Bad Faith Insurance Practices

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 means that your insurance company has a legal duty to 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. 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.

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

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.

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 their denial was based on a legitimate and reasonable interpretation of the facts or the policy. Under California law — as established in cases like Gruenberg v. Aetna Insurance Co. (1973) 9 Cal.3d 566 and 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.

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.

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 establish the 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 May 2025, the California Department of Insurance issued a formal legal directive declaring the FAIR Plan’s “permanent damage” policy language unlawful and unenforceable. In July 2025, CDI filed an Order to Show Cause and proposed cease-and-desist order against the FAIR Plan based on its systematic application of the language to deny and limit smoke damage claims.

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 critically 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 Insurance Code § 15002 expressly provides that the Public Adjuster Act 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.

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 To Do If You Suspect Bad Faith

If you believe your insurance company is acting in bad faith, consult 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, 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.

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 rule in Simon v. San Paolo U.S. Holding Co. (2005) 35 Cal.4th 1159, 1182, observing that ratios significantly greater than 9 or 10 to 1 are suspect. 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 1:1 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.

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.