In Negotiating and Settling Insurance Bad Faith Cases , insurance expert witness Guy O. Kornblum of GK Consultants, LLC, writes:
I’ve been handling bad faith insurance cases for almost my entire career. Initially the majority of cases encompassed the “duty to settle-excess liability cases” wherein the insurer became responsible for the entire amount of a judgment against its insured because the insurer acted imprudently or unreasonable by failing to accept a demand from a plaintiff for the policy limits or less. The basis for this liability was the implied covenant of good faith and fair dealing which exists in all contracts, but which has a special meaning in insurance policies. This covenant of good faith serves as the foundation for the expansion of insurers’ legal responsibility into the realm of tort liability stemming from its “bad-faith” conduct. If the insurer breaches the covenant of good faith by wrongfully handling an insurance claim under the applicable standard, a tort is committed.
In the early 70’s, the California Supreme Court applied these concepts to first party insurance relationships, i.e. where the insurer has promised to pay an insured for a covered loss. This type of coverage is found in all types of insurance relationships: commercial and personal property insurance, medical pay insurance, life, health and medical insurance, and other “direct reimbursement” insurance situations.
When the insurer’s conduct constitutes a tort, the plaintiff can recover damages for injuries that were proximately caused by that conduct, whether or not the injuries could have been anticipated when the contract was executed. Thus, in addition to contract damages, the insured may be able to recover extra-contractual damages, which are damages beyond those usually permitted for a breach of contract using the tort measure of damages. These include compensatory damages, damages for emotional distress, economic losses, and even attorneys’ fees. Moreover, punitive damages may be awarded in certain instances tort claims where a higher degree of misconduct is proven.