By: Guy O. Kornblum, Member of the California and Indiana Bars
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.”
The whole purpose of the statutory and regulatory principles that outline the good faith claims handling principles is to create a proactive set of guidelines, and to discourage the notion that claims handling is a passive process. They establish that insurance companies, in responding to a claim of an insured, have specific tasks that they must perform in order to reach timely and efficient point for evaluation, payment and settlement efforts, and cannot sit back and resist their payment obligations or insist that the file is not in a state for evaluation and payment because of the lack of information. The latter is totally contrary to the good faith claims handling principles in California.
With respect to the duty to investigate a claim, Insurance Code §790.03(h)(3) makes it an unfair claims settlement practice “to [fail] to adopt and implement reasonable standards for the prompt investigation and processing [of] claims arising under insurance policies.”
The good faith claims principles require that an “an insurer shall conduct and diligently pursue a thorough, fair and objective investigation. . . .” 10 Cal. Admin. Code §2695.7(d).) The “necessary investigation” is required to “begin” no later than 15 calendar days from receiving notice of a claim. 10 Cal. Admin. Code §2695.5(e).
The “investigation” includes “all activities of an insurer or its claims agent related to the determination of . . . liabilities, or nature and extent of loss or damage for which benefits are afforded by an insurance policy. . . .” 10 Cal. Admin. Code §2695.5(e)(3).
As stated above, these principles are usually incorporated into the insurance company’s claim manuals, 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”
Thus, the overarching purpose of the statutory and regulatory principles that outline the good faith claims handling principles is to create a proactive set of guidelines, and to discourage the notion that claims handling is a passive process. They establish that insurance companies, in responding to a claim of an Insured, have specific tasks that they must perform in order to reach timely and efficient point for evaluation, payment and settlement efforts, and cannot sit back and resist their payment obligations or insist that the file is not in a state for evaluation and payment because of the lack of information. The latter is totally contrary to the good faith claims handling principles in California.
Thus, in assessing if an insurance company has met its “good faith” insurance claims handling obligations, determining whether these operating principles were met in the handling of the Insured’s claims is necessary. Ordinarily, a positive determination that the insurer met its good faith obligations should reflect the statutory and regulatory policy goal for good faith claims handling: that the insurer was proactive in processing its Insured’s claim and dealt with him fairly and in good faith.
What the “Good Faith” Principles Require.
These are the criteria that generally can be applied to the insurance claims handling process in assessing if the insurer met its “good faith” claims handling responsibilities to its Insured:
- Promptly acknowledge that a claim has been made.
- Adopt and implement reasonable standards for the prompt investigation and processing of claims.
- Begin an investigation of a claim within a reasonable period of time from notice of a claim.
- Attempt to effectuate a prompt, fair and equitable settlement of a claim after liability becomes reasonably clear.
- Treat the Insured equally; do not put the insurance company’s financial interests above those of the Insured.
- Conduct a thorough, fair and objective investigation of a claim.
- Investigate all facts supporting payment of a claim as well as those that might support limiting or denying a claim.
- Be objective in evaluating a claim; low balling is not permitted.
- Respond to all communications timely.
 Mr. Kornblum is a partner in Kornblum, Cochran, Erickson & Harbison, LLP, with offices in San Francisco and Santa Rosa, California. He is certified in Civil Trial and Pretrial Practice Advocacy by the National Board of Trial Advocacy, and has been selected as a “Top 100 Trial Lawyer” by the National Trial Lawyers Organization. He has co-authored two books and dozens of published articles on insurance coverage and bad faith issues.
 See also 10 Cal. Admin. Code §2695.6(a).
 See Cal. Ins. Code §790.03(h)(3).
 In California, this is 15 days from notice. 10 Cal. Admin. Code §2695.5(e).
 See Cal. Ins. Code §790.03(h)(5).
 See 10 Cal. Admin Code §2695.7(d).
 See 10 Cal. Admin. Code §2695.7(g).
“Upon receiving any communication from a claimant, regarding a claim that reasonably suggests that response is expected, every licensee shall immediately, but in no event more than fifteen (15) calendar days after receipt of that communication, furnish the claimant with a complete response based on the facts as then known by the licensee.” The section does not apply if there is notice of a legal action. 10 Cal. Admin. Code §2695.5(b).