Bad Faith Archives - Page 2 of 14

Insurance companies owe a duty of good faith and fair dealing to the persons they insure. This duty is often referred to as the “implied covenant of good faith and fair dealing” which automatically exists by law in every insurance contract. They often defend “bad faith” litigation by invoking a what is known as the “genuine dispute” doctrine. In a recent California Court of Appeal decision, Fadeeff v. State Farm General Ins. Co., 50 Cal.App.5th 94 (2020), the Court ruled that an insurer relying on this doctrine should not automatically be considered to have acted in good faith just because the insurer relied on independent expert opinions when making claim determinations.

In Fadeeff, plaintiffs filed a property insurance claim with State Farm General Insurance Company (“State Farm”) for smoke and soot damage to their home due to a valley fire. After some initial payments, State Farm denied an additional claim for further smoke damage. After its denial, State Farm retained Forensic Analytical Consulting Services (“Forensic Analytical”) to perform an inspection and opine whether the additional repairs were necessary. Predictably, Forensic Analytical determined no further repairs were warranted. Plaintiffs filed a lawsuit against State Farm alleging breach of the implied covenant of good faith and fair dealing, or bad faith.

Subsequently, State Farm filed a motion for summary judgment asking the court to find that it did not deny plaintiffs’ claim in bad faith. State Farm argued that the genuine dispute doctrine automatically defeats a claim for bad faith where an insurer reasonably relies upon expert opinions when making its claim determinations. The trial court granted State Farm’s motion. Plaintiffs appealed.
State Farm argued that it could not have denied plaintiff’s claim in bad faith, since State Farm’s expert, Forensic Analytical, determined that no additional repairs were warranted. State Farm argued there could be no bad faith since its denial of the plaintiff’s claim was based on Forensic Analytical’s opinion and not its own opinion. The appellate court disagreed. The court held that an insurer’s reliance on an outside expert does not automatically insulate the insurer from a bad faith claim under the genuine dispute doctrine. Instead, when an insurer relies on the advice and opinions of independent experts, it is only a single factor in determining whether the insurer handled a claim in good faith. The court stated that there are several circumstances where a biased investigation claim should be decided by a jury.

In this case, the court held that all of State Farm’s conduct must be examined, not just the opinion of an independent expert when determining a claim for bad faith. For example, other factors to be considered include the following: (1) State Farm initially found that all claimed damage was caused by the fire, but the new adjuster for the additional claim concluded that some of the earlier claimed damage was caused by wear and tear; (2) Some of the additional damage was caused by the power washing that was recommended by State Farm; (3) It was apparent that Forensic Analytical did not perform a thorough investigation; and (4) State Farm’s coverage positions were inconsistent. Therefore, the court reversed the trial court dismissal of the plaintiff’s bad faith claim.
Importantly, the summary judgment motion was also reversed as to the issue of punitive damages. State Farm had previously argued that plaintiffs could not describe the factual basis for their punitive damages request and testified at deposition that they did not get the impression that anyone from State Farm was trying to harm them. However, with regard to punitive damages, the initial burden is on State Farm to show that plaintiffs could not prove that State Farm acted without malice, oppression or fraud. Only after State Farm had met its burden, did the burden shift to plaintiffs to establish evidence supporting punitive damages. The court held that State Farm had not met its burden, as plaintiffs’ “beliefs” do not conclusively answer the question of whether State Farm intentionally misrepresented or concealed a material fact because there can be other evidence to support these allegations.
Fadeeff is a very good opinion for California insureds who have all types of insurance claims, especially life and disability insurance claims as it significantly limits the genuine dispute doctrine, and thus the ability of insurers to utilize the doctrine as a complete defense to bad faith claims. This court did not allow insurers to hide behind its hired experts, no matter how biased they are, to avoid bad faith claims.

If your insurance company or plan administrator has mishandled or improperly denied your long-term disability, life insurance, health insurance, or accidental death claims, please contact our firm for a free consultation.

When insurance companies, including those offering disability, life, health or accidental death policies, engage in conduct that is sufficiently egregious, a court may award punitive damages against the insurance company. Under Arizona law, to support an award of punitive damages in an insurance bad faith case, the plaintiff must prove a willful and knowing failure to process or pay a claim known to be valid. Farr v. Transamerica Occidental Life Ins. Co. of California, 699 P.2d 376, 383 (1984). Recently, the Ninth Circuit grappled with a large punitive damages award issued by an Arizona jury in a long-term disability insurance case. In McClure v. Country Life Insurance Company, No. 18-16661 (February 27, 2020), the Ninth Circuit upheld a jury verdict awarding $2.5 million in punitive damages against defendant CC Services, Inc. (“CCSI”), the entity that administered the plaintiff’s claim.

After suffering a head injury in November 2012, Plaintiff Benjamin McClure developed severe depression and became unable to work. He filed a disability claim with his insurer, defendant Country Life Insurance Company (“Country Life”) and defendant CCSI undertook claims handling responsibilities. Defendants approved and paid McClure’s claim for thirteen months, but terminated his claim in April 2014. At trial, McClure contended that he was especially vulnerable and susceptible to emotional injury, and that the bad faith termination of benefits exacerbated his depression, resulting in extreme emotional distress and suicidal ideations for which he was hospitalized a number of times. McClure also contended that defendants terminated his claim without a reasonable basis and adequate investigation, ignored medical facts that supported the claim and misinterpreted medical facts to their advantage.

Following a jury trial, the jury returned a verdict in favor of McClure on his breach of contract and bad faith claims and found that the defendants were jointly liable for the conduct of the insurance adjusters handling the claim. The jury awarded $1.29 million in emotional distress damages and $2.5 million in punitive damages against each defendant. After the district court upheld the jury award and entered judgement in favor of McClure, the defendants appealed. The Ninth Circuit affirmed the judgement finding that the district court did not abuse its discretion in upholding the emotional distress and punitive damages award.

The Ninth Circuit first addressed defendants’ argument that there was insufficient evidence that Country Life and CCSI engaged in a joint venture. The Court determined that the jury’s conclusion that a joint venture existed was supported because Country Life had no employees of its own, all employees who made claim decisions were employed by CCSI and CCSI employees were compensated in part based on the profitability of Country Life. Therefore, a reasonable jury could infer that Country Life and CCSI shared in the control and management of the venture.

The Ninth Circuit then determined that the evidence supported the separate punitive damages award against CCSI. Of note, the defendants did not challenge the punitive damages award against Country Life. Under Arizona law, a business may be vicariously liable for punitive damages for acts of an employee that are committed in furtherance of the business and within the scope of employment. Hyatt Regency Phx. Hotel Co. v. Winston & Strawn, 907 P.2d 506, 515 (Ariz. Ct. App. 1995). The Court found that the CCSI employees’ actions were undertaken in furtherance of and within the scope of the employment and there was sufficient evidence of evil intent in terminating McClure’s benefits, justifying an award of punitive damages. For instance, evidence was presented that defendants’ claims adjuster knew that McClure suffered from major depressive disorder and panic attacks, that there was no basis to reject the opinions of McClure’s treating doctors who found that he suffered from disabling depression, that McClure had been hospitalized as suicidal and that terminating disability benefits could be devastating.

With regard to emotional distress damages, the Ninth Circuit found that the jury’s $1.29 million award was not “grossly excessive or monstrous” and that the jury could have reasonably inferred that the benefit termination aggravated McClure’s emotional distress. Defendants had argued that there was insufficient evidence that they caused McClure significant emotional distress and that the jury’s award was based on improper speculation. The district court concluded that McClure had offered sufficient evidence from which a jury could infer that defendants’ conduct resulted in McClure’s emotional distress. The jury had heard testimony from those close to McClure regarding his severe emotional pain brought on by financial hardship due to the denial of benefits. The Ninth Circuit agreed that McClure had presented sufficient evidence to justify the emotional distress award.

One final issue the Ninth Circuit addressed on appeal was defendants’ claim that the district court erred in limiting its expert’s testimony. At trial, after it was revealed that defendants’ bad faith expert witness’ definition of insurance bad faith was inconsistent with Arizona law, the district court ruled that defendants’ expert could not opine as to whether defendants’ conduct amounted to good faith or bad faith because any such opinion would have been unreliable. In finding that the district court did not abuse its discretion, the Ninth Circuit stated that the lower court “reasonably concluded that [the expert’s] testimony would have been an improper expert opinion on an ultimate issue of law.”

With the help of his attorneys, McClure was able to secure a victory against an insurance company who acted dishonestly every step of the way while putting its own profits ahead of the interests of its insured. If you believe you have been the victim of a bad faith insurance denial with regard to your disability, life, health or accidental death policy, please contact the McKennon Law Group PC. Having well-qualified, experienced attorneys on your side can make all the difference.

Life insurance lapse generally refers to coverage ending for insufficient or nonpayment of policy premiums. If premiums are not paid during the grace period to sustain the policy, then the life insurance ends. The lapse of a life insurance policy at the wrong time could have disastrous consequences for persons or families because policyholders could easily lose their life insurance if a single premium is accidentally missed, even if they have been paying premiums on time for years. On January 1, 2013, California added new sections 10113.71 and 10113.72 to the Insurance Code, as a way of providing consumer safeguards against life insurance policy lapse.

California Insurance Code Sections 10113.71 and 10113.72 primarily do three things: (1) mandate that life insurance policies issued or delivered in California have a 60-day grace period; (2) set forth notice of pending lapse and termination requirements; and (3) require insurers to provide notice to applicants and annual notice to policyholders of their right to designate someone other than themselves to receive lapse notices. The latter requirement, which applies only to individual life insurance policies, was an important addition to the California Insurance Code because it allows policyholders to designate persons who can receive lapse notices so that if the policyholder is too sick to read a premium notice and/or pay a premium, he may still be protected. While both statutes went into effect on January 1, 2013, a question remained as to whether these safeguards would apply to life insurance policies issued or delivered prior to January 1, 2013. As discussed below, the answer to this question is “no.”

In a recent decision, McHugh v. Protective Life Insurance, 40 Cal.App.5th 1166 (2019) (“McHugh”), the California Court of Appeals ruled that Insurance Code Sections 10113.71 and 10113.72 only apply to policies issued or delivered after January 1, 2013. William Patrick McHugh (“Insured”) purchased a life insurance policy (“Policy”) from Protective Life Insurance Company (“Protective Life”) on January 9, 2005, that provided for a 31-day grace period. The insured failed to make his 2013 premium payment; therefore, on February 9, 2013, the Policy lapsed per its express terms. Protective Life never received an additional premium payment or reinstatement application from the insured. The insured died in August 2013. Plaintiffs, the policy beneficiaries, sued Protective Life for breach of contract and insurance bad faith, alleging that Protective Life did not provide the insured with a 60-day grace period per code section 10113.71 and therefore, the lapse notices and subsequent termination of the policy were void. The court found that the 2013 statutes did not apply retroactively to the Policy, stating:

Sections 10113.71, subdivision (a)(1) and 10113.72, subdivision (a)(1), refer to term life insurance policies “issued or delivered,” a term that in California case law imports prospective application: “the terms ‘issued’ and ‘delivered’ must refer to the original issuance and delivery of the policy; they are fixed as to time and do not stretch into infinity.” (Ball v. California State Auto Assn. Inter-Ins. Bureau (1962) 201 Cal.App.2d 85, 87.) Therefore, as this policy was issued and delivered to McHugh in 2005, it could not incorporate the statutory amendments that became effective in 2013. Id.

Since the Policy was issued in 2005, Protective Life was not obligated to comply with California Insurance Code Sections 10113.71 and 10113.72. Thus, the express terms in the Policy dictated the duration of the grace period and any terms as to notice to the insured regarding the termination of the Policy. The court also rejected the contention that the statutes applied if the Policy was renewed after January 1, 2013.

This is an unfortunate ruling that does not protect insureds who have paid premiums for years and who may become too sick to pay a premium, thus allowing a policy lapse at the time the insured needs the life insurance the most. Policyholders need to be aware of the date their life insurance policy was first issued and/or delivered. If the policy was issued or delivered prior to January 1, 2013, a policyholder needs to carefully read the express terms of the policy to make sure they understand how their policies can lapse and they should take steps to protect themselves. When it comes to life insurance policies, a lack of knowledge can lead to big problems.

If you have questions about the lapse of a life insurance policy, McKennon Law Group PC has significant experience with most issues involving life insurance and we may be able to assist you. Please contact us for a free consultation.

Since 2004, when the California Supreme Court ruled that a “portion” of contingency attorney’s fees are recoverable in bad-faith insurance cases, plaintiffs and their lawyers have been able to recover attorney’s fees based in part on the specific terms of the contingency-fee retainer agreement. For starters, in order to recover attorney’s fees in these actions, a policyholder must prove that (1) contractual benefits were withheld in bad faith, and (2) reasonable fees were incurred by the policyholder to recover those benefits. However, any attorney’s fees incurred merely to prove the alleged “bad faith” claims are not recoverable at all; only fees incurred to prove actual coverage are recoverable. Cassim v. Allstate Insurance, 33 Cal.4th 780, 811 (2004).

In Cassim, plaintiffs Fareed and Rashida Cassim purchased a home in Palmdale in 1989 and insured the property against loss with Allstate Insurance. In December 1990, a fire (later determined to be arson) caused damage to the home. Although the fire burned only in the master bedroom and kitchen, the extensive heat, smoke and water damage to the rest of the structure rendered the entire home uninhabitable. After plaintiffs proved “bad faith” on the part of Allstate Insurance, a jury awarded plaintiffs a combined $3,594,600 in compensatory damages and $5 million in punitive damages. The plaintiffs’ attorney had a 40%-contingency-fee agreement.

The Cassim court held that a proper calculation of attorney’s fees requires the trier of fact to determine the percentage of fees attributable to securing just the contract recovery. This formula is based on the percentage of the attorney’s overall efforts devoted to the contractual recovery portion of the case and is divided into three categories: contract claim only, bad-faith claim only, and both claims. The Supreme Court remanded the case to the trial judge to make the calculation.

Using hypothetical numbers, and assuming a total compensatory award of $1 million, the 40% contingency fee would be $400,000. If the policyholder’s lawyer spent 1,500 total hours on the case and can prove the breakdown as follows: 200 hours on the contract claim only, 800 hours on the bad-faith claim only and 500 hours on both claims, then the trier of fact could, reasonably, conclude that one-half of the hours spent on the joint “contract and bad faith” issues are fairly attributable to the contract; i.e., half of 500 hours, or 250 hours, plus the 200 hours from the contract claim only, would total 30%. That 30% of the total attorney’s fee ($400,000) would be recoverable as well: $120,000 extra paid to the plaintiffs.

However, the Cassim court also cautioned judges to disregard fee agreements designed solely to manipulate the calculation of recoverable costs to the policyholder’s benefit, as have been shown to exist in some cases in the intervening years. For instance, the case of Pulte Home Corporation v. American Safety Indemnity, 14 Cal.App.5th 1086 (2017) disallowed a last-minute modification of a fee agreement from contingency to hourly, as an improper attempt to inflate the attorney’s fee (and punitive damage) award. This case involved the development of two residential housing projects that were built beginning in 2003 and sold between 2005-2006. The various subcontractors were required to name the developer as an “additional insured” on their policies, some of which were issued by American Safety. In 2013, several homeowners sued Pulte for alleged defects in the work performed by the subcontractors who were insured by American Safety. American Safety denied coverage and refused to provide a defense to Pulte because the construction had taken place 10 years prior.

Pulte sued American Safety, and prevailed on the “bad faith” claims, but American Safety then appealed the trial court’s award of attorney’s fees and punitive damages as violating the dictates set forth in the Cassim case, specifically improperly attempting to inflate the attorney’s fee (and punitive damage) award. Pulte’s lawyer in the bad-faith case originally had entered into a contingency-fee agreement with Pulte, which would have resulted in a fee award of only $371,000 under the Cassim formula, set forth above.

After the trial on bad faith, but before the punitive damage phase, Pulte “modified” the fee agreement to be based on an hourly rate instead and, thereafter, claimed an additional $274,000 in attorney’s fees actually incurred and paid, for a total of $645,000. The trial court disagreed with American Safety’s assertion that the change in the fee agreement was to manipulate the process. After making deductions for fees unrelated to pursuing amounts due under the insurance contract, the trial court awarded Pulte $471,313.52 in attorney’s fees. Based on the one-to-one ratio with attorney’s fees, the trial court also awarded $500,000 in punitive damages.

The Court of Appeal reversed, stating, “We have serious concerns that this change in Pulte’s fee agreement was apparently ‘designed to manipulate the calculation of Brandt fees’ to the plaintiff’s benefit.” Id. at 1132. The court also rejected Pulte’s argument that, because Pulte had actually incurred and paid the hourly fee, that amount must be considered as the proper amount for the attorney-fee award. The court concluded that the judge should have based the attorney-fee award on the agreement in force during the trial and, therefore, remanded the case to recalculate the proper amount of attorney’s fees (and to adjust the punitive damage award, since because it was based on the improper attorney-fee award). Id. at 1133.

The good news for plaintiffs’ attorneys is that any “bad faith” case can be prosecuted under a contingency-fee agreement, based on the Cassim case, and an award of attorney’s fees based on that fee agreement may be possible. California courts continue to define the outlying boundaries for recovering contingency attorney’s fees, but at least there is no question that “reasonable” fees (attributable to proving actual coverage) are recoverable.

When insurance companies, including those offering disability, life, health or accidental death policies, engage in conduct that is sufficiently egregious, a court may award punitive damages against the insurance company. California Civil Code Section 3294 (“Section 3294”) provides that where the defendant is guilty of oppression, fraud or malice, the plaintiff may recover punitive damages for the sake of example and by way of punishing the defendant. If the defendant is a corporation, such as an insurance company, the defendant is liable for punitive damages if the act of oppression, fraud or malice was authorized or ratified by an officer, director or managing agent of the corporation or if the officer, director or managing agent was personally guilty of such conduct. While it may be relatively simple to determine who would qualify as an officer or director of a corporation, the question of who qualifies as a managing agent is notably less clear.

In a recent decision by the California Court of Appeal, Mazik v. GEICO General Insurance Company, No. B281372, (May 17, 2019), the Court concluded that a regional liability administrator who had broad authority over the settlement of a large number of claims qualified as a “managing agent” to support an award of punitive damages against GEICO General Insurance Company (“GEICO”). The Court affirmed the trial court’s decision approving punitive damages of $1 million to the plaintiff for GEICO’S bad faith conduct in handling an underinsured motorist claim. The Court also found that the award of $1 million was within the constitutionally permitted range in view of the degree of reprehensibility of GEICO’s actions.

On August 11, 2008, Michael Mazik was involved in a serious automobile accident in which he sustained a comminuted fracture of his left heel bone which ultimately resulted in a left foot deformity, chronic pain, difficulty walking and a severely restricted range of motion in his left foot. At trial, Mazik’s medical expert testified that the injury to his heel was “devastating” and that the severe nature of Mazik’s injury was apparent from the doctors’ diagnoses “right from the beginning” as a comminuted fracture refers to a fracture producing many pieces of bone. Mazik submitted a claim to GEICO under his own underinsured motorist policy for $50,000 which represented the full policy limits of $100,000 offset by a $50,000 settlement he had already received from the driver of the other vehicle involved in the accident.

After receiving Mazik’s demand, a GEICO claims adjuster obtained approval from GEICO’s regional liability administrator, Lon Grothen (“Grothen”), to reject the demand and offer Mazik $1,000 to settle his claim. Approximately eight months later a new claims adjuster was assigned to the file and increased GEICO’s settlement offer to $13,800. Four months later, GEICO increased its offer to $18,000. On May 23, 2011, GEICO conducted an independent medical evaluation (“IME”) of Mazik. GEICO’s medical examiner determined that Mazik’s injury did not restrict his occupation as a teacher, that no further medical care was indicated and that Mazik’s prognosis was good. The claim went to arbitration in April 2013 and Mazik was awarded the full policy limits.

Mazik later filed a bad faith action against GEICO. In July 2016, a jury returned a verdict in favor of Mazik and awarded him $313,508 in compensatory damages and $4 million in punitive damages. The trial court reduced the amount of punitive damages to $1 million. GEICO appealed the award of punitive damages.

In upholding the award of punitive damages, the appellate court in Mazik determined that there was sufficient evidence in the record to show that GEICO’s managing agent ratified conduct warranting punitive damages. The plaintiff had argued that Grothen, who was a regional liability administrator for Orange County, Los Angeles, San Bernardino and Alaska, was a managing agent based upon his broad regional authority over adjusters and managers in cases up to $100,000. In analyzing the issue, the Court first turned to Section 3294 which establishes the legal standard for punitive damages in California. Section 3294 provides, among other things, that a corporate employer can be liable for punitive damages based on the acts of an employee if an officer, director or managing agent of the corporation authorized or ratified the wrongful conduct. The Court cited to White v. Ultramar, Inc., 21 Cal.4th 563 (1999) for the definition of managing agents. In White, the California Supreme Court explained that managing agents are employees who exercise substantial independent authority and judgment in their corporate decision-making so that their decisions ultimately determine corporate policy. White, 21 Cal.4th at 566-567. The Mazik court concluded that there was ample evidence that Grothen met this definition of managing agent.

The Court noted that Grothen had wide regional authority over claims settlements, over 100 claims adjusters were “funneled up” to him for approval of settlements and he typically had 18 to 20 meetings per day with claims adjusters seeking his approval or direction for handling claims. Grothen even testified that an extremely important part of his role was to maintain consistency in settlement valuations within his region. The Court found that a jury could have reasonably concluded that this type of broad decision-making responsibility for establishing GEICO’s settlement standards ultimately determined corporate policy.

Having determined that Grothen was a managing agent of GEICO, the Court next turned to the issue of whether Grothen ratified conduct warranting punitive damages. The Court pointed to evidence provided by Mazik that showed that GEICO deliberately “cherry-picked” medical information and disregarded unfavorable findings. For instance, the evidence showed that GEICO’s claims adjusters prepared an initial claim evaluation summary and summaries in advance of the arbitration that were misleading and omitted important information that appeared in Mazik’s medical records. GEICO argued that the claims adjusters’ conduct cannot support punitive damages because Grothen himself was not personally involved in investigating Mazik’s claim. The Court rejected this argument finding that there was sufficient evidence for the jury to conclude that Grothen engaged in oppressive conduct by ignoring information concerning the serious and permanent nature of Mazik’s injuries for the purpose of saving the company money.

The Court looked at the numerous instances as documented in the record where Grothen provided direction and/or approval for decisions affecting Mazik’s case such as his approval to reject Mazik’s initial policy demand, his instruction to the claims adjuster to obtain an IME and his approval to move the case toward arbitration. Grothen also testified that he has access to the entire claims file and that he “spot checks” the information the adjusters provide. The Court thus concluded that he had more than a “passing familiarity” with Mazik’s claim and that a jury reasonably could have found that not only he knew the claims adjusters’ summaries were misleading, but that he himself was fully aware of the severe nature of Mazik’s injuries. Importantly, the Court recognized that, when sufficiently egregious, an insurer’s bad faith conduct can also satisfy the standard for punitive damages. See Egan v. Mutual Omaha Ins. Co., 24 Cal.3d 809, 821-822 (1979). Based on the evidence, the Court determined that the jury had a sufficient basis to conclude that Grothen ratified such egregious conduct by approving unreasonably low offers to Mazik that ignored medical records showing the serious and permanent nature of his injuries.

Finally, the Court addressed the amount of the punitive damages award. In analyzing the degree of reprehensibility of GEICO’s conduct, the Court found that GEICO’s oppressive conduct was repeated based on the numerous instances that Grothen either authorized unreasonably low settlement offers or approved decisions not to increase offers. It also found that Mazik was financially vulnerable and that there was evidence that GEICO intentionally manipulated the facts by “cherry-picking” medical information and disregarding unfavorable findings. Each of these factors supported the conclusion that the $1 million punitive damages award was constitutionally permissible. The Court also found that the three-to-one ratio of punitive to compensatory damages did not exceed constitutional restraints.

The Mazik case is significant because it broadens the scope of who can be considered a managing agent for purposes of obtaining a punitive damages award. This decision establishes that a claims supervisor who has wide regional authority over claim settlements can qualify as a managing agent of an insurance company such that his conduct will be imputed to the insurance company for purposes of punitive damages. It should be noted that according to earlier cases, in-house claims managers and adjusters who handled claims with little if any supervision could be treated as “managing agents:” “When employees dispose of insureds’ claims with little if any supervision, they possess sufficient discretion for the law to impute their actions concerning those claims to the corporation.” Egan v. Mutual of Omaha Ins. Co., 24 Cal.3d 809, 822-823 (1979); see also Major v. Western Home Ins. Co., 169 Cal. App.4th 1197, 1220-1221 (2009) (outside claim representative vested with discretionary authority to pay or deny claims). In light of this decision and earlier decisions, claimants should look closely at the conduct of any managers or supervisors involved in the claims-handling process.

Every insurance policy, including disability, life, health or accidental death policies, contains an implied covenant of good faith and fair dealing between the insurance company and the insured. This covenant requires that insurance companies refrain from acting in a way that unreasonably jeopardizes, impairs or interferes with the rights of the insured to receive the benefit of the insurance contract. The Unfair Insurance Practices Act (California Insurance Code Sections 790, et seq., “UIPA”) was enacted to regulate the business of insurance by defining and prohibiting practices which constitute unfair methods of competition or unfair or deceptive acts or practices.

California Insurance Code Section 790.03(h) (“Section 790.03(h)”) enumerates a list of sixteen specific unfair claims settlement practices that insurance companies are prohibited from engaging in and which, if the insurance company is found to be in violation, could subject the company to severe penalties. These unfair claims settlement practices include, but are not limited to, misrepresenting to claimants pertinent facts or insurance policy provisions relating to any coverage at issue, failing to adopt and implement reasonable standards for the prompt investigation and processing of claims arising under the insurance policies, failing to affirm or deny coverage of claims within a reasonable time after proof of loss requirements have been completed and submitted by the insured, and failing to provide promptly a reasonable explanation of the basis relied on for the denial of a claim.

The California Insurance Commissioner (“the Commissioner”) is tasked with implementing regulations necessary to administer the UIPA. The Commissioner’s authority to promulgate such regulations was recently challenged in the matter of PacifiCare Life & Health Ins. Co. v. Jones, No. G053914, __ Cal. App.4th __ (September 20, 2018). The plaintiff PacifiCare Life & Health Ins. Co. (“PacifiCare”) brought an action challenging the validity of three regulations which the Commissioner relied on in finding that PacifiCare engaged in over 900,000 violations of the Insurance Code and imposing penalties in excess of $173 million. Specifically, PacifiCare argued that the regulation which purported to authorize enforcement action based on a single, knowing commission of a violation is facially invalid since it is inconsistent with Section 790.03(h). PacifiCare claimed Section 790.03(h) does not include the single knowing commission of a violation in its definition of an unfair claims settlement practice, but rather applies only to repetitive acts of misconduct which indicate a general business practice. PacifiCare also argued that the regulation which purported to define the term “knowingly committed” as including implied or constructive knowledge was invalid since this definition is inconsistent with the ordinary meaning of the term, and that the regulation which defined the term “willful” or “willfully” as not requiring intent to violate law or to injure another was also invalid snice the definition was inconsistent with the statutory definition of “willful” found in the Insurance Code.

The trial court granted PacifiCare’s motion for judgment on the pleadings and request for injunctive relief. The Commissioner appealed. Upon review, the California Court of Appeal reversed, disagreeing with PacifiCare and concluding that the Legislature intended to authorize the Commissioner to regulate activities based not only on patterns of unfair claims settlement practices, but also on single acts of misconduct by an insurer. The Court therefore upheld the validity of the challenged regulation and found that Section 790.03(h) defines an unfair claims settlement practice to be either a single knowing commission of a violation, or conduct that is committed with such frequency as to indicate a general business practice. The Court also determined that the regulations defining the terms “knowingly committed” and “willful” or “willfully” were permissible interpretations of UIPA and were therefore valid.

This case is significant in that it makes clear that insurance companies can engage in the sixteen prohibited acts enumerated in Section 790.03(h) by just once committing the described misconduct, and that the Commissioner is authorized to pursue enforcement action based on a single knowing commission of a prohibited practice. As the Court of Appeal stated, this result is consistent with the Legislature’s intent in enacting Section 790.03(h) and related provisions of the UIPA to curb insurer violations of the California Insurance Code.

Court Rules Insurers Cannot Hide Behind Biased Expert Consultants to Dispose of Bad Faith Claims

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