Overview
Understanding California bad faith insurance claims
Insurance bad faith in California occurs when an insurer unreasonably withholds policy benefits or fails to properly handle claims. California recognizes both contractual bad faith (breach of the implied covenant of good faith and fair dealing) and tortious bad faith, allowing policyholders to recover damages beyond the policy limits when insurers act unreasonably.
I draft bad faith demand letters that establish the factual and legal framework for recovery, citing specific violations of the California Fair Claims Settlement Practices Regulations (CCR 2695) and Insurance Code section 790.03. A properly constructed demand letter preserves all available remedies while creating a clear record of the insurer's misconduct.
California provides exceptionally strong protections for policyholders. Unlike most states, California allows recovery of attorney's fees under the Brandt doctrine, punitive damages for oppressive conduct, and consequential damages without policy limits caps for bad faith claims.
What Policyholders Need to Know
If your insurance company has denied your claim, delayed payment unreasonably, or offered a settlement far below your actual losses, you may have a bad faith claim. California law provides powerful remedies that go beyond simply recovering your policy benefits.
- Tort damages: You can recover emotional distress and other consequential damages
- Attorney's fees: Brandt fees allow recovery of fees incurred to obtain policy benefits
- Punitive damages: Available when insurer conduct is oppressive, fraudulent, or malicious
- No policy limits cap: Bad faith damages are not limited by your coverage amounts
A demand letter is often the first step in pursuing a bad faith claim. I help policyholders document misconduct, establish the legal framework for recovery, and create leverage for fair settlement negotiations.
What Insurance Companies Need to Know
California's bad faith liability exposure is among the most significant in the nation. Proper claims handling requires strict compliance with the Fair Claims Settlement Practices Regulations and documented, good-faith decision-making at every stage.
- Extracontractual exposure: Bad faith findings expose carriers to damages far exceeding policy limits
- Punitive damage risk: Systematic denials or pattern practices increase punitive exposure
- Regulatory scrutiny: CDI complaints and market conduct examinations create additional liability
- Coverage counsel: Early involvement of coverage counsel can mitigate bad faith exposure
I advise insurance companies on claims handling practices, respond to bad faith allegations, and help develop compliant procedures that minimize litigation risk while ensuring fair treatment of policyholders.
Legal Basis
California statutes, regulations, and common law
Statutory Framework
"The following are hereby defined as unfair methods of competition and unfair and deceptive acts or practices in the business of insurance... Knowingly committing or performing with such frequency as to indicate a general business practice any of the following unfair claims settlement practices..."
Insurance Code 790.03(h) defines specific prohibited practices including:
- Misrepresenting pertinent facts or policy provisions
- Failing to acknowledge and act reasonably promptly upon communications
- Failing to adopt and implement reasonable standards for prompt investigation
- Refusing to pay claims without conducting reasonable investigation
- Not attempting in good faith to effectuate prompt, fair, and equitable settlements
- Compelling insureds to institute litigation to recover amounts due by offering substantially less than amounts ultimately recovered
- Attempting to settle claims for less than reasonable amounts based on advertising materials
- Failing to promptly provide a reasonable explanation of the basis for claim denial
"Upon receiving proof of claim, every insurer shall immediately, but in no event more than forty (40) calendar days later, accept or deny the claim, in whole or in part... No insurer shall deny or reject a claim... without providing the claimant with a written statement listing all bases for such denial or rejection..."
Common Law Duties
Beyond statutory requirements, California common law imposes heightened duties on insurers based on the special relationship between insurer and insured. These duties flow from the implied covenant of good faith and fair dealing present in every insurance contract.
The California Supreme Court established that the implied covenant of good faith and fair dealing in insurance contracts creates a duty beyond contract breach. An insurer's unreasonable failure to pay benefits sounds in tort, allowing recovery of damages beyond policy limits including emotional distress and punitive damages.
The seminal case establishing that insurers owe a duty to accept reasonable settlement demands within policy limits. Failure to accept such demands exposes the insurer to liability for the entire judgment, including amounts exceeding policy limits. This "Comunale duty" is the California equivalent of the Stowers doctrine.
Extended bad faith liability to first-party claims (disability and health insurance). The court held that the insurer's obligation to deal fairly encompasses the duty to thoroughly investigate claims before denying them and to properly inform insureds of their policy rights.
The Common Carrier Duty
California Insurance Code section 1753 imposes heightened duties on insurance companies as "common carriers" in the business of insurance. This classification means insurers must exercise the utmost care consistent with their business operations and cannot arbitrarily refuse to deal with policyholders or claimants.
While the private right of action under Section 790.03 is limited to specific circumstances, the statutory definitions serve as evidence of what constitutes unreasonable conduct for common law bad faith claims. I cite these provisions in demand letters to establish the standard of care.
Elements of Bad Faith
What must be proven for a successful claim
First-Party Bad Faith Elements
For a policyholder suing their own insurer (first-party claim), the following elements must be established:
- Existence of a valid insurance policy: The claimant must be an insured or beneficiary under a valid, enforceable policy
- Covered loss: The claim falls within the policy's coverage provisions
- Benefits withheld or delayed: The insurer failed to pay benefits owed under the policy
- Unreasonable conduct: The insurer's actions were unreasonable under the circumstances, not based on a genuine dispute
- Resulting damages: The policyholder suffered harm as a result of the insurer's conduct
The California Supreme Court clarified that an insurer may owe damages for bad faith even when there is a "genuine dispute" about coverage if the insurer's conduct in handling the claim was unreasonable. The manner of claims handling matters independent of the ultimate coverage determination.
Third-Party Bad Faith Elements
When an insurer fails to properly defend or settle a claim against its insured (third-party/liability claims), the elements include:
- Duty to defend or indemnify: The claim triggers the insurer's defense or indemnity obligations
- Opportunity to settle within limits: A reasonable settlement demand was made within policy limits
- Failure to accept: The insurer failed to accept the reasonable demand
- Excess judgment: A judgment was entered against the insured exceeding policy limits
- Unreasonable conduct: The failure to settle was not based on a reasonable coverage position
Insurers commonly raise the "genuine dispute" doctrine as a defense, arguing that a legitimate coverage question precludes bad faith liability. However, this defense is not absolute. Even with a genuine dispute, bad faith can exist if the insurer failed to properly investigate, misrepresented policy terms, or handled the claim in an unreasonable manner. The defense focuses on coverage determination, not claims handling conduct.
Damages
Recoverable damages in California bad faith claims
Contract Damages
The foundational recovery in any bad faith case includes the policy benefits wrongfully withheld, plus interest from the date payment was due.
Tort Damages
California's recognition of bad faith as a tort opens significant additional categories of damages:
- Emotional distress: Mental suffering, anxiety, and stress caused by the insurer's conduct
- Consequential economic damages: Lost business opportunities, credit damage, bankruptcy consequences
- Physical manifestations: Health problems resulting from the stress of coverage denial
- Loss of use: Inability to repair property, obtain medical treatment, or resume normal life
Brandt Fees
The California Supreme Court held that attorney's fees incurred to obtain the policy benefits themselves are recoverable as tort damages in a bad faith action. These "Brandt fees" represent compensation for economic harm caused by the insurer's misconduct, not an award of attorney's fees for the bad faith litigation itself.
Brandt fees include only those fees reasonably attributable to recovering the policy benefits, not fees for proving bad faith or recovering other damages. However, this distinction often results in substantial fee awards since much of the work in bad faith cases relates to establishing coverage entitlement.
Punitive Damages
"In an action for the breach of an obligation not arising from contract, where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice, the plaintiff... may recover damages for the sake of example and by way of punishing the defendant."
Punitive damages require proof by clear and convincing evidence of:
- Oppression: Despicable conduct subjecting another to cruel and unjust hardship in conscious disregard of rights
- Fraud: Intentional misrepresentation, deceit, or concealment with intent to deprive of rights
- Malice: Conduct intended to cause injury or despicable conduct with willful and conscious disregard of rights
Established that punitive damages are available in insurance bad faith cases and that an insurer's systematic undervaluation of claims or pattern of unreasonable conduct can support punitive awards. The court noted insurance bad faith cases are particularly appropriate for punitive damages given the unequal bargaining position and the insurer's knowledge that policyholders often cannot afford to litigate.
For punitive damages against a corporate insurer, the conduct must be committed, authorized, or ratified by an officer, director, or managing agent under Civil Code 3294(b). Demand letters should request identification of decision-makers and document the chain of authority for claims decisions.
Evidence Checklist
Documentation to support a bad faith claim
Building a strong bad faith case requires comprehensive documentation. I help clients gather and organize the following evidence categories:
- The insurance policy and all endorsements: Complete policy package including declarations, conditions, exclusions, and any riders or amendments
- Proof of loss documentation: All claim submissions, supporting documents, estimates, medical records, or other evidence of the loss
- Complete claims file: Request the insurer's complete claim file including internal notes, communications, and coverage analyses
- All correspondence: Every letter, email, fax, and written communication between policyholder and insurer
- Phone call logs: Dates, times, participants, and summaries of all telephone communications
- Denial letters: All written denials, partial denials, or reservation of rights letters with stated reasons
- Independent expert reports: Appraisals, medical evaluations, engineering reports, or other expert assessments
- Timeline documentation: Chronological record of all events from loss occurrence through claim denial
- Damage evidence: Photos, videos, receipts, invoices, and repair estimates documenting the claimed loss
- Consequential harm evidence: Documentation of credit impacts, lost opportunities, health effects, or other consequential damages
- Premium payment history: Evidence of timely premium payments establishing the policy was in force
- Claims manual excerpts: Insurer's internal claims handling guidelines and procedures (obtainable through discovery)
I recommend sending a formal evidence preservation letter to the insurer early in the dispute. This creates a duty to preserve all documents, electronic communications, and other evidence related to the claim, and can support spoliation arguments if evidence is later destroyed.
Sample Language
Key provisions for bad faith demand letters
The following excerpts illustrate the type of language I incorporate into bad faith demand letters. Each letter is customized to the specific facts and circumstances of the claim.
This letter constitutes formal demand for payment of all benefits due under Policy No. [POLICY NUMBER] and notice of claims for insurance bad faith under California law. [INSURED NAME] has been insured under the above-referenced policy since [DATE], having paid all premiums when due and complied with all policy conditions. Despite timely submitting a valid claim for covered losses on [DATE], [INSURER NAME] has [denied the claim / failed to make timely payment / offered a settlement grossly inadequate to cover the actual loss]. This conduct violates the implied covenant of good faith and fair dealing inherent in every California insurance contract, as well as specific provisions of California Insurance Code Section 790.03(h) and the Fair Claims Settlement Practices Regulations codified at Title 10, California Code of Regulations, Section 2695 et seq.
[INSURER NAME]'s handling of this claim has been unreasonable under any standard. Specifically: 1. Failure to investigate: Despite receiving [SPECIFIC DOCUMENTATION], [INSURER NAME] failed to conduct a reasonable investigation as required by Insurance Code Section 790.03(h)(3) and CCR Section 2695.7(d). 2. Delayed response: [INSURER NAME] failed to accept or deny this claim within 40 days of receiving proof of loss, violating CCR Section 2695.7(b). 3. Inadequate denial explanation: The denial letter dated [DATE] failed to provide all bases for the denial as required by CCR Section 2695.7(b)(1), instead offering only [VAGUE REASON]. 4. Misrepresentation of policy terms: [INSURER NAME] denied coverage based on [STATED REASON], which misrepresents the actual policy language and applicable California law regarding [ISSUE]. These failures are not isolated instances but reflect a pattern of conduct designed to avoid paying legitimate claims, constituting the type of "unfair claims settlement practices" the California Legislature specifically prohibited.
Based on the foregoing, [INSURED NAME] demands payment of the following: 1. Policy Benefits: $[AMOUNT] representing the full value of the covered loss, plus interest at the legal rate from [DATE DUE] 2. Consequential Damages: $[AMOUNT] representing [SPECIFIC CONSEQUENTIAL DAMAGES INCLUDING CREDIT DAMAGE, LOST BUSINESS, ETC.] 3. Emotional Distress: Compensation for the substantial mental anguish, anxiety, and distress caused by [INSURER NAME]'s conduct, including [SPECIFIC MANIFESTATIONS] 4. Brandt Fees: All attorney's fees incurred to obtain the policy benefits, recoverable as tort damages under Brandt v. Superior Court (1985) 37 Cal.3d 813 5. Punitive Damages: [INSURER NAME]'s conduct in this matter constitutes oppression as defined by Civil Code Section 3294. By [SPECIFIC CONDUCT], [INSURER NAME] demonstrated conscious disregard for the rights of its insured, subjecting [INSURED NAME] to cruel and unjust hardship. Unless this matter is resolved within [TIMEFRAME], [INSURED NAME] will pursue all available remedies including but not limited to filing a complaint with the California Department of Insurance and commencing civil litigation.
Next Steps
How to proceed with your bad faith claim
For Policyholders
- Document everything: Begin keeping detailed records of all communications with your insurer immediately
- Review your policy: Understand exactly what coverage you purchased and what the policy requires of you
- Don't accept lowball offers: Initial offers are often far below actual value; you have the right to negotiate
- Consult an attorney: Bad faith claims are complex; professional evaluation can identify your full range of remedies
- Consider CDI complaint: The California Department of Insurance can investigate insurer misconduct
- Preserve evidence: Keep all documents, photos, communications, and records related to your claim
For Insurance Companies
- Review the claim file: Assess whether the claims handling complied with all regulatory requirements
- Evaluate exposure: Consider the full range of potential damages including punitive exposure
- Engage coverage counsel: Complex coverage issues benefit from early legal analysis
- Document decision-making: Ensure all coverage decisions are thoroughly documented and reasoned
- Consider resolution: Early resolution often minimizes exposure compared to litigation costs
I offer a $125 initial consultation to evaluate your bad faith claim or defense. During this consultation, I will review your situation, explain your legal options, and provide a candid assessment of the strengths and challenges of your case. For demand letter drafting, my flat fee is $450.