Insurance Bad Faith Law Gets an Update
California has long been considered a benchmark state with regard to the development of insurance bad faith law. What California pioneers, many other states often implement. As such, updates to California’s bad faith landscape have wide reaching impact on the larger body of insurance bad faith law. For consumers and attorneys alike, maintaining at least a basic understanding of the state of the law in California can have significant benefits.
What is bad faith?
For the layperson, bad faith law essentially makes insurance companies liable if they treat their clients unfairly. What exactly constitutes unfair treatment is complex, and currently under some flux, but the summation is as follows; implied in every contract is a commitment to treat the other parties fairly as the contract unfolds. Known as the implied covenant of good faith and fair dealing, this provision ,imposed on every contract by operation of law, requires parties to act in good faith as they carry out their duties under the agreement. In playground terms: No Cheating.
In the insurance setting, the list of things that constitute “cheating” by an insurance company is fairly long. Some types of bad faith are defined in specific laws while others are simply enforced by courts based on reasonable expectations. Some of the most common mistakes an insurer might make, and thus leading to potential liability, include:
- Withholding information from an insured, the beneficiary of a policy.
- Refusing to settle a claim for which liability is reasonably clear, otherwise known as “gambling with a client’s money.”
- Low-balling, or giving extremely unreasonable, settlement offers.
- Wasting everyone’s time with baseless delays; legal or procedural.
In the world of insurance litigation, a third-party is anyone who stands to collect a benefit, such as monetary payment, from an insurance contract owned by someone else. This might include hospitals which provide treatment to an injured person based on an expectation of later receiving payment out of an insurance settlement or the injured plaintiff themself in any lawsuit that may ultimately be covered by a defendant’s insurance policy. While the definition of a third-party is relatively clear, what rights those entities may have has changed somewhat over the years.
In August the California Supreme Court ruled that, while third-parties cannot sue an insurance company for bad faith unless they have some contractual relationship with that insurance company, other avenues may cover the same ground. In other words, bad faith is a legal remedy reserved for people who are actually contracted with an insurance company and is designed to help those people gain the full benefits of their arrangements. That is, the policies for which consumers pay good money for, should give a benefit in the event of an occurrence. But this understanding of bad faith law does not preclude lawsuits based on other legal theories just because the underlying facts might support both types of suits.
The Court’s ruling leaves open some potentially novel avenues by which third-parties, typically the plaintiffs in personal injury lawsuits, can pursue insurance companies for bad-faith like practices, even in circumstances traditionally blocked by limitations to third-party suits. In another recent decision, a California Court of Appeal further expanded these options when it allowed a third-party to sue a defendant’s insurance company for bad faith, failure to notify the injured party about a claims reporting deadline, under a med-pay clause of a policy for which primary liability had already been settled.
Plaintiff’s bottom line
While the full extent of these rulings will not be known until more cases come down the pipe dealing with these issues, recent rulings may provide injured plaintiffs with an expanded range of possible options for recovering their damages in some situations. This ultimately makes it more likely that your attorney will be able to get you the settlement to which you are entitled. Stay tuned as we continue to monitor the ongoing developments in this critical area of personal injury law.