What counts as insurance bad faith, and what doesn’t

Where the duty comes from

One of the early cases is Gruenberg v. Aetna Insurance Co., decided by the California Supreme Court in 1973 in a dispute over fire policies. The court said that “in every insurance contract there is an implied covenant of good faith and fair dealing,” and that “when the insurer unreasonably and in bad faith withholds payment of the claim of its insured, it is subject to liability in tort.” The court described a breach of that duty as sounding in both contract and tort, which is why bad faith is treated separately from an ordinary dispute over what the policy pays. Autoloss is independent and is not affiliated with or endorsed by any insurer; companies are named here only because the courts named them.

Other states have recognised similar duties, each with its own test. The common thread is that the duty arises from the insurance contract, so it runs to the insured.

Policyholders and third-party claimants

That matters for diminished value, because many claims are made against the other driver’s insurer. In that case you are a third-party claimant. The insurer owes contractual duties to its own policyholder, the at-fault driver, and your claim rests on that driver’s responsibility under your state’s law. First-party vs third-party diminished value explains the difference.

California shows how this plays out. In Royal Globe (1979) its Supreme Court had allowed third-party claimants to sue insurers under the state’s unfair practices statute. In Moradi-Shalal v. Fireman’s Fund (1988) the court overruled that decision for later cases and held that the legislature had not created a private cause of action for violations of that statute. It noted that courts in 17 of the 19 other states that had considered the question had refused to recognise one. It also said administrative remedies and common law claims, such as fraud, remain available.

States with a statutory remedy

Some legislatures have created a right to sue in a statute. Two examples, with exactly who can use them:

• Washington: Insurance Fair Conduct Act, RCW 48.30.015. A “first party claimant” who is unreasonably denied a claim for coverage or payment of benefits may sue in superior court for actual damages, costs and reasonable attorneys’ fees. The court may increase the total damages to up to three times actual damages, and violations of listed claim-handling rules also count. A first party claimant is someone asserting a right to payment as a covered person under the policy, so a driver claiming against someone else’s insurer is not one. Twenty days before filing, the claimant must give written notice to the insurer and the insurance commissioner.
• Florida: §624.155. The statute says “any person” damaged by listed violations or acts may bring a civil action against an insurer. The listed acts include not attempting in good faith to settle claims when, under all the circumstances, the insurer could and should have done so. The department and the insurer must first get 60 days’ written notice on the Department of Financial Services form, and no action lies if the damages are paid or the problem corrected within that time. The statute also says that, in any bad faith action, mere negligence alone is not enough. Its notice rules mention third-party claimants, but how it applies to a given claim is a question for a Florida attorney.

Texas takes a narrower route for late payment: when an insurer liable for a first-party claim does not meet the deadlines in Insurance Code ch. 542, the policyholder can recover interest and attorney’s fees (§542.060). Insurer not responding or delaying sets out those deadlines.

What usually is not bad faith

A disagreement over how much is owed is not bad faith by itself. Two diminished value cases make the point, and in both the policyholder lost the bad faith claim.

• Hyden v. Farmers Insurance Exchange (Colo. App. 2000). The court revived the policyholder’s contract claim for diminished value but affirmed judgment for Farmers on bad faith. To prove bad faith in Colorado, it said, a plaintiff must show the insurer acted unreasonably and with knowledge of or reckless disregard of its unreasonableness. Evidence that Farmers “may have acted unreasonably” was not enough without evidence on the second part, and Farmers had paid $16,868.96 toward the repair.
• Davis v. Farmers Insurance Co. of Arizona (N.M. Ct. App. 2006). The court held that an insurer acting in accordance with the express terms of its policy does not breach the implied covenant. Choosing the least expensive repair option the policy allowed, and not explaining that diminished value might be claimable, was not a breach.

The Farmers guide covers both cases. Neither describes how any insurer handles claims today. Each shows the standard a court applied to the facts before it.

Conduct the rules address

The NAIC’s model unfair claims act lists practices regulators treat as unfair. They include misrepresenting relevant facts or policy provisions, failing to acknowledge communications with reasonable promptness, refusing to pay without a reasonable investigation, not attempting in good faith to settle claims where liability has become reasonably clear, and failing to explain the basis for a denial or compromise offer. These are standards for regulators. Whether any of them supports a lawsuit depends on your state and on whether you are the policyholder. A complaint to the regulator is open to anyone; how to file an auto insurance complaint explains it.

When to talk to an attorney

Consider speaking to an attorney licensed in your state if:

• Your own insurer has denied a claim and will not give a reason in writing
• A claim has gone unanswered despite dated written follow-ups
• You are thinking about a statutory notice such as Washington’s 20-day notice or Florida’s 60-day notice, which have strict requirements
• Your filing deadline is getting close; property damage deadlines by state lists them

Autoloss is not a law firm and cannot advise on whether you have a bad faith claim. It is not a public adjuster and does not negotiate with insurers. What it provides is evidence of the amount: a diminished value appraisal prepared from your repair records and comparable vehicles, which you or your attorney can use. We answer the insurer’s questions about how the report was prepared. Why insurers deny or reduce diminished value claims covers the reasons adjusters commonly give. This page is general information, not legal advice, and rules vary by state.