Insurance bad faith

What it is

Every California insurance policy carries an implied promise that the insurer will deal fairly with its insured. In injury practice, bad faith most often means a liability insurer unreasonably refused a reasonable offer to settle within its limits, leaving its own insured exposed to a larger judgment.

The California rule

In Comunale v. Traders & General Insurance Co. (1958), the California Supreme Court held that an insurer that unreasonably refuses a reasonable settlement offer within limits is liable for the entire resulting judgment against its insured. Crisci v. Security Insurance Co. (1967) added damages for the insured's emotional distress, and Gruenberg v. Aetna Insurance Co. (1973) applied the covenant to an insurer's dealings with its own policyholder. An injured third party can't sue the at-fault driver's insurer directly for unfair claims practices under Insurance Code 790.03(h) (Moradi-Shalal v. Fireman's Fund, 1988); the usual path is an assignment of the insured's bad-faith claim after an excess judgment.

For pre-suit demands since 2023, Code of Civil Procedure 999.4 adds a condition: a time-limited demand that doesn't substantially comply with sections 999 to 999.5 isn't treated as a reasonable offer within limits in a later suit for extracontractual damages. Under section 999.3, an insurer that declines must explain its decision in writing before the deadline, and that explanation is relevant in the later suit.

Why it matters to a plaintiff firm

Bad-faith exposure is often what moves a carrier to pay limits, and it depends on a clean record: a compliant time-limited demand, the proof sent with it, and a clear log of what the carrier received and when.