2014 Bad Faith Compendium Sample

The Insurance Coverage Law Information Center
Presents...
2014 BAD FAITH
Compendium
Contributed by Nelson Brown & Co.
DC
Call 800.543.0874 | www.fcandslegal.com

Copyright © 2014 The National Underwriter Company. All Rights Reserved.
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A Word from the Editor...
Welcome to the 2014 edition of the Bad Faith Compendium!
The attorneys at Nelson Brown & Co., who are the authors of this Bad Faith Compendium, review nearly two dozen
jurisdictions where insurance bad faith issues most often arise and provide a synopsis of pre-litigation claims—
handling standards, first- and third-party claim issues, insurance company defenses, procedural and discovery
issues, and the scope of damages.
The first installment in the Bad Faith Compendium series, which explores bad faith law in California, one of the
country’s most volatile jurisdictions for insurance companies, was published on January 13, 2014, in the Eye on the Experts
column at FC&S Legal: The Insurance Coverage Law Information Center (www.fcandslegal.com). Each week for 22
weeks thereafter, another installment in the series was published on FC&S Legal. The result is this complete Bad Faith
Compendium, which contains detailed reviews of bad faith law in the following 23 jurisdictions:
California
Connecticut
Delaware
District of Columbia
Florida
Georgia
Maryland
Massachusetts
Minnesota
Mississippi
Missouri
New Jersey
New York
North Carolina
Ohio
Oklahoma
Pennsylvania
Rhode Island
South Carolina
Texas
Utah
Virginia
West Virginia
The Bad Faith Compendium is organized alphabetically by jurisdiction. Each installment in the series is arranged
topically, from pre-litigation claims handling through damages and discovery. The Bad Faith Compendium includes
complete case law citations and references to insurance laws and regulations, where applicable.
Easy to use and highly informative, the Bad Faith Compendium will be your go-to resource for bad faith law around
the nation.
On behalf of our subscribers and the entire FC&S Legal team, we send our many thanks to William O. Krekstein
and Michael S. Savett, the partners at Nelson Brown & Co. who were the primary authors of the Bad Faith
Compendium, and to Matthew B. Malamud, Emmett McGowan, Benjamin R. Messing, and Mark H. Rosenberg,
associates at the firm who worked with them, for providing FC&S Legal with this invaluable resource. Thanks also,
to Jennifer Sludden, the marketing communications manager at Nelson Brown & Co., whose professionalism and
dedication to ensuring the timely publication of the Bad Faith Compendium helped to make it possible, and to the
Summit Professional Networks staff who worked tirelessly to produce and distribute the Bad Faith Compendium.
I also wish to thank Steven A. Meyerowitz, the Director of FC&S Legal and Consulting Editor for the Bad Faith
Compendium, for generously sharing his expertise with all of us on the FC&S Legal team, and for ensuring that the
publications under the FC&S Legal umbrella exceed the industry’s highest editorial standards.
Victoria Prussen Spears
Editor, Bad Faith Compendium
Associate Director, FC&S Legal

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2014 BAD FAITH Compendium
About the Authors
William O. Krekstein and Michael S. Savett, partners at Nelson Brown & Co., are the lead authors of the 2014
Bad Faith Compendium.
As noted below, Matthew B. Malamud, Emmett McGowan, Benjamin R. Messing, and Mark H. Rosenberg,
associates at Nelson Brown & Co., contributed to certain of the chapters of the 2014 Bad Faith Compendium.
Lead Authors
William O. Krekstein, Partner
William O. Krekstein is resident in the firm’s Blue Bell, Pennsylvania, office and represents
both domestic and international insurers. Mr. Krekstein focuses his practice in a variety of
first- and third-party complex coverage and bad faith disputes under all types of homeowner,
commercial property, general liability, builders’ risk, and motor vehicle policies. Mr. Krekstein
may be contacted at bkrekstein@nelsonbrownco.com.
Michael S. Savett, Partner
Michael S. Savett practices in the firm’s Cherry Hill, New Jersey, office, advising insurers
on issues involving commercial liability, environmental, property, directors and officers,
and professional liability insurance. Mr. Savett also provides first- and third-party coverage
analysis, litigation management, design and implementation of cost-sharing agreements, and
advice concerning methods of bad faith and coverage dispute avoidance. Mr. Savett may be
contacted at msavett@nelsonbrownco.com.
Contributing Authors
Matthew B. Malamud, Associate
Matthew B. Malamud is resident in the firm’s Blue Bell, Pennsylvania, office. Mr. Malamud focuses
his practice on first- and third-party insurance coverage disputes, bad faith allegations, and
investigations of suspected insurance fraud. Mr. Malumud contributed to the Maryland chapter
of the Bad Faith Compendium. He may be contacted at mmalamud@nelsonbrownco.com.
Emmett McGowan, Associate
Emmett McGowan is resident in the firm’s Blue Bell, Pennsylvania, office, focusing his practice
primarily on complex first-party property claims with a special emphasis on sophisticated
commercial property, builders’ risk, and time element coverages. Mr. McGowan contributed
to the New Jersey, Ohio, and Pennsylvania chapters of the Bad Faith Compendium. He may
be contacted at emcgowan@nelsonbrownco.com.

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Benjamin R. Messing, Associate
Benjamin R. Messing is resident in the firm’s Blue Bell, Pennsylvania, office, focusing his
litigation practice on complex insurance coverage matters and insurance fraud. Mr. Messing
contributed to the Oklahoma and Virginia chapters of the Bad Faith Compendium. He may
be contacted at bmessing@nelsonbrownco.com.
Mark H. Rosenberg, Associate
Mark H. Rosenberg is resident in the firm’s Blue Bell, Pennsylvania, office, advising
clients on complex insurance disputes involving challenges to insurers’ institutional
claims-handling practices. He has experience defending insurance bad faith actions relating
to institutional practices and coverage issues. Mr. Rosenberg contributed to the New York,
North Carolina, and Texas chapters of the Bad Faith Compendium. He may be contacted at
mrosenberg@nelsonbrownco.com.

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2014 BAD FAITH Compendium
About the Editors
Editor
Victoria Prussen Spears, Esq.
Associate Director, FC&S Legal
Editor, Insurance Coverage Law Report
Victoria Prussen Spears, Esq., is the Associate Director of FC&S Legal: The Insurance Coverage Law
Information Center, the Editor of the Insurance Coverage Law Report, and a Senior Vice President at Meyerowitz
Communications Inc.
As Associate Director of FC&S Legal: The Insurance Coverage Law Information Center, Ms. Spears produces
the Industry News column and acquires and edits content for the Eye on the Experts column and FC&S Legal’s
flagship publication, the Insurance Coverage Law Report, for which she serves as Editor.
Ms. Spears, who was an integral member of the team that conceptualized FC&S Legal, designed the FC&S Legal
Web site and drafted its descriptive content. Ms. Spears regularly consults with the FC&S Legal team on all aspects
of FC&S Legal, including sales, marketing, product development, and editorial content, and provides on-going and
varied support for the Director of FC&S Legal, Steven A. Meyerowitz, Esq.
A graduate of Sarah Lawrence College and Brooklyn Law School, Ms. Spears was an attorney at Stroock & Stroock
& Lavan LLP, a prominent Wall Street law firm, where she worked on a variety of commercial transactions with
insurance law components. After Stroock, she served as of counsel to a law firm that represented policyholders’
interests in insurance matters.
Since 2005, she has been a researcher, writer, and editor for Meyerowitz Communications Inc., regularly writing and
editing articles on myriad legal and business subjects and consulting on a wide variety of marketing, business, and
strategic planning issues for Meyerowitz Communications Inc. and its clients. Ms. Spears also is the co-author of a
state-by-state privacy and data security law guide and a book about outsourcing to Mexico.
Ms. Spears can be reached at vspears@SummitProNets.com.

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Consulting Editor
Steven A. Meyerowitz, Esq.
Director, FC&S Legal
Editor-in-Chief, Insurance Coverage Law Report
Steven A. Meyerowitz, Esq., is the Director of FC&S Legal: The Insurance Coverage Law Information Center,
the Editor-in-Chief of the Insurance Coverage Law Report, and the Founder and President of Meyerowitz
Communications Inc.
As Director of FC&S Legal: The Insurance Coverage Law Information Center, Mr. Meyerowitz provides:
» Daily updates, analysis, and commentary on the most significant insurance coverage law decisions from courts
across the country;
» News regarding legislative and regulatory developments;
» Up-to-the minute reporting on changes to insurance laws and rules; and
» Interviews with expert professionals on insurance coverage law trends and developments.
A graduate of Harvard Law School, Mr. Meyerowitz was an attorney for Milbank, Tweed, Hadley & McCloy, a
prominent Wall Street law firm, for nearly five years. During that time, he represented sophisticated financial services
institutions in a wide range of matters.
After leaving Milbank, Mr. Meyerowitz founded Meyerowitz Communications Inc., a law firm marketing
communications consulting company. As president of Meyerowitz Communications, Mr. Meyerowitz specializes
in helping lawyers write, produce, and place their bylined articles, newsletters, brochures, and other marketing
materials, and in integrating publications into a firm’s overall marketing program.
Currently, Mr. Meyerowitz is editor-in-chief of nearly a dozen legal and business publications for national and
international publishers and is managing editor of the Federal Bar Council Quarterly. Mr. Meyerowitz also is the
author of the third edition of “Bankruptcy Law Digest” (published by West) and a book on marketing, sales, and
advertising law, and he is the co-author of a state-by-state privacy and data security law guide.
Mr. Meyerowitz can be reached at smeyerowitz@SummitProNets.com.

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TABLE OF Contents
Executive Summary
Insurance bad faith law is like a quilt, a patchwork that varies from square to square – in this instance, common
law decisions, statutes and codes that differ widely from state to state. Insurer conduct that is benign in one
jurisdiction may rise to the level of bad faith conduct in another. In this compendium, the authors review nearly
two dozen states where bad faith issues most often arise and provide a synopsis of pre-litigation claims-handling
standards, first- and third-party claim issues, insurance company defenses, procedural and discovery issues, and
the scope of damages.
Bad Faith Law in:
California................................................................................................................................................................... 8
Connecticut............................................................................................................................................................. 15
Delaware................................................................................................................................................................. 20
District of Columbia................................................................................................................................................ 24
Florida..................................................................................................................................................................... 27
Georgia................................................................................................................................................................... 31
Maryland................................................................................................................................................................. 36
Massachusetts......................................................................................................................................................... 40
Minnesota............................................................................................................................................................... 46
Mississippi............................................................................................................................................................... 54
Missouri................................................................................................................................................................... 60
New Jersey............................................................................................................................................................. 67
New York................................................................................................................................................................. 73
North Carolina........................................................................................................................................................ 79
Ohio......................................................................................................................................................................... 86
Oklahoma................................................................................................................................................................ 93
Pennsylvania............................................................................................................................................................ 98
Rhode Island......................................................................................................................................................... 106
South Carolina....................................................................................................................................................... 111
Texas...................................................................................................................................................................... 117
Utah....................................................................................................................................................................... 124
Virginia.................................................................................................................................................................. 130
West Virginia......................................................................................................................................................... 134

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BAD FAITH COMPENDIUM: CALIFORNIA
By William O. Krekstein and Michael S. Savett
Pre-litigation: Claims Handling Standards
Standard for making initial coverage determination
Insurers must look to four corners of contract first.
“An insurance policy is a contract, subject to inter-pretation
according to the rules applied to all con-tracts.
Accordingly, we look first to the language of
the contract in order to ascertain its plain meaning or
the meaning a layperson would ordinarily attach to it.
If that language is clear and explicit, it must be given
effect, and a policy provision will not be considered
ambiguous unless it is capable of two or more con-structions,
both of which are reasonable. Of course,
as is true of any contract, we must interpret the policy
as a whole, not in the abstract, and we will not strain
to create an ambiguity where none exists or indulge
in tortured constructions to divine some theoretical
ambiguity in order to find coverage where none was
contemplated.” Fireman’s Fund Ins. Co. v. Superior
Court, 65 Cal.App.4th 1205, 1212-13, 78 Cal.Rptr.2d
418, 422 (1997).
Insurers must fully investigate claims and must give
“at least as much consideration to the welfare of its
insured as it gives to its own interests.” Egan v. Mutual
of Omaha Ins. Co., 24 Cal.3d 809, 818, 169 Cal.Rptr.
691, 620 P.2d 141 (1979).
Relevance of extrinsic evidence in making
coverage determination
Extrinsic evidence may be considered by insurer in
determining coverage. Waller v. Truck Ins. Exchange,
Inc., 11 Cal.4th 1, 19, 900 P.2d 619 (1995).
Standard for duty to defend
An “insurer owes a broad duty to defend its insured
against claims that create a potential for indemnity”
and “‘must defend a suit which potentially seeks dam-ages
within the coverage of the policy.’” Horace Mann
Ins. Co. v. Barbara B., 846 P.2d 792, 795 (1993). The
“duty to defend is broader than the duty to indem-nify”
and may be owed even where no damages are
ultimately awarded, id., or where the claim is ground-less,
false or fraudulent. Burgett, Inc. v. Am. Zurich Ins.
Co., 830 F. Supp.2d 953, 959-60 (E.D. Cal. 2011).
Determining whether the insurer owes a duty to
defend “must be determined on the basis of facts
available to the insurer at the time the insured tenders
the defense.” Shade Foods, Inc. v. Innovative Products
Sales & Mktg., Inc., 93 Cal.Rptr.2d 364, 388 (2000). This
determination is generally “‘made in the first instance
by comparing the allegations of the complaint with
the terms of the policy.’” Montrose Chem. Corp. v.
Superior Court, 861 P.2d 1153, 1157 (1993).
In a duty to defend case, the evidentiary burden on an
insurer is especially high. Burgett, 830 F. Supp.2d at
959. “To prevail, the insured must prove the existence
of a potential for coverage, while the insurer must
establish the absence of any such potential. In other
words, the insured need only show that the underlying
claim may fall within policy coverage; the insurer must
prove it cannot.” Montrose, 861 P.2d at 1161.
Standard for duty to indemnify
An insurer’s duty to indemnify “lie[s] at the core of the
standard policy” and “has as its purpose ‘to resolve
liability . . . after liability is established.” Certain Under-writers
at Lloyd’s of London v. Superior Court, 16 P.3d
94, 101-02 (2001). The duty to indemnify the insured
“is limited to money ordered by a court” and does not
extend to any sums beyond the damages the insured
must pay. Id. at 105.
Reservation of rights
Insurers have 40 days to accept or deny claim in whole
or in part. (10 Cal. Admin. Code 2695)

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If arson or fraud suspected, then insurers have 80 days
to accept or deny claim.
If more time is needed, written notice of more time
is required. Insurers must specify the information re-quired
and state the reasons for inability.
Claim investigation must be commenced within 15
days.
Insurers must provide written notice to claimants every
30 days.
Insurers must disclose all policy provisions that might
be applicable. (10 Cal. Admin. Code 2695.4)
First-party claims handling standards
See above for time limitations.
An insurer owes a duty to its insured to investigate all
of the possible bases of an insured’s claim. The insur-er’s
duty to give as much consideration to the insured’s
interests as it does to its own obligates it to investigate
a claim thoroughly. An insurer must fully inquire into
the bases for the claim; indeed, it “cannot reasonably
and in good faith deny [benefits] to its insured without
thoroughly investigating the foundation for its denial.”
Egan, 24 Cal.3d at 819, 169 Cal.Rptr. 691, 620 P.2d 141.
Is coverage a condition precedent to maintaining a
bad faith claim?
Yes. A bad faith claim for an insurer’s failure to inves-tigate
is not separately actionable if there is no cover-age.
Jordan v. Allstate Ins. Co., 148 Cal.App.4th 1062,
1078, 56 Cal.Rptr.3d 312, 324 (2007). To maintain a bad
faith claim there must be coverage and policy benefits
must be due. See, e.g., Waller v. Truck Ins. Exch., Inc.,
11 Cal. 4th 1, 36, 900 P.2d 619, 639 (1995).
Is bad faith claims handling a recognized cause
of action absent finding of coverage?
(procedural bad faith)
Absent a finding of coverage, bad faith claims handling
is not a recognized cause of action. See, Jordan, supra
(“An insurer’s failure to investigate . . . is not separately
actionable if there is no coverage.”).
First Party
Standard for bad faith
The standard for establishing bad faith under Califor-nia
law requires a plaintiff to demonstrate “(1) benefits
due under the policy were withheld; and (2) the reason
for withholding benefits was unreasonable or without
proper cause.” Guebara v. Allstate Ins. Co., 237 F.3d
987, 992 (9th Cir. 2001). This standard is objective, and
subjective bad faith is both unnecessary and insuffi-cient
to establish a cause of action. Bosetti v. U.S. Life
Ins. Co. in City of New York, 96 Cal.Rptr.3d 744, 769
(2009). Whether the insurer’s decision was reasonable
or not “must be evaluated as of the time it was made.”
Filippo Indus., Inc. v. Sun Ins. Co. of New York, 88 Cal.
Rptr.2d 881, 888-89 (1999).
The insurer’s conduct not only must be erroneous but
“unreasonable” or “without proper cause.” Nager
v. Allstate Ins. Co., 83 Cal.App.4th 284, 288, 99 Cal.
Rptr.2d 348, 350 (2000).
An insurer “may raise a reasonable dispute over cover-age
without being guilty of bad faith” in first party cas-es.
Howard v. Am. Nat. Fire Ins. Co., 187 Cal.App.4th
498 115 Cal.Rptr.3d 42, 70 (2010). Where an insurer
advances its side of a dispute due to a genuine issue
as to their liability under the policy, there can be no
bad faith liability imposed on the insurer. Nieto v. Blue
Shield of Cal. Life & Health Ins. Co., 103 Cal.Rptr.3d
906, 928 (2010).
Statutory bad faith
California’s Unfair Insurance Practices Act’s bar
against private actions for unfair insurance prac-tices
does not prevent an Unfair Competition
Law claim based on common-law bad faith and
false advertising. Zhang v. Superior Court, 57 Cal.
4th, 159 Cal.Rptr.3d 672 (2013).
Common law
The covenant of good faith and fair dealing is implied
in every insurance contract, and “[t]he term “bad faith,”
as used in the context of an insured’s claim against
his or her insurer, is simply a shorthand reference to a
claimed breach by the insurer.” Bosetti, 96 Cal.Rptr.3d
at 768. This covenant generally “calls for consideration
of the reasonableness of the insurer’s conduct in deny-ing
coverage.” Shade Foods, 93 Cal.Rptr.2d at 386.
Where an insurer “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.” Gruenberg v. Aetna Ins. Co., 9 Cal.3d
566, 574, 510 P.2d 1032, 1037 (1973).

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reasonable settlements, a duty included within the im-plied
covenant of good faith and fair dealing. More-over,
examination of the balance of the Palmer, Critz,
and Davy opinions makes it clear that recovery may be
based on unwarranted rejection of a reasonable settle-ment
offer and that the absence of evidence, circum-stantial
or direct, showing actual dishonesty, fraud, or
concealment is not fatal to the cause of action. Crisci v.
Sec. Ins. Co. of New Haven, Conn., 66 Cal. 2d 425, 430,
426 P.2d 173, 176-77 (1967).
Parties to a Bad Faith Cause of Action
Direct action by injured party?
Yes, by policy terms or assignment. Pruyn v. Agric. Ins.
Co., 36 Cal.App.4th 500, 508, 42 Cal.Rptr.2d 295, 298
(1995). There must first be a final judicial determina-tion.
Moradi-Shalal, supra.
Also authorized by statute. Whenever judgment is se-cured
against the insured or the executor or adminis-trator
of a deceased insured in an action based upon
bodily injury, death, or property damage, then an ac-tion
may be brought against the insurer on the policy
and subject to its terms and limitations, by such judg-ment
creditor to recover on the judgment. Cal. Ins.
Code § 11580.
Third party beneficiaries?
As a general rule, absent an assignment of rights or
final judgment, a third-party claimant may not bring di-rect
action against an insurance company on contract
because the insurer’s duties flow to the insured. Cal.
Ins. Code § 11580(b)(2); Harper v. Wausau Ins. Co., 56
Cal.App.4th 1079, 66 Cal.Rptr.2d 64 (1997).
Parties with insurable interests?
No bad faith under third party beneficiary rule. Murphy
v. Allstate Ins. Co., 17 Cal. 3d 937, 944, 553 P.2d 584,
588 (1976).
Assignees
An insured may assign the breach of contract aspect
of a bad faith claim but not the tort aspect. Nelson v.
Exxon Mobil Corp., 179 Cal.Rptr. 4th 633. (2009). The
punitive damages claim, as a part of the tort aspect,
may not be assigned. Id.
Other insurers (excess v. primary)
An excess insurer can recover based on subrogation
principles for the amount it had to pay based on the
primary insurer’s bad faith. N.W. Mut. Ins. Co. v. Farmers’
An insurer may be liable for a bad faith denial or bad
faith delay. Waters v. United Servs. Auto. Assn., 41 Cal.
App.4th 1063, 1070, 48 Cal.Rptr.2d 910, 914 (1996).
Third Party
Standard for bad faith
“Third party bad faith lawsuits” generally involve an
insured’s suit against his liability insurer arising out of
the insurer’s mishandling of a third party claim against
its insured, such as by unreasonably refusing to settle
within policy limits, Samson v. Transamerica Ins. Co., 30
Cal.3d 220, 238, 178 Cal.Rptr. 343, 636 P.2d 32 (1981), or
unreasonably refusing to provide a defense in a third
party action. Tibbs v. Great American Ins. Co., 755 F.2d
1370, 1375 (9th Cir. 1985).
Statutory cause of action?
There is no statutory cause of action in California.
Insurers are subject to administrative sanctions for
violating statutory prohibitions against unfair and
deceptive claims settlement practices (see Ins.Code,
§§ 790.03, subd. (h), 790.035, 790.05, 790.07, 790.09),
but such violations do not give rise to a private right
of action for tort damages. Moradi-Shalal v. Fireman’s
Fund Ins. Companies, 46 Cal. 3d 287, 758 P.2d 58 (1988).
Bad faith cause of action at common law
In considering the liability of the insurer, several courts
have opined that bad faith is the equivalent of dis-honesty,
fraud, and concealment. Critz v. Farmers Ins.
Group, 230 Cal.App.2d 788, 796, 41 Cal.Rptr. 401 (1965);
Palmer v. Financial Indem. Co., 215 Cal.App.2d 419,
429, 30 Cal.Rptr. 204 (1963); Davy v. Public National Ins.
Co., 181 Cal.App.2d 387, 396, 5 Cal.Rptr. 488 (1960).
While a showing that the insurer has been guilty of
actual dishonesty, fraud, or concealment is relevant to
the determination whether it has given consideration
to the insured’s interest in considering a settlement of-fer
within the policy limits, the language used in the
cases, should not be understood as meaning that in
the absence of evidence establishing actual dishon-esty,
fraud, or concealment no recovery may be had
for a judgment in excess of the policy limits. Comunale
v. Traders & General Ins. Co., 50 Cal.2d 654, 658-659,
328 P.2d 198 (1958), makes it clear that liability based
or an implied covenant exists whenever the insurer re-fuses
to settle in an appropriate case and that liability
may exist when the insurer unwarrantedly refuses an
offered settlement where the most reasonable manner
of disposing of the claim is by accepting the settle-ment.
Liability is imposed not for a bad faith breach of
the contract but for failure to meet the duty to accept

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Prerequisite of excess judgment?
Generally, yes, but an insured may recover for bad
faith failure to settle, despite the lack of an excess
judgment, where the insurer’s misconduct goes
beyond a simple failure to settle within policy limits or
the insured suffers consequential damages apart from
an excess judgment, Howard, supra, such as a delay
that causes damages. Bodenhamer v. Superior Court
(St. Paul Fire & Marine Ins. Co.), 192 Cal.App.3d 1472,
1478-1479, 238 Cal.Rptr. 177, 180–181 (1987).
In the absence of a settlement demand or any other
manifestation the injured party is interested in settle-ment,
when the insurer has done nothing to foreclose
the possibility of settlement, there is no liability for bad
faith failure to settle. Reid v. Mercury Ins. Co., 220 Cal.
App.4th 262, 162 Cal.Rptr.3d 894 (2013).
Evidentiary value of expert testimony
When an insurer is subjectively aware that it has hired
a biased expert, it is simply not objectively reasonable
to rely on that expert. Chateau Chamberay Homeown-ers
Assn. v. Assoc. Int’l Ins. Co., 90 Cal.App.4th 335,
348–349, 108 Cal.Rptr.2d 776 (2001).
Defenses Available to Carrier
Generally
The key to a bad faith claim is whether or not the insur-er’s
denial of coverage was reasonable. Under Califor-nia
law, a bad faith claim can be dismissed on summary
judgment if the defendant can show that there was a
genuine dispute as to coverage. Lunsford v. American
Guarantee & Liability Ins. Co., 18 F.3d 653, 656 (9th Cir.
1994); Jordan, supra.
Advice of counsel
Good faith reliance on advice of counsel is a factor in
determining whether the insurer acted in “bad faith.”
Along with other relevant evidence, it may tend to
show the insurer was acting reasonably in its handling
of the claim. State Farm Mut. Auto Ins. Co. v. Supe-rior
Court (Johnson Kinsey, Inc.), 228 Cal.App.3d 721,
725–726, 279 Cal.Rptr. 116, 118 (1991).
Reverse bad faith
No. Agric. Ins. Co. v. Superior Court, 70 Cal.App.4th
385, 82 Cal.Rptr.2d 594 (1999).
Ins. Grp., 76 Cal.App.3d 1031, 1050, 143 Cal.Rptr. 415,
426 (Ct. App. 1978).
Limits on Conduct Evidencing Bad Faith
Insurer conduct during underwriting
An insurer has no legal duty to renew an insurance
policy when its term has expired. Travelers Ins. Co.
v. Lesher, 187 Cal.App.3d 169, 194, 231 Cal.Rptr. 791
(1986). Even a bad faith claim ordinarily cannot be
based upon an insurer’s nonrenewal decision. Id.
Post-claims underwriting for medical policies is prohib-ited
by statute but does not create a private cause of
action. Nieto v. Blue Shield of California Life & Health
Ins. Co., 181 Cal.App.4th 60, 83, 103 Cal.Rptr.3d 906,
925 (2010).
Insurer conduct during litigation
The insurer’s duty of good faith and fair dealing does
not evaporate during such litigation: “[V]arious litiga-tion
tactics ... or other conduct” by the insurer may
show breach of the insurer’s implied covenant of good
faith and fair dealing with the insured. White v. West-ern
Title Ins. Co., 40 Cal. 3d 870, 887; 221 Cal.Rptr. 509,
519 (1985).
Conduct by agents/attorneys
No tort action lies against the insurer’s agent for lack of
diligence in claims handling. Sanchez v. Lindsey Mor-den
Claims Services, Inc., 72 Cal.App.4th 249, 254, 84
Cal.Rptr.2d 799, 803 (1999).
Proving Bad Faith
Applicable burdens of proof
The plaintiff’s burden of proof is the preponderance of
the evidence standard. (Cal. Evid. §§ 115, 500.)
Evidence supporting bad faith conduct
An insurer’s failure to thoroughly investigate claim is
evidence. Egan, supra. An insurer may be subject to
bad faith liability for entering into a settlement with-out
the insured’s consent that bars the insured’s claim
against a third party. Barney v. Aetna Cas. & Sur. Co.,
185 Cal.App.3d 966, 978, 230 Cal.Rptr. 215, 220 (1986).
Prerequisite of improper denial?
Yes. See above.

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was the breach so egregious that there is evidence
of “oppression, fraud or malice” under Civil Code
section 3294, subdivision (a) so as to warrant punitive
damages. Griffin Dewatering Corp. v. N. Ins. Co. of
New York, 97 Cal.Rptr.3d 568, 585 (2009).
Consequential damages
The doctrine of insurance bad faith allows recovery
for consequential damages, such as mental suffering
or economic loss, unrelated to policy limits. Larraburu
Bros., Inc. v. Royal Indem. Co., 604 F.2d 1208, 1215 (1979).
An insured may recover for bad faith failure to settle,
despite the lack of an excess judgment, where the insurer’s
misconduct goes beyond a simple failure to settle
within policy limits or the insured suffers consequen-tial
damages apart from an excess judgment. Howard,
supra.
Other tort damages
An insured may seek and recover tort damages, such
as emotional distress damages, in bad faith actions.
See, Jordan, supra.
Attorney’s fees
Attorney’s fees attributable to proving an insurer’s bad
faith are not recoverable; however, “fees reasonably
incurred by an insured to compel payment of benefits
due under an insurance policy” are recoverable. Jor-dan,
supra.
Punitive damages
Punitive damages are available in a bad faith claim if
its “demonstrate[d] by clear and convincing evidence
that [the insurer] acted with malice, oppression or
fraud as these terms are used in Civil Code, section
3294, subdivision (a) and have been construed and ap-plied
in relevant case law.” Jordan, supra.
A record that presents a close case with regard to the
sufficiency of the evidence of bad faith will inevitably
provide a tenuous basis for supporting an award of pu-nitive
damages, since both the bad faith and punitive
damage findings rest on inferences to be drawn from
the same evidence. Shade Foods, supra.
Discovery Issues
Extrinsic evidence is relevant to establish the “mutual
intent of the parties at the time of contract formation.”
Silgan Containers v. Nat’l Union Fire Ins., C 09-05971
RS LB, 2010 WL 5387748 at *8 (N.D. Cal. Dec. 21, 2010).
Where a contract term is ambiguous, courts may or-
Fairly debatable standard
Reasonableness standard.
Can insurer recoup defense/indemnity payments
upon a finding of no coverage?
No, if those claims were potentially covered. However,
if insurer defended claims that were not even poten-tially
covered, it may recover costs. Buss v. Superior
Court, 16 Cal. 4th 35, 49, 939 P.2d 766, 775 (1997).
Procedural Issues
Bifurcation/Trifurcation
In state court, probably not necessary. Downey Sav. &
Loan Assn. v. Ohio Cas. Ins. Co., 189 Cal.App.3d 1072,
1086, 234 Cal.Rptr. 835, 842 (1987).
In federal court, it is necessary. Jones v. St. Paul Travel-ers,
C 06-00717 SI, 2006 WL 2956550 (N.D. Cal. Oct.
16, 2006).
Summary judgment
Appropriate where insurer can show genuine dispute
as to coverage, therefore insurer’s decision is reason-able
as a matter of law. Guebara, supra.
Applicable statute of limitations
The applicable statute is determined by the nature
of the action, not by the damages sought. Breach of
implied covenant actions are subject to the two–year
statute applicable to tort actions generally (CCP § 339,
subd. 1) rather than the statutes applicable to actions
for personal injury or to recover penalties or forfei-tures.
Richardson v. Allstate Ins. Co., 117 Cal.App.3d 8,
13, 172 Cal.Rptr. 423, 426 (1981).
A one-year limit written into a policy is valid. Prudential
LMI Comm’l Ins. v. Sup.Ct. (Lundberg), 51 Cal.3d 674,
686–687, 274 Cal.Rptr. 387, 395 (1990).
Judge v. jury
While the reasonableness of an insurer’s claims-han-dling
conduct is ordinarily a question of fact, it be-comes
a question of law where the evidence is un-disputed
and only one reasonable inference can be
drawn from the evidence. Chateau Chamberay, supra.
Damages
Damages in bad faith claims are determined in a
three-step process: (1) was there a breach at all so
as to warrant contract damages; (2) was the breach
unreasonable so as to warrant tort damages; and (3)

13
Reinsurer communications
May be discoverable though must meet relevancy test
after in camera review. Lipton v. Superior Court, 48 Cal.
App.4th 1599, 1620, 56 Cal.Rptr.2d 341, 353 (1996).
Claim manuals
Claims manuals are discoverable. Glenfed Dev. Corp.
v. Superior Court, 53 Cal.App.4th 1113, 1118, 62 Cal.
Rptr.2d 195, 198 (1997).
Personnel files
Personnel files are likely discoverable. Against an in-surer
alleging misconduct by a particular claims repre-sentative,
other insureds’ claims files may be relevant
to show other instances of misconduct in the past by
that particular claims representative and the insurer’s
awareness thereof. Colonial Life, supra (admissible to
prove “regular business practice” in former statutory
action against insurer under Ins. Code § 790.03(h)).
Prior claims
See “Evidence of other claims” above.
Attorney-client privilege
In certain instances it is difficult to determine if the
attorney-client privilege (or work product privilege) at-taches
to a communication, particularly where there
may be more than one purpose for that communica-tion:
“Where it is clear that the communication has but
a single purpose, there is little difficulty in concluding
that the privilege should be applied or withheld ac-cordingly.
If it appears that the communication is to
serve a dual purpose, one for transmittal to an attorney
‘in the course of professional employment’ and one
not related to that purpose, the question presented
to the trial court is as to which purpose predominates.
...” Travelers Ins. Companies v. Superior Court, 143 Cal.
App.3d 436, 452, 191 Cal.Rptr. 871 (1983). This “domi-nant
purpose” test not only looks to the dominant
purpose for the communication, but also to the domi-nant
purpose of the attorney’s work. Aetna Casualty
& Surety Co. v. Superior Court, 153 Cal.App.3d 467,
475, 200 Cal.Rptr. 471 (1984). Thus, “the attorney-client
privilege [would] not apply without qualification where
the attorney was merely acting as a negotiator for the
client, or merely gave business advice, or was merely
acting as a trustee for the client.” Aetna, supra.
To the extent that a law firm employed by an insurer
acted as a claims adjuster, work product, communica-tions
to client, and impressions about facts were to be
treated as ordinary business of the insurer; and those
der disclosure of extrinsic evidence, such as underwrit-ing
files and claims manuals, at the discovery phase of
litigation to establish the parties intent’ and “prove
that a term is, in fact, ambiguous.” Id. at *8-9.
Claims manuals
Claims manuals are relevant to a pending action and
discoverable when they “might reasonably assist a
party in evaluating its case, preparing for trial, or fa-cilitating
a settlement.” Glenfed Dev. Corp. v. Supe-rior
Court, 53 Cal.App.4th 1113, 1117, 62 Cal.Rptr.2d
195, 197 (1997) (finding good cause for the request for
disclosure of a claims manual by just a “fact-specific
showing of relevance”). California courts have “for
years recognized claims manuals are admissible cover-age
dispute litigation,” so “it follows (as the courts of
other states with similar discovery statutes have held)
that they are discoverable.” Id. at 197-98.
Claims manuals generally reference policy terms and
provide relevant information regarding claims han-dling,
and “even if inadmissible at trial . . . [they] may
lead to the discovery of other, relevant evidence that
is admissible, and no more is required to justify the
demand for its production.” Id. at 198. The California
insurance code requires insurers “maintain guide-lines
for the prompt processing of claims,” which are
often contained in claims manuals, supporting their
“relevan[ce] for coverage claims (not just bad-faith
claims).” Silgan Containers, supra. Claims manuals can
establish “how the insurer applied the standard lan-guage
in the claim,” as well as whether “an ambiguity
exists in the policy.” Id.
Underwriting file
Underwriting files may be discoverable where they are
relevant to determining the risks an insurer “expected
to cover in the policy, how it interpreted the various
policy terms, and whether the terms of the policy are
ambiguous in the first instance.” Silgan Containers, su-pra.
Courts may order disclosure of underwriting files
because they are relevant to coverage and/or reason-ably
calculated to lead to the discovery of admissible
evidence.” Id. at *9.
Evidence of other claims
Yes, if relevant. See Colonial Life & Acc. Ins. Co. v. Su-perior
Court (Perry), 31 Cal.3d 785, 790-792 (1982)
Reserve information
Reserve information is discoverable. Flintkote Co. v.
Gen. Acc. Assur. Co. of Canada, C 04-01827 MHP, 2009
WL 1457974 (N.D. Cal. May 26, 2009).

14
sections of documents reflecting mental processes and
opinions of counsel which truly bore on anticipated liti-gation
would be redacted as protected. 2,022 Ranch,
L.L.C. v. Superior Court, 7 Cal.Rptr.3d 197, 214 (2003),
disapproved of by Costco Wholesale Corp. v. Superior
Court, 219 P.3d 736 (2009).
Confidential reports by an insurance company as to an
accident in which its insured is involved are protected
by the attorney-client privilege. Heffron v. Los Ange-les
Transit Lines, 170 Cal.App.2d 709, 718, 339 P.2d
567 (1959). However, the determination of whether
the privilege attaches is one of fact, and depends on
the purpose underlying the preparation of a particular
document. Reavis v. Metro. Prop. & Liab. Ins. Co., 117
F.R.D. 160, 165 (S.D. Cal. 1987).
Work product doctrine
Disclosure depends on whether the attorney acting in
legal capacity. Aetna Cas. & Sur. Co. v. Superior Court
(Pietrzak). 153 Cal.App.3d 467, 476, 200 Cal.Rptr. 471,
476 (1984).
Work product protection is not limited to documents
prepared in anticipation of litigation. It also protects
opinions and conclusions of attorneys hired to provide
legal counsel to a client. Id.

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2014 Bad Faith Compendium Sample