The California Court of Appeal recently issued an opinion confirming the standard for determining an insurer’s bad faith conduct is whether the insurer acted unreasonably, not whether the insurer refused to pay a reasonable claim. I recently blogged about the California standards for proving bad faith.1 About a week after that blog post, lawyers for Pacific Specialty Insurance Company asked a Los Angeles judge to enter summary judgment against a Merlin client’s bad faith claims because bad faith was supposedly an intentional tort (i.e., the insured needed to prove intent to harm). Not surprisingly, the judge ruled in our client’s favor and rejected this argument. As noted in the blog post, bad faith only requires proof the insurer acted “unreasonably.” About a week later, California’s Second Appellate District Court confirmed in a separate case that bad faith only requires evidence of “unreasonable” conduct.2 Sorry, Pacific Specialty.

In this recently published decision (“Pinto”), the court confirmed that to prove bad faith, there must be a finding that the insurance company acted “unreasonably.” The case arose on a procedural technicality about jury verdict forms. The form used at the bad faith trial asked the jury to determine if the insurer failed to accept a “reasonable” settlement of the claim. The jury agreed. The insurer argued this finding was insufficient to support a finding of bad faith because the form did not ask, and there was therefore no finding by the jury, that the insurer’s failure to accept the settlement was “unreasonable.” In other words, the insurer argued that the jury must evaluate the reasonableness of the insurer’s conduct as opposed to the reasonableness of the insured’s claim. The court agreed. It did not rule on whether the insurer’s conduct was actually unreasonable.

This published opinion provides a good example of how and how not to argue bad faith, even during the underlying insurance claim. For example, arguing that your proof of loss or causation analysis is “reasonable” would not actually suffice as an argument the insurer is acting in bad faith. Instead, the argument must focus on how the insurer’s refusal to accept those items must have been unreasonable. Think of all the other reasons the insurance company might argue its conduct was reasonable. In the Pinto case, for instance, the insurer argued that its failure to accept the demand was reasonable, noting that the demand terms were too vague and one of the insureds was non-responsive. Applying this to a real claim adjustment, perhaps an insurer did not accept a reasonable proof of loss within forty (40) days as required by law.3 Does that failure alone constitute unreasonable behavior? Perhaps, but more is needed – why did the insurer not respond in time? If you are not asking those questions, you are not properly demonstrating bad faith.

This ruling also provides a fresh reminder that the standard for proving bad faith is not stringent. There is no need to prove malice, fraud, oppression, or anything of the sort. Instead, the evidence must merely demonstrate that the insurance company’s conduct was unreasonable. This is one of many reasons why we usually advise public adjusters and insureds that there is no need to argue the insurance company did anything more. In fact, when you argue the insurance company’s conduct was worse than “unreasonable,” you set the bar higher for yourself in terms of the standard of proof. Also, such attacks are often counter-productive as insurance company adjusters expect you to lead with facts if your facts are strong, and interpret a quick resort to aggressive allegations as a sign of weakness in the claim.

Finally, the ruling provides a stark warning to lawyers. Use the right verdict forms! Never rely on standardized verdict forms if your case has facts differentiating it from the classic scenario. The lawyers in Pinto used the standard California jury instruction issued by the Judicial Council, “the policymaking body of the California courts . . . [u]der the leadership of the Chief Justice.”4 The standard jury instruction form utilized in Pinto is called CACI No. 2334, and it was drafted for the specific factual scenario where a liability carrier fails to accept a reasonable settlement demand within the limits. That form fails to ask the jury if the insurer “unreasonably” failed to accept the demand.5 Pinto calls into question whether that form can ever properly be used again. Nonetheless, the insurance company’s arguments in Pinto appear to have been heavily focused on the reasonableness of its failure to accept the demand, not the demand itself. Note, because this was a liability insurance case, we do not express any significant opinions on the outcome specific to that context and wish the policyholders well in their anticipated appeal to the California Supreme Court.
1 As I noted in that blog post, California courts have stated that bad faith is an “imprecise label for what is essentially some kind of unreasonable insurer conduct[.]” Austero v. National Cas. Co. (1978) 84 Cal.App.3d 1, fn. 22, disapproved of by Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809.
2 Pinto v. Farmers Ins. Exchange, No. B295742, 2021 WL 857776 (Cal. App. Mar. 8, 2021).
3 10 Cal. Code Regs. § 2695.7(b).
5 CACI No. 2334. Bad Faith (Third Party)—Refusal to Accept Reasonable Settlement Within Liability Policy Limits—Essential Factual Elements. Judicial Council of California Civil Jury Instructions (2020 edition).