Coverage Analysis
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Unfair and deceptive claims handling practices are prohibited by Section 790.03 of the California Insurance Code.  Unfair competition acts.   A comprehensive set of new regulations governing the investigation and handling of claims by insurers went into effect on January 14, 1993.  Among other things, insurers are required to acknowledge the receipt of claims within fifteen days and must accept or deny a claim no later than 40 days after receiving all requested pertinent documentation requested from the insured.

Claims for unfair competition may also be pursued by insureds under Section 17200 of California's Business & Professions Code, which defines "unfair competition" as  “any unlawful, unfair or fraudulent business act or practice."  State Farm Fire and Cas. Co. v. Superior Court, 53 Cal Rptr. 2d 229 (Ct. App. 1996) (Sec. 17200 applied to insurers where conduct violates common law rights even though same conduct also violates Insurance Code Sec. 790).

An insurer is subject to tort liability for bad faith only where it unreasonably fails to provide benefits due under the policy or the law.  Carlton v. St. Paul Mercury Ins. Co., 30 Cal. App. 4th 1450, 1456, 36 Cal. Rptr. 2nd 229 (1994).  

An insurance contract imposes both public and private obligations upon the issuing company.  Kransco v. American Empire Surplus Lines Insurance Company, 23 Cal. 4th 390, 401 (2000).  

Allowing insureds to sue their insurers for breach of contract under tort theories is a significant departure from established principles of law in California.  Foley v. Interactive Data Corporation, 47 Cal. 3rd 654, 680 (1988).  

The California Court of Appeal has drawn a distinction between actions that are brought to enforce the benefits guaranteed under an insurance policy and an action based upon the defective use of those benefits, ruling in  Rattan v. USAA, 84 Cal. App.4th 715 (4th Dist. 2000) that an insured had no right to sue a homeowner’s carrier for bad faith based upon the defective conduct of contractors retained by the insurer to repair damage to the insured’s home.

A breach of the Insurance Code Regulations is merely evidence of a breach of the implied obligation of good faith and fair dealing and not a per se violation of that duty.   Rattan v. USAA, 84 Cal.App. 4th 715 (Cal. App. 2000.

"Bad faith litigation is not a game, where insureds are free to manufacture claims for recovery.  Summary judgment against an insurer potentially increases the amount that other citizens must pay for their insurance premiums." J.D. Aguerre, Inc. v. American Guaranty & Liability Ins. Co., 59 Cal. App. 4th 6, 68 Cal. Rptr. 2d 837 (1997).  

A bad faith action may only be pursued if the insurer's misconduct has result in a substantial economic loss to the insured.  See Maxwell v. Fire Ins. Exchange, 1998 WL 19960 (Cal. App. January 22, 1998)(81 delay in paying claim did not justify bad faith claim).  See also Waters v. USAA, 41 Cal. App.4th 1063, 48 Cal. Rptr.2d 910 (2d Dist. 1996).  Further, these economic consequences must be pleaded with specificity.  Pelkey v. Allstate Ins. Co., 19989 WL 1792 (Cal. App. January 6, 1998)(first party claim).

In Waller v. Truck Insurance Exchange, 11 Cal. 4th 1, 44 Cal. Rptr. 2d 370 (1995), the California Supreme Court declared that an action for bad faith will only arise if the insurer unreasonably withheld benefits that were owed under the policy.  As a consequence, such actions may only be brought if the insurer owed coverage.  If no policy benefits were owed in the first instance, no basis exists for such a claim.  See also  Murray v. State Farm Fire & Cas. Co., 219 Cal. App.3d 58, 65 (1990) and Allstate Ins. Co. v. Salahutdin, 815 F.Supp. 1309 (N.D. Cal. 1992).

When there is no coverage of any kind under an insurance contract, the insured may not hold the insurer liable for breach of the mplied covenant of good faith and fair dealing.  Waller v. Truck Insurance Exchange, 11 Cal. 4th 1, 37,  44 Cal. Rptr. 2d 370, 900 P.2d at 639 (1995).

Every contract (including an insurance policy) contains a covenant of good faith and fair dealing that is implied into the contract as a matter of law.   Shade Foods, Inc. v . Innovative Products Sales & Marketing, Inc., 93 Cal.Rptr.2d 364, 385 (Cal. App. 1st Dist. 2000)(in general, the standard of good faith and fairness calls for consideration of the reasonableness of the insurer’s conduct);  Comunale v. Traders & General Ins. Co., 328 P. 2d 198 (Cal. 1958)(there is an implied covenant of good faith and fair dealing in every insurance contract that neither party will do anything to injure the right of the other to receive the benefits of the agreement; if insurer wrongfully denies coverage, it is liable for any resulting damage).    As summarized by the California Supreme Court in the Gruenberg v. Aetna Ins. Co., 510 P.2d 1032, 1037 (Cal. 1973):

It is the obligation, deemed to be imposed by the law, under which the insurer must act fairly and in good faith in discharging its contractual responsibilities.  Where in so doing, it fails 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, such conduct may give rise to a cause of action in tort for breach of an implied covenant of good faith and fair dealing.

The Court of Appeal ruled in Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc., 78 Cal. App. 4th 847 (2000) that Northbrook breached the covenant of good faith and fair dealing by failing to undertake a reasonable investigation of the facts before denying coverage.  On the other hand, the Court of Appeals reversed the jury’s multimillion dollar award of punitive damages declaring that the insured had failed to establish oppression, fraud or malice according to a standard of clear and convincing evidence as required under Civil Code Section 3294(a).

Courts have recognized that the duty of good faith and fair dealing only extends to the insurer’s performance of its obligations under the policy and therefore does not extend to matters that are not covered.  PPG Industries, Inc. v. Transamerica Ins. Co., 975 P.2d 652 (Cal. 1999)(insurer may not be held liable for award of punitive damages that resulted from alleged failure to settle within policy limits since punitive damages are not insurable under California law).  The implied covenant of good faith and fair dealing does not extend to actions or matters which are outside the scope of the contract.  New Hampshire Ins. Co. v. Ridout Roofing Co., 80 Cal.Rptr.2d 286, 290 (Cal.App. 1st Dist. 1998).

The general rule is that only parties who are entitled to benefits under an insurance policy can maintain a cause of action for a breach of the implied covenant of good faith and fair dealing.  Murphy v. Allstate Insurance Company, 17 Cal.3d 937, 944 (1976).  Conversely, third party claimants may not sue for breach of the implied covenant, nor may insurers purporting to bring claims against other insurers on behalf of their mutual policyholder. Gulf Insurance Company v. TIG Insurance Company, B135799 (Cal. App. January 22, 2001)(rejecting insurer’s equitable subrogation claim.)

The Court of Appeal has refused to find that an insurer acted in bad faith by failing to conduct an investigation of the insured's claim beyond reviewing the allegations of the complaint where that was sufficient to establish that the claim was, in fact, not covered. American International Bank v. Fidelity & Deposit Co. of Maryland, No. B097359 (Cal. App. September 16, 1996).

An insurer’s good faith obligations do not end when coverage litigation begins.   White v. Western Title Ins. Co., 710 P.2d 309, 316 (Cal. 1985)(“it is clear that the contractual relationship between insurer and the insured does not terminate with commencement of the litigation”).In White, the California Supreme Court upheld the admission of post-filing evidence (including settlement offers) in an action by the policyholder for breach of the covenant of good faith and fair dealing.  The court held that a rule completely excluding such evidence “would encourage insurers to induce the early filing of suits, and to delay serious investigation and negotiation until after suit was filed when its conduct would be unencumbered by any duty to deal fairly and in good faith,” and that “[t]he policy of encouraging prompt investigation and payment of insurance claims would be undermined.”  Id. at 317.  The concurring opinion of Justice Grodin further noted that “...where an insurer has unreasonably and in bad faith withheld payment of benefits due under a policy prior to litigation, and then continues this bad faith conduct after a complaint is filed, there seems to be no compelling reason why the right to recover for that continuing wrong should terminate either because the insurer decides to file a preemptive action for declaratory judgment or because the insured, under the compulsion of the insurer’s recalcitrance, decides to file suit himself.”  Id. at 320-21.            

The Ninth Circuit has ruled that the rule in California, whereby an insurer may not be sued for bad faith or breach of the implied covenant of good faith and fair dealing if a “genuine issue” exists with respect to its coverage obligations, is not restricted to legal disputes concerning the meaning of policy terms but may also extend to the manner in which an insurer conducts an investigation of the insured’s claim.  In Guebara v. Allstate Insurance Company, No. 98-55458 (9th Cir. January 12, 2001), the court ruled 2-1 that although expert testimony should not automatically insulate an insurer from bad faith claims based on biased investigations, the testimony of Allstate’s experts had created a genuine issue of coverage sufficient to preclude a finding of bad faith in this case.  

Insurers are entitled to a reasonable period of time to analyze a situation requiring a coverage decision.  Dynamic Concepts, Inc. v. Truck Ins. Exchange, 61 Cal. App.4th 999, 71 Cal. Rptr.2d 882 (1998)(insurer did not act in bad faith in refusing to fund settlement that was submitted to it at the last minute). 

A first party insurer may not be liable in bad faith for its inadequate investigation of the insured's claim if there exists a genuine dispute of coverage.  Allstate Ins. Co. v. Madan, 889 F.Supp. 374 (C.D. Cal. 1995).

Whether an insurer’s conduct was reasonable must be based on the information known to it at the time of denial.  Acedes v. Allstate Insurance Company, 827 F. Supp. 1473, 1487 (S.D. Cal. 1993).

A federal district court in Illinois has predicted that California courts will not extend the duty of good faith and fair dealing to actions between insurers, particularly in the reinsurance context.  Stonewall Insurance Company v. Argonaut Insurance Company,  75 F.Supp.2d 893 (N.D. Ill. 1999).

Where an insurer wrongfully denies coverage and the insured is forced to defend itself, the ordinary measure of recoverable damages are the costs of defense paid by the insured.  2 Cal. Liability Insurance Practice,  Section 25.29.  However, in addition to such contract damages, tort damages may be awardable where the insurer's conduct constitutes a violation of the covenant of good faith and fair dealing.  In Campbell v. Superior Court, 44 Cal. App. 4, 1308, 52 Cal. Rptr.2d, 385 (1996), the Court of Appeal ruled for the first time that an insurer's refusal to provide a defense warranted a tort recovery even where the insurer was subsequently found not to have any indemnity obligation.  In Campbell, the Court of Appeal found that the implied covenant of good faith and fair dealing extends to an insurer's refusal to defend and is not solely limited to cases in which an insurer failed to settle a claim within policy limits.  

Prior to Campbell, the Court of Appeal had ruled in Amato v. Mercury Cas. Co. (Amato I), that an insured's recovery for a wrongful refusal to defend was limited to the actual defense costs incurred by the insured.  Following Campbell, however, the Court of Appeal ruled in Amato v. Mercury Casualty Co., 51 Cal. App.4th 1 (1996), as reconsidered, 1997 Cal. App. LEXIS 211 (Cal. App. March 24, 1997) (Amato II), that the insured's tort recovery extends to all consequential damages flowing from the insured's bad faith breach.  Because the insured's indigent circumstances prevented it from providing an adequate defense and resulted in a default judgment entering against it, the Court of Appeal found that the insurer was found to owe the full amount of the judgment even though it had later obtained a judicial declaration of no coverage.  If the insurer has acted in bad faith, the court ruled that the insured could recover all consequential damages, whether they were foreseeable at the time of the breach or not.  On reconsideration, the court further ruled on March 24, 1997 that the insured has no obligation to show that the default judgment was larger than the judgment that would otherwise have resulted even had the insurer provided a defense.  The court found that a default judgment does not enter until it has first been reviewed and approved by a trial court, based upon all of the evidence, and therefore does not pose a risk of fraud or collusion.

Punitive damages may only be awarded if there was no plausible basis for the insurer's coverage position and the insurer denied coverage to "vex, injure or annoy" its policyholder.  Slottow v. American Cas. Co. of Reading, 10 F.3d 1355 (9th Cir. 1993).

The Ninth Circuit has ruled that a first party insurer must exercise a higher duty of care in dealing with insureds who are not represented by counsel. Aceves v. Allstate Ins. Co., 68 F.3d 1160 (9th Cir. 1995).

A liability insurer must give equal weight to the interests of additional insureds and may not consider only the needs of the named insured.  Rankin v. Curtis, 183 Cal. App.3d 939, 945, 228 Cal. Rptr. 753 (1986).  Indeed, the Court of Appeals has ruled that even excess insurers cannot choose to pay their policy limits to settle claims involving named insureds that leave other insureds exposed.   Schwartz v. State Farm Fire & Cas. Co., No. B140274 (Cal. App. May 9, 2001).   The court ruled that an insurer facing multiple claims on a limited pool of funds has at least two means of protecting itself without breaching its duty to either insured.   The first is to seek a negotiated agreement among the insureds as to a fair apportionment of the pool of funds.  If that approach fails, an insurer may file an interpleader action as other insurers do when faced with multiple claimants to a single fund.  See, e.g. Minnesota Mut. Life Ins. Co. v. Ensley  174 F.3d 977, 981 (9th Cir. 1999)(insurer facing potential liability to two claimants for life insurance proceeds filed federal interpleader suit and was properly discharged from dispute upon depositing proceeds with the court).

A liability insurer has no fiduciary obligation to the underlying tort claimants to ensure that its settlement payment affects the intended purpose or benefits them.  Smith v. Premier Alliance Ins. Co., 41 Cal. App. 4th 691, 48 Cal. Rptr. 2d 461 (2d Dist. 1995) (even though insurer intended that wife and children benefit, it had no liability to children where wife appropriated entire settlement).  See also Sparman v. St. Farm Fire & Casualty Co., 185 Cal. App. 3d 1105, 230 Cal. Rptr. 264 (1986) (insurer that settles with one heir is not liable to other heir for failing to discover its existence).  

A primary insurer may be sued for failing to settle a claim within the available limits. Camelot by the Bay Condominium Owner's Assoc. v. Scottsdale Ins. Co., 27 Cal. App.4th 33, 32 Cal. Rptr.2d 354 (1994).  Liability does not exist merely because the insurer refused an offer within the policy limits; the refusal must be unreasonable.  Crisci v. Security Ins. Co., 66 Cal.2d 425, 58 Cal. Rptr. 13, 426 P.2d 173 (1967).  

Courts have disagreed as to whether an insurer may reject a policy limit settlement where a serious coverage issue or defense remains to be resolved.  Under California law, an insurer is strictly liable to indemnify the insured for the amount of the policy settlement if it negligently fails to pay it.  Johansen v. California State Auto Association Inter-Insurance Bureau, 15 Cal. 3d 9, 123 Cal. Rptr. 288, 538 P.2d 744 (1975).  In such circumstances, an insurer acts at its peril in rejecting a reasonable settlement offer and will be found to have an obligation to indemnify the insured for this amount if it is subsequently found to have wrongfully refused to defend.  The insurer's coverage questions are not an obstacle to its liability for failing to settle.

In cases involving a bad faith failure to settle within policy limits, the stated measure of damages will be the amount of the original verdict, whether amount that sum was ever actually paid by the insured or whether it was eventually reduced pursuant to some subsequent settlement.  Purdy v. Pacific Automobile Ins. Co., 157 Cal. App. 3d 59, 74, 203 Cal. Rptr. 524 (1984).

The likelihood of the underlying case resulting in a verdict in excess of policy limits may be determined by examining the damages claimed by the plaintiff as a percentage of a likely outcome of the litigation.  Miller v. Elite Ins. Co., 100 Cal. App.3d 739, 757, 161 Cal. Rptr.2d 330 (1980) and Issacson v. California Insurance Guaranty Association, 44 Cal. 3rd 775, 244 Cal. Rptr. 655, 750 P.2d 297 (1988).  

In Highlands Ins. Co. v. Continental Cas. Co., 64 F.3d 514 (9th Cir. 1995), the court ruled that the primary insurer was still liable to an excess insurer even though it had offered its full policy limits on the first day of trial.  The court also ruled in New Hampshire Ins. Co. v. United States, No. 95-55245 (9th Cir. August 2, 1996), that a liability insurer may be held liable for having negligently failed to settle a claim within the applicable primary policy limits even though the plaintiff never formally tendered a demand within those limits.  

Although an insured may sue a primary carrier for negligently failing to settle a claim within policy limits, it may not bootstrap a claim for the punitive damages part of the underlying award based on a theory that the damages would not have been awarded against it but for the insurer's negligence.  In PPG Industries, Inc. v. Transamerica Ins. Co., 20 Cal.4th 310, 975 P.2d 652 (1999), the California Supreme Court ruled  that a liability insurer does not owe coverage for an award of punitive damages awarded against its insured as a consequential aspect of the insurer's claimed negligence in failing to settle the claim within policy limits.  As coverage for punitive damages is barred both by statute and public policy, the court ruled that an insurer could not be forced to bear responsibility for such awards, even if it was otherwise negligent in failing to settle In such circumstances, the insurer’s failure to settle the third party lawsuit is a cause in fact of the punitive damages awarded against the insured but was not the proximate cause of those damages. 

Under California law, an insurer may not disclose its policyholder’s limits of insurance without the knowledge and consent of the policyholder.  Insurance Code, Section 79.13(a). On the other hand, a liability insurer was held to have acted improperly where it had a blanket corporate practice of refusing to even ask for permission.  Boicourt v. AMEX Assurance Company, G021061 (Cal. App. March 15, 2000).  The Court of Appeals ruled that such a policy could discourage settlements within policy limits. 

The California Court of Appeal has ruled that a policyholder could not contend that an insurer’s claim for reimbursement of sums paid to settle uncovered claims was a breach of the implied covenant of good faith and fair dealing  In Old Republic Insurance Company v. F.S.R. Brokerage, Inc., B100097 (Cal. App. May 4, 2000), the court declared that the statutory privilege in California for “litigation conduct”  shielded parties against claims of liability based upon positions or actions taken in court and that, while this privilege did not extend to litigation conduct that was advanced as evidence of earlier misconduct, it would preclude claims such as those presented here that were based solely on litigation conduct.

An insured may recover fees for pursuing its coverage claim against an insurer that has acted in bad faith.  Brandt v. Superior Court, 37 Cal.3d 813, 815, 210 Cal. Rptr. 211 (1985).  However, Brandt fees do not extend to costs incurred by an insured in responding to an insurer's unsuccessful appeal of a bad faith award.  Burnaby v. Standard Fire Ins. Co., 40 Cal. App. 4th 787, 47 Cal. Rptr.2d 326 (1995).  Nor are such fees recoverable where the insurer acted in good faith in bring a DJ to resolve a bona fide coverage dispute. Dalrymple v. USAA, 40 Cal. App.4th 497 (4th Dist. 1995).

Claims for emotional distress are not recoverable in a bad faith case unless the claimant also suffered a financial loss.  Waters v. USAA, 41 Cal. App.4th 1063, 48 Cal. Rptr.2d 910 (1996).

An insured that unilaterally settled liability claims against it after its insurer refused to make payment may not assert a claim for negligent failure to settle based upon the possibility of an excess verdict.  Finkelstein v. 20th Century Ins. Co., 11 Cal. App. 4th 926, 14 Cal. Rptr.2d 305 (1992).  

The Court of Appeal has ruled that an insurer that negligently failed to communicate a settlement offer to its policyholder for a case for which it was later found not to have a duty to defend might be held liable under a theory of tort (negligence) but that, absent any contractual duty to defend, no claim based upon a breach of the implied covenant of good faith and fair dealing could be asserted since there was no duty to defend in the first instance to support such  a claim. Farmers Insurance Exchange v. Jacobs, B113172 (Cal. App. September 30, 1999).

The California Court of Appeal ruled in Safeco Ins. Co. v. Superior Court, A084765 (Cal. App. April 8, 1999), that a liability insurer was not bound by a stipulated judgment that its policyholder entered into with the plaintiff over Safeco’s objection where  the insurer had been defending under a reservation of rights.  The court ruled that the stipulated judgment directly interfered with the insurer’s right to control the defense of the  underlying case in violation of the “no action” clause in its policy.  The fact that the stipulated judgment was negotiated with the help of the insured’s independent Cumis counsel did not make it any more binding on the insurer.  The Court of Appeal ruled that  the remedy for an insured that was concerned about its liability was to prospectively assign  to the plaintiff its cause of action for bad faith failure to settle within policy limits, recognizing that such an action could not be pursued immediately and would not become operable unless and until an excess verdict occurred.  In the interim, the insurer was free to proceed with the defense of the case.  

An insurer that has defended a claim under a reservation of rights is not estopped to dispute the reasonableness of a judgment that its insured had unilaterally entered into with the third party claimant.  Wright v. Fireman's Fund Ins. Co., 11 Cal.App. 4th 998, 14 Cal. Rptr. 588 (1992).   The Court of Appeals has also since ruled that where an insurer is defending a case under a reservation of rights and its insured seeks to settle the suit and assign all of its rights to the tort claimant, against the wishes of the insurer, the Court of Appeals has ruled in Hamilton v. Maryland Cas. Co., A085219 (Cal. App. February 25, 2000) that the settlement is not binding on the insurer and that, in light of the policy’s “no action” clause, the claimants may not bring a direct action on the policy until they have obtained a judgment against the insured after an actual trial or until the insurer has agreed to a settlement.

The  Ninth Circuit  ruled in Anguiano v. Allstate Insurance Company, No. 97-56704 (9th Cir. April 19, 2000) that the implied covenant of good faith and fair dealing requires a liability insurer to communicate a plaintiff’s settlement offer to its policyholder in any case where the third-party claims present a potential exposure in excess of policy limits.

On the other hand, an insurer that exercises its contractual right to settle a claim that it has defended was held not to have breached the implied covenant of good faith and fair dealing, despite the insured's objections to the settlement, in Western Polymer Technology, Inc. v. Reliance Ins. Co., 32 Cal. App.4th 14, 38 Cal. Rptr.2d 78 (1995), review denied (Cal. 1995).  Similarly, the Court of Appeal ruled in New Hampshire Ins.  Co.  v.  Rideout Roofing Co., Inc., 1998 WL 847668 (1st Dist.  December 9, 1998), that an insurer had acted in bad faith in seeking to recover from its insured the deductible portion of a settlement.  The court ruled that the implied covenant could not be construed as barring an insurer from exercising express contractual rights guaranteed to it under the insurance contract.

An insurer must act to protect the interests of all of its insureds and cannot pay its limit to settle claims against one insured that would leave other insureds bare. Strauss v. Farmers Ins. Exchange, 26 Cal. App.4th 1017, 31 Cal. Rptr.2d 811 (1994).  See also Shell Oil Co. v. National Union Fire Ins. Co. of Pittsburgh, 44 Cal. App. 4th 1633, 52 Cal. Rptr.2d 580 (2d Dist. 1996)(insurer had continuing good faith obligations to co-insured and could not terminate its policy obligations by paying its policy limits to settle claims against only one insured) and Rankin v. Curtis, 183 Cal. App. 3d 939, 228 Cal. Rptr. 753 (1986) (insurer breached duty of good faith and fair dealing by not informing the additional insured of a lawsuit filed against the named insured and by providing her with Cumis counsel).

An insurer may agree to defend a suit subject to a reservation of rights.  Truck Ins. Exchange v. Superior Court 51 Cal.App.4th 985, 994 (1996).  In this manner, an “insurer meets its obligation to furnish a defense without waiving its right to assert coverage defenses against the insured at a later time.”  (Croskey et al., Cal. Practice Guide:  Insurance Litigation (The Rutter Group 2000)  7:723, p. 7B-61.)  As the Supreme Court stated in Gray v. Zurich Insurance Co., 65 Cal.2d 263, 279 (1966) , “if the insurer adequately reserves its right to assert the noncoverage defense later, it will not be bound by the judgment.  If the injured party prevails, that party or the insured will assert his claim against the insurer.  At this time the insurer can raise the noncoverage defense previously reserved.”

The right of third parties to sue liability insurers was initially recognized by the California Supreme Court in Royal Globe Ins. Co. v. Superior Court, 592 P.2d 329 (Cal. 1979) but disallowed nine years later in Moradi Shalal v. Fireman’s Fund Ins. Co., 758 P.2d 58 (Cal. 1988).  

In 1999, however, Governor Davis signed legislation (Senate Bill 1237/Assembly Bill 1309) that reinstates the right of third parties to sue liability insurers for bad faith in bodily injury claims subject to certain limitations.   Claims for property damage could not be pursued.  Further, the plaintiff could not have recovered a judgment in excess of the amount offered by the insurer.  Business to business suits could also not be claimed.   The statute was challenged by referendum, however, and defeated by the voters of California by a 2-1 margin in March 2000.

Earlier in 1999, the California Court of Appeal ruled in Spray Gould & Bowers v. Associated Int’l Ins. Co., 84 Cal. Rptr.2d 552 (Cal. App. 1999) that an insured could invoke a state regulation pertaining to the time in which a first party claim must be filed, thus estopping the insurer from denying coverage owing to its failure to comply with this regulatory requirement.

As a general rule, third-party claimants have no direct right of action against insurers.  JC Penny Casualty Ins. Co. v. M.K., 52 Cal. 3d 1009, 278 Cal. Rptr. 64, 804 P.2d 689 (1991) and.  Coleman v.  Gulf Insurance Company, 41 Cal.  3rd 782, 718 P.2nd 77 (1986).  There are three exceptions to this general rule, however.  First, a claimant may pursue an action based upon an assignment of rights from the insured.  Second, it may pursue a direct action if it has a final judgment against the insured, as the claimant is that a third-party beneficiary of the insurance policy and may enforce the terms which flow to its benefit pursuant to Insurance Code 11580. Hughes v. Mid-Century Ins. Co., 38 Cal. App. 4th 1176, 45 Cal. Rptr.2d 302 (1995)(final judgment is a prerequisite to direct action).  Finally, a claimant may sue the insurer as a third-party beneficiary using traditional contract principles.  See Harper v. Wausau Ins. Corp., 1997 Cal. App. LEXIS 614 (2d Dist. July 29, 1997) (holding that medical payment provision of liability policy permitted direct right of action since the tort claimant was a third-party beneficiary of this coverage).  

A claim for bad faith may be assigned to a third party but only as to the contractual benefit assigned, not the insured's alleged emotional distress.  Murphy v. Allstate Ins. Co., 553 P.2d 584, 587 (Cal. 1976).  

While an insured is entitled to information about his coverage, a third party claimant may not compel disclosure without the insured's assent.  Griffith v. State Farm, 230 Cal. App.3d 59 (1991).

The Court of Appeal gave broad license to policyholders to compel disclosure of reserve information in Lipton v. Superior Court, 48 Cal. App.4th 1599, 56 Cal. Rptr.2d 341 (1996), suggesting that the credibility of an insurer's position that it had no duty to defend might be belied by it having set a reserve reflecting such an obligation.

The California Supreme Court has ruled that an insurance company may not raise its insured’s “comparative fault” or “reverse bad faith” as an affirmative defense to an insured’s suit for breach of the implied covenant of good faith and fair dealing.   In Kransco v. International Insurance Company, 23 Cal. 4th 390 (2000), the court declared that whereas an insurer’s breach of the implied covenant of good faith and fair dealing gives rise to a cause of action in tort, an insured’s breach is only contractual and that the policy reasons supporting a tort cause of action against the insurer have no application in the context of a policyholder’s action.  Accordingly, the court sustained the lower court’s finding that International was not excused from its liability for an excess judgment or its failure to settle the claim within policy limits by reason of the insured’s earlier misconduct in withholding or misstating material information concerning prior product problems, which misstatements were seized upon by plaintiff’s counsel as evidence of the insured’s culpability.

An insurer may not be held vicariously liable for the malpractice of its appointed defense counsel in defending the insured. Merritt v. Reserve Ins. Co., 110 Cal. Rptr. 511, 526 (Cal. App. 1973).  

The California Court of Appeals  ruled in Sanchez v. Lindsey Morden Claims Services, Inc., 21 Cal. App.4th 249, 84 Cal. Rptr.2d 799 (2nd Dist. 1999), that a individual who was hired by Lloyds of London to adjust a cargo claim could not be sued by the insured for alleged negligence in its handing of the claim that only resulted in economic loss.  The Court of Appeals declared that imposing a separate of duty of care would expose adjusters to greater liability than even insurers faced and, furthermore, that it was questionable whether imposing such a duty would deter adjusters from negligent acts since they already face exposure to insurers who may seek recourse against them in the event of misconduct.  

A one year suit limitation period in an insurance policy applies both to contract claims and bad faith claims arising out of the insurer’s alleged breach. in CBS Broadcasting v. Firemans Fund Ins. Co.,  B107681 (Cal. App. March 22, 1999).

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