Identifying Bad Faith Insurance Practices in Commercial Insurance Claims

Insurance is an industry unlike any other. Rather than buying a definite good or service, policyholders are paying for protection against an event that may never occur.

Justice Mosk of the California Supreme Court summarized the situation well in a foundational state insurance decision: “The insured […] does not seek to obtain a commercial advantage by purchasing the policy — rather, he seeks protection against calamity.” (Egan v. Mutual of Omaha Ins. Co.(1979) 24 Cal. 3d 809, 818.)

This remains true when a policyholder is a business rather than an individual. The purpose of insurance is to protect the policyholder from financial losses. The means and kinds of protection available depend on the policy, but the fundamental purpose does not change.

Policyholders place substantial trust in insurers for this system to work. Most insured parties will pay premiums for years without ever making a claim. They must be able to trust that the insurer will honor any claim they eventually need to make, otherwise there is no reason to continue paying those premiums. In other words, they must believe the insurer will act in good faith.

However, insurers all too often refuse to honor contracts or otherwise attempt to avoid paying covered claims. When a business insurer acts in bad faith like this, the financial and personal outcomes for policyholders can be catastrophic. Let’s break down what constitutes bad faith under California law and how companies may support their claims.

California’s Bad Faith Insurance Laws

An insurance policy is a contract. Like any other contract, all parties involved are subject to an implied covenant to deal fairly with each other and act in good faith. Insurers are expected to honor their policies and fulfill their contractual obligations when an insured makes a covered claim.

However, insurance companies are in a position of power in every claim. Their entire business is structured around receiving as many premiums while paying out as little as possible. As such, California insurance laws (in the form of statutes, regulations, and court decisions) hold these companies to higher standards regarding their policies than apply to standard contracts.

Specifically, if an insurer does not respond reasonably to a claim, a consumer may file a bad faith tort action instead of a breach of contract claim. This permits the claimant to pursue significantly greater damages. This threat incentivizes policyholders to enforce their rights, and incentivizes insurers to act in good faith.

The specific requirements for good faith vary depending on the claim type. Insurance claims may be first-party, in which the insured person files a claim directly with their insurer. Commercial property damage due to extreme weather, fire, or burglary are common examples of first-party claims. Insurers must fulfill the following duties regarding first-party claims:

• Conduct a timely and comprehensive investigation into the matter
• Evaluate the damage fairly
• Provide a fair settlement offer
• Approve valid claims
• Provide a reasonable explanation for any denied claims, including the legal and factual bases for the decision
• Answer policyholder questions and communications promptly, truthfully and completely
• Pay settlements per the policy

In contrast, third-party claims occur when someone files a claim with an insurer because of the insured’s actions. A personal injury lawsuit by a customer against a business is considered a third-party claim. In such cases, insurers must:

• Competently defend the policyholder in matters that are even possibly covered under the policy.
• Take the opportunity to settle claims against policyholders if a court judgment may exceed the policy limit.
• Pay any damages a court or jury awards up to the policy limit if the claimant refuses to settle.
• Pay the full amount of damages awarded, regardless of policy limits, if the insurer unreasonably refused to settle or if it refused to defend.

Failing to fulfill any of these duties reasonably and in a timely manner may be considered insurance bad faith. However, it is important to note that bad faith is not the same as human error. An unintentional mistake by your insurer will not become grounds for a bad faith claim if the company promptly corrects the problem.

Demonstrating Commercial Insurance Bad Faith and Pursuing Legal Remedies

The insurance business model is predicated upon avoiding paying claims. Commercial insurers have dedicated legal departments to defend themselves against legal disputes. As such, the first and most important step toward proving commercial insurance bad faith and pursuing damages is consulting with a skilled insurance attorney.

Your attorney will work with you closely to build a strong case. Depending on your circumstances, your lawyer may do the following to support your argument:

• Comparing the policy and adjusting communications: By checking your insurer’s communications against your policy, your lawyer may identify inconsistencies or unreasonable behavior.
• Confirming whether the investigation was insufficient: Your attorney may request documents regarding the examination of your claim during discovery to determine whether it was properly performed.
• Comparing the insurer’s conduct to its own claims handling standards:  Your attorney will likely request the insurer’s claims handling manuals and guidelines to determine whether the way the company treated you is consistent with the standards it set for itself.
• Showing a pattern and practice of similar behavior: Your lawyer may request information regarding claims similar to yours to determine if the company regularly makes similar mistakes or delays. A consistent pattern is evidence that the insurer is acting in bad faith rather than committing a single error.
• Demonstrating an egregious breach: Information from other claims may also be used to demonstrate that your insurer acted unreasonably by denying your covered claim or failing to defend you despite approving or defending other policyholders in similar situations.

Proving bad faith can be a complex matter. However, you have the right to hold insurers accountable if they attempt to violate the terms of your policy. With the right legal counsel, you can pursue remedies such as compensation for the coverage you were denied, punitive damages, legal fees, and more.

If you believe your insurer is acting in bad faith and harming your business, do not hesitate to get help. Schedule your consultation with the expert insurance attorneys at Oksenendler Law, P.C. in San Francisco. Our skilled team has decades of experience representing companies and individuals struggling with insurance disputes. We are dedicated to helping you pursue the compensation your organization deserves after your insurer fails to act in good faith.