2014 Bad Faith Compendium Sample

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2014 BAD FAITH Compendium

Contributed by Nelson Brown & Co.

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A Word from the Editor...Welcome to the 2014 edition of the Bad Faith Compendium!

The attorneys at Nelson Brown & Co., who are the authors of this Bad Faith Compendium, review nearly two dozen jurisdictions where insurance bad faith issues most often arise and provide a synopsis of pre-litigation claims— handling standards, first- and third-party claim issues, insurance company defenses, procedural and discovery issues, and the scope of damages.

The first installment in the Bad Faith Compendium series, which explores bad faith law in California, one of the country’s most volatile jurisdictions for insurance companies, was published on January 13, 2014, in the Eye on the Experts column at FC&S Legal: The Insurance Coverage Law Information Center (www.fcandslegal.com). Each week for 22 weeks thereafter, another installment in the series was published on FC&S Legal. The result is this complete Bad Faith Compendium, which contains detailed reviews of bad faith law in the following 23 jurisdictions:

California

Connecticut

Delaware

District of Columbia

Florida

Georgia

Maryland

Massachusetts

Minnesota

Mississippi

Missouri

New Jersey

New York

North Carolina

Ohio

Oklahoma

Pennsylvania

Rhode Island

South Carolina

Texas

Utah

Virginia

West Virginia

The Bad Faith Compendium is organized alphabetically by jurisdiction. Each installment in the series is arranged topically, from pre-litigation claims handling through damages and discovery. The Bad Faith Compendium includes complete case law citations and references to insurance laws and regulations, where applicable.

Easy to use and highly informative, the Bad Faith Compendium will be your go-to resource for bad faith law around the nation.

On behalf of our subscribers and the entire FC&S Legal team, we send our many thanks to William O. Krekstein and Michael S. Savett, the partners at Nelson Brown & Co. who were the primary authors of the Bad Faith Compendium, and to Matthew B. Malamud, Emmett McGowan, Benjamin R. Messing, and Mark H. Rosenberg, associates at the firm who worked with them, for providing FC&S Legal with this invaluable resource. Thanks also, to Jennifer Sludden, the marketing communications manager at Nelson Brown & Co., whose professionalism and dedication to ensuring the timely publication of the Bad Faith Compendium helped to make it possible, and to the Summit Professional Networks staff who worked tirelessly to produce and distribute the Bad Faith Compendium.

I also wish to thank Steven A. Meyerowitz, the Director of FC&S Legal and Consulting Editor for the Bad Faith Compendium, for generously sharing his expertise with all of us on the FC&S Legal team, and for ensuring that the publications under the FC&S Legal umbrella exceed the industry’s highest editorial standards.

Victoria Prussen Spears Editor, Bad Faith CompendiumAssociate Director, FC&S Legal


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2014 BAD FAITH CompendiumAbout the AuthorsWilliam O. Krekstein and Michael S. Savett, partners at Nelson Brown & Co., are the lead authors of the 2014 Bad Faith Compendium.

As noted below, Matthew B. Malamud, Emmett McGowan, Benjamin R. Messing, and Mark H. Rosenberg, associates at Nelson Brown & Co., contributed to certain of the chapters of the 2014 Bad Faith Compendium.

Lead AuthorsWilliam O. Krekstein, Partner

William O. Krekstein is resident in the firm’s Blue Bell, Pennsylvania, office and represents both domestic and international insurers. Mr. Krekstein focuses his practice in a variety of first- and third-party complex coverage and bad faith disputes under all types of homeowner, commercial property, general liability, builders’ risk, and motor vehicle policies. Mr. Krekstein may be contacted at [email protected].

Michael S. Savett, Partner

Michael S. Savett practices in the firm’s Cherry Hill, New Jersey, office, advising insurers on issues involving commercial liability, environmental, property, directors and officers, and professional liability insurance. Mr. Savett also provides first- and third-party coverage analysis, litigation management, design and implementation of cost-sharing agreements, and advice concerning methods of bad faith and coverage dispute avoidance. Mr. Savett may be contacted at [email protected].

Contributing AuthorsMatthew B. Malamud, Associate

Matthew B. Malamud is resident in the firm’s Blue Bell, Pennsylvania, office. Mr. Malamud focuses his practice on first- and third-party insurance coverage disputes, bad faith allegations, and investigations of suspected insurance fraud. Mr. Malumud contributed to the Maryland chapter of the Bad Faith Compendium. He may be contacted at [email protected].

Emmett McGowan, Associate

Emmett McGowan is resident in the firm’s Blue Bell, Pennsylvania, office, focusing his practice primarily on complex first-party property claims with a special emphasis on sophisticated commercial property, builders’ risk, and time element coverages. Mr. McGowan contributed to the New Jersey, Ohio, and Pennsylvania chapters of the Bad Faith Compendium. He may be contacted at [email protected].


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Benjamin R. Messing, Associate

Benjamin R. Messing is resident in the firm’s Blue Bell, Pennsylvania, office, focusing his litigation practice on complex insurance coverage matters and insurance fraud. Mr. Messing contributed to the Oklahoma and Virginia chapters of the Bad Faith Compendium. He may be contacted at [email protected].

Mark H. Rosenberg, Associate

Mark H. Rosenberg is resident in the firm’s Blue Bell, Pennsylvania, office, advising clients on complex insurance disputes involving challenges to insurers’ institutional claims-handling practices. He has experience defending insurance bad faith actions relating to institutional practices and coverage issues. Mr. Rosenberg contributed to the New York, North Carolina, and Texas chapters of the Bad Faith Compendium. He may be contacted at [email protected].


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2014 BAD FAITH CompendiumAbout the Editors

Editor Victoria Prussen Spears, Esq.Associate Director, FC&S Legal Editor, Insurance Coverage Law Report

Victoria Prussen Spears, Esq., is the Associate Director of FC&S Legal: The Insurance Coverage Law Information Center, the Editor of the Insurance Coverage Law Report, and a Senior Vice President at Meyerowitz Communications Inc.

As Associate Director of FC&S Legal: The Insurance Coverage Law Information Center, Ms. Spears produces the Industry News column and acquires and edits content for the Eye on the Experts column and FC&S Legal’s flagship publication, the Insurance Coverage Law Report, for which she serves as Editor.

Ms. Spears, who was an integral member of the team that conceptualized FC&S Legal, designed the FC&S Legal Web site and drafted its descriptive content. Ms. Spears regularly consults with the FC&S Legal team on all aspects of FC&S Legal, including sales, marketing, product development, and editorial content, and provides on-going and varied support for the Director of FC&S Legal, Steven A. Meyerowitz, Esq.

A graduate of Sarah Lawrence College and Brooklyn Law School, Ms. Spears was an attorney at Stroock & Stroock & Lavan LLP, a prominent Wall Street law firm, where she worked on a variety of commercial transactions with insurance law components. After Stroock, she served as of counsel to a law firm that represented policyholders’ interests in insurance matters.

Since 2005, she has been a researcher, writer, and editor for Meyerowitz Communications Inc., regularly writing and editing articles on myriad legal and business subjects and consulting on a wide variety of marketing, business, and strategic planning issues for Meyerowitz Communications Inc. and its clients. Ms. Spears also is the co-author of a state-by-state privacy and data security law guide and a book about outsourcing to Mexico.

Ms. Spears can be reached at [email protected].


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Consulting Editor Steven A. Meyerowitz, Esq.Director, FC&S Legal Editor-in-Chief, Insurance Coverage Law Report

Steven A. Meyerowitz, Esq., is the Director of FC&S Legal: The Insurance Coverage Law Information Center, the Editor-in-Chief of the Insurance Coverage Law Report, and the Founder and President of Meyerowitz Communications Inc.

As Director of FC&S Legal: The Insurance Coverage Law Information Center, Mr. Meyerowitz provides:

» Daily updates, analysis, and commentary on the most significant insurance coverage law decisions from courts across the country;

» News regarding legislative and regulatory developments;

» Up-to-the minute reporting on changes to insurance laws and rules; and

» Interviews with expert professionals on insurance coverage law trends and developments.

A graduate of Harvard Law School, Mr. Meyerowitz was an attorney for Milbank, Tweed, Hadley & McCloy, a prominent Wall Street law firm, for nearly five years. During that time, he represented sophisticated financial services institutions in a wide range of matters.

After leaving Milbank, Mr. Meyerowitz founded Meyerowitz Communications Inc., a law firm marketing communications consulting company. As president of Meyerowitz Communications, Mr. Meyerowitz specializes in helping lawyers write, produce, and place their bylined articles, newsletters, brochures, and other marketing materials, and in integrating publications into a firm’s overall marketing program.

Currently, Mr. Meyerowitz is editor-in-chief of nearly a dozen legal and business publications for national and international publishers and is managing editor of the Federal Bar Council Quarterly. Mr. Meyerowitz also is the author of the third edition of “Bankruptcy Law Digest” (published by West) and a book on marketing, sales, and advertising law, and he is the co-author of a state-by-state privacy and data security law guide.

Mr. Meyerowitz can be reached at [email protected].


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TABLE OF ContentsExecutive SummaryInsurance bad faith law is like a quilt, a patchwork that varies from square to square – in this instance, common law decisions, statutes and codes that differ widely from state to state. Insurer conduct that is benign in one jurisdiction may rise to the level of bad faith conduct in another. In this compendium, the authors review nearly two dozen states where bad faith issues most often arise and provide a synopsis of pre-litigation claims-handling standards, first- and third-party claim issues, insurance company defenses, procedural and discovery issues, and the scope of damages.

Bad Faith Law in:California .................................................................................................................................................................. 8

Connecticut ............................................................................................................................................................ 15

Delaware ................................................................................................................................................................ 20

District of Columbia ............................................................................................................................................... 24

Florida .................................................................................................................................................................... 27

Georgia .................................................................................................................................................................. 31

Maryland ................................................................................................................................................................ 36

Massachusetts ........................................................................................................................................................ 40

Minnesota .............................................................................................................................................................. 46

Mississippi .............................................................................................................................................................. 54

Missouri .................................................................................................................................................................. 60

New Jersey ............................................................................................................................................................ 67

New York ................................................................................................................................................................ 73

North Carolina ....................................................................................................................................................... 79

Ohio ........................................................................................................................................................................ 86

Oklahoma ............................................................................................................................................................... 93

Pennsylvania ........................................................................................................................................................... 98

Rhode Island ........................................................................................................................................................ 106

South Carolina ...................................................................................................................................................... 111

Texas ..................................................................................................................................................................... 117

Utah ...................................................................................................................................................................... 124

Virginia ................................................................................................................................................................. 130

West Virginia ........................................................................................................................................................ 134


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BAD FAITH COMPENDIUM: CALIFORNIABy William O. Krekstein and Michael S. Savett

Pre-litigation: Claims Handling StandardsStandard for making initial coverage determination

Insurers must look to four corners of contract first. “An insurance policy is a contract, subject to inter-pretation according to the rules applied to all con-tracts. Accordingly, we look first to the language of the contract in order to ascertain its plain meaning or the meaning a layperson would ordinarily attach to it. If that language is clear and explicit, it must be given effect, and a policy provision will not be considered ambiguous unless it is capable of two or more con-structions, both of which are reasonable. Of course, as is true of any contract, we must interpret the policy as a whole, not in the abstract, and we will not strain to create an ambiguity where none exists or indulge in tortured constructions to divine some theoretical ambiguity in order to find coverage where none was contemplated.” Fireman’s Fund Ins. Co. v. Superior Court, 65 Cal.App.4th 1205, 1212-13, 78 Cal.Rptr.2d 418, 422 (1997).

Insurers must fully investigate claims and must give “at least as much consideration to the welfare of its insured as it gives to its own interests.” Egan v. Mutual of Omaha Ins. Co., 24 Cal.3d 809, 818, 169 Cal.Rptr. 691, 620 P.2d 141 (1979).

Relevance of extrinsic evidence in making coverage determination

Extrinsic evidence may be considered by insurer in determining coverage. Waller v. Truck Ins. Exchange, Inc., 11 Cal.4th 1, 19, 900 P.2d 619 (1995).

Standard for duty to defend

An “insurer owes a broad duty to defend its insured against claims that create a potential for indemnity” and “‘must defend a suit which potentially seeks dam-ages within the coverage of the policy.’” Horace Mann Ins. Co. v. Barbara B., 846 P.2d 792, 795 (1993). The

“duty to defend is broader than the duty to indem-nify” and may be owed even where no damages are ultimately awarded, id., or where the claim is ground-less, false or fraudulent. Burgett, Inc. v. Am. Zurich Ins. Co., 830 F. Supp.2d 953, 959-60 (E.D. Cal. 2011).

Determining whether the insurer owes a duty to defend “must be determined on the basis of facts available to the insurer at the time the insured tenders the defense.” Shade Foods, Inc. v. Innovative Products Sales & Mktg., Inc., 93 Cal.Rptr.2d 364, 388 (2000). This determination is generally “‘made in the first instance by comparing the allegations of the complaint with the terms of the policy.’” Montrose Chem. Corp. v. Superior Court, 861 P.2d 1153, 1157 (1993).

In a duty to defend case, the evidentiary burden on an insurer is especially high. Burgett, 830 F. Supp.2d at 959. “To prevail, the insured must prove the existence of a potential for coverage, while the insurer must establish the absence of any such potential. In other words, the insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot.” Montrose, 861 P.2d at 1161.

Standard for duty to indemnify

An insurer’s duty to indemnify “lie[s] at the core of the standard policy” and “has as its purpose ‘to resolve liability . . . after liability is established.” Certain Under-writers at Lloyd’s of London v. Superior Court, 16 P.3d 94, 101-02 (2001). The duty to indemnify the insured “is limited to money ordered by a court” and does not extend to any sums beyond the damages the insured must pay. Id. at 105.

Reservation of rights

Insurers have 40 days to accept or deny claim in whole or in part. (10 Cal. Admin. Code 2695)


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If arson or fraud suspected, then insurers have 80 days to accept or deny claim.

If more time is needed, written notice of more time is required. Insurers must specify the information re-quired and state the reasons for inability.

Claim investigation must be commenced within 15 days.

Insurers must provide written notice to claimants every 30 days.

Insurers must disclose all policy provisions that might be applicable. (10 Cal. Admin. Code 2695.4)

First-party claims handling standards

See above for time limitations.

An insurer owes a duty to its insured to investigate all of the possible bases of an insured’s claim. The insur-er’s duty to give as much consideration to the insured’s interests as it does to its own obligates it to investigate a claim thoroughly. An insurer must fully inquire into the bases for the claim; indeed, it “cannot reasonably and in good faith deny [benefits] to its insured without thoroughly investigating the foundation for its denial.” Egan, 24 Cal.3d at 819, 169 Cal.Rptr. 691, 620 P.2d 141.

Is coverage a condition precedent to maintaining a bad faith claim?

Yes. A bad faith claim for an insurer’s failure to inves-tigate is not separately actionable if there is no cover-age. Jordan v. Allstate Ins. Co., 148 Cal.App.4th 1062, 1078, 56 Cal.Rptr.3d 312, 324 (2007). To maintain a bad faith claim there must be coverage and policy benefits must be due. See, e.g., Waller v. Truck Ins. Exch., Inc., 11 Cal. 4th 1, 36, 900 P.2d 619, 639 (1995).

Is bad faith claims handling a recognized cause of action absent finding of coverage? (procedural bad faith)

Absent a finding of coverage, bad faith claims handling is not a recognized cause of action. See, Jordan, supra (“An insurer’s failure to investigate . . . is not separately actionable if there is no coverage.”).

First PartyStandard for bad faith

The standard for establishing bad faith under Califor-nia law requires a plaintiff to demonstrate “(1) benefits due under the policy were withheld; and (2) the reason

for withholding benefits was unreasonable or without proper cause.” Guebara v. Allstate Ins. Co., 237 F.3d 987, 992 (9th Cir. 2001). This standard is objective, and subjective bad faith is both unnecessary and insuffi-cient to establish a cause of action. Bosetti v. U.S. Life Ins. Co. in City of New York, 96 Cal.Rptr.3d 744, 769 (2009). Whether the insurer’s decision was reasonable or not “must be evaluated as of the time it was made.” Filippo Indus., Inc. v. Sun Ins. Co. of New York, 88 Cal.Rptr.2d 881, 888-89 (1999).

The insurer’s conduct not only must be erroneous but “unreasonable” or “without proper cause.” Nager v. Allstate Ins. Co., 83 Cal.App.4th 284, 288, 99 Cal.Rptr.2d 348, 350 (2000).

An insurer “may raise a reasonable dispute over cover-age without being guilty of bad faith” in first party cas-es. Howard v. Am. Nat. Fire Ins. Co., 187 Cal.App.4th 498 115 Cal.Rptr.3d 42, 70 (2010). Where an insurer advances its side of a dispute due to a genuine issue as to their liability under the policy, there can be no bad faith liability imposed on the insurer. Nieto v. Blue Shield of Cal. Life & Health Ins. Co., 103 Cal.Rptr.3d 906, 928 (2010).

Statutory bad faith

California’s Unfair Insurance Practices Act’s bar against private actions for unfair insurance prac-tices does not prevent an Unfair Competition Law claim based on common-law bad faith and false advertising. Zhang v. Superior Court, 57 Cal. 4th, 159 Cal.Rptr.3d 672 (2013).

Common law

The covenant of good faith and fair dealing is implied in every insurance contract, and “[t]he term “bad faith,” as used in the context of an insured’s claim against his or her insurer, is simply a shorthand reference to a claimed breach by the insurer.” Bosetti, 96 Cal.Rptr.3d at 768. This covenant generally “calls for consideration of the reasonableness of the insurer’s conduct in deny-ing coverage.” Shade Foods, 93 Cal.Rptr.2d at 386.

Where an insurer “fails to deal fairly and in good faith with its insured by refusing, without proper cause, to compensate its insured for a loss covered by the policy, such conduct may give rise to a cause of action in tort for breach of an implied covenant of good faith and fair dealing.” Gruenberg v. Aetna Ins. Co., 9 Cal.3d 566, 574, 510 P.2d 1032, 1037 (1973).


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reasonable settlements, a duty included within the im-plied covenant of good faith and fair dealing. More-over, examination of the balance of the Palmer, Critz, and Davy opinions makes it clear that recovery may be based on unwarranted rejection of a reasonable settle-ment offer and that the absence of evidence, circum-stantial or direct, showing actual dishonesty, fraud, or concealment is not fatal to the cause of action. Crisci v. Sec. Ins. Co. of New Haven, Conn., 66 Cal. 2d 425, 430, 426 P.2d 173, 176-77 (1967).

Parties to a Bad Faith Cause of ActionDirect action by injured party?

Yes, by policy terms or assignment. Pruyn v. Agric. Ins. Co., 36 Cal.App.4th 500, 508, 42 Cal.Rptr.2d 295, 298 (1995). There must first be a final judicial determina-tion. Moradi-Shalal, supra.

Also authorized by statute. Whenever judgment is se-cured against the insured or the executor or adminis-trator of a deceased insured in an action based upon bodily injury, death, or property damage, then an ac-tion may be brought against the insurer on the policy and subject to its terms and limitations, by such judg-ment creditor to recover on the judgment. Cal. Ins. Code § 11580.

Third party beneficiaries?

As a general rule, absent an assignment of rights or final judgment, a third-party claimant may not bring di-rect action against an insurance company on contract because the insurer’s duties flow to the insured. Cal. Ins. Code § 11580(b)(2); Harper v. Wausau Ins. Co., 56 Cal.App.4th 1079, 66 Cal.Rptr.2d 64 (1997).

Parties with insurable interests?

No bad faith under third party beneficiary rule. Murphy v. Allstate Ins. Co., 17 Cal. 3d 937, 944, 553 P.2d 584, 588 (1976).

Assignees

An insured may assign the breach of contract aspect of a bad faith claim but not the tort aspect. Nelson v. Exxon Mobil Corp., 179 Cal.Rptr. 4th 633. (2009). The punitive damages claim, as a part of the tort aspect, may not be assigned. Id.

Other insurers (excess v. primary)

An excess insurer can recover based on subrogation principles for the amount it had to pay based on the primary insurer’s bad faith. N.W. Mut. Ins. Co. v. Farmers’

An insurer may be liable for a bad faith denial or bad faith delay. Waters v. United Servs. Auto. Assn., 41 Cal.App.4th 1063, 1070, 48 Cal.Rptr.2d 910, 914 (1996).

Third PartyStandard for bad faith

“Third party bad faith lawsuits” generally involve an insured’s suit against his liability insurer arising out of the insurer’s mishandling of a third party claim against its insured, such as by unreasonably refusing to settle within policy limits, Samson v. Transamerica Ins. Co., 30 Cal.3d 220, 238, 178 Cal.Rptr. 343, 636 P.2d 32 (1981), or unreasonably refusing to provide a defense in a third party action. Tibbs v. Great American Ins. Co., 755 F.2d 1370, 1375 (9th Cir. 1985).

Statutory cause of action?

There is no statutory cause of action in California. Insurers are subject to administrative sanctions for violating statutory prohibitions against unfair and deceptive claims settlement practices (see Ins.Code, §§ 790.03, subd. (h), 790.035, 790.05, 790.07, 790.09), but such violations do not give rise to a private right of action for tort damages. Moradi-Shalal v. Fireman’s Fund Ins. Companies, 46 Cal. 3d 287, 758 P.2d 58 (1988).

Bad faith cause of action at common law

In considering the liability of the insurer, several courts have opined that bad faith is the equivalent of dis-honesty, fraud, and concealment. Critz v. Farmers Ins. Group, 230 Cal.App.2d 788, 796, 41 Cal.Rptr. 401 (1965); Palmer v. Financial Indem. Co., 215 Cal.App.2d 419, 429, 30 Cal.Rptr. 204 (1963); Davy v. Public National Ins. Co., 181 Cal.App.2d 387, 396, 5 Cal.Rptr. 488 (1960). While a showing that the insurer has been guilty of actual dishonesty, fraud, or concealment is relevant to the determination whether it has given consideration to the insured’s interest in considering a settlement of-fer within the policy limits, the language used in the cases, should not be understood as meaning that in the absence of evidence establishing actual dishon-esty, fraud, or concealment no recovery may be had for a judgment in excess of the policy limits. Comunale v. Traders & General Ins. Co., 50 Cal.2d 654, 658-659, 328 P.2d 198 (1958), makes it clear that liability based or an implied covenant exists whenever the insurer re-fuses to settle in an appropriate case and that liability may exist when the insurer unwarrantedly refuses an offered settlement where the most reasonable manner of disposing of the claim is by accepting the settle-ment. Liability is imposed not for a bad faith breach of the contract but for failure to meet the duty to accept


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Prerequisite of excess judgment?

Generally, yes, but an insured may recover for bad faith failure to settle, despite the lack of an excess judgment, where the insurer’s misconduct goes beyond a simple failure to settle within policy limits or the insured suffers consequential damages apart from an excess judgment, Howard, supra, such as a delay that causes damages. Bodenhamer v. Superior Court (St. Paul Fire & Marine Ins. Co.), 192 Cal.App.3d 1472, 1478-1479, 238 Cal.Rptr. 177, 180–181 (1987).

In the absence of a settlement demand or any other manifestation the injured party is interested in settle-ment, when the insurer has done nothing to foreclose the possibility of settlement, there is no liability for bad faith failure to settle. Reid v. Mercury Ins. Co., 220 Cal.App.4th 262, 162 Cal.Rptr.3d 894 (2013).

Evidentiary value of expert testimony

When an insurer is subjectively aware that it has hired a biased expert, it is simply not objectively reasonable to rely on that expert. Chateau Chamberay Homeown-ers Assn. v. Assoc. Int’l Ins. Co., 90 Cal.App.4th 335, 348–349, 108 Cal.Rptr.2d 776 (2001).

Defenses Available to CarrierGenerally

The key to a bad faith claim is whether or not the insur-er’s denial of coverage was reasonable. Under Califor-nia law, a bad faith claim can be dismissed on summary judgment if the defendant can show that there was a genuine dispute as to coverage. Lunsford v. American Guarantee & Liability Ins. Co., 18 F.3d 653, 656 (9th Cir. 1994); Jordan, supra.

Advice of counsel

Good faith reliance on advice of counsel is a factor in determining whether the insurer acted in “bad faith.” Along with other relevant evidence, it may tend to show the insurer was acting reasonably in its handling of the claim. State Farm Mut. Auto Ins. Co. v. Supe-rior Court (Johnson Kinsey, Inc.), 228 Cal.App.3d 721, 725–726, 279 Cal.Rptr. 116, 118 (1991).

Reverse bad faith

No. Agric. Ins. Co. v. Superior Court, 70 Cal.App.4th 385, 82 Cal.Rptr.2d 594 (1999).

Ins. Grp., 76 Cal.App.3d 1031, 1050, 143 Cal.Rptr. 415, 426 (Ct. App. 1978).

Limits on Conduct Evidencing Bad FaithInsurer conduct during underwriting

An insurer has no legal duty to renew an insurance policy when its term has expired. Travelers Ins. Co. v. Lesher, 187 Cal.App.3d 169, 194, 231 Cal.Rptr. 791 (1986). Even a bad faith claim ordinarily cannot be based upon an insurer’s nonrenewal decision. Id.

Post-claims underwriting for medical policies is prohib-ited by statute but does not create a private cause of action. Nieto v. Blue Shield of California Life & Health Ins. Co., 181 Cal.App.4th 60, 83, 103 Cal.Rptr.3d 906, 925 (2010).

Insurer conduct during litigation

The insurer’s duty of good faith and fair dealing does not evaporate during such litigation: “[V]arious litiga-tion tactics ... or other conduct” by the insurer may show breach of the insurer’s implied covenant of good faith and fair dealing with the insured. White v. West-ern Title Ins. Co., 40 Cal. 3d 870, 887; 221 Cal.Rptr. 509, 519 (1985).

Conduct by agents/attorneys

No tort action lies against the insurer’s agent for lack of diligence in claims handling. Sanchez v. Lindsey Mor-den Claims Services, Inc., 72 Cal.App.4th 249, 254, 84 Cal.Rptr.2d 799, 803 (1999).

Proving Bad FaithApplicable burdens of proof

The plaintiff’s burden of proof is the preponderance of the evidence standard. (Cal. Evid. §§ 115, 500.)

Evidence supporting bad faith conduct

An insurer’s failure to thoroughly investigate claim is evidence. Egan, supra. An insurer may be subject to bad faith liability for entering into a settlement with-out the insured’s consent that bars the insured’s claim against a third party. Barney v. Aetna Cas. & Sur. Co., 185 Cal.App.3d 966, 978, 230 Cal.Rptr. 215, 220 (1986).

Prerequisite of improper denial?

Yes. See above.


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was the breach so egregious that there is evidence of “oppression, fraud or malice” under Civil Code section 3294, subdivision (a) so as to warrant punitive damages. Griffin Dewatering Corp. v. N. Ins. Co. of New York, 97 Cal.Rptr.3d 568, 585 (2009).

Consequential damages

The doctrine of insurance bad faith allows recovery for consequential damages, such as mental suffering or economic loss, unrelated to policy limits. Larraburu Bros., Inc. v. Royal Indem. Co., 604 F.2d 1208, 1215 (1979).

An insured may recover for bad faith failure to settle, despite the lack of an excess judgment, where the insurer’s misconduct goes beyond a simple failure to settle within policy limits or the insured suffers consequen-tial damages apart from an excess judgment. Howard, supra.

Other tort damages

An insured may seek and recover tort damages, such as emotional distress damages, in bad faith actions. See, Jordan, supra.

Attorney’s fees

Attorney’s fees attributable to proving an insurer’s bad faith are not recoverable; however, “fees reasonably incurred by an insured to compel payment of benefits due under an insurance policy” are recoverable. Jor-dan, supra.

Punitive damages

Punitive damages are available in a bad faith claim if its “demonstrate[d] by clear and convincing evidence that [the insurer] acted with malice, oppression or fraud as these terms are used in Civil Code, section 3294, subdivision (a) and have been construed and ap-plied in relevant case law.” Jordan, supra.

A record that presents a close case with regard to the sufficiency of the evidence of bad faith will inevitably provide a tenuous basis for supporting an award of pu-nitive damages, since both the bad faith and punitive damage findings rest on inferences to be drawn from the same evidence. Shade Foods, supra.

Discovery IssuesExtrinsic evidence is relevant to establish the “mutual intent of the parties at the time of contract formation.” Silgan Containers v. Nat’l Union Fire Ins., C 09-05971 RS LB, 2010 WL 5387748 at *8 (N.D. Cal. Dec. 21, 2010). Where a contract term is ambiguous, courts may or-

Fairly debatable standard

Reasonableness standard.

Can insurer recoup defense/indemnity payments upon a finding of no coverage?

No, if those claims were potentially covered. However, if insurer defended claims that were not even poten-tially covered, it may recover costs. Buss v. Superior Court, 16 Cal. 4th 35, 49, 939 P.2d 766, 775 (1997).

Procedural IssuesBifurcation/Trifurcation

In state court, probably not necessary. Downey Sav. & Loan Assn. v. Ohio Cas. Ins. Co., 189 Cal.App.3d 1072, 1086, 234 Cal.Rptr. 835, 842 (1987).

In federal court, it is necessary. Jones v. St. Paul Travel-ers, C 06-00717 SI, 2006 WL 2956550 (N.D. Cal. Oct. 16, 2006).

Summary judgment

Appropriate where insurer can show genuine dispute as to coverage, therefore insurer’s decision is reason-able as a matter of law. Guebara, supra.

Applicable statute of limitations

The applicable statute is determined by the nature of the action, not by the damages sought. Breach of implied covenant actions are subject to the two–year statute applicable to tort actions generally (CCP § 339, subd. 1) rather than the statutes applicable to actions for personal injury or to recover penalties or forfei-tures. Richardson v. Allstate Ins. Co., 117 Cal.App.3d 8, 13, 172 Cal.Rptr. 423, 426 (1981).

A one-year limit written into a policy is valid. Prudential LMI Comm’l Ins. v. Sup.Ct. (Lundberg), 51 Cal.3d 674, 686–687, 274 Cal.Rptr. 387, 395 (1990).

Judge v. jury

While the reasonableness of an insurer’s claims-han-dling conduct is ordinarily a question of fact, it be-comes a question of law where the evidence is un-disputed and only one reasonable inference can be drawn from the evidence. Chateau Chamberay, supra.

DamagesDamages in bad faith claims are determined in a three-step process: (1) was there a breach at all so as to warrant contract damages; (2) was the breach unreasonable so as to warrant tort damages; and (3)


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Reinsurer communications

May be discoverable though must meet relevancy test after in camera review. Lipton v. Superior Court, 48 Cal.App.4th 1599, 1620, 56 Cal.Rptr.2d 341, 353 (1996).

Claim manuals

Claims manuals are discoverable. Glenfed Dev. Corp. v. Superior Court, 53 Cal.App.4th 1113, 1118, 62 Cal.Rptr.2d 195, 198 (1997).

Personnel files

Personnel files are likely discoverable. Against an in-surer alleging misconduct by a particular claims repre-sentative, other insureds’ claims files may be relevant to show other instances of misconduct in the past by that particular claims representative and the insurer’s awareness thereof. Colonial Life, supra (admissible to prove “regular business practice” in former statutory action against insurer under Ins. Code § 790.03(h)).

Prior claims

See “Evidence of other claims” above.

Attorney-client privilege

In certain instances it is difficult to determine if the attorney-client privilege (or work product privilege) at-taches to a communication, particularly where there may be more than one purpose for that communica-tion: “Where it is clear that the communication has but a single purpose, there is little difficulty in concluding that the privilege should be applied or withheld ac-cordingly. If it appears that the communication is to serve a dual purpose, one for transmittal to an attorney ‘in the course of professional employment’ and one not related to that purpose, the question presented to the trial court is as to which purpose predominates. ...” Travelers Ins. Companies v. Superior Court, 143 Cal.App.3d 436, 452, 191 Cal.Rptr. 871 (1983). This “domi-nant purpose” test not only looks to the dominant purpose for the communication, but also to the domi-nant purpose of the attorney’s work. Aetna Casualty & Surety Co. v. Superior Court, 153 Cal.App.3d 467, 475, 200 Cal.Rptr. 471 (1984). Thus, “the attorney-client privilege [would] not apply without qualification where the attorney was merely acting as a negotiator for the client, or merely gave business advice, or was merely acting as a trustee for the client.” Aetna, supra.

To the extent that a law firm employed by an insurer acted as a claims adjuster, work product, communica-tions to client, and impressions about facts were to be treated as ordinary business of the insurer; and those

der disclosure of extrinsic evidence, such as underwrit-ing files and claims manuals, at the discovery phase of litigation to establish the parties intent’ and “prove that a term is, in fact, ambiguous.” Id. at *8-9.

Claims manuals

Claims manuals are relevant to a pending action and discoverable when they “might reasonably assist a party in evaluating its case, preparing for trial, or fa-cilitating a settlement.” Glenfed Dev. Corp. v. Supe-rior Court, 53 Cal.App.4th 1113, 1117, 62 Cal.Rptr.2d 195, 197 (1997) (finding good cause for the request for disclosure of a claims manual by just a “fact-specific showing of relevance”). California courts have “for years recognized claims manuals are admissible cover-age dispute litigation,” so “it follows (as the courts of other states with similar discovery statutes have held) that they are discoverable.” Id. at 197-98.

Claims manuals generally reference policy terms and provide relevant information regarding claims han-dling, and “even if inadmissible at trial . . . [they] may lead to the discovery of other, relevant evidence that is admissible, and no more is required to justify the demand for its production.” Id. at 198. The California insurance code requires insurers “maintain guide-lines for the prompt processing of claims,” which are often contained in claims manuals, supporting their “relevan[ce] for coverage claims (not just bad-faith claims).” Silgan Containers, supra. Claims manuals can establish “how the insurer applied the standard lan-guage in the claim,” as well as whether “an ambiguity exists in the policy.” Id.

Underwriting file

Underwriting files may be discoverable where they are relevant to determining the risks an insurer “expected to cover in the policy, how it interpreted the various policy terms, and whether the terms of the policy are ambiguous in the first instance.” Silgan Containers, su-pra. Courts may order disclosure of underwriting files because they are relevant to coverage and/or reason-ably calculated to lead to the discovery of admissible evidence.” Id. at *9.

Evidence of other claims

Yes, if relevant. See Colonial Life & Acc. Ins. Co. v. Su-perior Court (Perry), 31 Cal.3d 785, 790-792 (1982)

Reserve information

Reserve information is discoverable. Flintkote Co. v. Gen. Acc. Assur. Co. of Canada, C 04-01827 MHP, 2009 WL 1457974 (N.D. Cal. May 26, 2009).


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sections of documents reflecting mental processes and opinions of counsel which truly bore on anticipated liti-gation would be redacted as protected. 2,022 Ranch, L.L.C. v. Superior Court, 7 Cal.Rptr.3d 197, 214 (2003), disapproved of by Costco Wholesale Corp. v. Superior Court, 219 P.3d 736 (2009).

Confidential reports by an insurance company as to an accident in which its insured is involved are protected by the attorney-client privilege. Heffron v. Los Ange-les Transit Lines, 170 Cal.App.2d 709, 718, 339 P.2d 567 (1959). However, the determination of whether the privilege attaches is one of fact, and depends on the purpose underlying the preparation of a particular document. Reavis v. Metro. Prop. & Liab. Ins. Co., 117 F.R.D. 160, 165 (S.D. Cal. 1987).

Work product doctrine

Disclosure depends on whether the attorney acting in legal capacity. Aetna Cas. & Sur. Co. v. Superior Court (Pietrzak). 153 Cal.App.3d 467, 476, 200 Cal.Rptr. 471, 476 (1984).

Work product protection is not limited to documents prepared in anticipation of litigation. It also protects opinions and conclusions of attorneys hired to provide legal counsel to a client. Id.

2014 Bad Faith Compendium Sample

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Transcript of 2014 Bad Faith Compendium Sample