California law imposes an implied covenant of good faith and fair dealing in insurance contracts under which neither party may act so as to injure the rights of the other to receive benefits under the contract. Insurers whose actions harm the rights of their insureds to receive contracted-for insurance benefits breach this implied covenant of good faith and fair dealing, or act in “bad faith.” An insurer’s bad faith may occur at many stages of the claims process, even after the initial denial. Accordingly, insureds should protect their interests and be mindful of potential bad faith on the part of their insurers, from the claims determination process and in some cases, the insurer’s litigation tactics.

Bad Faith in Determining or Administering Insurance Claims

Most bad faith suits against insurers allege unlawful or improper behavior during the claims administration process. Indeed, insurers often engage in unreasonable behavior in order to deny claims and increase their bottom lines, which effectively places burdens on insureds to challenge these denials. Evidence of bad faith may arise from the affirmative actions of the insurer, such as misinterpreting claims information, conducting biased reviews, attempting to settle claims for unreasonably low amounts or setting unreasonable or impossible standards of evidence in order to avoid approving a claim. Conversely, an insurer’s bad faith may be reflected by its inactions, such as failure to communicate with insureds or failure to conduct reasonable investigations into the circumstances surrounding claims.

Bad Faith Following a Denial of an Insurance Claim

An insurer’s duty to act in good faith toward an insured continues even after it issues a denial. For example, an insurer must provide insureds with a clear and reasonable explanation for its denial decision. In general, this explanation should clarify why the claim was not payable, reference any applicable policy exclusions and in some cases provide guidance of what an insured needs to do to perfect the claim. Failure to do so may be evidence of bad faith.

Bad Faith in Coverage Litigation

The California Supreme Court has held an insurer’s duties of good faith and fair dealing do not end once litigation begins. In White v. Western Title Insurance Co., 40 Cal. 3d 870 (1985) (superseded by statute on other grounds), the Court allowed post-litigation actions, including the insurer’s unreasonable settlement efforts, as evidence to support a claim for bad faith. Although California courts have declined to broaden this holding, the decision still serves to curb abusive conduct by insurance companies. Subsequent cases have held an insurer may be acting in bad faith in failing to fully investigate a claim, even if litigation is pending, and if the insurer engages in unreasonable conduct in addition to litigation, such as by seeking declaratory relief against the insured, threatening baseless litigation and instigating criminal investigations. Although these situations occur less frequently, these examples show an insurer does not have a free pass to engage in bad faith after issuing a denial, or once litigation commences.

Insureds have a legal and contractual right to expect insurers administer claims in good faith and provide coverage when appropriate under the insurance contract. If insurers act unreasonably in order to issue denials, insureds should consult experienced insurance litigation attorneys in order to bring suit for policy benefits and other damages, including consequential damages, compensatory damages, punitive damages and attorneys’ fees and costs.