Bad Faith Insurance in San Jose
Insurance bad faith primer
California insurance bad faith law—claims denials and insurance coverage issues, including ERISA preemption issues
By Alice Wolfson and David Lilienstein
D L Law Group
345 Franklin Street • San Francisco, California 94102
Telephone: 415-678-5050 • Facsimile: 415-358-8484
B . Bad faith
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. Additionally, an insurer owes the insured the duty to defend. This refers to an insurer’s obligation to pay for legal fees and other costs associated with defending a claim made under an insurance policy. (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.) For example, if a carrier in San Jose denies a claim without warrant or a reasonable explanation, or denies a claim in full by underpaying, this could be construed as an instance of San Jose insurance bad faith. Also, if there is a dispute over what is covered by a policy, it could be construed as bad faith if an insurer fails to disclose policy limits. Issues may also arise under ERISA, the federal program which regulates employee benefit and pension plans. Insurers operating under ERISA are often immune to many bad faith actions and subsequent disputes must be handled in federal court, making them much more complicated.
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 San Jose insurance 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.) Consult one of our San Jose bad faith insurance lawyers if you need more specific information on this topic.
- 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 statute is designed to prevent. (Evid. Code section 669, Vesely v. Sager (1971) 5 Cal.3d 153, 95 Cal.Rptr. 623.) Contact our San Jose bad faith insurance attorneys for additional information regarding the Unfair Claims Practices Act.