The law imposes a duty or obligation on insurance companies (insurers) to act in good faith (reasonably and fairly) when investigating and settling claims with their insureds—including the duty to promptly pay claims when liability under the insurance policy becomes reasonably clear. This duty was traditionally created by judges in court opinions (common law) but is now often located in a state’s statutes—often in the insurance code.
This duty of good faith and fair dealing in insurance practices generally requires an insurer to settle a claim with its insured (known as a first-party claim) promptly when liability has become reasonably clear. In contrast, an insurer generally does not have a duty of good faith and fair dealing in the investigation and settlement of a claim with a party other than its insured (a third party or third-party claim). This is because the duty of good faith and fair dealing is rooted in the insurance contract between the insurer and its insured, and a person or entity who is not a party to the insurance contract is not owed the duty of good faith and fair dealing.
An insured who believes their insurer acted in bad faith in the investigation and settlement of an insurance claim may file a lawsuit for breach of the duty of good faith and fair dealing in the insurance contract—known as a bad faith claim. A court may award a plaintiff whose insurer has acted in bad faith (1) interest on a claim amount, (2) punitive damages, and (3) attorney fees.
The bad faith standard requires an insured to prove with clear and convincing evidence that (1) the insurer lacked a reasonable basis for unreasonably delaying or denying benefits or payment under the insurance contract; and (2) the insurer knew or recklessly disregarded its lack of reasonable basis for delaying or denying benefits under the insurance policy.
Bad faith claims are fact specific and turn on the conduct of the insurer towards the insured. A plaintiff must plead specific facts as evidence of bad faith and cannot rely on conclusory statements.
The insurer does not breach the duty of good faith and fair dealing by investigating a claim, by refusing to pay a claim, or by litigating a dispute with its insured if there is a legitimate dispute as to coverage or amount of the claim—provided the insurer's position is reasonable and legitimate.
In general, an insurer's litigation tactics and strategy in defending a claim are not relevant to the insurer's decision to delay or deny coverage for the claim. And once litigation has begun, the actions taken in its defense are not evidence of whether the insurer acted in bad faith in the investigation and settlement of the insured’s claim for benefits under the insurance policy.
In California, insurance companies are legally obligated to handle claims from their insureds in good faith, meaning they must investigate and settle claims reasonably and fairly. This duty is rooted in both common law and statutory law, specifically within the California Insurance Code. When an insurer receives a first-party claim (a claim from its insured), it must promptly pay the claim if the liability under the policy is reasonably clear. However, this duty does not extend to third-party claims, where the claimant is not the insured party. If an insured believes their insurer has acted in bad faith by unreasonably delaying or denying a claim, they may file a lawsuit for breach of the duty of good faith and fair dealing. To succeed in a bad faith claim in California, the insured must provide clear and convincing evidence that the insurer had no reasonable basis for its actions and that it knew or recklessly disregarded this fact. Specific facts must be presented to prove bad faith; general statements are insufficient. It's important to note that an insurer does not breach this duty by simply investigating, refusing to pay, or litigating a claim, as long as there is a legitimate dispute and the insurer's actions are reasonable. Actions taken by the insurer during litigation are generally not considered evidence of bad faith in the handling of the claim.
