How the Tort of Bad Faith Was Invented: The History That Changed Insurance Law Forever

There was a time in America when an insurance company could deny your claim, drag out its investigation for months or years, lowball your payment, and face no meaningful consequence for any of it. If you were lucky enough to have a lawyer and the resources to fight, the most you could hope to recover was the policy benefit you were owed in the first place — the money the insurer should have paid you from the beginning. There was no penalty for the delay. No accountability for the suffering the insurer caused while you waited. No mechanism to punish the company for treating your family's financial ruin as an acceptable cost of doing business.

That world began to end in California, in a sequence of California Supreme Court decisions stretching from 1958 to 1979 — cases pressed by several plaintiff-side firms, but reaching their most influential expression in the landmark Egan v. Mutual of Omaha decision litigated by William M. Shernoff.

The tort of bad faith — the legal principle that an insurance company can be held liable in damages beyond the policy for unreasonably denying, delaying, or mishandling a claim — was built by the California Supreme Court case by case over two decades. Each case added a piece: Comunale (1958) established the implied covenant of good faith and fair dealing; Crisci (1967) added emotional-distress damages; Gruenberg (1973) extended the tort framework to first-party claims; Neal (1978) established the punitive-damages framework; and Egan (1979) cemented the duty to investigate and addressed the managing-agent question. William M. Shernoff and his firm Shernoff Bidart Echeverria LLP became influential bad-faith litigators by pressing these doctrines aggressively and successfully — Egan became one of the most-cited bad-faith decisions in American legal history. The doctrine itself was the work of the California Supreme Court and the lawyers, plaintiff-side and defense-side, who shaped the appellate record. The body of law has since been adopted in some form in at least twenty-five states.

This article traces the history of that legal revolution — from the first tentative recognition that insurers owe their policyholders something more than a check, through the landmark decisions that transformed bad faith from a theory into a weapon, to the modern reality of how bad faith claims actually play out in litigation. It is a story of genuine legal innovation. It is also a story with a cautionary ending, because the existence of bad faith law and the ability to win a bad faith case are two very different things.

Before Bad Faith: A World Without Consequences

To appreciate what Shernoff and others accomplished, you need to understand what came before.

Before the late 1950s, an insurance company's obligation to its policyholder was treated as a simple contract. You paid premiums. The insurer agreed to pay covered losses. If the insurer refused to pay, your remedy was a breach of contract action — and the damages were limited to what the insurer should have paid under the policy, plus interest. That was it.

There was no recognition that the insurance relationship was special. No acknowledgment that a family waiting for a claim payment might lose their home, their credit, their business, or their health while the insurer sat on the file. No mechanism to recover for the emotional devastation of watching your insurer betray the promise that was the entire reason you bought the policy. And critically, no punitive damages — nothing to deter the insurer from doing the same thing to the next policyholder, and the one after that.

The insurer could deny your claim, force you into litigation, make you wait years for a trial, and then — if you won — pay you exactly what it owed you all along, plus some interest. The cost of wrongful denial was essentially zero. The insurer got to use your money for years, and the only penalty was giving it back.

This was the legal landscape that the California Supreme Court began to dismantle in 1958.

The Foundation: Comunale v. Traders & General Insurance Co. (1958)

The case that planted the seed of bad faith law in California had nothing to do with a homeowner's claim. It involved a car accident.

Mr. and Mrs. Comunale were struck in a crosswalk by a truck driven by Percy Sloan. Sloan carried liability insurance with Traders & General Insurance Company, with policy limits of $10,000 per person and $20,000 per occurrence. When the Comunales sued Sloan, Traders denied coverage entirely — claiming the policy did not cover a truck Sloan did not own — and refused to defend the lawsuit.

The Comunales obtained a judgment against Sloan that exceeded his policy limits. The question before the California Supreme Court was whether Traders' refusal to settle within policy limits, when settlement was the most reasonable course of action, created liability beyond those limits.

In Comunale v. Traders & General Insurance Co. (1958) 50 Cal.2d 654, the California Supreme Court answered yes. The court held that every insurance contract contains an implied covenant of good faith and fair dealing, and that neither party will do anything to injure the right of the other to receive the benefits of the agreement. When the most reasonable disposition of a claim is settlement within policy limits, the insurer's unwarranted refusal to settle constitutes a breach of that implied covenant. An insurer who denies coverage does so at its own risk, and if the denial is found wrongful, the insurer is liable for the full amount of the insured's detriment — including amounts exceeding policy limits.

Comunalewas a third-party case — it dealt with the insurer's duty to protect its own insured from excess liability to someone else. It was framed as a contract action, not a tort. And its damages theory was still tied to the consequences of the insurer's refusal to settle. But the principle it established — that insurers owe their policyholders a duty of good faith and fair dealing that goes beyond simply paying the claim — was the foundation on which everything else would be built.

The Emotional Cost: Crisci v. Security Insurance Co. (1967)

Nine years after Comunale, the court took the next step. And this time, the human cost of bad faith was impossible to ignore.

Rosina Crisci was an elderly property owner who held a $10,000 general liability policy with Security Insurance Company. After a tenant was injured in a fall, the tenant's attorney offered to settle the entire case for $9,000 — well within Crisci's policy limits. Security refused. The case went to trial, and the jury awarded $101,000. Security paid its $10,000 limit and walked away, leaving Crisci personally responsible for the remaining $91,000.

The financial devastation was total. Crisci lost nearly everything she owned. She became severely depressed, attempted suicide, and was committed to a state mental hospital.

In Crisci v. Security Insurance Co. (1967) 66 Cal.2d 425, the California Supreme Court affirmed the $91,000 excess judgment against Security and then went further. The court awarded Crisci $25,000 for mental suffering. The reasoning was direct: among the considerations in purchasing liability insurance is "the peace of mind and security it will provide in the event of an accidental loss." When the insurer destroys that peace of mind through unreasonable conduct, emotional distress damages are a natural consequence.

Legal scholars would later describe Criscias marking "the dawn of the modern era of insurance bad faith and emotional distress damages." (Jeffrey E. Thomas, "Crisci v. Security Insurance Co.: The Dawn of the Modern Era," SSRN Paper No. 1017087.) It established that the harm from bad faith is not purely financial — it is deeply personal, and the law should recognize that.

The Tort Is Born: Gruenberg v. Aetna Insurance Co. (1973)

Comunale and Crisci dealt with third-party claims — situations where the insurer failed to protect its insured from liability to someone else. But what about first-party claims — where the policyholder is the one making the claim, seeking payment for their own loss?

Before 1973, first-party bad faith barely existed as a concept. If your homeowner's insurer denied your fire claim, you could sue for breach of contract and recover the policy benefits. But you could not sue in tort. You could not recover emotional distress. And you could not seek punitive damages to punish the insurer for its conduct.

Gruenberg v. Aetna Insurance Co. (1973) 9 Cal.3d 566 changed that permanently.

The facts were appalling. A bar and restaurant owner filed a property insurance claim after fire damage. His insurers allegedly implied to law enforcement that he had a motive to commit arson, triggering criminal charges. The criminal investigation prevented the insured from attending the examination under oath required by his policy. The insurers then denied his claim on the ground that he had failed to submit to the examination — an examination he could not attend because of the criminal charges the insurers themselves had helped instigate.

The California Supreme Court held that the insured had stated a cause of action in tortagainst the insurance companies for breach of their implied duty of good faith and fair dealing. The court explicitly stated that the duty of an insurer to act in good faith in handling third-party claims against the insured, and the duty in handling its own insured's first-party claim, were merely "two different aspects of the same duty."

This was the moment first-party bad faith became an independent tort in California. After Gruenberg, policyholders could sue their own insurer in tort — not just in contract — for unreasonably denying, delaying, or mishandling their own claims. The tort framework unlocked the full range of tort remedies: compensatory damages without contract limitations, emotional distress, and — critically — punitive damages. Since 1973, at least twenty-five other states have adopted some form of first-party bad faith tort, many citing Gruenberg directly.

One defense attorney's reflection, published thirty years later, captured the magnitude of the decision: "No single decision has been cited more often or had a greater impact on the obligations of insurance companies in their dealings with their insureds." (Butler Weihmuller Katz Craig LLP, "Reflections — Thirty Years After Gruenberg v. Aetna Ins. Co.")

Punitive Damages Enter the Picture: Neal v. Farmers Insurance Exchange (1978)

With Gruenberg establishing bad faith as a tort, the next question was inevitable: could a jury punish the insurer with punitive damages?

In Neal v. Farmers Insurance Exchange (1978) 21 Cal.3d 910, the answer was unequivocally yes. Frances Neal had sued Farmers for bad faith failure to pay uninsured motorist benefits. She died during the litigation, and her husband was substituted as plaintiff. The jury returned a verdict of more than $1.5 million.

The California Supreme Court used Neal to establish the framework for punitive damages in bad faith cases. Punitive damages are available under California Civil Code section 3294 when the insurer acts with malice, oppression, or fraud, and the court articulated a three-factor test for assessing whether an award is excessive:

• The reprehensibility of the defendant's conduct in light of the entire record.
• The relationship between the punitive damages award and the actual damages.
• The wealth of the defendant— "the wealthier the wrongdoing defendant, the larger the award of exemplary damages need be in order to accomplish the statutory objective."

This third factor was particularly significant. Insurance companies are among the wealthiest corporations in America. A punitive damages award that would devastate a small business is a rounding error to a major insurer. Neal recognized that the purpose of punitive damages — deterrence — requires that the award be large enough to actually be felt by the defendant. The Neal factors remain the governing standard for punitive damages in California bad faith cases today.

The Man Who Made It Real: William Shernoff and Egan v. Mutual of Omaha

The cases discussed above established the legal framework. But it was William M. Shernoff — a lawyer from Claremont, California — who turned that framework into a practical reality for policyholders across the country.

Shernoff was born in Chicago in 1937 and grew up in Crivitz, Wisconsin, a small town of roughly five hundred people about fifty miles north of Green Bay. His father was the town lawyer. His grandparents were Russian Jewish immigrants who ran pawnshops. He earned his law degree from the University of Wisconsin in 1962, served as a military defense lawyer in the U.S. Army, and then moved to California to practice personal injury law. In 1975, he founded his own firm, which became Shernoff Bidart Echeverria LLP — a firm that celebrated its fiftieth anniversary in 2025 and that has been called the birthplace of insurance bad faith law.

The case that made Shernoff's reputation — and the most-cited bad-faith decision in California history — was Egan v. Mutual of Omaha Insurance Co. (1979) 24 Cal.3d 809.

Michael Egan had received disability benefits from Mutual of Omaha for three prior back-related injuries arising out of his employment. When he submitted a fourth claim in May 1970 for a back injury suffered during the course of his employment, Mutual of Omaha denied coverage — reclassifying the condition as a non-covered illness rather than a covered accidental injury. The denial was reached without a fair investigation of the supporting medical evidence.

At trial, Shernoff obtained the insurer's internal claim file and demonstrated the depth of the home office's involvement in the denial — demolishing any attempt to characterize the mishandling as mere negligence by a rogue adjuster. The jury returned a verdict that included $45,600 in compensatory damages, $78,000 in general damages, and $5 million in punitive damages against Mutual of Omaha.

On appeal, the California Supreme Court's disposition was nuanced:

• Compensatory damages affirmed. The Court upheld the bad-faith liability finding and the compensatory and general damages award.
• Punitive damages reversed as excessive.The Court reversed the $5 million punitive damages award as “the result of passion and prejudice on the part of the jurors” — the award was more than forty times the compensatory damages and represented over two months of Mutual's entire 1973 net income.

What survives Egan as binding precedent are the legal holdings, not the $5 million dollar figure:

• An insurer can be liable for bad faith based on its failure to adequately investigatea policyholder's claim — an inadequate investigation can support liability where it caused the claim to be wrongly denied, delayed, or underpaid.
• The court addressed the "managing agent" question for the insurance context under the pre-1980 Civil Code § 3294. The California Legislature amended § 3294(b) in 1980 to add the express "officer, director, or managing agent" requirement, and the California Supreme Court in White v. Ultramar, Inc.(1999) 21 Cal.4th 563 substantially narrowed the test. Today's managing-agent analysis is the White test, not the broader Egan formulation. See our companion article on managing agent liability and punitive damages for the modern framework.

Shernoff later described the impact of Eganin characteristically dramatic terms: "There was no bad faith law before the Egancase. You couldn't really fight with insurance companies." The literal claim is an overstatement — Comunale, Crisci, Gruenberg, and Neal all preceded Egan and laid its foundation, as the chronology above reflects. But the practical impact Shernoff was describing is real: Egan consolidated the doctrine, made the punitive exposure unavoidable, and turned bad-faith litigation from an experimental theory into a working tool.

The Egan decision is one of the most-cited California Supreme Court bad-faith opinions and has been referenced in thousands of subsequent California and out-of-state cases. Shernoff went on to author or co-author four books, including Insurance Bad Faith Litigation (1984, Matthew Bender) — co-authored with Sanford M. Gage and Harvey R. Levine — which became the definitive legal treatise on the subject, and Payment Refused(1986, Richardson & Steirman), a consumer-oriented book recounting his landmark cases that is now held by the American Museum of Tort Law. He also co-founded, with Ralph Nader, the National Insurance Consumer Organization (NICO), and his firm has been a major contributor to Consumer Watchdog and Public Justice.

Shernoff's partners carried the work forward. Ricardo Echeverria became president-elect of the Consumer Attorneys Association of Los Angeles (CAALA). The firm secured an $86 million settlement after the MGM Grand Hotel fire, an $86.7 million verdict in American Samoa v. Affiliated FM Insurance (1995) — described at the time as the largest insurance bad faith judgment in California history — and played a role in the $5 billion Holocaust victim restitution settlement against Generali Insurance in 2002.

The firm became one of the most influential bad-faith litigators in California — building on the doctrinal foundation the California Supreme Court had been developing since Comunale, and shaping how the doctrine was applied in practice for the next several decades.

A Brief Rise and Fall: Third-Party Bad Faith Under Royal Globe

The story of bad faith law includes one dramatic detour worth understanding.

In Royal Globe Insurance Co. v. Superior Court (1979) 23 Cal.3d 880, the California Supreme Court held that Insurance Code section 790.03(h) — the Unfair Insurance Practices Act, which lists sixteen prohibited unfair claims settlement practices — created a private cause of actionagainst insurers. This meant that not just the insurer's own policyholder, but injured third-party claimants could sue the at-fault party's insurer directly for unfair claims practices and seek punitive damages.

The decision opened the floodgates. Third-party bad faith litigation exploded. The insurance industry was furious.

Nine years later, in Moradi-Shalal v. Fireman's Fund Insurance Companies (1988) 46 Cal.3d 287, the court reversed course. It overruled Royal Globe, concluding that the decision "was incorrectly decided, and that it has generated and will continue to produce inequitable results, costly multiple litigation, and unnecessary confusion unless overruled." Section 790.03(h) does not create a private cause of action.

After Moradi-Shalal, the primary vehicle for bad faith claims returned to the common-law implied covenant of good faith and fair dealing — a duty that runs between insurer and insured, not between the insurer and a third-party claimant. However, violations of section 790.03(h) remain relevant as evidenceof bad faith in cases brought under the implied covenant, even though they no longer support an independent cause of action. This distinction matters: a policyholder can still point to the insurer's violation of the statutory unfair practices list to prove that the insurer acted unreasonably, even though the statute itself does not give the policyholder a direct right to sue under it.

The Evolution: From Denial to Delay

One of the most important developments in bad faith law — and one of the least understood by policyholders — is the expansion of what constitutes bad faith conduct.

The Early Understanding: Bad Faith Required a Wrongful Denial

In the early decades of bad faith law, the paradigm case was straightforward: the insurer denied a covered claim, the insured proved the denial was unreasonable, and the insurer was liable for bad faith. If the insurer paid what it owed, there was no bad faith. The harm came from the refusal to pay.

The Middle Period: Underpayment as Bad Faith

Courts gradually recognized that bad faith could also arise from underpayment — where the insurer acknowledged the claim but paid far less than what was owed. An insurer that paid $20,000 on a $100,000 loss had not "denied" the claim in the traditional sense, but the underpayment could still constitute a breach of the implied covenant if the insurer's valuation was unreasonable and not supported by a genuine investigation. The same principles applied: the insurer had a duty to thoroughly and fairly investigate, to give at least as much consideration to the insured's interests as to its own, and to pay what was reasonably owed.

The Modern Understanding: Delay Alone Can Constitute Bad Faith

Modern California cases have recognized that unreasonable delay in payment can support bad-faith liability even where the insurer ultimately pays everything it owes, provided the delay was unreasonable and without proper cause — not a delay attributable to a genuine dispute or a reasonable ongoing investigation.

This principle reflects a simple reality that the courts eventually acknowledged: money has a time value, and people's lives do not pause while they wait for their insurance company. A homeowner who waits eighteen months for a claim payment that should have been issued in sixty days may lose their home to foreclosure, destroy their credit, exhaust their savings, suffer severe emotional distress, or face health consequences from living in a damaged structure. The fact that the insurer eventually writes the correct check does not undo any of that harm.

Under California law, the implied covenant of good faith requires the insurer to process claims promptly and without unreasonable delay. California's Fair Claims Settlement Practices Regulations (Title 10, California Code of Regulations, § 2695.7) impose specific timelines: the insurer must accept or deny the claim within forty days of receiving proof of claim, and payment must follow within thirty days of settlement. These regulatory timelines do not themselves create a private cause of action (Moradi-Shalal v. Fireman's Fund Ins. Co. (1988) 46 Cal.3d 287), but their violation is often material evidence in a common-law bad-faith action that the insurer acted unreasonably.

The practical consequence is significant: an insurer that pays policy limits eighteen months late, after the policyholder has suffered foreclosure, relocation expenses, credit damage, and emotional devastation, may be exposed to consequential damages as bad faith — subject to proof of causation, proximate-cause foreseeability, reasonable mitigation, and the genuine-dispute defense — even though it ultimately paid every dollar owed under the policy. The late tender of the correct amount does not eliminate tort liability for harm caused by an unreasonable delay; whether and to what extent any particular consequential damages are recoverable depends on the facts and proof.

This evolution reflects the courts' growing recognition that the purpose of insurance is not merely to provide eventual reimbursement. It is to provide timely financial protection when the policyholder needs it most. An insurer that withholds payment for months or years, forcing the policyholder to bear losses that the insurer was contractually obligated to cover, has breached its fundamental obligation — regardless of whether it eventually gets around to writing the check.

How Bad Faith Damages Are Calculated

When bad faith is established, the range of recoverable damages extends well beyond the policy benefits. Understanding these categories is essential for any policyholder evaluating whether a bad faith claim is worth pursuing.

Contract Damages

The starting point is always the policy benefits owed — the amount the insurer should have paid under the contract. This includes prejudgment interest running from the date payment should have been made.

Economic Losses Caused by the Insurer's Conduct

These are the real-world financial consequences of the insurer's bad faith. They can include lost business profits, additional interest charges on loans the policyholder was forced to take out, fees incurred because benefits were not timely paid, foreclosure costs, credit damage, relocation expenses, storage costs, and any other economic harm that was proximately caused by the insurer's unreasonable conduct.

Emotional Distress

Bad faith claims allow recovery for the anxiety, frustration, humiliation, and mental suffering caused by the insurer's conduct. There is an important procedural requirement: under Waters v. United Services Auto. Assn. (1996) 41 Cal.App.4th 1063, the plaintiff must prove some economic loss as a means of validating the seriousness of the emotional distress claim. But this threshold is easily met. Under Delos v. Farmers Group, Inc. (1979) 93 Cal.App.3d 642, the attorney fees incurred to obtain wrongfully withheld benefits (known as Brandt fees, discussed below) themselves constitute sufficient economic loss. And once economic loss is established, the plaintiff is entitled to recover for allemotional distress proximately caused by the insurer's bad faith, "without proving any causal link between the emotional distress and financial loss." Clayton v. United Services Auto. Assn. (1997) 54 Cal.App.4th 1158.

Brandt Fees (Attorney Fees)

Under Brandt v. Superior Court(1985) 37 Cal.3d 813, the insured can recover the attorney fees incurred to obtain the policy benefits that the insurer wrongfully withheld. The rationale is straightforward: if the insurer's tortious conduct forced the insured to hire a lawyer just to get the benefits they were already owed, the insurer should bear that cost. These fees are limited to the portion attributable to obtaining the rejected policy benefits (as opposed to fees spent litigating the bad faith claim itself).

Punitive Damages

When the insurer's conduct rises to malice, oppression, or fraud — proven by clear and convincing evidence — punitive damages are available under Civil Code § 3294. The Neal v. Farmersthree-factor test governs the amount: reprehensibility of conduct, relationship to compensatory damages, and wealth of the defendant. Punitive damages against a corporate defendant require proof that the bad-faith conduct was authorized or ratified by an "officer, director, or managing agent" of the insurer, per Civil Code § 3294(b). After Egan, the California Legislature amended § 3294(b) in 1980 to tighten the standard, and the California Supreme Court in White v. Ultramar, Inc. (1999) 21 Cal.4th 563 and Roby v. McKesson Corp. (2009) 47 Cal.4th 686 narrowed the test, requiring that the responsible employee possess "substantial independent authority and judgment" over "significant aspects" of corporate business.

For claims brought on behalf of senior citizens, disabled persons, or veterans alleging unfair or deceptive practices — including financial elder-abuse claims under Welfare & Institutions Code § 15600 et seq. and Unfair Competition Law claims under Business & Professions Code § 17200 arising from insurance conduct — Civil Code § 3345 authorizes the trier of fact to enhance certain statutorily authorized fines, penalties, or other punitive/deterrent remedies up to three times the amount otherwise available. Section 3345 is not a general trebling of common-law punitive damages in standard bad-faith cases; it is an enhancement of statutory punitive remedies in the narrow protected-class context.

Extra-Contractual Damages vs. Bad Faith: Understanding the Distinction

These two terms are often used interchangeably, and for most practical purposes the overlap is substantial. But they are not identical, and understanding the distinction matters.

Extra-contractual damages is the broader term. It refers to any damages recovered beyond what the insurer owed under the policy contract — that is, anything beyond the policy benefits themselves. Extra-contractual damages are the category of harm. Bad faith is the theory of liability that most commonly produces them.

Bad faith — breach of the implied covenant of good faith and fair dealing — is the primary tort theory that generates extra-contractual damages in insurance disputes. But it is not the only one. Several other legal theories can also produce damages beyond the policy benefits:

Fraud and promissory fraud. California cases including Wetherbee v. United Insurance Co. (1968) 265 Cal.App.2d 921 and Miller v. National American Life Insurance Co.(1976) 54 Cal.App.3d 331 have recognized that an insurer's misrepresentations about coverage may, on the facts of a particular case, support a separate fraud claim. Plaintiff-side counsel sometimes evaluate a fraud theory because fraud itself satisfies the requirements of Civil Code § 3294 for punitive damages without separate proof of malice or oppression. Whether a fraud claim is viable in any specific case depends heavily on the facts.

Intentional infliction of emotional distress.Where the insurer's behavior rises to “extreme and outrageous” conduct, an IIED claim has sometimes been pleaded alongside bad faith. The IIED standard is higher than the bad-faith unreasonableness standard.

Unfair Competition Law (Business & Professions Code § 17200). California's UCL prohibits unlawful, unfair, or fraudulent business practices. California cases including State Farm Fire & Casualty Co. v. Superior Court (1996) 45 Cal.App.4th 1093 have addressed when and how broadly UCL claims arising from insurance conduct can support discovery and remedies; the scope and admissibility of any pattern-and-practice evidence in a particular case is fact-specific and a question for counsel.

Violations of Insurance Code § 790.03(h). After Moradi-Shalal, these are not independently actionable but may serve as evidence of unreasonable conduct in a common-law bad-faith action.

Which combination of theories to plead in any specific case is the policyholder attorney's decision based on the facts; this section is a descriptive overview, not a recommendation.

The Realistic Perspective: Why Bad Faith Is Hard to Win

Everything described above — the legal framework, the categories of damages, the landmark cases — might suggest that any policyholder who has been mistreated by an insurance company can walk into court and collect a multimillion-dollar verdict. That is not reality.

Bad faith law exists. Bad faith happens. But proving bad faith in litigation, surviving the insurer's inevitable motion for summary judgment, and persuading a jury to award meaningful damages are three entirely different challenges. Policyholders and their attorneys need to understand all of them.

The Motion for Summary Judgment: The Insurer's Most Powerful Weapon

In virtually every bad faith case that reaches litigation, the insurer will file a motion for summary judgment (MSJ) seeking to have the bad faith claim dismissed before it ever reaches a jury. This motion argues that, as a matter of law, no reasonable jury could find that the insurer acted in bad faith — and therefore the claim should be thrown out.

The MSJ is not a formality. It is the insurer's primary defense strategy, and it succeeds far more often than policyholders expect.

The Genuine Dispute Doctrine: The Insurer's Shield

The insurer's most potent argument on summary judgment is the genuine dispute doctrine. This defense, which emerged in Opsal v. United Services Automobile Ass'n (1991) 2 Cal.App.4th 1197 and was significantly expanded in Chateau Chamberay Homeowners Ass'n v. Associated International Insurance Co. (2001) 90 Cal.App.4th 335, holds that an insurer cannot be found liable for bad faith if it maintained a genuine, good-faith dispute with its insured over the interpretation of the policy or the facts underlying the claim.

The logic sounds reasonable on its face: if reasonable minds could disagree about whether the claim was covered or how much was owed, the insurer's decision to dispute the claim should not be treated as bad faith, even if the insurer ultimately turns out to be wrong. Being wrong is not the same as acting in bad faith.

Plaintiff-side commentators argue the doctrine has been over-applied in practice. The label “expert safe harbor” — coined by plaintiff-bar critics, not by the courts — describes what these commentators see as a tendency of trial courts to defer to the insurer's expert on summary judgment, even when the opinion is contestable. The California courts themselves have not adopted the label or treated the rule as a categorical safe harbor; the test still requires that the insurer's reliance on the expert be both reasonable and in good faith. As one Advocate Magazine article observed, "since 2001, despite hundreds if not thousands of attempts, an insured has yet to demonstrate an expert's 'bias' and prevail" against the expert safe-harbor defense in a published California appellate decision. ("Bad Faith, Genuine Dispute, and the 'Expert Safe-Harbor,'" Advocate Magazine, September 2017.) Whether that pattern reflects the law's correct application or its misapplication is contested between the plaintiff and defense bars.

The leading formulation of the doctrine, from Chateau Chamberay, states it bluntly: "the existence of a genuine dispute means no liability for bad faith even though the insurer might be liable for breach of contract." That decision — which has been cited many hundreds of times — did articulate examples of conduct that could justify submission to a jury rather than dismissal on summary judgment:

Immediately after that list, the court added a footnote that has become one of the most important sentences in California insurance bad-faith law:

Subsequent California cases and commentary have added other categories of conduct that defeat the defense (failure to conduct a thorough investigation, dishonest expert selection, employee dishonesty during depositions, and expert opinions that are themselves unreasonable). Those additional categories are real, but the practitioner should cite them to the cases that articulate them, not attribute them to Chateau Chamberay's list. Proving any of these requires substantial evidence and litigation that is generally beyond what a public adjuster can do unsupported.

The only California Supreme Court decision directly addressing the genuine dispute doctrine is Wilson v. 21st Century Insurance Co.(2007) 42 Cal.4th 713. In that case, Reagan Wilson, a twenty-one-year-old woman injured by a drunk driver, sought $100,000 in uninsured motorist benefits. Her insurer rejected the claim, arguing she had only soft-tissue injuries with preexisting degenerative disc disease — ignoring her treating physician's contrary opinion. The Supreme Court reversed summary judgment, holding: "The genuine dispute rule does not relieve an insurer from its obligation to thoroughly and fairly investigate, process and evaluate the insured's claim." An insurer cannot focus only on facts supporting denial while ignoring contradictory evidence.

Wilson was an important corrective. But it did not eliminate the genuine dispute doctrine — it reaffirmed it while establishing that the defense has limits. The practical reality remains that many bad faith claims are dismissed on summary judgment, and the genuine dispute doctrine is the reason.

What This Means for Policyholders

The existence of bad faith law does not mean that every policyholder who has been treated unfairly will recover bad faith damages. Many — perhaps most — bad faith claims are either settled for their contract value alone (the policy benefits without any bad faith premium) or are dismissed on summary judgment before trial. The insurer's MSJ burden is not insignificant, but neither is the policyholder's burden in opposing it.

A policyholder pursuing a bad faith claim needs to understand several realities:

Bad-faith disputes are heavily defended.Where the carrier's exposure on a bad-faith theory exceeds the policy benefits, insurers typically deploy experienced coverage counsel and invest in extensive expert and discovery work.

Documentation matters. The contemporaneous record built during the claim — the claim file, correspondence, adjuster notes, timeline — is what frames any later legal analysis. Detailed documentation of interactions, missed deadlines, broken promises, and harm suffered during delay generally produces a stronger record than uncontemporaneous recollection.

The genuine dispute doctrine has limits. Under Wilson, the test focuses on whether the insurer's position was reached reasonably and in good faith through a thorough and fair investigation. Evidence the insurer ignored contradictory evidence, relied on questionable experts, failed to investigate obvious leads, or adopted an unreasonable interpretation has been treated by California courts as relevant. The application is fact-specific and a question for counsel.

The factual record is built during the claim, not after.Plaintiff-side counsel routinely note that the strongest bad-faith records are the ones built in real time, with each unreasonable response or missed deadline captured in writing — the ongoing displacement, mounting debt, or untreated damage that demonstrates the insurer's conduct caused real injury.

How This Benefits Homeowners and Property Owners

Despite the challenges of winning a bad faith case in litigation, the existence of bad faith law profoundly benefits every policyholder — including those who never file a lawsuit.

The Deterrent Effect

Bad faith law's greatest benefit is not in the courtroom. It is in the claims department. Insurance companies know that unreasonable claim handling can expose them to damages far exceeding the policy limits. Every adjuster, every supervisor, every claims manager operates with the knowledge that if they push too hard, delay too long, or deny without a reasonable basis, the insured may pursue a bad faith claim that threatens emotional distress damages, attorney fees, and punitive damages.

This knowledge changes behavior. Not perfectly — insurers still underpay, still delay, still deny claims that should be paid — but far less egregiously than they would in a world without bad faith consequences. The tort of bad faith is the reason insurance companies have compliance departments, fair claims settlement practices manuals, and internal deadlines for claim resolution. Remove the threat of bad faith liability, and those guardrails disappear.

Leverage in Negotiations

For homeowners and building owners dealing with a disputed claim, bad-faith law provides leverage that did not exist before 1973. When the policyholder's attorney raises the possibility of a bad-faith claim — supported by evidence of unreasonable delay, inadequate investigation, or lowball offers contradicted by the insurer's own evidence — the carrier's exposure calculation changes. The dispute is no longer weighing the cost of paying the claim against a breach-of-contract action; it includes the potential tort exposure subject to the constitutional ceiling discussed above. Raising the legal theory of bad faith is attorney work, but the factual record supporting it is often built during the claims process by the policyholder, the policyholder's public adjuster, and counsel.

The factual record is most powerful when carefully documented during the claim. A detailed chronology showing the insurer's missed regulatory deadlines, ignored evidence, reliance on questionable experts, or shifting denial reasons is part of what an attorney evaluates when assessing the bad-faith side of the case and what an attorney may use in negotiation with the carrier.

Protection for the Most Vulnerable

Bad faith law disproportionately protects the policyholders who need it most: those whose financial survival depends on timely claim payment. A large commercial insured with deep pockets can absorb a delayed payment and pursue litigation at its leisure. A homeowner displaced by a fire, living in a hotel, watching their savings evaporate while the insurer investigates — that homeowner faces catastrophic harm from delay. The recognition that delay itself can constitute bad faith, even when the insurer ultimately pays, is what gives that homeowner a legal remedy for the very real harm they suffered while waiting.

The Continuing Evolution

Bad faith law is not static. It continues to evolve as courts encounter new patterns of insurer misconduct and new arguments from both sides.

The genuine dispute doctrine remains the most contested battleground. Plaintiff-side attorneys, writing in publications like the Advocate Magazine and Plaintiff Magazine, have argued that the doctrine has expanded far beyond its original scope and now functions as a near-automatic shield for any insurer that retains a supportive expert. ("The 'Genuine Dispute' Defense: Overused and Abused," Plaintiff Magazine.) Defense attorneys counter that the doctrine is a necessary check on frivolous bad faith claims that attempt to convert honest disagreements into tort liability.

The Wilson decision remains the most significant recent development — a Supreme Court ruling that the genuine dispute doctrine does not relieve the insurer of its duty to investigate thoroughly and fairly. But Wilson is now nearly twenty years old, and the lower courts have applied it with varying degrees of rigor. The tension between the genuine dispute defense and the duty to investigate is unlikely to be fully resolved anytime soon.

California courts have recognized bad-faith liability in a variety of contexts beyond the classic wrongful-denial paradigm: unreasonable policy interpretation, failure to inform the insured of available benefits, misrepresentation of policy terms, unreasonable demands for documentation, and — as discussed — unreasonable delay in the absence of any denial at all. Whether new categories will emerge depends on how courts treat future cases as patterns of insurer conduct develop.

Conclusion

The tort of bad faith was not discovered in a statute or derived from ancient legal principles. It was invented — case by case, verdict by verdict — by lawyers who recognized that the relationship between an insurer and its policyholder is unlike any other commercial relationship, and that the traditional contract remedy of simply paying what was owed was grotesquely inadequate to address the harm that insurance companies could inflict.

William Shernoff, standing before a jury in 1974, arguing that Mutual of Omaha owed Michael Egan more than the disability benefits it had withheld — that it owed him for the suffering its conduct had caused and that a jury should punish the company to deter it from doing the same thing to others — was making an argument that had essentially never been made before. The jury agreed. The California Supreme Court agreed. And the law changed.

Today, the implied covenant of good faith and fair dealing, the availability of emotional distress damages, the right to Brandt fees, and the possibility of punitive damages are part of the fabric of insurance law in California and across the country. They exist because a handful of lawyers in the 1960s and 1970s — building on the foundation that the California Supreme Court laid in Comunale — insisted that insurance companies should be accountable for how they treat the people who trust them.

Whether those legal tools actually deliver justice in any given case depends on the facts, the evidence, the skill of counsel, and the willingness of judges to let bad faith claims reach a jury. The genuine dispute doctrine, the motion for summary judgment, and the sheer cost of litigation ensure that bad faith law is not a guarantee of recovery. It is a possibility — a powerful one, but one that requires preparation, documentation, and the realistic understanding that the existence of a legal right and the ability to enforce it are two very different things.

For homeowners and property owners, the lesson is this: an insurance company's obligation to its insured goes beyond the dollar amount printed on the policy. The insurer owes a duty to handle claims fairly, promptly, and in good faith. Where that duty is breached, California law may provide remedies in addition to the policy benefits — though whether and how those remedies apply to a specific claim is a question for a licensed California attorney. The strength of any such remedy depends on the contemporaneous evidence built during the claims process and the realistic assessment of the road ahead.

Key Cases Referenced

• Comunale v. Traders & General Insurance Co. (1958) 50 Cal.2d 654
• Crisci v. Security Insurance Co. (1967) 66 Cal.2d 425
• Gruenberg v. Aetna Insurance Co. (1973) 9 Cal.3d 566
• Neal v. Farmers Insurance Exchange (1978) 21 Cal.3d 910
• Egan v. Mutual of Omaha Insurance Co. (1979) 24 Cal.3d 809
• Royal Globe Insurance Co. v. Superior Court (1979) 23 Cal.3d 880
• Brandt v. Superior Court (1985) 37 Cal.3d 813
• White v. Western Title Insurance Co. (1985) 40 Cal.3d 870
• Moradi-Shalal v. Fireman's Fund Insurance Companies (1988) 46 Cal.3d 287
• Opsal v. United Services Automobile Ass'n (1991) 2 Cal.App.4th 1197
• Waters v. United Services Auto. Assn. (1996) 41 Cal.App.4th 1063
• Clayton v. United Services Auto. Assn. (1997) 54 Cal.App.4th 1158
• White v. Ultramar, Inc. (1999) 21 Cal.4th 563
• Chateau Chamberay Homeowners Ass'n v. Associated International Insurance Co. (2001) 90 Cal.App.4th 335
• Wilson v. 21st Century Insurance Co. (2007) 42 Cal.4th 713
• Roby v. McKesson (2010) 47 Cal.4th 686

Further Reading

• William M. Shernoff, Sanford M. Gage, and Harvey R. Levine, Insurance Bad Faith Litigation (Matthew Bender, 1984)
• William M. Shernoff and Thelma O'Brien, Payment Refused (Richardson & Steirman, 1986)
• Jeffrey E. Thomas, "Crisci v. Security Insurance Co.: The Dawn of the Modern Era of Insurance: Bad Faith and Emotional Distress Damages," SSRN Paper No. 1017087
• Butler Weihmuller Katz Craig LLP, "Reflections — Thirty Years After Gruenberg v. Aetna Ins. Co."
• "Bad Faith, Genuine Dispute, and the 'Expert Safe-Harbor,'" Advocate Magazine, September 2017
• "Understanding and Opposing the 'Genuine Dispute' Doctrine," Advocate Magazine, September 2019
• "Does Egan's 'Managing Agent' Rule Survive 40 Years Later?," Advocate Magazine, September 2019
• "Insurer Misconduct: Is It Fraud or Just Bad Faith?," Advocate Magazine, August 2014
• "The 'Genuine Dispute' Defense: Overused and Abused," Plaintiff Magazine
• "Emotional-Distress Damages in Insurance Bad-Faith Cases," Plaintiff Magazine
• CACI Jury Instructions, Series 2300 (Insurance Litigation)