Important Information on Insurance Bad Faith

In the State of California, it is a generally held belief that an insurance company is obligated to deal with its policyholders fairly, in good faith, and deal fairly when a claim is presented. Each insurance policy implies an obligation of good faith and fair dealing on both sides, so that neither party will injure the rights of the other party to receive the benefits due them based on the agreement. To fulfill this implied obligation, the insurance company is expected to give the same consideration to the interests of its policyholders as it gives to its own interests.

In order to be considered in breach of this obligation, an insurance company would have to unreasonably act or fail to act in a manner that deprives the policyholder of their due benefits. It is not necessary for the insurer to intend to deprive the insured of the benefits of the policy for the insurance company to be liable.

If the insurer unreasonably denies benefits, tort laws could be violated and punitive damages would apply. Even if an employee of an insurance company believes that he or she is in the right, any sort of deceit or subterfuge is a violation of the principle of good faith. The requirements of good faith go even further: bad faith may be blatant or may consist of doing nothing when action should be taken and fair dealing may require more than just truthfulness. Examples of bad faith actions that have been recognized in judicial decisions are evasion of the bargaining spirit, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of power by not specifying terms, and interfering in another party's performance by not cooperating with that party.

The law may be clarified by looking at illustrations of when an insurance company was found to have acted in bad faith. If an automobile insurance company provides uninsured motorist coverage for their insured and an accident occurs involving an uninsured motorist, the insured is entitled to fair and prompt compensation under the policy. If the insurer argues over the value of the insured's injury and as a consequence refuses to pay any benefits, the insurance company may be liable for bad faith, even if they ultimately end up paying the claim. If there is an unreasonable delay in the payment of a claim this may result in the insurer committing bad faith as well. This can occur in a situation where the insurer forces the insured into arbitration even though the amount of the claim clearly exceeds the policy limit. Thus, payment is late and comes only after a needless arbitration hearing and judgment.

Bad faith can also occur when an insurance company denies a claim (for life insurance benefits, property damage, etc.) based on its own unreasonable interpretation of the policy. Sometimes a policy may contain a provision or requirement for coverage that is not explicitly detailed anywhere in the policy. In the end, it is the insurance company who will decide how to interpret the policy language. The insurer will be found to have acted in bad faith when the company disregards the plain meaning of a word or does not consider the policy holder's understanding of the policy. It is the responsibility of the insurer to make the policy language clear and concise. The general rule is that exclusions in a policy are interpreted narrowly against the insurer; additionally, exclusions in a policy must be conspicuous, plain, and clear.

It should be understood that an insurance company is not required to pay every claim presented to it, though the law generally favors the insured in bad faith cases. The insurer also has an obligation to its other policyholders and to the stockholders (if applicable) not to deplete its reserves through the payment of unfounded claims. Doing so would have a negative effect on members of the public attempting to purchase insurance since companies would need to charge more.

If bad faith can be demonstrated, even in cases where the particular harm could not have been anticipated, the amount of damages to which the insured is entitled must include compensation for all harm that was caused. Proof of damages is the responsibility of the insured. However, the insured is not expected to come up with a precise amount of damages for which they want to be compensated. Compensation for mental suffering, anxiety, humiliation, and emotional distress may be included as part of the damages in certain cases. Court costs and attorney fees may also be awarded. In certain situations as referenced above, punitive damages can be awarded as well.

The potential claims for damages are almost endless and every insurance bad faith case is unique. To reach a fair result and help you find your way through the facts and the law, you will do well to have an experienced trial attorney on your side.