California Third-Party Bad Faith: Understanding Your Rights

California law allows both first and third parties to bring a suit for bad faith against their insurers. However, the duty of good faith and fair dealing only extends to first-party claims, not third-party claims. A first-party claim is made between a policyholder and the insurance company, whereas a third-party claim is made by a party that is not a named policyholder. In California, insurance bad faith falls under the Fair Claims Settlement Practices Regulations, which detail the standards for prompt, fair, and equitable settlements that insurance providers must comply with to act in good faith.

Unreasonable denial of claims

In California, an insurance company is said to be acting in bad faith when it denies a claim without providing a valid reason. Unreasonable denial of claims is one of the ways in which an insurance company can breach the implied obligation of good faith and fair dealing.

To establish insurer bad faith, the insured must show that the insurer has withheld benefits due under the policy, and that such withholding was 'unreasonable' or 'without proper cause'. This can include the denial of benefits due, paying less than is due, and/or unreasonably delaying payments due.

In California, the Fair Claims Settlement Practices Regulations outline what constitutes good conduct by insurance providers and what they must do to act in good faith towards their policyholders. These regulations include standards for prompt, fair, and equitable settlements, such as responding to a claimant's request for insurance coverage policy limits within 10 days, and not withholding a claim settlement for longer than 30 days.

To prove an insurance company acted in bad faith, the plaintiff must show that they were insured under a policy of liability insurance issued by the defendant, that the claimant made a claim against the plaintiff that was covered by the defendant's insurance policy, and that the claimant made a reasonable demand to settle the claim for an amount within the policy limits. The plaintiff must also prove that the defendant's failure to accept this settlement demand was the result of unreasonable conduct and that this failure was a substantial factor in causing the plaintiff's harm.

It is important to note that the distinction between first-party and third-party claims is critical in California. First-party claims are made directly between the policyholder and the insurance company, while third-party claims are made by a party that is not a named policyholder or insured. Only first-party claimants are owed a duty of good faith and fair dealing by the insurance company, as this duty only extends to claims where the insurance company has a direct relationship with the insured.

Unreasonable delay in claims process

In California, an insurance company is required to act in good faith and deal fairly with its customers. This means that they must process claims in a reasonable manner, including conducting a proper investigation, providing reasonable valuation and settlement offers, approving valid claims, denying questionable claims with valid reasons, and paying approved claims without delay.

Unreasonable delay in the claims process can be considered bad faith. This includes any unjustified deferral of payment after a claim has been processed and a compensation amount agreed upon. California law states that insurance companies are legally obligated to tender payment within 30 calendar days of accepting a claim.

If an insurance company is found to have acted in bad faith, they may be liable to pay for the original amount the policyholder is due, plus any damages that arose due to the initial claim being denied, and other economic losses resulting from the denial.

To establish bad faith, the insured must show that the insurer has withheld benefits due under the policy and that such withholding was unreasonable or without proper cause. This can include not only the denial of benefits but also delaying or underpaying them.

It is important to note that the duty of good faith and fair dealing only extends to first-party claims, not third-party claims. A first-party claim is made by the policyholder with their own insurance company, whereas a third-party claim is made by another party with the insured's insurance company.

Unreasonable termination of claims

In California, a third-party bad faith claim can be filed against an insurance company for unreasonable termination of claims, or failure to settle. This occurs when the insurance company acts in a way that is unreasonable and contrary to its obligations under the policy, exposing the policyholder to financial harm.

To establish a third-party bad faith claim for unreasonable termination of claims, the plaintiff must prove the following:

• That the plaintiff was insured under a policy of liability insurance issued by the defendant.
• That the claimant made a claim against the plaintiff that was covered by the defendant's insurance policy.
• That the claimant made a reasonable demand to settle the claim for an amount within the policy limits.
• That the defendant failed to accept this settlement demand.
• That the defendant's failure to accept the settlement demand was the result of unreasonable conduct.
• That a judgment was entered against the plaintiff for a sum of money greater than the policy limits.

It is important to note that the specific requirements for proving unreasonable termination of claims may vary depending on the state and the specific circumstances of the case.

In California, third-party bad faith claims are allowed in limited situations, as outlined in the "Fair Insurance Responsibility Act of 2000." This Act specifies that the third-party plaintiff's bad faith claim must arise from bodily injury or property damage resulting from an incident involving a motor vehicle. The Act also imposes important deadlines for insurers when responding to third-party claimants, such as responding to a claimant's final written settlement demand within 30 days and responding to a request for insurance coverage policy limits within 10 days.

To recover damages in a third-party bad faith claim for unreasonable termination of claims, the plaintiff must typically prove that they suffered financial harm as a result of the insurance company's failure to settle. This may include the amount of compensation the insured person was wrongfully denied, any money the insured person was ordered to pay above the policy limits, and any financial losses resulting from the insurance company's actions.

Unreasonable underpayment of claims

In California, underpayment of claims can be a form of insurance bad faith. Insurance companies are obligated to pay what they owe a claimant according to the terms of their policy. If they unreasonably refuse to do so, they breach the contract and may be liable for damages.

To establish a claim for bad faith in California, the plaintiff must prove the following:

• That the plaintiff was insured under a policy of liability insurance issued by the defendant.
• That the claimant made a claim against the plaintiff that was covered by the defendant's insurance policy.
• That the claimant made a reasonable demand to settle the claim for an amount within the policy limits.
• That the defendant failed to accept this settlement demand.
• That the defendant's failure to accept the settlement demand was the result of unreasonable conduct.
• That a judgment was entered against the plaintiff for a sum of money greater than the policy limits.

A settlement demand for an amount within policy limits is reasonable if the defendant knew or should have known that a potential judgment against the plaintiff was likely to exceed the amount of the demand based on the claimant's injuries or losses and the plaintiff's probable liability.

Insurance companies frequently offer to pay insured individuals less than what the policy stipulates. Policyholders are often forced to take these low-ball offers to meet their immediate financial needs. This is considered underpayment and can be a form of insurance bad faith in California.

Failure to defend

In California, insurance bad faith claims can be brought by both first and third parties. A third-party bad faith claim occurs when an insurance company fails to defend their client in a lawsuit, which can be considered a breach of their contractual duty.

If an insurance company fails to provide an adequate defence on behalf of their client in a lawsuit, this can be considered bad faith. This means that the insurance company has a duty to defend the client and act in their best interests. If they fail to do so, it may be considered a breach of their contractual duty and the client may have grounds for a bad faith claim.

Requirements for a Third-Party Bad Faith Claim

To establish a third-party bad faith claim, the insured must show that the insurer has withheld benefits due under the policy and that such withholding was 'unreasonable' or 'without proper cause'. This can include denial of benefits, underpayment, or unreasonable delay in payment.

Examples of Bad Faith

• Unreasonably denying a claim
• Unreasonably delaying the claims process
• Unreasonably terminating the claim
• Making lowball settlement offers
• Unreasonably delaying payment of a valid claim
• Making unreasonable demands for documentation
• Failing to investigate the claim thoroughly
• Failing to maintain adequate investigative procedures
• Failing to disclose policy limits and explain applicable policy provisions or exclusions

Statute of Limitations for Bad Faith Claims in California

It is important to note that there is a statute of limitations for filing a bad faith claim in California. If the claim is a tort claim, the policyholder has 2 years from the date of the denial to file. If the claim is a breach of contract claim, the policyholder has 4 years from the date of the denial.

Frequently asked questions