Bad Faith Policy Limit Demand

In the Insurance Bad Faith litigation world there are important distinctions between a potential first and third party potential bad faith.

Third Party Insurance

Generally, in each insurance liability policy, California law implies a covenant of good faith and fair dealing that obligates the insurance company to make reasonable efforts to settle a third party’s lawsuit against the insured. If the insurer breaches the implied covenant by unreasonably refusing to settle the third party suit, the insured may sue the insurer in tort to recover damages proximately caused by the insurer’s breach.” PPG Industries, Inc. v. Transamerica Ins. Co. (1999) 20 Cal.4th 310, 312

General, an injured party is neither a party to nor an intended beneficiary of an insurance contract until such time as the injured party has obtained a judgment against the insured. Therefore, an injured party has no action against an insurance company for breach of the implied covenant of good faith and fair dealing based upon the insurer’s refusal to settle a claim. Murphy v. Allstate Ins. Co. (1976) 17 Cal.3d.937, 941. Although the Unfair Claims Settlement Practices Act under Insurance Code sections 790, et seq., requires an insurance company “to attempt in good faith to effectuate prompt, fair and equitable settlement of claims in which liability has become reasonably clear,” no private action is created from that statute. Moradi-Shalal v. Fireman’s Fund Ins. Cos. (1988) 46 Cal.3d.287, 313. Bad faith may only be actionable by the injured party against the third party insurer if:

  • There is an excess judgment,
  • There was a reasonable basis to settle within policy limits after a demand was made,
  • The insurer refused to settle within limits, and
  • The tortfeasors assigns his benefits and rights under their policy to pursue the bad faith claim.

An insured’s claim for bad faith based on an alleged wrongful refusal to settle first requires proof the third party made a reasonable offer to settle the claims against the insured for an amount within the policy limits. This first element can be satisfied if:

  • Its terms are clear enough to have created an enforceable contract resolving all claims had it been accepted by the insurer,
  • All of the third party claimants have joined in the demand,
  • It provides for a complete release of all insureds and
  • The time provided for acceptance did not deprive the insurer of an adequate opportunity to investigate and evaluate its insured’s exposure.

Coe v. State Farm Mut. Auto. Ins. Co. (1977) 66 Cal.App.3d 981, 992-993; Strauss v. Farmers Ins. Exchange (1994) 26 Cal.App.4th 1017, 1021; Critz v. Farmers Ins. Group (1964) 230 Cal.App.2d 788, 798. Plainly stated, a claim for bad faith based on an alleged wrongful refusal to settle also requires proof the insurer unreasonably failed to accept an otherwise reasonable offer within the time specified by the third party for acceptance. However, when a liability insurer timely tenders its “full policy limits” in an attempt to effectuate a reasonable settlement of its insured’s liability, the insurer has acted in good faith as a matter of law because “by offering the policy limits in exchange for a release, the insurer has done all within its power to effect a settlement.” (Lehto v. Allstate Ins. Co. (1994) 31 Cal.App.4th 60,

First Party Insurance

By contrast, first party claims can give rise to claims for insurance bad faith based upon breach of contract and breach of the implied covenant of good faith and fair dealing. The standard utilized (whether third party by assignment or first party) examines the reasonableness of the insurer’s conduct, and mere errors by an insurer in discharging its obligations to its insured. Brandt v. Superior Court (1985) 37 Cal.3d 813. Therefore, erroneous denial of a claim does not alone support tort liability unless it is found to have withheld benefits unreasonably.


When a claim is based on the insurer’s bad faith, alleging either the insurer unreasonably refused to pay policy benefits or did not conduct an adequate investigation, the ultimate test is whether the insurer’s conduct was unreasonable under all of the circumstances. Chateau Chamberay Homeowners Assn. v. Associated Internat. Ins. Co. (2001) 90 Cal.App.4th 335, 346. Only then is there a plausible argument of opening a third party insurer to an excess judgment potentially subject to the assignment of bad faith.

Certainly, not all lawsuits that result in an excess judgment are bad faith lawsuits. The critical question to a bad faith lawsuit lies in what the insurer could and should have done to settle the case within policy limits.

Insurance Bad Faith Consultation Form

Aenean eu leo quam.

California law defines certain acts and conduct that can qualify as bad faith, which includes: unreasonable denial of policy benefits, misrepresenting facts or policy provisions to claimants, failing to respond or act in a timely manner on a claim, lack of reasonable standards for the prompt investigation and processing of claims, failing to either approve or deny claims within a reasonable time period after the loss was submitted, refusing to settle the claim in good faith when liability is reasonably clear, forcing the insured to litigate the claim because the insurance company has refused to make an adequate settlement offer, misleading a claimant as to the legal deadline for filing a claim or initiating a lawsuit, advising the insured not to hire a lawyer, failing to give a reason for denial of a claim, and threats by the insurance company to compel its insured to accept an unreasonable settlement offer. In fact, when investigating a claim, an insurance company has a duty to diligently search for evidence which supports its insured’s claim in order to holds the interest of their insured above their own.(Mariscal v. Old Republic Life Ins. Co. (1996) 42 Cal.App.4th 1617, 1620.)

Currently, California only recognizes first party bad faith, which involves an insured’s claims against their own insurance company. (Waters v. United Servs. Auto Ass’n (1996) 41 Cal.App.4th 1063, 1069.) The types of coverage that can be subject to bad faith involve commercial policies providing coverage to buildings, homeowners insurance providing coverage a homeowner’s property, uninsured and underinsured motor coverage designed to guarantee reimbursement to an insured motorist for injuries wrongfully inflicted by a financially irresponsible motorist without automobile liability coverage or with limited coverage, or even Life, Health & Disability insurance.

Damages for insurance bad faith comprise contract damages, extra-contractual compensation, and sometimes punitive damages. “The damages awarded under a contract claim should place the injured party in the same position it would have held had the contract properly been performed, but such damage may not exceed the benefit which it would have received had the promisor performed.” Brandon & Tibbs (1990) 226 Cal.App.3d 442, 468. The main questions for the jury is whether a breach occurred and if so, is the insurer obligated under the terms of the policy to pay, defend, and/or indemnify the insured? The usual runaround by insurance companies is that they paid already – but the timing of payment is delayed, which is still a breach.

In addition, to contractual damages, extracontractual damages, including physical, mental, and emotional distress, attorney fees, and possibly punitive damages may be awarded. (Silberg v. Calif. Life Ins. Co. (1974) 11 Cal.3d 452, 462.) “An insurer that unreasonably delays, or fails to pay, benefits due under the policy may be held liable in tort for breach of the implied covenant.” (Chateau v. Chamberay Homeowners Ass’n v. associated Int’l Ins. Co. (2001) 90 Cal.App.4th 335, 346-347.) California law permits all consequential damages flowing from denial of policy benefits. “Because breach of the implied covenant is actionable as a tort, the measure of damages for tort actions applies, and the insurance company generally is liable for ‘any damages which are the proximate result of that breach.’” (PPG Indus., Inc. v. Transamerica Ins. Co. (1999) 20 Cal.4th 310, 315.) This may include personal injury or wrongful death damages under the right circumstances. With respect to punitive damages, it requires a showing through clear and convincing evidence of oppression, fraud, or malice. (Civ. C. § 3294; Amerigraphics, Inc. v. Mercury Cas. Co. (2010) 182 Cal.App.4th 1538, 1558.) The award may be partially dependent on the net worth of the defendant. This is very easy in insurance cases because all admitted insurance companies must file a financial statement with the Department of Insurance and the net worth is listed.

Finally, where the case is being handled on a contingency fee basis, Brandt attorney fees are permitted and not limited to the agreed-upon percentage of the benefits owing under the policy. Rather, the award must compensate for the attorney’s efforts to obtain those benefits. (Cassim v. Allstate Ins. Co. (2004) 33 Cal.4th 780, 810.) At the end of trial, it may be a question for the jury to award a special verdict on attorneys’ fees.

Receive a Free Insurance Bad Faith Case Evaluation

Click Here