Insurance Bad Faith Law under Personal Injury
Insurance Bad Faith Law (under Personal Injury Law)
1. What is Insurance Bad Faith?
Insurance bad faith occurs when an insurance company unreasonably or unfairly refuses to pay a legitimate claim, delays payment, or otherwise fails to fulfill its contractual obligations to the insured. In personal injury cases, where damages are often significant, insurance bad faith can exacerbate the harm suffered by the injured party.
The insured party enters into a contract (the insurance policy) with the insurer expecting protection and compensation in case of loss. When an insurer acts in bad faith, it breaches this implied covenant of good faith and fair dealing.
2. Why Does Bad Faith Matter in Personal Injury?
In personal injury lawsuits, the defendant’s insurance company often controls settlement and compensation. If the insurer denies or delays payment without a reasonable basis, the injured party may suffer financial hardship, emotional distress, and prolonged litigation.
Bad faith claims allow the insured or the injured third party to sue the insurance company for damages beyond the policy limits, sometimes including punitive damages.
3. Types of Bad Faith Conduct
Unreasonable denial of claims
Delaying payments without justification
Failing to investigate claims adequately
Misrepresenting policy provisions
Refusing to settle within policy limits to expose the insured to excess liability
Coercing settlements for less than fair value
4. Legal Elements of Insurance Bad Faith
To succeed in a bad faith claim, the plaintiff (insured or third party) generally must prove:
Existence of an insurance contract
The insurer acted unreasonably or without proper cause in handling the claim
The insurer knew or recklessly disregarded the lack of a reasonable basis for denial or delay
The plaintiff suffered damages as a result of the insurer’s bad faith
5. Types of Plaintiffs Who Can Sue for Bad Faith
First-party insured: The policyholder suing their own insurer for refusing to pay their claim.
Third-party claimant: The injured party suing the defendant’s insurer for failure to settle or pay damages owed to the injured party.
6. Case Law Examples
A. First-Party Bad Faith
Case: Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566
Facts: The insured claimed uninsured motorist benefits, and the insurer delayed payment without proper cause.
Holding: The California Supreme Court held insurers have an implied duty of good faith and fair dealing to their insured. Failure to investigate and pay claims fairly constituted bad faith.
Significance: This case established the insurer’s duty to act fairly and promptly with respect to claims, forming the foundation of first-party bad faith law.
B. Third-Party Bad Faith
Case: Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654
Facts: The insurer refused to settle a third-party claim within policy limits, exposing the insured to a larger judgment.
Holding: The insurer has a duty to act in good faith toward third parties and can be liable if it refuses a reasonable settlement offer.
Significance: This case is seminal for third-party bad faith claims, especially regarding settlement practices.
C. Punitive Damages for Bad Faith
Case: Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809
Facts: The insurer unjustifiably delayed payment of benefits.
Holding: The court ruled that punitive damages could be awarded for bad faith where the insurer acts with malice or oppression.
Significance: Bad faith conduct can lead not only to compensatory but also punitive damages.
7. Bad Faith in Personal Injury Settlement Context
In personal injury cases, the defendant’s liability insurance carrier often has a duty to settle claims within policy limits when a reasonable settlement offer is made. If the insurer refuses to settle in good faith, the insured may face a judgment exceeding policy limits, and the insurer can be sued for bad faith for the excess judgment.
8. Consequences of Insurance Bad Faith
Compensatory Damages: Including amounts beyond the policy limits.
Emotional Distress Damages: In some cases where bad faith causes severe emotional harm.
Punitive Damages: To punish and deter wrongful conduct by insurers.
Attorney’s Fees: Sometimes courts award insureds attorneys’ fees when insurers act in bad faith.
9. Defenses Insurers Use Against Bad Faith Claims
Reasonable dispute over policy coverage or claim validity.
Lack of evidence showing insurer’s knowledge of unreasonableness.
Good faith reliance on experts or investigations.
Procedural defenses (e.g., failure to exhaust administrative remedies).
10. Summary
| Aspect | Insurance Bad Faith |
|---|---|
| Definition | Unreasonable insurer conduct breaching contract |
| Context | Personal injury claims, settlement, claim handling |
| Key Duties of Insurer | Investigate, evaluate, pay or settle claims fairly |
| Plaintiffs | First-party insured, third-party claimant |
| Remedies | Compensatory, punitive damages, attorney’s fees |
| Key Case Law | Gruenberg, Comunale, Egan |
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