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Self Study Examinations for CLE Credit: The Bar Association of San Francisco

December 2011 Self Study Examination


Earn one hour of MCLE credit by taking the monthly self-evaluation exam. Read the monthly article below and answer the accompanying test questions. When you’re done, return the answer form (at the bottom) and a $25 check for processing.


 

Insurance “Bad Faith” in Uninsured and Underinsured Motorist Cases
By Guy Kornblum, Guy Kornblum & Associates

California law has established strict duties an insurer must follow in processing a first party claim made by its insured. These rules apply to uninsured and underinsured motorist claims made by an insured party in privity of contract with the insurer, who seeks direct reimbursement of the losses covered, and thus has a right to have this claim handled in good faith. The California courts have explained that “[t]he failure of an insurer to deal fairly and in good faith with its insured by refusing, without proper cause, to compensate its insured for a loss covered by the policy, including a loss under uninsured motorist’s endorsement, may give rise to a cause of action in tort for breach of the implied covenant of good faith and fair dealing.” Fleming v. Safeco Ins. Co. (1984) 160 Cal.App.3d 31, 38, citing Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910. Thus, an insurer must act fairly and in good faith when it handles its own insured’s claims including insured and uninsured motorist claims.

The Basic Principles of Good Faith That Apply

The implied covenant of “good faith” has three basic principles:

  • Neither party can do anything which will injure the right of the other to receive the benefits of the agreement. Gruenberg v. Aetna Insurance Company (1973) 9 Cal.3d 566, 573, citing Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 658;
  • An insurer cannot “put its own interests before those of the insured.” Miller v. Elite Ins. Co. (1980) 100 Cal.App.3d 739, 758.
  • An insurance carrier must “give at least as much” consideration to the interests of the insured as it does to its own interests. Egan v. Mutual of Omaha (1979) 24 Cal.3d 809, 819 (emphasis added). Rather, “[t]he insurer has a duty to protect the insured’s interests as if it were its own....” Mariscal v. Old Republic Life Ins. Co. (1966) 42 Cal.App.4th 1617, 1623 (emphasis added).

By failing to pursue the adjustment of a claim with reasonable diligence, the insurer tortiously breaches its implied covenant of good faith and fair dealing it has with the insured. Fleming, supra, at 37. Unreasonable delay in the processing of a claim or the payment of benefits is evidence of “bad faith” by the insurer. Id. at 36-37.

Whether an insurance carrier acted reasonably is usually a question of fact. Fillipo Industries, Inc. v. Sun Ins. Co. (1999) 74 Cal.App.4th 1429, 1438 (an insurer’s bad faith “is ordinarily a question of fact to be determined by a jury considering the evidence of motive, intent and state of mind…”).

Bad Faith for Violations of Insurance Code or California Regulations

Standards for determining what constitutes “bad faith” claims conduct can be found in the statutes and regulations that define the responsibilities of insurers. The California Insurance Code §790.03(h) requires that an insurer refrain from engaging in specific practices defined as unfair claims settlement practices. For example, an insurer commits an “unfair practice” by “[c]ompelling insureds to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by the insureds, when the insureds have made claims for amounts reasonably similar to the amounts ultimately recovered.” Ins. Code §790.03(h)(6).
Furthermore, “[n]ot attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear” is specifically stated to be an unfair claims settlement practice. Ins. Code §790.03(h)(5).

In addition to acts defined as unfair and deceptive by the Insurance Code, case law holds that an insurer’s failure to abide by insurance regulations (10 Cal. Code Reg. §2695.1 et seq.) is “evidence a lack of reasonableness by the insurer in handling an insured’s claim, and thus may support a claim that the insurer acted in bad faith in dealing with its insured.” See, Rattan, et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2007) ¶14:127, p.14-27; Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc. (2000) 78 Cal.App.4th 847, 916.

These regulations were adopted “[t]o delineate certain minimum standards for the settlement of claims which, when violated knowingly on a single occasion or performed with such frequency as to indicate a general business practice shall constitute an unfair claims settlement practice within the meaning of Insurance Code Section 790.03(h).” 10 Cal. Code Reg. §2695.1(a)(1). They were also adopted “[t]o promote the good faith, prompt, efficient and equitable settlement of claims on a cost effective basis.” 10 Cal. Code Reg. §2659.1(a)(2).

California insurance regulations mandate that every insurer “conduct and diligently pursue a thorough, fair and objective investigation and shall not persist in seeking information not reasonably required for or material to the resolution of a claim dispute.” 10 Cal. Code Reg. §2695.7(d) (emphasis added).
Under 10 Cal. Code Reg. §2695.2(k), “‘Investigation’ means all activities of an insurer or its claims agent related to the determination of coverage, liabilities, or nature and extent of loss or damage for which benefits are afforded by an insurance policy, obligations or duties under a bond, and other obligations or duties arising from an insurance policy or bond.” An insurer must “…adopt and implement reasonable standards for the prompt investigation and processing of claims arising under insurance policies.” Ins. Code §790.03(h)(3).

These Fair Claims Regulations can thus be used to establish an insurer’s bad faith conduct. Spray, Gould & Bowers v. Associated International Ins. Co. (1999) 71 Cal. App.4th 1260, 1269.

The Importance of the Duty to Investigate

An insurance company is liable for breach of the implied covenant of good faith and fair dealing when it denies or delays payment resulting from its failure to “thoroughly investigate” a claim. Egan, supra, at 819. An insurer must “fully inquire into all possible bases that might support the insured’s claim,” and may not deny a claim or delay payments to its insured “…without thoroughly investigating the foundation for its denial.” Egan, supra, at 819 (emphasis added); see also, Anderson v. Allstate Ins. Co. (2002) 45 Fed. Appx. 754, 758 9th Cir. (Cal.) [“One of the most critical factors in determining the unreasonableness of an insurer’s conduct is the adequacy of its investigation of the claim.”]; Wilson v. 21st Century Ins. Co. (2007) 42 Cal.4th 713 (“To protect its insured’s contractual interest in security and peace of mind, ‘it is essential that an insurer fully inquire into possible bases that might support the insured’s claim’ before denying it.” Id. at 721 citing Egan, supra.); Brehm IV v. 21st Century Ins. Co. (2008) 166 Cal. App. 4th 1225.

The duty to investigate includes obtaining statements of all percipient witnesses, including investigating police officers and other officials, and medical professionals (Mariscal, supra, at 1624); interviewing or obtaining information from experts concerning relevant facts and consulting with its own experts (id. at 1623-1625); and analyzing and correctly evaluating legal issues relevant to the claim. Shade Foods, Inc., supra, at 908.

Applying the “Good Faith” Claims Principles to Uninsured and Uninsured Motorist Claims

Here are just some examples of bad faith conduct in these cases:

  • Failure to timely pay the UM policy benefits to the insured (Neal, supra, at 920-921);
  • Taking the position that liability is contested when the investigation indicates there is no merit for such;
  • Failing to “conduct and diligently pursue a thorough, fair and objective investigation” (10 Cal. Code Regs. §2695.7(d));
  • Ignoring the opinions of treating physicians, or other evidence favorable to the insured (Mariscal, supra, at 1623-1625);
  • Focusing on the defense medical report instead of looking at the entire medical picture (id.; Cerni v. Provident Life & Acc. Ins. Co. (C.D.Cal.) 2002 U.S. Dist. LEXIS 6053, at p. 33);
  • Manipulating the defense medical examination by engaging a physician who does these exams for insurance companies on a regular basis, including the insurer in the case at hand;
  • Refusing to honor the claim at the outset and forcing the insured to seek counsel and arbitrate to get what is owed;
  • Failing to respond to offers to resolve the claim;
  • “Low balling” (10 Cal. Code Regs. §2695.7(g));
  • Entering into prolonged litigation unnecessarily (Downey Savings & Loan Assn. v. Ohio Casualty Ins. Co. (1987) 189 Cal. App. 3d 1072, at 1097-1099);
  • Using computer programs to create results which undervalue the claim by failing to input complete and accurate information, or using the results to create the impression that the claim is worth less than it really is.

Damages

Since the breach of the good faith duties by an insurer is considered a tort, the measure of damages is governed by Civil Code §3333 which reflects general tort principles. However there are some special rules that apply:

  • The amount of the contract damages;
  • Other economic losses proximately caused by the bad faith conduct;
  • Emotional distress damages, but only if there are economic damages (Waters v. USAA (1996) 41 Cal.App.4th 1063, at 1070);
  • Attorneys fees attributable to the pursuit of the contract claim if bad faith is established (see Brandt v. Superior Court (1985) 37 Cal.3d 813; Cassim v. Allstate Ins. Co. (2004) 33 Cal. 4th 780);
  • Punitive damages provided the requirements of Civil Code §3294 and §3295 are complied with.

For a further discussion of the tort of insurance bad faith and more on the damages claims that can be asserted and some defenses an insurer may rely on, see Kornblum, “Insurance Bad Faith Basics,” Parts I and II, 24 CEB Cal. Bus. L. Prac., Nos. 3 (p. 96) and 4 (123).



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