Generally speaking, when talking about bad faith claims in California, it involves unreasonable delay or withholding benefits to the insured. In most instances when an insurance carrier fully and promptly pays the benefits due to an insured, a bad faith claim is not viable. Even if the insurance adjuster’s conduct is hostile or over the top, in the absence of an unreasonable delay or withholding of benefit, case law indicates that no breach of contract or breach of the implied covenant of good faith and fair dealing exists. See Delgado v. Heritage Life Ins. Co.(1984) 157 Cal. App. 3d 262.
However, in California, there are three distinct exceptions that have been adjudicated and are considered bad faith despite an insurer’s timely payment of a first party claim:
1) Insurer’s Concealment: In the matter of McMillin Scripps North Partnership v. Royal Ins. Co. of America (1993) 19 Cal. App. 4th 1215, the Court ruled that despite a prompt payment of the policy limits of $10,000 on an insured’s fire loss, the insurance company acted in bad faith because it concealed to the insured that the fire had been caused by a third party who had $100,000 liability coverage with the same carrier. The Court found that the concealment breached the implied covenant of good faith and fair dealing.
2) Insurer Bars Insured’s Counterclaim: In Barney v. Aetna Cas. & Sur. Co. (1986) 185 Cal. App. 3d 966, the Court ruled that the insurance company breached the implied covenant of good faith and fair dealing when it entered into a settlement that effectively barred the insured from filing a counterclaim. The insurance company has a duty to its insured not to "knowingly use its discretionary power under the policy to effect a settlement in a manner injurious of plaintiff’s rights." Id. 977-978.
3) Favoring One Insured Over Another: Courts have decided that when all benefits are paid in full, insurance companies must ensure they do not favor one insured to the detriment of another. Such favoritism can breach the covenant of good faith and fair dealing. In Schwartz v. State Farm Fire & Cas. Co. (2001) 88 Cal. App. 4th 1329, the Court found that when an insurer paid out a policy limit on an uninsured motorist claim by passengers in the insured vehicle, the insurer prejudiced the insured’s potential recovery.
Overall, California courts don’t like to find bad faith when policy limits are paid. However, courts consider whether an insurer has breached a duty that may harm its own insured on a case by case basis.