Third-Party Bad Faith Actions Return To California

Vandenberg v. The Superior Court of Sacramento County, No. S067115 (9th Cir. June 30, 1999)

Governor Gray Davis has signed into law the "Fair Insurance Responsibility Act of 2000," giving third-party plaintiffs the right to sue a tortfeasor's insurance company for bad faith in limited situations.

Here are the highlights:

  • The third-party plaintiff's bad faith claim must arise from bodily injury + or property damage resulting from an incident involving a motor vehicle.
  • "Insurer" is defined to include the third-party administrator of a self-funded liability program, but not the self-funded program itself.
  • The third-party claimant may bring an action for bad faith for commission of any unfair claims settlement practice specified in paragraphs (1), (2), (3), (5), (8), (9), (10), (11), (12), (13), (14) or (15) of subdivision (h) of Insurance Code section 790.03 as it relates to a third-party claimant.
  • The fact that an insurer does not settle a claim is not necessarily proof of bad faith, and an insurer shall not be considered to have violated its obligation to act in good faith because of an insurer's "honest mistake in judgment in connection with the settlement of the claim."
  • To recover, the third-party claimant must obtain in the underlying action either (1) a final judgment after trial, (2) a judgment after default, or (3) an arbitration award resulting from the contractual arbitration clause, and the judgment or award must exceed the amount of the third-party claimant's final written settlement demand made before trial, entry of default, or arbitration.
  • Emotional distress claims against the insured fall within the Act only if there are actual physical manifestations of such emotional distress.
  • When the third-party's claim against the insured does not exceed $50,000, or where applicable insurance does not exceed $50,000, a request by the insurer for binding arbitration, or the insurer's agreement to participate in binding arbitration, creates a presumption that the insurer acted in good faith.
  • The Act applies only to accidents, events, occurrences, or losses that occur on or after January 1, 2000, and to conduct by any insurer, its agents or employees concerning accidents, events, occurrences, or losses that occur on or after January 1, 2000.

The Act imposes important deadlines for insurers in responding to third-party claimants:

  • A claimant's final written settlement demand is deemed rejected if not responded to within 30 days.
  • An insurer "shall respond" within 10 days to a claimant's request for insurance coverage policy limits.
  • A third-party claimant's request to arbitrate is deemed rejected if not responded to within 30 days.
  • An insurer has 90 days from receipt of a settlement demand not exceeding $50,000 to request arbitration.
  • If applicable policy limits do not exceed $50,000, the insurer has 150 days after service of the complaint to request arbitration.

The Act raises many questions about what insurers can do to avoid bad faith actions. The Act may create some new dangers. We will be providing a fuller analysis of the Act in the coming weeks. In the meantime, insurers should pay close attention to those paragraphs of section 790.03(h) identified in the Act as a first step to protecting your interests under this new legislation.