The California Court of Appeals recently issued an opinion confirming the standard for determining an insurer's unbelievable conduct is if the insurer acted unreasonably, not if the insurer refused to pay a reasonable claim. I recently blogged about California's standards to prove bad faith. 1 About a week after that blog post, Pacific Specialty Insurance Company lawyers asked a Los Angeles judge to pass a summary judgment on a Merlin client's allegations of bad faith because bad faith was probably intentional torture ([19459006)] ie the insured needed to prove intent to harm). Unsurprisingly, the judge ruled in our client's favor and rejected that argument. As noted in the blog post, bad faith only requires proof that the insurer acted "unreasonably." About a week later, California's Second District Court of Appeal confirmed in a separate case that bad faith requires only evidence of "unreasonable" conduct. 2 Sorry, Pacific Specialty.
In this recently published decision (" Pinto "), the court confirmed that in order to prove bad faith, there must be a conclusion that the insurance company acted "unreasonably. “The case arose with a procedural technique on jury member forms. The form used in the trial against bad faith asks the jury to decide whether the insurer does not accept a "reasonable" solution to the claim. The jury agreed. The insurer argued that this finding was insufficient to support an assessment of bad faith, as the form did not ask, and there was therefore no finding by the jury, that the insurer's failure to accept the settlement was "unreasonable." In other words, the insurer argued that the jury must evaluate the reasonableness of the insurer's conduct in contrast to the reasonableness of the insured's claim. The court agreed. It did not determine whether the insurer's conduct was in fact unreasonable.
This published opinion provides a good example of how and how not to argue for bad faith, not even under the underlying insurance claim. For example, arguing that your evidence of loss or causal analysis is "reasonable" would not actually suffice as an argument that the insurer acts in bad faith. Instead, the argument must focus on how the insurer's refusal to accept these things must have been unreasonable. Think of all the other reasons that the insurance company may claim that its conduct was reasonable. In the case of Pinto for example, the insurer claimed that its failure to accept the claim was reasonable, noting that the terms of the claim were too vague and that one of the insured did not respond. By applying this to an actual claim adjustment, an insurance company may not have accepted reasonable proof of loss within the forty (40) days required by law. 3 Does the only failure constitute unreasonable behavior? Maybe, but more is needed ̵
This decision also provides a new reminder that the standard for proving bad faith is not strict. There is no need to prove evil, fraud, oppression or the like. Instead, the evidence only has to show that the insurance company's behavior was unreasonable. This is one of many reasons why we usually recommend public adjusters and assured that there is no need to argue that the insurance company did anything more. When you argue that the insurance company's behavior was worse than "unreasonable", you actually set the bar higher for you when it comes to the standard of proof. Such attacks are often counterproductive because insurance companies' adjusters expect you to lead with facts if your facts are strong and interpret a quick resort to aggressive accusations as a sign of weakness in the claim.
Finally, the decision contains a sharp warning to lawyers. Use the correct judgment form! Never rely on standardized judgment forms if your case has facts that distinguish it from the classic scenario. The lawyers in Pinto used the standard jury instruction in California issued by the Judicial Council, "the political body of the courts of California. . . [u] under the direction of the Supreme Court. 4 The standard jury instruction form used in Pinto is called CACI No. 2334, and it was prepared for the specific actual scenario where a liability company does not accept a reasonable requirement for settlement within the boundaries. The form does not ask the jury if the insurer "unreasonably" did not accept the claim. 5 Pinto questions whether that form can ever be used again. Nevertheless, the insurance company's argument in Pinto seems to have been strongly focused on the reasonableness of its failure to accept the claim, not the claim itself. Please note, as this was a liability insurance case, we do not express significant opinions about the outcome specifically for that context and wish policyholders good luck in their expected appeal to the California Supreme Court.
1 As I noted in that blog post, California courts have stated that bad faith is an "imprecise etiquette of what is basically some unreasonable insurer's behavior [.]" Austero against National Cas. Co. (1978) 84 Cal.App.3d 1, fn. 22, disapproved of Egan against Mutual by Omaha Ins. Co. (1979) 24 Cal.3d 809.
2 Pinto v. Farmers Ins. Byt No. B295742, 2021 WL 857776 (Cal. App. March 8, 2021).
3 10 Cal. Kodreg. § 2695.7 (b).
5 CACI No. 2334. Bad faith (third party)) – Refusal to accept reasonable solution within the limits of liability policy – Essential factual elements . Judicial Council of California Civil Jury Instructions (2020 edition). https://www.justia.com/trials-litigation/docs/caci/2300/2334/