In California, your insurance company has a duty to defend and indemnify you. This means that when a third party makes a claim for a covered risk, the insurer must promptly and fairly investigate the claim in good faith as well as provide you with a legal defense if the claim is potentially covered.
Here are five key things to know:
- Failure to defend and indemnify you as a policyholder may constitute “bad faith” by the insurer.
- Courts look to the insurance policy language to determine whether a risk is covered and what your “reasonable expectation” should be.
- Whenever the insurance policy is ambiguous, the court resolves it your favor.
- Damages for a bad faith breach of the “duty to defend” can include your attorney’s fees, emotional distress, and reimbursem*nt of what you paid to the injured party.
- In some cases, a bad faith insurer may also have to pay you punitive damages.
To help you better understand California’s “bad faith insurance” laws, our California personal injury lawyers discuss, below:
- 1. What is an insurer’s “good faith” obligation?
- 2. What acts constitute “bad faith” by an insurer in California?
- 3. When does an insurer have a duty to defend me?
- 4. What is a “covered risk” under California insurance law?
- 5. What damages can I recover for an insurer’s bad faith in California?
1. What is an insurer’s “good faith” obligation?
Insurance policies are contracts between the insurer and you as the policyholder. Under California law, every contract contains an implied covenant of good faith and fair dealing.
This means that each party has a duty of good faith to act to fulfill its obligations under the contract. The parties must not do anything to interfere unfairly with the other party’s right to receive the benefit(s) of the contract.1
You are contractually obligated to notify your insurance after an accident.
Common insurance contract terms
Most contracts of insurance in Californiarequire an insurer to:
- Pay claims when you experience a potentially “covered risk,”2
- Investigate a claim to determine who is liable for the injury,
- Provide you as the policyholder with a legal defense against third-party claims, and
- Use good faith attempts to settle claims.
Example: During a party at Bill’s house, a guest trips and hits her head on the sink. She makes a premises liability claim against Bill for her medical bills and lost wages. Bill’s homeowner’s insurance policy covers “slip and fall” accidentsif caused by the homeowner’s negligence. At this stage no one is sure why the guest slipped. But because the claim is potentially covered, the insurer must investigate it promptly and use good faith efforts to defendBill’s rights.
2. What acts constitute “bad faith” by an insurer in California?
Many acts can constitute insurance bad faith claims by California insurers. Without limitation these California insurance bad faith cases may involve:
- Unreasonably delaying or refusing to pay a claim.3
- Failure to conduct a full, prompt and fair investigation in the claims process.4
- Lack of reasonable standards for investigating claims.
- Failure to communicate with you regarding a claim.
- Misrepresentation of facts about the policy benefits, policy provisions, policy limits, or coverage of the insurance contract.5
- Unreasonable refusal or unreasonable delay to settle a valid claim or get a settlement offer.
- Failure to adequately explain a claim denial.
- Breach of contract.
- Compromising your ability to defend a lawsuit in any way.6
3. When does an insurer have a duty to defend me?
Insurers in California are required to defend and indemnify you as their policyholder if a risk is even “potentially” covered. This means that even if the cause of an accident is unknown, the insurer must treat it as a covered risk, at least initially.
Example: Joel buys a new home but lets the current owners stay in it for up to 60 days. Sometime before the 60 days is up the family moves out, leaving the house vacant. During that time the house is damaged in a fire. Joel’s homeowner denies Joel’s claim for property damage on the grounds that the policy does not cover homes that have been vacant for more than 30 days. But absent proof of when the prior owners moved out, the company must investigate and consider Joel’s claim in good faith.
You must also act in good faith and comply with the notice requirements set forth in the policy.7 Misrepresenting the facts of an accident could invalidate the policy and possibly result in prosecution for fraud.
4. What is a “covered risk” under California insurance law?
In determining whether a risk is covered, California courts look to the language contained in the insurance policy. The court then decides what is your “reasonable expectation” based upon such language.
If the intent is not clear, the court resolves any ambiguity in your favor. The result is that where a claim might or might not be covered, depending on facts that are as yet unknown, the insurance company must still investigate and, if necessary, defend against third-party claims.
If your insurance policy is unclear about whether a particular risk is covered, courts will resolve the uncertainty in your favor.
5. What damages can I recover for an insurer’s bad faith in California?
Damages for an insurer’s bad faith failure to defend and indemnify can include:
- Amounts you had to pay to the injured party,
- Costs of defending a lawsuit against the other party,
- Legal fees incurred in obtaining benefits under the insurance policy, and/or
- Damages for anxiety, mental suffering and emotional distress.8
In truly egregious cases, you may also be able to recover punitive damages for bad faith breach of the duty to defend.
Finally, it is also worth noting that if the insurer fails to defend a third-party claim, it cannot later challenge a judgment about that claim because it was not a party to the proceedings.
Legal references:
- California Civil Jury Instructions (CACI)325. Breach of Covenant of Good Faith and Fair Dealing—Essential Factual Elements.
- See, for example, CACI 2300.Breach of Contractual Duty to Pay a Covered Risk.
- CACI 2331. Breach of the Implied Obligation of Good Faith and Fair Dealing—Failure or Delay in Payment (First Party)—Essential Factual Elements; see also Major v. Western Home Ins. Co. (2009) 169 Cal.App.4th 1197; Dua v. Stillwater Ins. Co. (Court of Appeal of California, Second Appellate District, Division Two, 2023) 91 Cal. App. 5th 127; 24th & Hoffman Investors, LLC v. Northfield Ins. Co. (Court of Appeal of California, First Appellate District, Division Three, 2022) 82 Cal. App. 5th 825.
- See, for example, CACI 2332. Bad Faith (First Party)—Failure to Properly Investigate Claim.
- CACI 2333. Bad Faith (First Party)—Breach of Duty to Inform Insured of Rights—Essential Factual Elements.
- CACI2336. Bad Faith (Third Party)—Unreasonable Failure to Defend—Essential Factual Elements. Also see generally CACI2337. Factors to Consider in Evaluating Insurer’s Conduct.
- CACI 2320. Affirmative Defense—Failure to Provide Timely Notice.
- CACI 2350. Damages for Bad Faith. There is no fixed standard for deciding the amount of damages for emotional distress in a bad-faith lawsuit. The jury can award any reasonable amount it deems appropriate.
