Understanding Bad Faith Damages
When an insurance company unreasonably denies, delays, or underpays your legitimate claim, you may have a bad faith cause of action. Unlike a simple breach of contract case (where you can only recover the policy benefits), bad faith claims can result in significantly larger recoveries.
The rationale is simple: insurance companies have a special duty of good faith and fair dealing toward their policyholders. When they breach this duty, courts allow policyholders to recover damages beyond the policy limits to deter such conduct.
Types of Damages Available
1. Contract Damages (Policy Benefits)
At minimum, you can recover the benefits that should have been paid under your policy. This forms the foundation of any bad faith claim, though in pure bad faith cases, the contract damages may already be paid by the time of trial.
2. Consequential Damages
These are the real-world financial harms caused by the insurer's bad faith conduct:
- Lost income if you couldn't work due to unpaid medical treatment
- Additional living expenses while waiting for property claim payment
- Credit damage from unpaid medical bills
- Loss of business from delayed business interruption payments
- Foreclosure or bankruptcy costs triggered by the denial
3. Emotional Distress Damages
Most states allow recovery for emotional distress caused by bad faith conduct. This recognizes that insurance claims often arise during stressful situations (illness, accidents, property loss), and an insurer's misconduct compounds that stress.
Evidence of emotional distress can include:
- Medical records showing anxiety, depression, or stress-related conditions
- Testimony from family members about behavioral changes
- Documentation of sleep problems, weight changes, or relationship impacts
California expressly recognizes emotional distress damages in first-party bad faith cases. The landmark case Gruenberg v. Aetna Ins. Co. (1973) established that emotional distress is a foreseeable consequence of an insurer's breach of the covenant of good faith and fair dealing.
California courts have awarded substantial emotional distress damages, particularly in cases involving vulnerable plaintiffs or egregious insurer conduct.
4. Punitive Damages
Punitive damages are designed to punish the insurer and deter future misconduct. They require a showing of conduct more egregious than mere unreasonableness, typically involving:
- Fraud or intentional misrepresentation
- Oppression (conscious disregard of rights)
- Malice (intent to cause harm)
Punitive damages are not available in all states or require specific proof thresholds.
Under California Civil Code section 3294, punitive damages require "clear and convincing evidence" that the insurer acted with oppression, fraud, or malice. The damages must bear a reasonable relationship to actual damages, though ratios of 4:1 to 9:1 have been upheld in appropriate cases.
5. Attorney Fees
Attorney fee recovery varies significantly by state:
California allows recovery of attorney fees incurred to obtain policy benefits when the insurer's denial was in bad faith. These are called "Brandt fees" after Brandt v. Superior Court (1985).
Important: Brandt fees are considered compensatory damages for breach of the implied covenant, not a separate fee-shifting provision. This means they can be awarded even when no statute allows fee recovery.
Damages by Category Overview
| Damage Type | Description | Availability |
|---|---|---|
| Policy Benefits | The amount owed under the insurance contract | All states |
| Consequential Damages | Financial losses caused by the bad faith denial | Most states |
| Emotional Distress | Mental anguish, anxiety, depression from denial | Most states (first-party) |
| Punitive Damages | Punishment for egregious conduct | Most states (heightened standard) |
| Attorney Fees | Fees to recover policy benefits (Brandt fees) | CA, some other states by statute |
| Statutory Penalties | Fixed penalties under state insurance codes | Some states (varies) |
Statutory Penalties by State
Some states have enacted specific statutes that impose penalties or create private causes of action for insurance bad faith. These can provide additional remedies beyond common law bad faith claims.
States with Significant Statutory Remedies
- Texas: Up to three times actual damages under the Insurance Code for unfair settlement practices
- Florida: Statutory bad faith action under section 624.155 with potential for punitive damages
- Montana: Independent cause of action with potential punitive damages under the Unfair Trade Practices Act
- Arizona: Treble damages available in certain cases
California's Unfair Insurance Practices Act (Insurance Code sections 790-790.15) prohibits unfair claims practices but does not create a direct private right of action (Moradi-Shalal v. Fireman's Fund). However, violations of the regulations can serve as evidence of bad faith in common law claims.
The California Fair Claims Settlement Practices Regulations (Cal. Code Regs. tit. 10, section 2695.1 et seq.) provide specific standards that, when violated, can support a bad faith claim.
Factors That Increase Damages
Courts consider various factors when assessing bad faith damages, particularly for emotional distress and punitive damages:
Egregious Insurer Conduct
- Ignoring clear evidence supporting the claim
- Misrepresenting policy terms to deny coverage
- Failing to investigate the claim properly
- Deliberately delaying resolution without justification
- Threatening or intimidating the policyholder
- Corporate policies that prioritize denial over fair evaluation
Vulnerability of the Policyholder
- Serious illness or injury underlying the claim
- Financial distress exacerbated by the denial
- Elderly or disabled claimants
- Unequal bargaining power
Insurer's Financial Position
For punitive damages, courts consider the insurer's net worth to ensure the punishment is meaningful. A multi-billion dollar insurer may face larger punitive awards than a smaller company for similar conduct.
The U.S. Supreme Court has set constitutional limits on punitive damages. In most cases, punitive damages exceeding a single-digit ratio to compensatory damages may be constitutionally suspect, though exceptions exist for particularly egregious conduct.
Proving Your Damages
To maximize your bad faith recovery, you need solid documentation:
For Consequential Damages
- Bank statements showing financial distress
- Late payment notices and collection letters
- Credit reports showing score decline
- Documentation of additional expenses incurred
- Lost wage verification from employers
For Emotional Distress
- Medical records from treating physicians
- Mental health treatment records
- Prescription records for anxiety/depression medications
- Testimony from family members and friends
- Personal journal entries documenting your experience
For Punitive Damages
- Pattern of similar conduct by the insurer
- Internal insurer documents showing knowledge of wrongdoing
- Evidence of corporate policies encouraging denials
- Prior regulatory actions against the insurer
Need Help Evaluating Your Bad Faith Claim?
I can help you understand what damages may be available in your specific situation and develop a strategy to maximize your recovery.