In California, an insurance bad faith claim is a claim that an insured has against his or her insurance company resulting from the insurance company’s bad acts. These claims usually arise from actions an insurance company takes, or fails to take, after incidents like a motor vehicle accident or property damage. Insurance bad faith is a complicated area of law.
In general, insurance companies owe a duty of “good faith and fair dealing” to their insureds. If the insurance company violates this duty, for example, by denying an insurance claim that it should have covered (and therefore not dealing in “good faith and fair dealing”) the insured may have a claim against the insurance company known as an insurance bad faith claim. However, whether an insurance company has violated this duty can be a complicated legal determination based on an exploration of the facts of what occurred, the behavior of the insurance company, the insurance policy, and the state of the law at the time. There is no uniform definition of what constitutes “bad faith.”
More and more, we see the buzzwords “bad faith” being alleged early on in the claims stage and early in litigation when an early settlement demand has not been accepted or denied when discovery and investigation is ongoing. Contrary to those crying bad faith, a disagreement in the value of a claim is not a basis for bad faith liability. (See Aronson v. State Farm Ins. Co. (C.D. Cal. 2000) 2000 WL 667285 (finding “an unaccepted settlement offer does not liquidate the amount of damages or constitute an admission of ‘undisputed amounts’ owed.”).
An insurance company is not obligated to pay a claim while it seeks information essential to determining the merits of the claim. (Blake v. Aetna Life Ins. Co., 99 Cal.App.3d 901 (1979) (insurer is entitled to withhold payment of a claim until its investigation reveals, “to a measure of certainty,” that a loss is covered). An insurer is entitled to withhold payment until it “receives adequate information to process the claim and reach an agreement with the insureds.” (Globe Indem. Co. v. Superior Court (1992) 6 Cal.App. 4th 725, 731; see also Othman v. Globe Indem. Co. (9th Cir. 1985) 759 F.2d 1458, 1468 n. 13, overruled on other grounds by Bryant v. Ford Motor Co. (9th Cir.1987) 832 F.2d 1080 (holding an insurer is entitled to withhold benefits while it investigates claim to determine if coverage exists under policy).
As a matter of law, “[i]t is not unreasonable for an insurer to resolve good faith doubts about the claim against the claimant.” (Phelps v. Provident Life & Acc. Ins. Co. (C.D.Cal.1999) 60 F.Supp.2d 1014, 1022 (applying California law). The implied covenant allows “the insurer [to] … give its own interests consideration equal to that it gives the interests of its insured.” (Love v. Fire Ins. Exch. (1990) 221 Cal.App.3d 1136, 1148–49.)
In addition, both the insurance policy and Insurance Code section 11580.2 can provide disagreements over the value of a UM/UIM claim are to be resolved by arbitration. An insurance company does not automatically commit bad faith when it cannot reach an agreement with its insured, and resolves the disagreement through arbitration. (See Rangel v. Interinsurance Exch., 4 Cal.4th 1, 16–17 (1992) (“[b]ecause the loss payable is subject to arbitration under the policy, payment may be delayed until the amount of the loss payable has been determined in arbitration.”); Austin v. Allstate Ins. Co. (1993) 16 Cal.App. 4th 1812, 1817 (“the Legislature has established a policy that underinsured motorist claims are to be determined by arbitration.”).
Overall, “bad faith” lawsuits are becoming more and more prevalent in California. While a bad faith claim can present serious implications and expose the insurer to extra-contractual damages, including punitive damages, the conduct of the insurer must be unreasonable and unwarranted to make it liable for bad faith, which is not the case when an insurer seeks information essential to determining the merits of the claim.