Bad Faith

Under California law, a covenant of good faith and fair dealing is implied in every contract, including insurance policies. Insurance companies can be held liable for “bad faith” in a variety of situations based on the unreasonable withholding of insurance policy benefits. For example, with first-party property damage claims under homeowners and automobile policies, insurers have a duty to make a thorough and prompt investigation of the insured’s claim for benefits. Insurance companies are exposed to potential “bad faith” liability for failing to make a proper investigation and for unreasonable delay or withholding of policy benefits.

In third-party cases, where the insured has potential liability coverage for lawsuits filed by third parties, insurance companies can be liable for bad faith based on an unreasonable refusal to settle, as well as a delayed or unreasonable settlement. An insurer’s unreasonable refusal to defend also constitutes “bad faith”.

Bad faith liability exposes an insurance company to tort damages, in addition to contract damages. Damages for insurance bad faith can include emotional distress caused by the insurer’s conduct, as well as punitive damages. In addition, an insured can recover attorney’s fees (Brandt fees) incurred to obtain policy benefits that were wrongfully and unreasonably denied by the insurer.