As we enter the New Year, it is a good time to review what constitutes "Bad Faith" in California. The case law has evolved over time and so have the statutes. I’ve heard people claim that bad faith doesn’t truly exist in California, but that assertion is simply untrue. The Courts have taken a very conservative approach to bad faith damages in the last ten years, however, there are times a truly exceptional case may sway both judge and jury when damages calculations are before them.
In bad faith, any coverage provided for the insured’s direct benefit is considered first party coverage. First party coverage usually involves uninsured and underinsured motorist coverage in automobile liability insurance and medical and property casualty coverage in automobile or homeowners or business policies.
In California, there is a three step analysis for bad faith (of course there are exceptions):
- First, determine if the insurer has contractual liability under the contract to pay the insured’s claim for policy benefits;
- Second, determine whether the insurer’s failure to pay or other conduct in the connection with the claims subjects it to extra contractual (tort) liability for compensatory damages over and above whatever is owed under the policy; and
- Third, separate consideration must be given to determine whether punitive damages might be recoverable based upon the insurer’s conduct.
Generally, when one thinks of "bad faith," they think in terms whether or not the insurer breached the implied covenant of good faith and fair dealing. The breach of the implied covenant is actionable under tort or contract and an action on either theory is commonly referred to as "bad faith." Archdale v. American Int’l Specialty Lines Ins. Co. (2007) 154 Cal.App.4th 449,467. In analyzing bad faith, we look to see whether the insurer’s delay or withholding benefits was unreasonable or without proper cause. Jordan v. Allstaste Ins. Co. (2007) 148 Cal.App.4th 1062, 1072-1073. Usually, no bad faith action lies where the benefits due were fully and promptly paid, no matter how hostile or egregious the insurer’s conduct towards the insured may be prior to the payout.
Overall, bad faith actions are filed for withholding of benefits due under a policy or for unreasonable conduct by the insurer. Although there are many ways to analyze withholding of benefits or unreasonable conduct, these are the basic terms. It will be interesting to see how the analysis and case law will evolve over the upcoming year.