“Bad Faith” Cases Defined
Many people believe that large, international corporations could not possibly structure their businesses with the intent to deprive consumers of benefits to which the consumers are rightfully entitled. To put it another way, on its face it may seem difficult to believe many major insurance companies do their best to ensure that you will never get paid if and when you file a claim.
In every contract there is an implied covenant of good faith and fair dealing. In the case of first party disputes between and insured and his/her/its insurer, the insurer must not take an unreasonable stance on the validity of a defense nor investigate the claim with a conscious disregard of facts which might support coverage. (Beck v. State Farm Mut. Auto Ins. Co. (1976) 54 Cal.App.3d 347, 354; and Delgado v. Heritage Life Ins. Co. (1984) 157 Cal.App.3d 262, 276-278.) Under California law, the gravamen of the wrong in a first party bad faith action is the unreasonable refusal to pay all benefits due under the terms of the policy. (Paulfrey v. Blue Chip Stamps (1983) 150 Cal.App.3d 187, 192.) An insurer may also be liable for bad faith if it unreasonably delays payment on a claim. The exception to this rule is if the insured fails to cooperate. (Globe Indemnity Co. v. Superior Court (1992) 6 Cal.App.4th 725.)
While insurers (smartly) have proved hesitant to cooperate with the discovery process, my colleagues and I have unearthed some very damning and valuable information over the years. One major insurer incentivized its adjusters to deny claims, and kept statistics on its adjusters’ denial rates. Bonuses were offered for higher rates of denial. Another large insurance company instructed its adjusters to deny mold claims based upon a faulty reading of its own policy, and even after the courts had found that such a reading was improper.
Insurance companies work off of probabilities, and some insurers have taken the position that it’s easier to deny claims initially and overpay on bad faith claims than it is to just pay valid claims in the first place. The rationale works like this: if Insurer X denies 10 claims valued at $100,000 apiece, and it knows that only 1 of 10 people are going to sue for bad faith, and on a bad faith claim it may pay anywhere from $100,000 to $400,000, in the long run making 10 denials in bad faith results in profits of $600,000 to $900,000. (Not to mention, in delaying payment on that claim by 12-24 months, the insurer has the benefit of collecting interest on those funds during the time of non-payment, further reducing the value of the expenditure.)
Damages available on a bad faith claim include actual damages (the amount of the claim), consequential damages (including financial and emotional distress), attorneys’ fees, and punitive damages. Even though the law in California is very tough on insurers who breach the implied covenant of good faith and fair dealing, there are still many insurers within California who fail to operate under the letter of the law.
If you have made a claim to your insurer and that claim has been denied, you may want to check with a lawyer to ensure that the denial was proper. I offer a free 45-minute initial consultation, generally an ample amount of time to discuss the facts of your claim and to review the pertinent documents. In order to be prepared for an initial consultation you will need a copy of your insurance policy and any and all correspondence and communication related to your claim, including the denial letter. It is always best to have every communication with your insurer in writing (email is sufficient), and make sure each communication is dated. Be firm, don’t allow yourself to be railroaded, and when the time is right get a lawyer involved to ensure that your rights are protected.
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