Under California law, an insurance company which unreasonably denies coverage has committed the tort of bad faith and faces a possible judgment for the payment of compensatory damages, the payment of attorneys fees, and the payment of punitive damages.

There are three main issues: 1) did the insurance company breach the contract denying or delaying the payment of benefits?; 2) was the conduct of the insurance company unreasonable?; and 3) was the conduct so egregious (done with “malice, oppression or fraud”) as to justify the award of punitive damages?

An insurance company which unreasonably denies coverage for a covered claim, or fails to pay for a covered claim or delays payment of a covered claim has not only committed a breach of contract but has also committed the tort of bad faith. When an insurance company has acted in bad faith, the policyholder is entitled to recover not just what the insurance company owed in the first place had it paid the claim, but certain additional damages. Those additional damages include the attorney’s fees paid by the policyholder in bringing the lawsuit to establish coverage; emotional distress suffered by the policyholder, and punitive damages.

The California Department of Insurance has enacted the Fair Claims Settlement Practices Regulations at 10 CCR 2695.1. These regulations implement the California Insurance Code section 790.03 (h), which prohibit unfair or deceptive practices in the business of insurance.

The Regulations require insurance companies to investigate claims within certain time limits, to advise the policyholder of benefits and coverage under the policy, to promptly pay covered claims, and to explain why any claims are not covered.

Failure to follow these regulations is evidence of bad faith.