Perhaps the most universally misunderstood aspect of insurance litigation in California is what the potential outcomes look like for the insured. Some policyholders fear the insurance company will tie them up in litigation for years and drain them emotionally, while others think a jury will swiftly award them tens of millions in punitive damages. The truth is somewhere in between. Insureds need their attorneys to help them understand the realistic outcomes. Insureds who misunderstand this early on will find themselves in trouble down the road when comes time to make the hard decisions.

What can an insured recover as damages in California?

The majority of insurance lawsuits allege two legal claims against the insurer. The first is breach of contract. An insurer breaches the contract when they fail to pay what is owed on the claim. An insured who wins in court that the insurer failed to pay amounts owed under the policy will be awarded only that, and perhaps be reimbursed for some of their litigation costs.

The second legal claim is bad faith, or, breach of the covenant of good faith and fair dealing. To prove bad faith, one must generally prove that the insurer acted unreasonably and without proper cause. Proving bad faith usually requires evidence that the insurer did not make a prompt, full and fair claim investigation and that there was no genuine dispute over coverage. If bad faith is proved, an insured has access to additional monetary recovery beyond withheld policy benefits. This includes a portion of their attorney fees—the fees spent proving the claim was covered. Fees spent proving bad faith occurred are never recoverable in California. Individual insureds (not businesses) can also seek damages for emotional distress, which are difficult to value. Other financial losses resulting from the insurer’s unreasonable conduct may also be recovered. For example, business losses that continue because the insurer’s delays prevented you from reopening.

An insured can also potentially recover punitive damages. This is difficult to accomplish because a jury must agree there is “clear and convincing” evidence the insurer acted with malice, fraud or oppression. This is a high bar and many claims disputes will never reach this level, no matter how upset the insured is. Even where there is potential for punitive damages, it is difficult to estimate what they may be. Further, for the most part these will be based only on what the insurer did to you, not what it does to everyone. An appellate court will most likely reduce any punitive damages award that is higher than a 3:1 ratio when comparing punitive damages to the non-punitive damages awarded. An appellate court will most likely reduce an award to no more than 1:1 when there is no significant emotional distress factor.

Based on the above, the key for most cases to succeed in litigation is a large amount of unpaid policy benefits. That’s because these are known, predictable numbers that anchor a case. Suing where the only real damage is from “bad faith” is in most cases not advised because of the unpredictability of the monetary outcome combined with high costs of litigation (addressed below). One jury might think the emotional suffering is with $10,000, and another might think it is worth $100,000. It is nearly impossible to say what the result might be in advance. Therefore, do not count on having a good case merely because the insurer frustrated you, but did not deprive you of significant sums of money actually owed for the loss.

The insurer has many opportunities to narrow your case before trial.

Just because you file suit does not mean the insurer is going to trial on punitive damages and bad faith. The insurer has several opportunities to narrow your case for trial or eliminate it completely. These stages usually only come after you incur a lot of costs and fees.

The first opportunity is right after you file. The insurer can argue you cannot state facts sufficient to assert a claim for bad faith or punitive damages. This poses a lesser risk but a risk, nonetheless.

The bigger risk comes at summary judgment. This is right before trial where the insurer asks the court to throw out the claims for bad faith and punitive damages. A good policyholder attorney can find ways around summary judgment, but these motions are granted not infrequently. If the motion is granted, your case is limited to recovering withheld policy benefits. The biggest issue with summary judgment is that by the time that motion is heard, you will have likely spent a significant amount of money on your case.

Consider your costs and fees.

As discussed above, you can only get awarded your attorney fees if you prove bad faith. If you do prove bad faith, you only get awarded a portion of your fees attributable to proving the insurer withheld money owed under the contract. Thus, if your case is all about bad faith, you won’t recover the majority of attorney fees even if you prove it was the worst case of bad faith ever seen.

Costs are another significant consideration. Every case will require at least a handful of depositions before trial. Each deposition costs between $1,500 and $5,000 depending on location and if it’s video-taped. Cases will also take a few thousand in filing and service fees, and many thousands for expert witnesses. Most of those costs are not recoverable, so they offset any jury award or settlement.

Another consideration for costs—you might have to pay the insurer’s costs. Any party who loses in California generally has to pay some of the other side’s costs. A party can shift even more costs to the other side by making an “offer of judgment,” which is an offer to settle for a certain amount that, if rejected and not beat at trial, will cause you to pay the other side’s costs, even if you win.

Most attorneys, us included, may take your case on a contingency fee basis, meaning you pay nothing unless we win and you have little to no risk of being out of pocket in costs or fees. However, you still must remember that as your costs and fees grow, you will need to recover more and more money to offset them. Therefore, this must always be considered when presented with a settlement offer.

Consider your time and annoyance.

Litigation is annoying and stressful for most people, even if they are not actively involved with the day to day process. If the insurance claims process stressed you out, you can count on that continuing throughout the case.

Going through the trial court alone can take 2-3 years, and if you do really well or lose badly, the appeal can add another 1-2 years. Only you can decide what your time and stress is worth, but the key point is not to downplay it early on to your detriment.

Am I going to change the insurance company’s bad practices?

Probably not. In most cases the dispute is too specific to the facts at hand to really change how the insurance company operates. Big jury awards make headlines but typically don’t cause an insurance company to suddenly change its practices. Insurance companies anticipate litigation costs in what they do so an award won’t break them. Class actions, on the other hand, can tend to cause greater changes, but these are usually not possible for individual claims. Most claims do not meet the standards for a class action because there are too many unique facts for each case.

Should I be discouraged now?

No! The goal of this post is to give a realistic lay of the land in general terms to provide context. Do not walk away from this post thinking you never have a case. We would not be in business and this blog would not exist if all cases were doomed. The point is this: have a realistic understanding of what a case entails, up front, to avoid misunderstanding what your case is worth. Those misunderstandings can stop you from making the right decisions strategically down the road.