Introduction:
Insurance companies in California owe a duty of good faith and fair dealing with their insureds and failure to comply with that duty can impose liability upon the insurance company. The insurance company has a right to investigate claims and, depending on the wording of the policy, may have rights as to what they can expect the insured to provide in terms of cooperation and information to allow reasonable investigation and determination of coverage. They are not required to automatically accept any claim made by an insured.
But if their investigation is merely a ploy to evade their responsibilities under the insurance agreement or is not conducted with due diligence and good faith, they are in breach of their obligations. This article shall describe the basic law on this duty imposed upon insurance companies.
The Basic Law:
When an insurance company takes unreasonable investigative steps with the underlying motive of denying legitimate claims, it can be alleged that they have violated their duty to the insured and are liable for claims predicated on bad faith.
There are numerous methods by which an insurance company can act in bad faith, including the denying that a valid claim is covered; only paying part of the sums that should be paid for coverage; refusing to pay the cost of defense of a third party claim; refusing to settle with another party; failure to properly investigate a claim; undue delay in claims processing whether or not claims are eventually paid; offering an unreasonably low settlement amount; claiming a breach of the policy by the insured; cancelling a policy in an attempt to avoid paying the claim. There are various other ways the doctrine of bad faith can be invoked, all based on the theme of bad faith efforts to avoid payment.
It is important to note that an insurance company can make the wrong decision and not be acting in bad faith. To demonstrate the existence of bad faith that can give rise to a cause of action, it is necessary to prove by a preponderance of the evidence that the company's actions were unreasonable when compared to the customary course of business in the industry and also that the company's motivations were wrong. Breach of the covenant of fair dealing and bad faith is not the same as breach of contract, note. If the insurance company denies your claim due to negligence or error, that is not bad faith but can be breach of contract allowing damages. Breach of the covenant of good faith allows greater damages but requires wrongful intent on their part.
Jury Instructions:
A good place to find the basic law on a matter is in the Jury Instructions, which are the legal instructions a judge normally gives to a jury as to the matter they are deliberating. Here, we have reproduced the standard jury instructions available to a judge in California on the issue of bad faith in investigations:
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332.Bad Faith (First Party)—Failure to Properly Investigate
Claim—Essential Factual Elements
[Name of plaintiff] claims that [name of defendant] acted unreasonably, that is, without proper cause, by failing to conduct a proper investigation of [his/her/its] claim. To establish this claim, [name of plaintiff] must prove all of the following:
1. That [name of plaintiff] suffered a loss covered under an insurance policy issued by [name of defendant];
2. That [name of plaintiff] properly presented a claim to [name of defendant] to be compensated for the loss;
3. That [name of defendant], failed to conduct a full, fair, prompt, and thorough investigation of all of the bases of [name of plaintiff]’s claim;
4. That [name of plaintiff] was harmed; and
5. That [name of defendant]’s failure to properly investigate the claim was a substantial factor in causing [name of plaintiff]’s harm.
When investigating [name of plaintiff]’s claim, [name of defendant] had a duty to diligently search for and consider evidence that supported coverage of the claimed loss.
New September 2003; Revised December 2005, December 2007, April 2008,
December 2015, June 2016
Directions for Use
This instruction sets forth a claim for breach of the implied covenant of good faith
and fair dealing based on the insurer’s failure or refusal to conduct a proper
investigation of the plaintiff’s claim. The claim alleges that the insurer acted
unreasonably, that is, without proper cause, by failing to properly investigate the
claim. (See Rappaport-Scott v. Interinsurance Exch. of the Auto. Club (2007) 146
Cal.App.4th 831, 837 [53 Cal.Rptr.3d 245].)
The instructions in this series assume that the plaintiff is the insured and the
defendant is the insurer. The party designations may be changed if appropriate to
the facts of the case.
Sources and Authority
• “[A]n insurer may breach the covenant of good faith and fair dealing when it
fails to properly investigate its insured’s claim.” (Egan v. Mutual of Omaha
Insurance Co. (1979) 24 Cal.3d 809, 817 [169 Cal.Rptr. 691, 620 P.2d 141].)
• “To fulfill its implied obligation, an insurer must give at least as much
consideration to the interests of the insured as it gives to its own interests.
When the insurer unreasonably and in bad faith withholds payment of the claim
of its insured, it is subject to liability in tort. And an insurer cannot reasonably
and in good faith deny payments to its insured without fully investigating the
grounds for its denial.” (Frommoethelydo v. Fire Insurance Exchange (1986) 42
Cal.3d 208, 214–215 [228 Cal.Rptr. 160, 721 P.2d 41], internal citation
omitted.)
• “To protect [an insured’s] interests it is essential that an insurer fully inquire
into possible bases that might support the insured’s claim. Although we
recognize that distinguishing fraudulent from legitimate claims may occasionally
be difficult for insurers, . . . an insurer cannot reasonably and in good faith
deny payments to its insured without thoroughly investigating the foundation for
its denial.” (Egan, supra, 24 Cal.3d at p. 819.)
• “When investigating a claim, an insurance company has a duty to diligently
search for evidence which supports its insured’s claim. If it seeks to discover
only the evidence that defeats the claim it holds its own interest above that of
the insured.” (Mariscal v. Old Republic Life Ins. Co. (1996) 42 Cal.App.4th
1617, 1620 [50 Cal.Rptr.2d 224].)
• “While we agree with the trial court . . . that the insurer’s interpretation of the
language of its policy which led to its original denial of [the insured]’s claim
was reasonable, it does not follow that [the insurer]’s resulting claim denial can
be justified in the absence of a full, fair and thorough investigation of all of the
bases of the claim that was presented.” (Jordan v. Allstate Ins. Co. (2007) 148
Cal.App.4th 1062, 1066 [56 Cal.Rptr.3d 312], original italics.)
• “An unreasonable failure to investigate amounting to . . . unfair dealing may
be found when an insurer fails to consider, or seek to discover, evidence
relevant to the issues of liability and damages. . . . [¶] The insurer’s willingness
to reconsider its denial of coverage and to continue an investigation into a claim
has been held to weigh in favor of its good faith.” (Shade Foods, Inc. v.
Innovative Products Sales & Marketing, Inc. (2000) 78 Cal.App.4th 847, 880
[93 Cal.Rptr.2d 364], internal citation omitted.)
• “[The insurer], of course, was not obliged to accept [the doctor]’s opinion
without scrutiny or investigation. To the extent it had good faith doubts, the
insurer would have been within its rights to investigate the basis for [plaintiff]’s
claim by asking [the doctor] to reexamine or further explain his findings, having
a physician review all the submitted medical records and offer an opinion, or, if
necessary, having its insured examined by other physicians (as it later did).
What it could not do, consistent with the implied covenant of good faith and
fair dealing, was ignore [the doctor]’s conclusions without any attempt at
adequate investigation, and reach contrary conclusions lacking any discernable
medical foundation.” (Wilson v. 21st Century Ins. Co. (2007) 42 Cal.4th 713,
722 [68 Cal.Rptr.3d 746, 171 P.3d 1082], original italics.)
• “[W]hether an insurer breached its duty to investigate [is] a question of fact to
be determined by the particular circumstances of each case.” (Paulfrey v. Blue
Chip Stamps (1983) 150 Cal.App.3d 187, 196 [197 Cal.Rptr. 501].)
• “[L]iability in tort arises only if the conduct was unreasonable, that is, without
proper cause.” (Rappaport-Scott, supra, 146 Cal.App.4th at p. 837.)
• “[W]ithout actual presentation of a claim by the insured in compliance with
claims procedures contained in the policy, there is no duty imposed on the
insurer to investigate the claim.” (California Shoppers, Inc. v. Royal Globe
Insurance Co. (1985) 175 Cal.App.3d 1, 57 [221 Cal.Rptr. 171].)
• “It would seem reasonable that any responsibility to investigate on an insurer’s
part would not arise unless and until the threshold issue as to whether a claim
was filed, or a good faith effort to comply with claims procedure was made, has
been determined. In no event could an insured fail to keep his/her part of the
bargain in the first instance, and thereafter seek recovery for breach of a duty to
pay seeking punitive damages based on an insurer’s failure to investigate a
nonclaim.” (Paulfrey, supra, 150 Cal.App.3d at pp. 199–200.)
Conclusion:
Delay in resolution alone or lack of courtesy does not constitute bad faith. It requires an intent on the part of the insurance company to evade responsibility. Insurance companies do not make money by paying out claims: they make money by selling insurance. In such a situation it is not surprising that some insurance companies begin to slant their investigation and actions to minimize the chance of paying out on claims. Even if not explicitly stated, employees of an insurance company are going to understand that monies spent to compensate policy holders are not monies retained by the employer.
It is because of this implicit economic interest that bad faith law was developed so that the insurance companies face greater exposure than that available in a simple breach of contract action. After a few sizable judgments, the cost benefit analysis radically alters for the insurance companies and the number of instances of bad faith can be expected to decline.
But they still exist and the wise policy holder will keep that in mind as he or she interacts with the insurance company to develop appropriate payout for a claim.