Crossing fingers in good faith.

What is California’s Bad Faith Insurance Law?

Posted on
profile photo
By Yosi Yahoudai
Founder and Managing Partner

California’s bad faith insurance law refers to the legal principles that hold insurance companies accountable for failing to act fairly and honestly toward their policyholders. It is based on the implied covenant of good faith and fair dealing, which is part of every insurance contract in California.

Under California law, insurance companies are expected to meet certain obligations, including:

  1. Investigating claims promptly and thoroughly: After a claim is filed, the insurance company should begin an investigation within a reasonable time and complete it in a timely manner.
  2. Making reasonable and fair claim determinations: The insurance company should evaluate all of the evidence and make a decision based on a fair and balanced review of the information.
  3. Paying valid claims promptly: If a claim is valid, the insurance company should pay it without unnecessary delay.
  4. Explaining reasons for claim denials or delays: If a claim is denied or delayed, the insurer must provide a clear and specific explanation.

When an insurance company violates these obligations, it may be considered to have acted in bad faith. A policyholder can sue the insurance company for bad faith and potentially recover damages beyond the original value of the claim, including for emotional distress, financial loss caused by the delay or denial, and sometimes punitive damages if the insurer’s conduct was particularly egregious.

What was the Unfair Insurance Practices Act (UIPA) that was passed in 1959?

california bad faith insurance lawyer
Photo by Anton Imbro

The Unfair Insurance Practices Act (UIPA) is a California law passed in 1959 that prohibits insurance companies from engaging in certain practices that are deemed unfair or deceptive. The law, codified in Sections 790 through 790.10 of the California Insurance Code, provides a list of specific acts and practices that are considered unfair or deceptive.

Examples of such practices include:

  1. Misrepresenting policy benefits, terms, or conditions.
  2. Failing to acknowledge or act promptly upon communications regarding claims.
  3. Failing to adopt and implement reasonable standards for the prompt investigation and processing of claims.
  4. Refusing to pay claims without conducting a reasonable investigation based on all available information.
  5. Not attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear.

The California Department of Insurance is responsible for enforcing the UIPA. Violations can lead to penalties, including fines and the potential suspension or revocation of the insurer’s license.

However, under the UIPA, individual policyholders are not given a private right of action, meaning they can’t sue insurance companies directly under this Act for unfair practices. But they can report violations to the Department of Insurance, and the unfair practices can be used as evidence in a lawsuit alleging bad faith under common law.

In 1972, California expanded the Unfair Insurance Practices Act (UIPA) with the addition of Section 790.03(h), which lists 16 specific acts or practices which are considered unfair methods of competition and unfair or deceptive acts or practices in the business of insurance. These were intended to provide more specific guidance as to what constitutes “bad faith” behavior by insurance companies.

Here are the 16 unfair claims practices enumerated in the statute:

  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 such insureds.
  7. Attempting to settle a claim by an insured for less than the amount to which a reasonable person would have believed he or she 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 that was altered without notice to, or knowledge or consent of, the insured.
  9. Making claims payments to insureds or beneficiaries not accompanied by a statement setting forth the coverage under which payments are being made.
  10. Making known to insureds or claimants a policy 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 the 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 promptly settle claims, 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 promptly provide a reasonable explanation of the basis of the insurance policy in relation to the facts or applicable law for 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 the hospital, medical, or surgical benefits for services provided with respect to a claim under a policy of disability insurance or of hospital, medical, or surgical benefits relative to a policy of health insurance on the basis of whether the claimant continues to be disabled.

Violation of these provisions can lead to regulatory action by the California Department of Insurance, but as of the last update in September 2021, the UIPA still does not provide a private right of action. Individuals can, however, use violations of these practices as evidence in a lawsuit alleging bad faith under common law.

What Damages Can Be Recovered From a Bad Faith Insurance Lawsuit?

In California, if an insurance company is found to have acted in bad faith, the policyholder may be able to recover several types of damages:

  1. Contract Damages: This includes the benefits that the insurance company should have paid under the terms of the policy.
  2. Consequential Damages: These are damages that result from the insurer’s bad faith conduct, which could include additional financial losses suffered as a result of the insurer’s wrongful denial or delay in paying benefits.
  3. Emotional Distress Damages: If the insurance company’s actions caused significant stress or mental suffering, the insured may be awarded damages for emotional distress.
  4. Punitive Damages: If the insurance company’s conduct was particularly egregious or malicious, the court may award punitive damages. These are intended to punish the insurance company and deter similar conduct in the future. In California, there is a high bar for punitive damages, and they are only awarded in cases where the plaintiff can demonstrate that the insurer acted with “malice, oppression, or fraud.”
  5. Attorney’s Fees and Costs: In some cases, the court may order the insurance company to pay the policyholder’s attorney’s fees and costs.

Note that each case is unique, and the specific damages that can be recovered will depend on the details of the case. If you believe an insurance company has acted in bad faith, you should consult with J&Y Law so we can help you understand your options and potential remedies.

Cities We Serve in California

J&Y Law Firm has offices in 42 cities across California to assist those dealing with an insurance company that has acted in bad faith, including:

Need Help With a Bad Faith Insurance Claim?

It is vital that you consult with a legal expert for the most current and detailed understanding of California’s Unfair Insurance Practices Act. The legal team at J&Y Law has experience with winning bad faith insurance lawsuits and will be happy to help you to get the compensation that you deserve. Contact us today for a free consultation. There is no fee unless you win your case.

author photo
About the Author
Yosi Yahoudai is a founder and the managing partner of J&Y. His practice is comprised primarily of cases involving automobile and motorcycle accidents, but he also represents people in premises liability lawsuits, including suits alleging dangerous conditions of public property, third-party criminal conduct, and intentional torts. He also has expertise in cases involving product defects, dog bites, elder abuse, and sexual assault. He earned his Bachelor of Arts from the University of California and is admitted to practice in all California State Courts, and the United States District Court for the Southern District of California. If you have any questions about this article, you can contact Yosi by clicking here.