Insurance is a unique contract. It is one of the only products people buy in the hope they will never have to use it. The California Supreme Court has explained that, when someone buys an insurance policy, they do “not seek to obtain a commercial advantage” but only “protection against calamity.” (Egan v. Mutual of Omaha Ins. Co.(1979) 24 Cal. 3d 809, 818.) When a loss has occurred and a claim is made, insurance companies are in a powerful position, as they write the contract, know the rules, have already received the insurance premiums, and have unlimited resources if they choose to contest the claim.
In California, every contract has an implied covenant of good faith and fair dealing. This is a promise the law implies into every contract that the parties will act in good faith to fulfill the contract. Only in the context of an insurance contract, however, does California law allow a policyholder to sue his insurance company for tort damages (as opposed to just contract damages) for breach of the implied covenant of good faith and fair dealing, also known as insurance bad faith. The unique aspects of an insurance policy, the disparity in power, and the vulnerable position of the insured, are all reasons that California law allows tort claims against insurance companies for bad faith breach of contract.
A bad faith claim is an extremely powerful tool for insureds, as tort remedies allow the insured to pursue all consequential damages, including emotional distress and a claim for punitive damages.
The duty of good faith and fair dealing is “is unconditional and independent” of any obligations owed by the policyholder. (Gruenberg v. Aetna Insurance Company (1973) 9 Cal.3d 556, 578.) To pursue an insurance bad faith case, an insured must prove his insurance company unreasonably withheld policy benefits. The key is unreasonable conduct. If the insured can show that the insurance company failed to pay benefits unreasonably, the insured can recover tort damages, and potentially punitive damages, in addition to contract damages.
An insurance company’s unreasonable conduct in withholding benefits can occur in a myriad of contexts. This includes unreasonably investigating the claim, interpreting the policy, estimating the damages, and making settlement offers. Any such unreasonable conduct gives rise to a bad faith case if policy benefits were withheld.
Not all states allow for tort claims for breach of an insurance policy as California does. This is an important rule that insurance companies are well aware of. Potential bad faith liability is a threat which insurance companies take seriously. Insurance companies don’t like being sued for bad faith, as they do not face such rules throughout the country.
In making an insurance claim in California, policyholders should be aware they are in a state that has uniquely favorable law protecting policyholders. The rules relating to good faith and fair dealing with respect to insurance policies and claims provide a potent tool for California insureds who have been denied insurance benefits unreasonably.