Implicit in every insurance policy is the promise of good faith and fair dealing. In California, when an insurer refuses to settle a claim on behalf of its insured--thereby financially jeopardizing the insured--it is acting in bad faith. In such instances, a claim against the insurance company may arise, from which compensatory and punitive damages may be awarded.

Generally, insurance companies will utilize all resources available to them to avoid paying for claims, especially ones that exceed the insured's policy limits. Moreover, the insurance company often has tremendous influence over the legal process the insured must endure: the selection of the defense attorney, choices made during the litigation process, and, ultimately, how the case will be resolved, whether by mediation, arbitration, or trail. Taking the case to trial is not only the most costly and time-consuming of the three options, it also may economically jeopardize the insured if that party is found responsible for an accident or an injury.

This was recently the case with a California road construction company. While the company was only insured for up to $2,000,000, it was accused of safety violations that were found to be contributing factors in a solo rollover car accident that left one passenger dead and two others seriously injured. The claims against the company were projected to exceed $20,000,000. Despite being given the opportunity to resolve the case within the policy limit prior to trial, the insurer refused to settle.

The insurance company chose to take the case to trial on liability, despite the threat to the construction company's economic stability if a jury found it even partially liable for the accident. As the trial progressed, it became increasingly clear that the insurance company was acting in bad faith by refusing to reach a resolution before a judgment was made: the jury supported evidence that the construction company was partially responsible for the accident, and trial transcripts suggested that a jury would indeed find some liability. The insurance company, however, maintained its refusal to resolve the case for any amount exceeding the insured's policy limits. Ultimately, the construction company obtained the services of an attorney, who persuaded the insurer to agree to pay the entire settlement amount of $10, 275,000 in order to avoid a costly bad faith claim against it.

Under California law, an insurance company is obligated to protect its insured from a potential judgment greater than the insurance coverage, as failing to do so could jeopardize the insured's economic stability. In cases in which an insurance company refuses to comply with this law, addressing the matter early on in the legal process--prior to a trial or arbitration--often proves an effective means of persuading the insurer to settle.