The McKennon Law Group PC periodically publishes articles on its California Insurance Litigation Blog that deals with frequently asked questions in the insurance bad faith and ERISA area of the law.  This is another such article in that series.

Generally, in order to sue for insurance bad faith there necessarily must be an insurance policy at issue that establishes a concept known as “privity of contract” between an insured and an insurer.  This means that an insured under an insurance policy typically may sue for bad faith if the insured is entitled to benefits under a policy and if those benefits are wrongfully withheld or payment was wrongfully delayed.  This includes the contracting parties (persons named as insureds) as well as others entitled to benefits as “additional insureds” or as express beneficiaries under the policy.  In insurance parlance, this means that the “named insured” and any “additional insureds” may sue. 

Furthermore, a designated beneficiary of an insurance contract has standing to sue for both the policy benefits and extra-contractual damages if the benefits are wrongfully withheld.  An express beneficiary need not be specifically named.  An insured may have standing to sue if a member of a class for whose benefit the contract was made.  Someone not a party to the contract has no standing to sue.  Thus, in the disability insurance context, even though a spouse may have suffered emotional distress, if she is not an insured, she cannot sue the insurer for bad faith.  However, if an insurer breaches an independent duty it owes to a spouse, it is possible for that spouse to sue for damages (e.g., intentional infliction of emotional distress).  In the life insurance context, a beneficiary of the policy would have standing to sue for insurance bad faith.

In addition, an insurance bad faith claim can be assigned.  In the context of a third party claim, it is possible to assign a bad faith claim under certain circumstances.  This is most typically done in connection with a failure by an insurer to defend and indemnify an insured for third party liability.  However, because purely personal tort claims are not assignable, the insured’s claims for emotional distress damages and punitive damages are not assignable. Essex Ins. Co. v. Five Star Dye House, Inc., 38 Cal. 4th 1252, 1263 (2006).  An assignment allows the third-party to obtain more than the policy limits from the insurer.  Without the assignment, a third-party can only sue the insurer for the amount of the judgment as third party beneficiary of those liability policies.  Ins. Code § 11580(a).

The same “privity of contract” requirement applies in determining who may be sued.  Generally, only the insurer(s) on the risk as the party to the contract can be sued.  This includes “primary,” “excess” and “umbrella” insurers.  Moreover, it is possible to sue an insurer’s alter ego or joint-venturer, typically a parent company.  It is also possible under certain circumstances to sue a “managing general agent” who is appointed by the insurer to manage all or part of its insurance business.  An insurance agent can be sued for professional negligence, but not for insurance bad faith.  See Kurtz, Richards, Wilson & Co. v. Insurance Communicators Marketing Corp., 12 Cal. App. 4th 1249, 1257 (1992) (“At a minimum, an insurance agent has a duty to use reasonable care, diligence, and judgment in procuring the insurance requested by its client.  An agent may assume additional duties by an agreement or by holding himself or herself out as having specific expertise.”); Williams v. Hilb, Rogal & Hobbs Ins. Services of Calif., Inc., 177 Cal. App. 4th 624, 635–636 (2009) (holding that a special duty will arise when an agent holds himself out as having specific expertise.)

Insurance bad faith claims can be potent weapons for insureds or beneficiaries who have been mistreated by insurance companies in the handling of their insurance claims.  Knowing who can sue and be sued is therefore important to understand if you are considering an insurance bad faith lawsuit.