When Is An Insurance Company Acting In Bad Faith In California?

Implicit in every insurance policy is the promise of good faith and fair dealing. In California, when an insurer refuses to settle a claim on behalf of its insuredthereby financially jeopardizing the insuredit is acting in bad faith. In such instances, a claim against the insurance company may arise, from which compensatory and punitive damages may be awarded.

Generally, insurance companies will utilize all resources available to them to avoid paying for claims, especially ones that exceed the insured's policy limits. Moreover, the insurance company often has tremendous influence over the legal process the insured must endure: the selection of the defense attorney, choices made during the litigation process, and, ultimately, how the case will be resolved, whether by mediation, arbitration, or trail. Taking the case to trial is not only the most costly and time-consuming of the three options, it also may economically jeopardize the insured if that party is found responsible for an accident or an injury.

This was recently the case with a California road construction company. While the company was only insured for up to $2,000,000, it was accused of safety violations that were found to be contributing factors in a solo rollover car accident that left one passenger dead and two others seriously injured. The claims against the company were projected to exceed $20,000,000. Despite being given the opportunity to resolve the case within the policy limit prior to trial, the insurer refused to settle.

Early on in the proceedings, the construction company's liability in the accident was evident, and it was clear that its insurer was acting in bad faith: the jury had found in favor of the plaintiffs, the accident victims, and against the defendant, the construction company. Prior to the damages portion of the trial, a bad faith attorney persuaded the insurer to settle the case for $10,275,000 to avoid a separate claim against it from the construction company.

Under California law, an insurance company is obligated to protect its insured from a potential judgment greater than the insurance coverage, as failing to do so could jeopardize the insured's economic stability. In cases in which an insurance company refuses to comply with this law, addressing the matter early on in the legal processprior to a trial or arbitrationoften proves an effective means of persuading the insurer to settle.