Although it has no traditional bright line rule regarding bad faith, California has addressed bad faith insurance practices both through the Unfair Claims Practices Act (“UCPA”) and the common law doctrine of breach if the implied covenant of good faith and fair dealing.

The UCPA (Ins. Code Sections 790, et seq.) sets forth specific types of an insurer’s conduct that by definition is “unfair” or “deceptive.”  In that regard, Section 790.03(h) of the UCPA defines the following to be 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:

(1) Misrepresenting to claimants pertinent facts or insurance policy provisions relating to any coverages at issue.

(2) Failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies.

(3) Failing to adopt and implement reasonable standards for the prompt investigation and processing of claims arising under insurance policies.

(4) Failing to affirm or deny coverage of claims within a reasonable time after proof of loss requirements have been completed and submitted by the insured.

(5) Not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear.

(6) Compelling insureds to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by the insureds, when the insureds have made claims for amounts reasonably similar to the amounts ultimately recovered.

(7) Attempting to settle a claim by an insured for less than the amount to which a reasonable man would have believed he was entitled by reference to written or printed advertising material accompanying or made part of an application.

(8) Attempting to settle claims on the basis of an application which was altered without notice to, or knowledge or consent of, the

(9) Failing, after payment of a claim, to inform insureds or beneficiaries, upon request by them, of the coverage under which payment has been made.

(10) Making known to insureds or claimants a practice of the insurer of appealing from arbitration awards in favor of insureds or claimants for the purpose of compelling them to accept settlements or compromises less than the amount awarded in arbitration.

(11) Delaying the investigation or payment of claims by requiring an insured, claimant, or the physician of either, to submit a preliminary claim report, and then requiring the subsequent submission of formal proof of loss forms, both of which submissions contain substantially the same information.

(12) Failing to settle claims promptly, where liability has become apparent, under one portion of the insurance policy coverage in order to influence settlements under other portions of the insurance policy coverage.

(13) Failing to provide promptly a reasonable explanation of the basis relied on in the insurance policy, in relation to the facts or applicable law, for the denial of a claim or for the offer of a compromise settlement.

(14) Directly advising a claimant not to obtain the services of an attorney.

(15) Misleading a claimant as to the applicable statute of limitations.

(16) Delaying the payment or provision of hospital, medical, or surgical benefits for services provided with respect to acquired immune deficiency syndrome or AIDS-related complex for more than 60 days after the insurer has received a claim for those benefits, where the delay in claim payment is for the purpose of investigating whether the condition preexisted the coverage. However, this 60-day period shall not include any time during which the insurer is awaiting a response for relevant medical information from a health care provider.”

In Moradi-Shalal v. Fireman’s Fund Ins. Cos. (1988) 46 Cal.3d 287, the California Supreme Court disavowed a private right of action under the UPA. Shortly thereafter, Insurance Code §1861.03(a) was enacted, which provides that “… insurance shall be subject to the laws of California applicable to any other business, including, but not limited to, the Unruh Civil Rights Act (51-53, inclusive, of the Civil Code), and the antitrust and unfair business practices laws (Parts 2 (commencing with 16600) and 3 (commencing with 17500) of Division 7 of the Business and Professions Code).”

Thus, while the UCPA provides no private right of action per se, other legislative provisions found in the Business & Professions Code and the Civil Code provide the insured a statutory basis for an insured’s action against an insurer.

Also, as discussed in detail below the common law action of breach of implied covenant of good faith and fair dealing most likely applies to violations of the UCPA. In that regard, it was established long ago in California that an insured can sue an insurer for breach of the implied covenant of good faith and fair dealing. Communale v. Traders & General Insurance Co. (1958) 50 Cal.2d 654, 658-659.

The implied covenant creates a duty on the part of an insurer toward the insured to accept a reasonable offer to settle a third party liability case within policy limits, and a wrongful refusal to settle may make the insurer liable for the full amount of judgment, regardless of policy limits. Communale, supra, 50 Cal.2d at 661.

The obligations of good faith and fair dealing encompass qualities of “decency and humanity” inherent in the responsibilities of a fiduciary. Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 820.

The implied covenant requires that neither party do anything that will injure the right of the other party to receive the benefits of the agreement. Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 684.

In summary, an insurer is implied to have the following duties under every policy of insurance:

1)  Investigate the pertinent matters thoroughly, impartially, and promptly;

2)  Communicate honestly and promptly with the policyholder as the claim is processed;

3)  Make timely decisions about the claim; and

4)  Explain clearly and forthrightly the basis or bases on which the carrier premised its decision.

Unreasonable conduct by the carrier can take many different forms. The most common examples are denial of coverage, withholding of benefits, delay in payment of benefits, improper investigation, misrepresenting coverage, refusal to settle claims against the insured, and refusal to provide a defense to the insured, discussed below. But the foregoing list is not exhaustive, and disposition of the existence of bad faith on the part of an insurer presents an ad hoc issue determination.


Not every denial of coverage amounts to bad faith insurance practices. It is axiomatic that the denial of coverage must in fact be unreasonable. For example, it is possible that the insurance company breached the insurance contract by failing to pay a covered claim, but did not act unreasonably in doing so. In that instance, there is no bad faith on the part of the insurer. Tomaselli v. Transamerica Ins. Co. (1994) 25 Cal.App.4th 1269, 1280-1281; Opsal v. United Services Auto Ass’n (1991) 2 Cal.App.4th 1197, 1205.

Whether an insurance company acted unreasonably normally presents a question of fact for the jury. Walbrook Ins. Co. v. Liberty Mutual lns. Co. (1992) 5 Cal.App.4th 1445, 1454; Filippo Industries, Inc. v. Sun Ins. Co. (1999) 74 Cal.App.4th 1429, 1438; Davy v. Public National Ins. Co. (1960) 181 Cal.App.2d 387, 397.

But there are other instances in which the court may decide, as a matter of law, that the given conduct by the carrier was either reasonable or unreasonable. See, e.g., Chateau Chamberay Homeowners Ass’n v. Associated Intern. Ins. Co. (2001) 90 Cal. App.4th 335, 348 [under so-called “genuine dispute doctrine,” there is no bad faith if there was a “legitimate dispute” as to the insurance company’s liability]; Century Sur. Co. v. Polisso (2006) 139 Cal.App.4th 922, 948-949 [explaining and limiting the bad faith doctrine]; Filippo, supra, 74 Cal.App4th at 1438 [doctrine not appropriate where there was no uncertainty in case law about words in policy at issue]; Amadeo v. Principal Mutual Life Ins. Co. (9th Cir. 2002) 290 F.3d 1152, 1161-1162 [doctrine not appropriate where the insurance company’s interpretation of disability leading to the denial of the claim was arbitrary and pretextual].

At one end of the spectrum, an insurance company is typically found to have acted in bad faith when it is provide that it knew there is coverage, but denied coverage anyway. Richardson v. Employers Liability Assurance Co. (1972) 25 Cal.App.3d 232, 245 (1972) [punitive damages awarded where insurance company knew that insured had a valid uninsured motorists claim, but nevertheless forced insured to undergo a lengthy arbitration process]; Delgado v. Heritage Life Ins. Co., (1994) 157 Cal.App.3d 262, 277 [actual knowledge that denial of claim is wrongful demonstrates bad faith].

At the other end of the spectrum, there may be only modest inferences of bad faith if the conduct although in breach of the agreement is shown to not have been engaged in intentionally. Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc. (2000) 78 Cal. App.4th 847, 909.

The ultimate test for “bad faith” is whether the insurance company acted unreasonably. Opsal, supra, 2 Cal.App.4th at 1205; Guebara v. Allstate Ins. Co. (9th Cir. 2001) 237 F.3d 987, 992.

California is among the jurisdictions that apply an objective standard in determining the existence of bad faith, evaluating whether the conduct of the insurer was objectively unreasonable. The evaluation of whether an insurer acted reasonably is based upon the circumstances as they existed at the time of the action or decision in question. R&B Auto Center, Inc. v. Farmers Group, Inc. (2006) 140 Cal.App.4th 327, 354; Century Surety Co. v. Polisso (2006) 139 Cal.App.4th 922, 949.


California courts have extended the application of the implied covenant of good faith and fair dealing to cover many of the claims settlement practices enumerated in the UCPA:

Unreasonable Delay In Payment Of Claim

An insurance company commits bad faith when it fails to act reasonably in processing and handling a claim. Gruenberg v. Aetna Ins. Co., (1973) 9 Cal.3d 566, 573.  One hallmark of an insurer’s bad faith insurance practices is their unreasonable delay in adjusting a claim. Insurance Code Section 790(h); Fleming v. Safeco Ins. Co., (1984) 160 Cal.App. 3d 31, 37; Palmer v. Financial Indemnity Co., (1963) 215 Cal.App.2d 419, 429; Austero v. National Cas. Co. (1978) 84 Cal.App.3d 1, 29-30 (1978); Bodenhamer v. Superior Court, 192 Cal.App.3d 1472, 1476 [insurance company deliberately delayed payment]; Richardson v. Employers’ Liability Assurance Co. (1972) 25 Cal.App.3d 232, 247 [nine month delay in paying benefits on a claim carrier knew to be valid is bad faith per se].

When an insurer unreasonably, or without proper cause withholds a payment or denies a payment that is due under the policy, the insurer has not only breached the contract, but is subject to the tort of bad faith. Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 574-575; Waters v. United Services Auto Ass’n, (1996) 41 Cal.App.4th 1063, 1070 (1996).

Duty to Investigate

An insurer cannot deny payments to its insured without conducting a thorough investigation. Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 819 [“[l]t is essential that an insurer fully inquire into the possible bases that might support the insured’s claim”].

An insurance company has a duty to look for coverage and cannot just look for ways to deny coverage. Mariscal v. Old Republic Ins. Co. (1996) 42 Cal.App.4th 1617, 1623 [insured determined that insured died of illness but ignored other medical records indicating that insured’s death was caused by auto accident]; Betts v. Allstate Ins. Co. (1984) 154 Cal.App.3d 688, 702 [insurance company relied on insured’s self-serving account of accident and ignored mass of other available evidence indicating insured’s negligence]; Downey Savings & Loan Association v. Ohio Cas. Ins. Co., (1987) 189 Cal.App.3d 1072, 1096 (1987); Hughes v. Blue Cross of Northern California, (1989) 215 Cal. App.3d 832, 846 [insurer made no reasonable effort to obtain all medical records in reviewing medical necessity of hospitalization].

An insurer must affirmatively seek out witnesses who can provide information in support of the insured’s claim. Frommoethelydo v. Fire Ins. Exchange, (1996) 42 Cal.3d 208, 220; Mariscal at 1624; McCormick v. Sentinel Life Ins. Co., (1984) 153 Cal.App.3d 1030, 1047-1048.

The insurer cannot in good faith reject its own experts’ advice. Neal v. Farmers Insurance Exchange (1978) 21 Cal.3d 910, 921-23; Delgado v. Heritage Life Ins Co., (1994) 157 Cal.App.3d 262, 278-279 [evidence that insurer ignored evidence in file which supported claim, while focusing on facts to deny claim, supported award of $3 million in punitive damages]; Sprague v. Equifax, Inc. (1985) 166 Cal.App.3d 1012, 1025 [$4 million in punitive damages upheld where claims adjuster testified that he was instructed by supervisor not to find ways to pay claims, but to find ways to deny claims]; Chodos v. Ins. Co. of North America, (1981) 126 Cal.App.3d 86, 101-103 [de facto practice of minimizing payment of claims, as inferred through testimony of claims adjusters and policy manuals]; Tibbs v. Great American Ins. Co., (9th Cir. 1985) 755 F.2d 1370, 1375 [bad faith failure to investigate where in-house counsel conducted little investigation and ignored employees who said insured probably entitled to a defense].

The duty to investigate includes the duty to consider legal issues. Shade Foods, Inc. v. Innovative Product Sales & Marketing, Inc. (2000) 78 Cal.App.4th 847, 908 [bad faith failure to evaluate choice-of-law issues].

Duty to Settle

The insurance company has a duty to make good faith efforts to negotiate towards a reasonable settlement. Shade Foods, supra, 78 Cal.App.4th at 906-907.

An insurance company is required to attempt to settle a claim against the insured when there is a reasonable likelihood of a judgment in excess of the insured’s policy limits. Garner v. American Mutual Liability Co. (1973) 31 Cal.App.3d 843, 848; Communale, supra, 50 Cal.2d at 659-660; Crisci v. Security Ins. Co. (1967) 66 Cal. 2d 425, 429; Murphy v. Allstate Ins. Co. (1976) 17 Cal. 3d 937, 941.

The duty may also be breached when there is an unreasonable denial of a settlement offer that is below the limits of the policy. Shade Foods, supra, 78 Cal. App.4th at 905-907. The duty to settle is implied at law, even if the policy does not contain such a provision. Murphy, supra, 17 Cal.3d at 941.

When the insurer’s own counsel advises the insurer to seek settlement rather than gamble on a verdict, the insurer acts in bad faith when it heedlessly gambles on a verdict and loses. Kinder v. Western Pioneer Ins. Co. (1965) 231 Cal.App.2d 894, 901.

Conditioning settlement upon demand that insured give up other coverage constitutes bad faith insurance practices. Shade Foods, supra, 78 Cal.App.4th at 893.

If an insurer unreasonably denies or delays payment without proper cause, they will be found to have committed bad faith. McCormick v. Sentinel Life Ins. Co. (1984) 153 Cal.App.3d 1030, 1045; Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 578.

Duty to Disclose Coverage

California Code of Regulations Section 2695.4 requires an insurer to disclose all benefits, coverages or other provisions of the insurance policy that may apply to the claim presented. Failure to advise the policyholder of pertinent time limits resulted in waiver to enforce those time limits. Spray, Gould & Bowers v. Associated International Ins. Co.(1999) 71 Cal.App.4th 1260, 1272-73; Sarchett v. Blue Shield of California (1987) 43 Cal. 3d 1, 15; Textron Financial Corp. v. National Union (2004) 118 Cal.App.4th 1061 [punitive damages awarded for concealment of coverage];  Hangarter v. Paul Revere Life Ins. Co. (N.D. Cal. 2002) 236 F.Supp.2d 1069, affd, 373 F.3d 998 (9th Cir. 2004) [failure to advise insured of coverage amongst many other bad faith acts]; Ramirez v. U.S.A.A. (1991) 234 Cal.App.3d 391, 399 [duty to disclose possible existence of underinsured motorist coverage].

Abusive Claims Handling Tactics

An insurer may not attempt or threaten to rescind the policy where there are no valid grounds for rescission. Fletcher v. Western Nat ‘I Life Ins. Co. (1970) 10 Cal.App. 3d 376, 392.

An insurer may not attempt to “retire the file without payment” if the insurer, in fact has no defense to the claim and is simply trying to pressure the claimant into accepting the settlement offer. Mustachio v. Oho Farmers Ins. Co. (1975) 44 Cal.App. 3d 358, 363.

Unsupported allegations that the insured is guilty of insurance fraud constitute evidence of bad faith. Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 575-76; Mustachio, supra 44 Cal.App3d at 362 [accusation of arson after basis for charge eliminated by investigator].

Hostile attitude of claims personnel may constitute evidence of bad faith insurance practices. Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 821 [claims personnel reduced an insured to tears in view of wife and daughter by asserting that insured was a fraud and did not want to return to work].

Adjuster’s curt and sarcastic attitude, combined with threats to sue insured, will support a finding of bad faith. Pistorius v. Prudential Ins. Co. (1981) 123 Cal.App.3d 541, 547.

False promise to provide coverage. Diamond Woodworks, Inc. v. Argonaut Ins. Co. (2003) 109 Cal.App.4th 1020, 1046.

Low settlement offers made during course of bad faith litigation. White v. Western Title Ins. Co. (1985) 40 Cal.3d 870, 885.

Trickery, fraud, backdating documents, concealing evidence, persisting in denial during course of litigation. Textron Financial Corp v. National Union, (2004) 118 Cal. App.4th 1061, 1082.

Unduly restrictive interpretation of disability on questionnaire. Moore v. American United Life Ins. Co., (1984) 150 Cal.App.3d 610,621; Delgado v. Heritage Life Ins. Co. (1984) 157 Cal. App. 3d 262, 277; Miller v. National American Life Ins. Co. (1976) 54 Cal. App. 3d 331, 339.

Misleading policyholder about uninsured motorist coverage. Delos v. Farmers Ins. Group (1979) 93 Cal.App.3d 642, 665-666.

Refusal to settle one portion of claim to influence settlement of other portions of the claim. Neal v. Farmers Insurance Exchange (1978) 21 Cal.3d 910, 991. [Cal. Ins. Code Section 790.03(h)(12)]

Delay in adjusting claim for jewelry loss caused damage to business, even if the ultimate outcome was within policy limits. Bodenhamer v. Superior Court (1987) 192 Cal.App.3d 1472, 1479.

Duty to communicate on claims matters. Delgado v. Heritage Life Ins. Co. (1984) 157 Cal.App.3d 262, 278. [Cal. Ins. Code Section 790.03(h)(2) and (13)]

Delays in claims processing are bad faith. Wilson v. 21st Century Ins. Co. (2006) 38 Cal.Rptr.3d 514, 518; Richardson v. GAB Business Services, Inc. (1984) 161 Cal.App.3d 519, 522. [Cal. Ins. Code 790.03(h)(2)-(4) & (11)]

Misrepresentation of policy terms and conditions, although negligent misrepresentation is not sufficient to award punitive damages. Delos v. Farmers Ins. Group (1979) 93 Cal.App.3d 642, 656. [Cal. Ins. Code Section 790.03(h)(1).]

Wrongful refusal to defend third party claim. Pershing Park Villas v. United Pacific Ins. Co. (9th Cir. 2000) 219 F. 3d 895, 901-902; Campbell v. Superior Court (1996) 44 Cal.App.4th 1308, 1319; Shade Foods, supra, 78 Cal. App.4th 847, 881; Century Surety Co v. Polisso (2006) 139 Cal.App.4th 922; Amato v. Mercury Cas. Co. (1997) 53 Cal.App.4th 825

Unreasonable (“low ball”) settlement offers. Clayton v. United Services Auto Ass’n, (1997) 54 Cal.App.4th 1158, 1161-1162 [insurance company offered $10,000 on policy limits of $300,000 to parents whose only child was killed in automobile accident]; White v. Western Title Ins. Co. (1985) 40 Cal.3d 870, 887 [low settlement offers made in course of bad faith litigation].

Unreasonably demanding that policyholder contribute to a settlement. Coe v. State Farm Mutual Auto Ins. Co. (1977) 66 Cal.App.3d 981, 994; Shade Foods, supra [insurance company offered to pay only a fraction of the covered loss].

Unreasonably filing lawsuit against insured. Hillenbrand, Inc v. Ins. Co. of North America (2002) 104 Cal.App.4th 784, 816-817.

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