Insurance Bad Faith: Different Standards for Different States – Part 2 (California)

In this series of posts, we are outlining what constitutes insurer bad faith from state to state. Our previous post outlined Arizona’s standards, and today, we look at the bad faith law of California.

In California, the Unfair Trade Practices Act of the Insurance Code statute dealing with unfair claims settlement practices is merely a codification of its bad faith law.  A policyholder can bring a suit in California against its disability insurance company under the tort law, but not under the statute itself.

The Statute: Cal. Ins. Code § 790.03(h)

The Rules:

An insurance company’s duties include the following:

  • To investigate disability claims thoroughly.
  • To not deny coverage based on unduly restrictive policy interpretations.
  • To use standards it knows are improper to deny disability claims.
  • To not unreasonably delay processing or paying claims.
  • To give as much consideration to the insured’s interests as it does to its own.

An insurance company is not allowed to:

  • Misrepresent pertinent facts or policy provisions.
  • Fail to acknowledge or act reasonably promptly on communications about a disability insurance claim.
  • Fail  to adopt and implement reasonable standards for prompt claims investigation.
  • Fail to make a decision on coverage within a reasonable time after a policyholder has submitted complete proof of loss.
  • Tell claimants the company always appeals arbitration awards in favor of claimants to get them to accept lowball settlement offers.
  • Not attempt to make prompt, fair, and equitable settlements in which it has become reasonably clear that the disability insurance company must pay a claim.
  • Force an insured to litigate to recover under the policy by offering an unreasonable settlement.
  • Delay investigation or payment of claims by requiring an insured to submit multiple forms containing the same data.
  • Withhold a reasonable explanation of the basis relied on in the insurance policy for the denial of a disability claim or for the offer of a compromise settlement.
  • Directly advise a disability claimant not to obtain the services of a lawyer.
  • Deceive a claimant as to the statute of limitations that applies.

The Tort Law Standard:  A disability insurer can be found to have acted in bad faith if it withholds benefits unreasonably and without proper cause, whether or not the insurance company had a conscious awareness of wrongdoing or intent to harm the policyholder.