What Unreasonable Behavior of the Insurer Gives Rise to Bad Faith in California?

CACI 2330 states:

In every insurance policy there is an implied obligation of good faith and fair dealing that neither the insurance company nor the insured will do anything to injure the right of the other party to receive the benefits of the agreement.

To fulfill its implied obligation of good faith and fair dealing, an insurance company must give at least as much consideration to the interests of the insured as it gives to its own interests.

To breach the implied obligation of good faith and fair dealing, an insurance company must, unreasonably or without proper cause, act or fail to act in a manner that deprives the insured of the benefits of the policy. It is not a mere failure to exercise reasonable care. However, it is not necessary for the insurer to intend to deprive the insured of the benefits of the policy.

The jury instruction comes up for interpretation. In order to find bad faith, the insurance company must act “unreasonably.” Yet, mere failure to exercise “reasonable” care is not bad faith. Therefore, the interpretation of what is unreasonable or reasonable behavior of the insurer is the key to interpreting whether an insurer has breached the implied good faith and fair dealing, and committed bad faith. In Bernstein v. Travelers Insurance Company,¹ “unreasonable” in concept is a self-conscious disconnect (a large, unabridged gap) between, on the one hand, what the insurer is communicating to, demanding of, and paying its insured and, on the other hand, what the insurer thought it owed and would owe under the claim.

In Chateau Chamberay Homeowners Association v. Associated International Insurance Company,² the court held an insurer’s conduct is “unreasonable” when a refusal to discharge a contractual responsibility is prompted by a conscious and deliberate act which unfairly frustrates the agreed common purpose and disappoints the reasonable expectation of the other party depriving the party of the benefits of the agreement. The analysis of an insurer’s reasonable or unreasonable performance, depends on whether claims were handled per the Insurance Code, abided by an insurer’s own claims handling practice guides, or if the insurer had self-interest over the interests of the client/customer.

Unreasonableness or reasonableness is largely a subjective standard but CACI 2330 is clear in stating bad faith is not a “mere failure to exercise reasonable care,” which tells us that inadvertent errors or some passage of time by itself may not be a breach rising to bad faith.

Often my clients ask whether their cases and situations surrounding the handling of their claims rise to bad faith. Because the standard is subjective—and almost one of a sliding scale of how egregious or unreasonable an act or failure to act may be—it’s often safe to say that jurors are reluctant to find bad faith until there is a clear bright-line showing that the insurer acted in an inexcusable manner that puts the insured into a position of disadvantage.
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¹ Bernstein v. Travelers Ins. Co., (N.D. Cal., 2006) 447 F.Supp.2d 1100, 1108.
² Chateau Chamberay Homeowners v. Associated Inter. Ins. Co., (2001) 90 Cal.App.4th 335, 346.