Bad Faith Insurance Practices

You paid your premiums. You filed a claim. And now your insurer is stalling, lowballing, or denying without explanation. Something feels wrong — but is it just frustrating, or is it actually illegal? In California, when an insurer handles your claim unreasonably, it is called "bad faith." Bad faith is not just unfair. It is a legal wrong that exposes the insurer to damages far beyond your original claim.

The Implied Covenant of Good Faith and Fair Dealing

Every insurance contract in California carries an implied covenant of good faith and fair dealing. This duty is not written into the policy — it exists by operation of law. It means your insurance company must treat you fairly, handle your claim in good faith, and not place its own financial interests above your right to receive the benefits of your policy. Concretely, the insurer must investigate your claim fairly, evaluate it honestly, and pay what is owed without unreasonable delay. When an insurer violates this duty, it is called "bad faith" — and it can expose the insurance company to liability far beyond the original claim amount.

The legal standard is reasonableness. The insurer does not have to agree with you. It does not have to pay every dollar you claim. But its conduct must be reasonable — based on a fair investigation, an honest evaluation of the evidence, and a good-faith effort to pay what is owed.

What Constitutes Bad Faith in California

Bad faith occurs when the insurance company unreasonably denies, delays, or underpays a claim without a proper basis. Insurance claim underpayment is a well-documented problem. Congressional testimony, regulatory investigations, and policyholder advocacy groups have consistently shown that insurers routinely reduce field adjusters' damage estimates through desk reviews, sometimes cutting payments dramatically. California courts have recognized numerous forms of bad faith conduct:

• Unreasonably denying a claim that is clearly covered
• Failing to conduct a thorough and objective investigation
• Unreasonably delaying claim handling or payment
• Lowballing — offering substantially less than the claim is worth without justification
• Misrepresenting policy language to avoid paying a claim
• Failing to communicate with the policyholder
• Refusing to provide a reasonable explanation for a denial or reduced payment
• Not attempting in good faith to reach a fair settlement when liability is reasonably clear

Common Bad Faith Behaviors

The general categories above show up in recurring real-world patterns. Here are the behaviors that most frequently arise in California homeowner claims:

• Unreasonable delay:Missing the regulatory timelines under California's Fair Claims Settlement Practices Regulations (10 CCR §§ 2695.5 and 2695.7) — failing to acknowledge a claim within 15 days, failing to accept or deny within 40 days after proof of loss, dragging out the process for months or years without legitimate reason. Under Moradi-Shalal, regulatory violations are not independently actionable as a private cause of action; however, California case law permits them to be raised as evidence of unreasonable conduct in a common-law bad-faith action.
• Lowballing without basis: Offering substantially less than the claim is worth without a reasonable explanation grounded in the facts and the policy.
• Denying without investigation: Issuing a denial before completing a fair, thorough, and objective investigation of the claim.
• Moving the goalposts:First requesting one set of documents, then another, then another — each time finding a new reason to delay payment.
• Misrepresenting the policy:Telling you something is excluded when it is not, or interpreting ambiguous language against you rather than in your favor (which violates California's rules of policy interpretation).
• Failing to inform you of coverages:Not telling you about available benefits — such as Additional Living Expenses, code upgrade coverage, or debris removal — that apply to your loss (Cal. Code Regs., tit. 10, § 2695.4(a)).
• Ignoring evidence: Disregarding your expert reports, contractor estimates, or documentation without a reasonable counter-position.

The "Genuine Dispute" Defense

Insurance companies are not liable for bad faith simply because they were wrong. Under California law, an insurer can avoid bad faith liability if it can show that there was a "genuine dispute" about the claim — meaning that there was a reasonable basis for the insurer's position, even if that position ultimately turned out to be incorrect. The genuine dispute doctrine protects insurers who are wrong but reasonable. If there is a legitimate disagreement about coverage, causation, or the amount of loss — supported by evidence on both sides — the insurer is not acting in bad faith simply because it took a position that ultimately proved incorrect. The question is not "was the insurer right?" but "was the insurer's position reasonable given what it knew or should have known?"

This is an important distinction. The legal standard for bad faith is not "wrong" — it is "unreasonable." An insurance company can deny a claim and be wrong without acting in bad faith, as long as its denial was based on a legitimate and reasonable interpretation of the facts or the policy. Under California law — established in Gruenberg v. Aetna Insurance Co. (1973) 9 Cal.3d 566, refined in Wilson v. 21st Century Ins. Co. (2007) 42 Cal.4th 713, and applied to claims handling in Chateau Chamberay Homeowners Ass'n v. Associated International Insurance Co.(2001) 90 Cal.App.4th 335 — the question is whether the insurer's conduct was unreasonable or without proper cause. For a layperson, bad faith is essentially synonymous with unreasonable conduct: the insurer acted without a reasonable basis for its position, or it failed to properly investigate before taking that position. The insurer does not get the benefit of the doubt simply because it can construct an after-the-fact justification — if the conduct was unreasonable at the time, that can establish bad faith.

But the genuine dispute doctrine has limits. It does not protect an insurer that manufactured the dispute — by conducting a biased investigation, ignoring evidence, or relying on an expert whose opinion was not based on the actual facts. As the court stated in Wilson v. 21st Century Ins. Co. (2007) 42 Cal.4th 713, the genuine dispute doctrine does not insulate an insurer from bad faith liability when the insurer fails to conduct a thorough investigation.

Why Bad Faith Cases Are Hard to Win

The "unreasonable" standard creates a high bar. Insurance companies know this, and they often build their claim files carefully to create the appearance of a genuine dispute. They may hire experts, issue detailed denial letters citing policy language, and document their investigation — all to create a record that they can point to later and say, "We had a reasonable basis for our position."

This is exactly why your documentation matters so much. Bad faith cases are won or lost on the paper trail. The more evidence you have of unreasonable conduct — broken promises, missed deadlines, contradictory statements, refusal to communicate — the harder it is for the insurer to hide behind the genuine dispute defense.

Key California Case Law

Several landmark California cases define the bad faith landscape:

• Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566: Established that the implied covenant of good faith and fair dealing applies to insurance contracts and that breach gives rise to tort damages, not just contract damages.
• Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809: Recognized the insurer-insured relationship as “special” and the insurance contract as “adhesive” with the insurer in a superior bargaining position — making the implied covenant of good faith and fair dealing especially important. Established the duty to thoroughly investigate as part of the implied covenant. (Note: the jury's $5 million punitive damages award in Egan was later reversed as excessive; the surviving precedential value is in the legal holdings on bad-faith liability and the investigation duty, not the dollar figure.)
• Moradi-Shalal v. Fireman's Fund Ins. Cos. (1988) 46 Cal.3d 287: Eliminated the private right of action under Insurance Code Section 790.03 (unfair practices act) but left intact the common-law bad faith tort action.
• Wilson v. 21st Century Ins. Co. (2007) 42 Cal.4th 713:Clarified that the genuine dispute doctrine requires a genuine, not manufactured, dispute — and that failure to investigate can defeat the defense.
• Chateau Chamberay Homeowners Ass'n v. Associated Int'l Ins. Co. (2001) 90 Cal.App.4th 335: Applied the unreasonable-conduct standard to first-party claims-handling and helped frame how the genuine dispute defense is evaluated in coverage and valuation disputes.

Insurance Code Section 790.03

California Insurance Code Section 790.03 provides the statutory foundation for unfair claims practices. This section defines specific acts that constitute unfair or deceptive practices in the business of insurance, including:

• Knowingly misrepresenting pertinent facts or policy provisions
• Failing to acknowledge and act reasonably promptly on communications about claims
• Failing to adopt and implement reasonable standards for prompt investigation of claims
• Not attempting in good faith to reach prompt, fair, and equitable settlements when liability is reasonably clear
• Compelling policyholders to file lawsuits to recover amounts due by offering substantially less than the amounts ultimately recovered
• Failing to promptly provide a reasonable explanation for a denial

How Bad Faith, Statutory Violations, and Regulatory Violations Relate to Each Other

One of the most commonly misunderstood areas of California insurance law is the relationship between three related but distinct concepts: bad faith (breach of the implied covenant of good faith and fair dealing), statutory violations (Insurance Code § 790.03), and regulatory violations (the Fair Claims Settlement Practices Regulations, 10 CCR § 2695). These concepts overlap significantly, but they are not the same thing — and confusing them can lead to unrealistic expectations about what a policyholder can recover in a lawsuit.

Regulatory Violations Are Not Automatically Bad Faith

The Fair Claims Settlement Practices Regulations (10 CCR § 2695) set detailed rules for how insurers must handle claims — timelines for acknowledgment, investigation deadlines, requirements for written explanations of denials, and more. When an insurer violates one of these regulations, it has broken an administrative rule enforced by the California Department of Insurance (CDI). But a regulatory violation does not automatically mean the insurer has committed bad faith.

For example, the regulations require that an insurer acknowledge a claim within 15 days. If your insurer acknowledges your claim on day 18, that is a regulatory violation. But did the three-day delay cause you any harm? Did it affect the outcome of your claim or the amount you were paid? If the insurer ultimately investigated thoroughly and paid the claim fairly, the late acknowledgment — while technically a violation — may not amount to bad faith and may not result in any recoverable damages.

Statutory Violations Are Not Automatically Causes of Action

Insurance Code § 790.03 defines unfair claims practices, but it does not create a direct private right of action. The California Supreme Court held in Moradi-Shalal v. Fireman's Fund Ins. Co.(1988) 46 Cal.3d 287 that insureds cannot sue an insurer solely for violating § 790.03 — the statute itself does not give the insured standing to bring a claim in court based on that violation alone. The Supreme Court later confirmed this rule in Zhang v. Superior Court(2013) 57 Cal.4th 364, while holding that insureds may pursue separate Unfair Competition Law (UCL) claims based on the same underlying conduct, provided the UCL claim does not depend on a private right of action under § 790.03. The statute defines the standards, but the cause of action comes from elsewhere — typically the implied covenant of good faith and fair dealing (bad faith) or breach of contract.

This means that even if you can point to specific statutory violations, those violations are not independently actionable claims you can plead in a lawsuit. You cannot simply list violations of § 790.03 in a complaint and expect a court to award damages. Instead, the statutory violations serve as evidence— they inform the court about the standard of conduct expected of insurers and help demonstrate that the insurer's behavior fell below that standard.

While regulatory violations alone do not create a separate lawsuit — the Moradi-Shalalrule means an insured cannot sue solely on a § 790.03 or regulatory violation — a pattern of regulatory violations is often material evidence in a bad faith case. Missed deadlines, inadequate investigation, unreasonably low offers, and failure to provide required documentation, taken together, can build the factual foundation a plaintiff’s attorney would use to argue the underlying contract breach was handled in bad faith. Experienced counsel weave these violations into the broader bad faith narrative rather than treating them as isolated incidents. The regulations exist because they define what reasonable claim handling looks like. When an insurer systematically ignores those standards, that pattern can tell a story that juries understand — with the legal weight depending on the facts of the specific case.

Bad Faith Is Not Always a Statutory or Regulatory Violation

The relationship also runs the other direction. An insurer can act in bad faith without violating a specific statute or regulation. Bad faith is rooted in the implied covenant of good faith and fair dealing — a contractual duty that exists independent of any regulatory scheme. An insurer that technically complies with every regulation and every statutory requirement can still act in bad faith if it unreasonably denies, delays, or underpays a claim.

For example, an insurer might acknowledge the claim on time, investigate within the regulatory deadlines, and issue a written explanation for every decision — checking every regulatory box — while simultaneously offering $40,000 on a $200,000 loss with no reasonable basis. The regulatory compliance does not immunize the insurer from a bad faith claim based on the unreasonable underpayment.

Violations Do Not Automatically Mean Recoverable Damages

Even when violations exist, they do not automatically translate into damages a policyholder can recover in court. A regulatory violation that caused no harm may not result in any damages at all. A statutory violation that cannot be independently pleaded may have no direct legal consequence. A breach of contract that was ultimately cured — for example, a late payment that was eventually made in full — may result in only nominal damages.

To recover meaningful damages in a lawsuit, the policyholder generally must show that the insurer's conduct was unreasonable (not just technically wrong), that it caused actual harm (not just a procedural irregularity), and that the harm resulted in quantifiable damages (economic losses, emotional distress, or, in egregious cases, punitive damages).

How These Concepts Work Together

While regulatory violations, statutory violations, and bad faith are different legal concepts, they are deeply interrelated in practice. Here is how they typically work together in a real claim:

The key principle: violations of the Insurance Code and the Fair Claims Regulations may be so closely related to the insurer's contractual bad faith that those violations greatly help to establishthe bad faith. A single missed deadline may not prove anything. But a pattern of regulatory violations, combined with statutory violations and an unreasonable claims outcome, can paint a compelling picture of an insurer that was not acting in good faith — and that picture is exactly what a policyholder needs to prevail in a bad faith lawsuit.

Recent Example: California FAIR Plan Smoke-Damage Policy Language

A recent illustration of how coverage disputes and bad faith can intersect is the California FAIR Plan’s “permanent physical change” smoke-damage restriction. For years the FAIR Plan had limited smoke-damage coverage to damage involving a “permanent physical change” visible to the unaided eye, and used that language to deny or minimize smoke claims. Two parallel California actions addressed the language in 2025:

• Judicial: In Aliff v. California FAIR Plan Association(L.A. Super. Ct., June 24, 2025) (Case No. 21STCV20095), the Los Angeles Superior Court granted in part the plaintiff’s motion for summary adjudication, holding that the “permanent physical change” language provided less coverage than is required by California Insurance Code § 2070 (the Standard Fire Policy). The order is a trial-court ruling, not a published appellate decision, so it is persuasive rather than binding statewide. The FAIR Plan publicly indicated it was unlikely to appeal and was in the process of updating its policy language.
• Regulatory: In March 2025, the California Department of Insurance issued Bulletin 2025-7 directing all insurers (including the FAIR Plan) to properly investigate and pay legitimate smoke-damage claims. In May 2025, Commissioner Lara sent a formal legal directive deeming the FAIR Plan’s “permanent damage” policy language unlawful and unenforceable. On July 31, 2025, the Department filed an Order to Show Cause and proposed cease-and-desist order with potential penalties of up to $10,000 per violation against the FAIR Plan based on its systematic application of the restrictive language to deny and limit smoke-damage claims (CDI Press Release No. 054-2025).

The example illustrates a broader bad-faith principle: coverage interpretations insurers treat as “reasonable” are not immune from later judicial rejection or regulatory challenge. Continuing to apply a coverage theory that a court or regulator has rejected may be difficult to defend as reasonable going forward. How any specific policy reading affects a particular claim is a question for a California-licensed attorney.

The Role of a Public Adjuster in Documenting Bad Behavior

A Public Adjuster's primary objective is to obtain all the money that is due to the policyholder under the insurance contract. That is the job — maximize the contractual recovery. But in the course of doing that job, a skilled Public Adjuster performs another important function: documenting the insurer's conduct.

During the claims process, the Public Adjuster is in direct contact with the insurance company — exchanging correspondence, reviewing estimates, requesting claim file information, submitting supplements, and negotiating. In the course of those interactions, the Public Adjuster is in a unique position to observe and document:

• Regulatory violations— missed deadlines, failure to provide required disclosures, inadequate investigation, failure to respond to communications
• Statutory violations— misrepresentation of policy provisions, failure to attempt a fair settlement, compelling the insured to file a lawsuit by offering substantially less than is owed
• Breaches of contract— failure to pay covered losses, failure to honor policy terms, misapplication of deductibles or limits
• Bad faith conduct— unreasonable delays, lowball offers without basis, refusal to provide explanations, contradictory positions, stonewalling

All of this documentation is generated in the normal course of the Public Adjuster's work — it is not manufactured for litigation. It is a contemporaneous record of how the insurance company actually handled the claim, created in real time by a licensed professional who was directly involved. If a lawsuit ultimately becomes necessary, this evidence can be invaluable.

This is an important and often overlooked part of a Public Adjuster's function. The PA is not an attorney and does not file lawsuits — California’s Public Insurance Adjusters Act (Cal. Ins. Code §§ 15000–15062) regulates Public Adjusters as a specialized claims-handling profession and does not authorize the practice of law. The PA’s role is to adjust the claim: develop the scope, document the conditions, negotiate the settlement, and create a contemporaneous file of how the insurer actually handled the matter. The documentation that emerges from thorough public-adjusting work is often the foundation an attorney would use if litigation later becomes necessary — but the litigation itself is the attorney’s work, not the PA’s. Many policyholders who handle claims on their own fail to create this documentation, and when they later consult an attorney, there is little evidence to support their case beyond their own recollection. A Public Adjuster's file changes that equation entirely.

First-Party vs. Third-Party Bad Faith

There is an important distinction between first-party and third-party bad faith:

• First-party bad faith involves your own insurance company mistreating you on your own claim. For example, your homeowners insurer denying your fire damage claim without a reasonable basis. This is the type of bad faith most relevant to property damage claims.
• Third-party bad faith involves your insurance company failing to properly defend or settle a claim brought against you by someone else. For example, if someone sues you for an injury on your property and your insurer unreasonably refuses to settle within policy limits, exposing you to a judgment exceeding your coverage.

For homeowners dealing with property damage claims, first-party bad faith is the primary concern. However, both types arise from the same fundamental duty of good faith and fair dealing.

How to Know If Your Insurer Is Acting in Bad Faith

Ask yourself these questions:

1. Has the insurer provided a clear, written explanation for its position citing specific policy language?
2. Did the insurer conduct a fair investigation — or did it start from a conclusion and work backward?
3. Is the insurer responding to your communications within regulatory timeframes?
4. Has the insurer paid the undisputed portion of the claim while disputing the rest?
5. Is the insurer's position supported by evidence — or just assertion?
6. Has the insurer moved the goalposts — changing its reason for denial or delay?
7. Has the insurer told you about all available coverages that apply to your loss?

If you are answering "no" to multiple questions, the insurer's conduct may cross the line. Document everything and consult an attorney.

Building Your Documentation

If you believe your insurance company is acting in bad faith, the most important thing you can do is document everything. Start from the very first day of your claim and maintain thorough records throughout:

• Keep a detailed communication log. Record the date, time, method (phone, email, letter), and substance of every communication with the insurance company. Note who you spoke with, what was said, and what was promised.
• Save everything. Every email, letter, estimate, report, and document you receive from or send to the insurer should be saved and organized.
• Follow up phone calls in writing. After any significant phone conversation, send an email summarizing what was discussed and agreed upon. This creates a written record of verbal commitments.
• Document broken promises. If the adjuster says they will call you back by Friday and they do not, note that. If they promise to send a payment within 30 days and it does not arrive, document it.
• Track delays and missed deadlines. Note every deadline the insurer misses and every unreasonable delay in the process.
• Get independent estimates.Compare the insurer's estimate to independent estimates from qualified contractors or a Public Adjuster. A significant gap between the insurer's number and independent assessments can be evidence of lowballing.

What Damages Are Available

Bad faith is a tort — an actionable wrong — not just a breach of contract. This distinction matters because tort damages are broader than contract damages. The categories of damages that California cases have recognized in successful bad-faith actions include:

• Policy benefits: The full amount owed under the policy (the claim itself).
• Consequential damages:Financial harm caused by the insurer's unreasonable conduct — inability to rebuild, lost business, additional housing costs.
• Emotional distress:Anxiety, stress, depression, and other mental suffering caused by the insurer's bad faith conduct.
• Punitive damages:Available when the insurer's conduct is malicious, oppressive, or fraudulent — proven by clear and convincing evidence (Civil Code § 3294). Punitive damages must be proportional to the harm caused.
• Brandt fees: Attorney fees incurred to recover the policy benefits that should have been paid in the first place (Brandt v. Superior Court (1985) 37 Cal.3d 813).

In California, bad faith can support an award of punitive damages — damages designed to punish the insurer, not just compensate the policyholder. California has no statutory cap on punitive damages in insurance bad faith cases, but federal due process imposes a meaningful ceiling. The U.S. Supreme Court held in State Farm Mut. Auto. Ins. Co. v. Campbell(2003) 538 U.S. 408, 425, that “few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process.” The California Supreme Court applied this guidance in Simon v. San Paolo U.S. Holding Co. (2005) 35 Cal.4th 1159, where the jury had awarded $1.7 million in punitive damages against approximately $5,000 in compensatory damages — a ratio of roughly 340-to-1. The Court reduced the punitive award to $50,000 (a 10-to-1 ratio), which it identified as the constitutional ceiling on the facts of that case. And in Roby v. McKesson Corp.(2009) 47 Cal.4th 686, 719, the California Supreme Court held that where compensatory damages are “substantial” (and especially where they include a significant noneconomic component), a 1-to-1 ratio may be the constitutional maximum.

In practice, this means that the realistic punitive damages exposure in California insurance bad faith cases tends to land in the low single digits relative to compensatory damages. Courts evaluate the reprehensibility of the insurer's conduct, the ratio between actual harm and the punitive award, and comparable penalties in similar cases. Even with the constitutional ceiling, the potential recovery in litigation may exceed what is achievable through negotiation or appraisal alone — especially in cases with relatively modest compensatory damages but egregious conduct. An attorney experienced in insurance bad faith can evaluate whether punitive damages are a realistic possibility on a specific set of facts.

What To Do If You Suspect Bad Faith

If you believe your insurance company is acting in bad faith, you might consider consulting with a Public Adjuster to evaluate your claim and, if necessary, an attorney who specializes in insurance bad faith litigation. Bad faith claims can potentially recover not only the original insurance benefits owed, but also consequential damages, emotional distress damages, attorney fees attributable to recovering the policy benefits (so-called “Brandt fees” under Brandt v. Superior Court (1985) 37 Cal.3d 813), and in egregious cases, punitive damages. However, these cases require strong evidence and experienced legal representation. Do not make bad faith accusations lightly, but do not tolerate genuinely unreasonable conduct either.

A Public Adjuster typically develops the factual record — documenting regulatory compliance issues, delays, and offer history — in the ordinary course of adjusting the claim. If a bad-faith dispute later emerges, that contemporaneous record is often what an attorney would build a legal case around. The PA’s role is the adjusting; the attorney’s role is the legal claim.

When to Call a Lawyer

You might consider calling an insurance bad faith attorney when:

• The insurer has denied coverage without a reasonable basis
• The insurer is unreasonably delaying payment for months
• The gap between your evidence and their offer is enormous and unexplained
• You have been referred to the Special Investigations Unit (SIU)
• The insurer is demanding an Examination Under Oath (EUO)
• You believe the insurer is misrepresenting your policy
• The conduct pattern matches the bad faith indicators above

Most insurance bad faith attorneys work on contingency — they do not get paid unless you win. An initial consultation is usually free. For help deciding if you need an attorney, see our guide on when to hire an attorney. For more on your insurer's legal obligations, see our insurer obligations cheat sheet.

Bad faith is a serious legal claim with serious consequences for an insurer. It exists because the California courts and the legislature recognized that insurance companies have substantial power over their policyholders — and that power must have checks. When the carrier's conduct crosses from unreasonable into the kind of pattern California law recognizes as bad faith, the remedy can include damages beyond the policy benefits. Whether and how those remedies apply to a specific claim is a question for a licensed attorney.

This article is for informational purposes only and does not constitute legal advice. California’s Public Insurance Adjusters Act (Cal. Ins. Code §§ 15000–15062) regulates Public Adjusters as a specialized claims-handling profession; it does not authorize the practice of law. Whether the facts of a specific claim support a bad-faith action, and what damages may be recoverable, is a question for a licensed California attorney. The Public Adjuster's role is to document the carrier's conduct and assist with claims handling; the attorney's role is the legal claim. Insurance policies and applicable law vary by state and by policy form; consult with a licensed professional regarding your specific situation.

Written by Leland Coontz III, Licensed Public Adjuster, CA License #2B53445.