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.

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. 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.” 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 Criscidealt 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.”

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. The California Supreme Court established 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:

1. The reprehensibility of the defendant’s conduct in light of the entire record.
2. The relationship between the punitive damages award and the actual damages.
3. 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. The insurer need not have outright denied the claim — a biased or inadequate investigation can support bad-faith 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 — requiring the employee to “exercise substantial independent authority and judgment in their corporate decisionmaking so that their decisions ultimately determine corporate policy.” 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 has been cited approximately eight thousand times in appellate arguments across the United States. Shernoff went on to author or co-author four books, including Insurance Bad Faith Litigation (1984, Matthew Bender) — 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.

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

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) 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.

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.” 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. However, violations of section 790.03(h) remain relevant as evidence of bad faith in cases brought under the implied covenant, even though they no longer support an independent cause of action.

The Evolution: From Denial to Delay

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.

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 could still breach the implied covenant if the valuation was unreasonable and not supported by a genuine investigation.

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. 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, or suffer severe emotional distress. The fact that the insurer eventually writes the correct check does not undo any of that harm; bad-faith liability fills the gap that contract damages alone cannot.

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. Although Moradi-Shalal v. Fireman's Fund Ins. Co.(1988) 46 Cal.3d 287 bars insureds from suing directly under Insurance Code § 790.03 or the implementing regulations, violations of those timelines remain admissible as evidence that the insurer’s conduct was unreasonable in a common-law bad-faith action.

How Bad Faith Damages Are Calculated

Contract Damages

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

Economic Losses

The real-world financial consequences of the insurer’s bad faith: lost business profits, additional interest charges, fees incurred because benefits were not timely paid, foreclosure costs, credit damage, relocation expenses, storage costs, and any other economic harm proximately caused by the insurer’s unreasonable conduct.

Emotional Distress

Bad faith claims allow recovery for anxiety, frustration, humiliation, and mental suffering. Under Waters v. United Services Auto. Assn. (1996) 41 Cal.App.4th 1063, the plaintiff must prove some economic loss to validate the emotional distress claim. Under Delos v. Farmers Group, Inc. (1979) 93 Cal.App.3d 642, Brandt fees themselves constitute sufficient economic loss. Once economic loss is established, recovery extends to all emotional distress proximately caused by bad faith. 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 attorney fees incurred to obtain the policy benefits the insurer wrongfully withheld. If the insurer’s tortious conduct forced the insured to hire a lawyer just to get benefits already owed, the insurer bears that cost.

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 Nealthree-factor test governs the amount, subject to the federal due-process constitutional limits discussed below. Punitive damages against a corporate defendant require proof that the bad-faith conduct was authorized or ratified by an “officer, director, or managing agent” per Civil Code § 3294(b) and White v. Ultramar (1999) 21 Cal.4th 563.

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

Extra-contractual damagesis the broader term — any damages beyond the policy benefits. Bad faith is the theory of liability that most commonly produces them, but plaintiff-side counsel sometimes evaluate other theories alongside bad faith depending on the facts:

• Fraud and promissory fraud.Where the insurer’s misrepresentation about coverage rises to the level of actionable fraud, counsel may include a fraud claim. Fraud has its own statutory punitive-damages framework under Civil Code § 3294.
• Intentional infliction of emotional distress.Where the insurer’s behavior is sufficiently extreme and outrageous, an IIED claim is sometimes available alongside bad faith. The IIED standard is higher than bad faith.
• Unfair Competition Law (Business & Professions Code § 17200). UCL claims have been used in some insurance contexts where the conduct constitutes an unfair business practice; whether and how broadly they support company-wide discovery is fact- and judge-specific.
• Violations of Insurance Code § 790.03(h). No longer an independent cause of action after Moradi-Shalal, but admissible as evidence of unreasonable conduct in a common-law bad-faith action.

Which theories to plead, and in what combination, is a question for the policyholder’s attorney based on the specific facts of the case.

The Realistic Perspective: Why Bad Faith Is Hard to Win

Proving bad faith in litigation, surviving the insurer’s motion for summary judgment, and persuading a jury to award meaningful damages are three entirely different challenges.

The Genuine Dispute Doctrine

The insurer’s most potent defense is the genuine dispute doctrine, from Opsal v. United Services Automobile Ass’n (1991) 2 Cal.App.4th 1197, expanded in Chateau Chamberay Homeowners Ass’n v. Associated International Insurance Co.(2001) 90 Cal.App.4th 335. If the insurer maintained a genuine, good-faith dispute over coverage or the facts, it cannot be liable for bad faith — even if it turns out to be wrong.

Plaintiff-bar commentators have labeled one application of the doctrine the “expert safe harbor” — arguing that the rule, as it has sometimes been applied, allows insurers to defeat bad-faith liability simply by retaining an expert whose report supports the carrier’s position. The label is critical commentary, not a phrase the California courts have adopted. The actual test continues to require that the insurer’s reliance on the expert be both reasonable and in good faith.

The only California Supreme Court decision directly addressing the doctrine is Wilson v. 21st Century Insurance Co.(2007) 42 Cal.4th 713, which held: “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.

What This Means for Policyholders

• 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.
• Documentation matters.The contemporaneous claim file, correspondence, adjuster notes, and timeline are the materials that frame any later legal analysis — whether the question is settlement leverage or summary-judgment posture.
• The genuine dispute doctrine has limits.California cases have recognized that the doctrine does not protect an insurer whose investigation was inadequate, whose reliance on experts was unreasonable, or whose conduct ignored contradictory evidence — though the application is fact-specific and ultimately 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.

How This Benefits Homeowners and Property Owners

The Deterrent Effect

Bad faith law’s greatest benefit is not in the courtroom — it is in the claims department. Every adjuster operates knowing that unreasonable handling can expose the carrier to damages far exceeding policy limits. This knowledge changes behavior. The tort of bad faith is the reason insurance companies have compliance departments and internal deadlines.

Leverage in Negotiations

When a 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.

Protection for the Most Vulnerable

Bad faith law disproportionately protects policyholders whose financial survival depends on timely claim payment. A homeowner displaced by a fire, watching savings evaporate while the insurer investigates, faces catastrophic harm from delay. The recognition that delay itself can constitute bad faith gives that homeowner a legal remedy.

Conclusion

The tort of bad faith was invented — case by case, verdict by verdict — by lawyers who recognized that the traditional contract remedy was grotesquely inadequate to address the harm that insurance companies could inflict. William Shernoff, standing before a jury in 1974, 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 insisted that insurance companies should be accountable for how they treat the people who trust them.

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.

This article is for informational purposes only and does not constitute legal advice. California Insurance Code § 15002 expressly provides that the Public Adjuster Act does not authorize the practice of law — pleading, litigation strategy, choice of legal theories, and bad-faith claim filing are attorney work. A public adjuster’s role is to adjust the claim and document the carrier’s conduct; an attorney’s role is the legal claim. Policyholders facing disputed insurance claims should consult with both a licensed public adjuster and an attorney experienced in insurance coverage law as the situation warrants.