The Development of the Tort of Bad Faith

Some of the Most Important Cases Creating the Tort of Bad Faith

In Comunale v. Traders & Gen. Ins. Co., 50 Cal. 2d 654 (1958), the insurance company wrongfully refused to defend its insured who had been sued in the underlying action for damages arising out of an automobile accident. It also refused to conclude the suit after receiving an offer of settlement for about 25 percent of the ultimate judgment obtained against its insured. The refusal resulted in an excess judgment against its insured. In the subsequent bad faith action the insurer was held liable for the entire judgment including the excess limits and other resulting damages. This was clearly an extra-contractual recovery since under a straight breach of contract claim the insurer would have been liable for only the amount of the policy.

In Critz v. Farmers Ins. Group, 230 Cal.App.2d 788, 799, 41 Cal.Rptr. 401 (1964), an injured person who had recovered a judgment against an insured brought an action, as assignee of the insured, against the insurer. The Court of Appeal held that the assignment by the insured to the injured person of any right of action that the insured might have against his insurer for unreasonably rejecting the injured person’s settlement offer to the insurer would subject the insurer to liability for the amount of recovery by the injured person against the insured in excess of the policy limit if the insurer acted in bad faith in rejecting the offer of settlement. The court in this case held that a wrongful refusal to settle sounded only in contract was expressly disapproved. The court stated that, in determining whether to accept a settlement offer, the insurer must give the interest of the insured at least as much consideration as its own. When there is a great risk of an excess judgment, good faith requires acceptance of an offer within policy limits. The Court of Appeal concluded that if bad faith occurred before the assignment the action could be maintained by the assignee.

In Critz v. Farmers Ins. Group, 230 Cal.App.2d 788, 799, 41 Cal.Rptr. 401 (1964), an injured person who had recovered a judgment against an insured brought an action, as assignee of the insured, against the insurer. The Court of Appeal held that the assignment by the insured to the injured person of any right of action that the insured might have against his insurer for unreasonably rejecting the injured person’s settlement offer to the insurer would subject the insurer to liability for the amount of recovery by the injured person against the insured in excess of the policy limit if the insurer acted in bad faith in rejecting the offer of settlement. The court in this case held that a wrongful refusal to settle sounded only in contract was expressly disapproved. The court stated that, in determining whether to accept a settlement offer, the insurer must give the interest of the insured at least as much consideration as its own. When there is a great risk of an excess judgment, good faith requires acceptance of an offer within policy limits. The Court of Appeal concluded that if bad faith occurred before the assignment the action could be maintained by the assignee.

In Silberg v. California Life Ins. Co., 11 Cal. 3d 452 (1974), the insurer advertised an accident policy with the phrase “Protect Yourself Against the Medical Bills That Can Ruin You.” It issued an accident policy to Mr. Silberg. The policy excluded injuries covered by workers’ compensation. Silberg was injured while performing incidental services at his place of employment. His employer’s compensation carrier denied coverage. Mr. Silberg found himself with substantial medical bills which California Life also refused to pay. California Life claimed that no payments were required to be made until the question of workers’ compensation coverage had been resolved. The court held that the insurer could have made the payments required under the policy and, if workers’ compensation were later determined to be applicable, a lien against the award could have been filed.

In Egan v. Mutual of Omaha, Between 1962 and 1970, Michael Egan injured his back several times in the course of his employment and received small amounts of benefit payments pursuant to his disability policy. He returned to his employment despite his injuries. In 1970, Egan, then 55, attempted to descend from the roof of a one-story building where he was working. The ladder broke as he stepped on it. He fell 12 feet to the ground, thereby re-injuring his back. In November 1970, a representative of Mutual of Omaha and its claims manager visited Egan at home and advised Egan that he would receive no more benefit payments, since Egan was not really disabled but was merely having difficulty finding work. Egan denied the allegations and expressed his concern. The claims manager called Egan a fraud. After cutting off his payments the claims staff of Mutual of Omaha continued to harass Egan in an attempt to get him to turn in his disability policy.

ZALMA OPINION

It is important that everyone involved in insurance claims understand that the tort of bad faith exists and must be dealt with whenever a claims is investigated and attempts to settle fail. The insurance claim professional can learn to avoid the mistakes made by their predecessors who cause the creation of the tort by not treating their insureds fairly and in good faith, and sometime by attempting to defraud or hurt their insureds to avoid payment of legitimate claims. Because of the creation of the tort of bad faith such wrongful conduct is rare but still exists and needs to be removed from the industry.

© 2021 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

He is available at http://www.zalma.com and zalma@zalma.com. Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at Rumble.com at https://rumble.com/c/c-262921; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4