March 1, 1992. The insured must file suit prior to February 1, 1993. The one month that elapsed between the loss and the notice to the insurer counts toward the limitations period. Based on the length of the delay in reporting the loss, the insured will have only and additional eleven months after denial to file the lawsuit. (Prieto v. state Farm Fire & Casualty Co. (1990) 225 Cal.App.3d 1188, 275 Cal.Rptr. 362.)
- Q: When does the statute of limitations begin to run on an action to compel and insurer to abide by an arbitration clause?
A: The limitations period begins to run when the insurer refuses to arbitrate. (Spear v. California State Auto. Assn. (1992) 2 Cal.4th 1035, 9 Cal.Rptr.2d 381.)