When a policyholder files a claim under his or her own insurance policy, the insurer has certain obligations to the insured and has a duty to act with good faith in handling that claim. This is a very different situation from when a person files a personal injury lawsuit (for example, in a case involving medical malpractice or a car accident) and there is an insurance company for the defendant involved. The defendant's insurance company owes no duty to the plaintiff; it's only obligations are towards the insured defendant. This article provides a brief overview of the duties that insurance companies have when handling claims.
Unfair Claim Settlement Practices
Generally speaking, insurance companies have certain responsibilities when handling claims made by the people they insure. Insurance companies must act in good faith when handling a claim; thoroughly investigate claims; respond to claims promptly; pay or deny claims within a reasonable time; and if denying a claim, provide a written explanation of the reasons for the denial.
Section 790.03(h) of the California Insurance Code sets forth a list of sixteen things that constitute unfair claim settlement practices. These practices include:
- Misrepresenting facts or policy provisions to claimants
- Failing to respond to communications about claims within a reasonable time
- Failing to follow reasonable standards for prompt investigation and claim processing
- Failing to allow or deny claims within a reasonable period of time
- Failing to act in good faith to reach prompt, fair and equitable settlements where liability is reasonably clear
- Compelling policyholders to sue to recover insurance benefits by offering substantially less to settle a claim than what is ultimately recovered
- Trying to settle claims for less than what a reasonable person would believe he or she was entitled to because of advertising material that accompanied the application
- Trying to settle claims based on applications that were changed without the knowledge or consent of the insured
- Failing to tell insureds or beneficiaries of coverage under which payment was made
- Letting insureds know that it is the insurer's practice of appealing arbitration awards in favor of insureds as a way to compel the insured to accept a lower settlement
- Delaying the investigation or payment of claims by requiring an insured to submit a preliminary claim report plus a formal proof of loss that contains substantially the same information
- Failing to promptly settle claims where liability is clear as a way to influence the insured to settle a claim under another portion of the policy
- Failing to reasonably explain the denial of a claim in a prompt manner
- Telling an insured not to retain an attorney
- Misleading an insured about the applicable statute of limitations
- Delaying payment of benefits for services provided with respect to AIDS for more than 60 days after receiving a claim if the delay is to investigate whether the condition preexisted the coverage
Bad Faith Lawsuits
If an insurance company acts in bad faith or engages in conduct that constitutes an unfair settlement practice, the insured can bring a lawsuit against the insurance company. In Wilson v. 21st Century Ins. Co., 42 Cal.4th 713, 171 P.3d 1082 (Cal., 2007), a recent case involving first party insurance bad faith in the automobile insurance context, the California Supreme Court reversed a grant of summary judgment for the insurance company, finding that there was an issue of fact as to whether the insurance company acted unreasonably and in bad faith in denying the plaintiff's claim. In Wilson, the insurance company eventually did pay the plaintiff's claim two years after initially denying her benefits.
In addition to filing a bad faith lawsuit, people who are having problems dealing with their insurance companies can file a complaint with the California Insurance Commissioner. Before filing such a complaint, the insured should try to resolve the issue with the insurance company. If the insured is unsuccessful in dealing with an insurance company that is not upholding obligations, then he or she should contact the California Insurance Commissioner. The California Insurance Commissioner can help individuals with issues such as misrepresentations made by insurance agents; cancellations of policies that violate the law; wrongful delays in paying or denying a claim; and improper denials of claims.
Obligations Only to Insureds
As stated above, insurance companies owe no duties to third parties. Their obligations to act in good faith and avoid unfair settlement practices extend only to their insureds. For example, suppose a person who is injured in a car accident sues the driver who caused the accident and wins a damages award. If the person who caused the accident has car insurance, it is likely that the insurance company will be involved in paying the award. That insurance company has no obligations to act in a certain way in its interactions with the injured person. The insurance company only owes duties to the insured party. Generally, the insurance company will provide that person an attorney.