Insurance companies in California customarily follow what are known in the industry as “good faith” claims practices.  The term “good faith” arises from a principle that, in handling insurance claims made by an insured, the insurance company must abide by a promise that the claim will be handled and administered in “good faith” and with “fair dealing” by the insurance company.  These customary claims practices arise from a series of statutes, regulations and cases that have fashioned a body of procedures for insurance companies to follow in order to meet their responsibilities to their insureds.  These practices are customarily followed by insurers who provide insurance coverage to their insureds in California.  It is my experience that insurers generally adopt principles of operation, guidelines, and claims manuals based on what the “good faith” claims practices customarily are.

            The basic “good faith” rules are outlined in California Insurance Code section § 790.03(h), as elaborated in California Administrative Code section 2695, adopted at the recommendation of and by the California Insurance Commissioner in 1993.  It is my experience that insurers issuing policies in California customarily follow these good faith requirements, and that insurance industry groups as well as the National Association of Insurance Commissioners, which originally adopted a Model Unfair Practices Statute, which led to the adoption of California Insurance Code section 790.03(h), encourage that they be followed.  These were supplemented in 1993 by California Code of Regulations, California’s administrative code, which outlines more specifically what insurers doing business in California must do in areas, inter alia, of training, claims handling, investigation, administration, and evaluation of various types of insurance claims, and communications with insureds.

            Virtually all the insurers that I have seen not only adopt these good faith rules, but have internal operating rules for implementing these good faith requirements in their claims manuals and memoranda to their claims administrators.

            Once the claim is submitted then the processing, investigation, handling and investigation of that claim is subject to the “good faith” claims handling requirements.  To comply with the “good faith” requirements, insurance claims personnel generally follow the customs and practices that have arisen from the promise to act in good faith and deal fairly with the insured when that insured makes a claim under the property coverage.

            There are three basic operating principles that have arisen and that are customarily followed by insurance claims personnel when handling, administering, processing and managing an insurance claim made by an insured:

  • An insurer must properly investigate its insured’s claim. This is a two-part obligation: a) it is essential that the insurer fully inquire into possible bases that might support the insured’s claim; and b) an insurer cannot reasonably and in good faith deny payments to an insured without thoroughly investigating the foundation for its denial. It is thus a basic operating principle for an insurer to “thoroughly” investigate any claim made to it;
  • The insurer must give equal consideration to the interests or position of the insured as its does to its own interests; that is, the insurer cannot put its own financial or other interests above those of the insured’s; stated another way, an insurer cannot do anything that results in the insured being deprived of a right; the insured has to receive the benefits of the insurance for the which insured has paid a premium; and
  • The insurance company cannot unreasonably withhold payments or other benefits of the policy from the insured.

            Thus, in assessing if an insurance company has met its “good faith” insurance claims handling obligations, one must look at these operating principles to see if they were met in the handling of the insured’s claims.  Ordinarily these are incorporated into a company Claims Manual which also usually incorporates industry claims standards, e.g. the American Insurance Association’s “Claims Code of Conduct,” which pledges “fair play” and adopts certain “Settlement Practices.”

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