Sunday, March 30, 2014

Viau & Kwaniewski: The Nuts And Bolts Of How To Defeat A Strategy That Essentially Renders Some Coverage Illusory

Insurance Carriers’ Increasingly Asserted Requirement In First Party Cases That
Insureds Pay Out-Of-Pocket Before Reimbursement Of Various Covered Costs

The Nuts And Bolts Of How To Defeat A Strategy
That Essentially Renders Some Coverage Illusory


In these economic times, there is an almost unassailable argument that insurance companies have even greater incentives to underpay on claims.  Although decisional, statutory, and regulatory law (as well as fundamental notions of integrity), proscribe the practice, the claims department may become a means for the carrier to attain profitability.

The Insurance Services Office (“ISO”) estimates that in 2010, the U.S. property/casualty insurance industry’s net income after taxes reached $34.7 billion.  This is up from its net income of $28.7 billion in 2009.  (ISO Studies and Whitepapers, Insurer Financial Results, 2010, Executive Summary, p. 1.) 

ISO also concludes, however, that it is clear that the “Great Recession” has had an adverse impact on the property/casualty insurance industry - its 2010 net income of $34.7 billion is just over half of its $62.5 billion in net income for 2007.  (Ibid.)

In 2008 alone, it is estimated that the housing market crash cost homeowner insurers $1 billion in lost premium growth, due to a 50 percent decline in new home construction, and stricter lending standards resulting in fewer sales.  (Robert P. Hartwig, Ph.D., Insurance Information Institute, “The Financial Crisis and the P/C Insurance Industry: Challenges Amid the Economic Storm,” September 23, 2008.)

With this backdrop, property/casualty carriers - particularly homeowner insurers - have been more unyielding vis-à-vis claim proof requirements - to the point of wavering from past industry standards or practices. 

Based on trends we have observed over the past 25 years of practice, including most recently a homeowner bad faith trial that spanned 7 weeks (which concluded with a confidential resolution), we focus in this article on homeowner carriers’ evident evolving attitude towards claims handling in first party homeowner cases.

Additional Living Expenses


Standard ISO homeowner Forms provide Coverage D, Loss of Use Coverage, and include “Additional Living Expense (“ALE”).”  After their homes suffer a catastrophic loss, most insureds initially are primarily concerned about their ALE coverage. 

The purpose of ALE is to provide immediate relief due to uninhabitability of the home, and to help insureds maintain their “normal,” pre-loss standard of living. 

ALE benefits often are the first payments the insurance company makes.  Prompt payment of ALE benefits in an amount reasonably necessary for insureds to maintain their “normal” standard of living - e.g., for a comparable residence - often facilitates the smooth handling of the claim thereafter.

Because of the critical and immediate nature of this coverage, carriers in the past typically would front ALE costs - even before insureds provided receipts and proofs of out-of-pocket costs.  Once insureds were able to secure long term relocation, if necessary, they then provided cost proofs to their carriers. 

Even in situations where ALE was advanced, it was not unusual, however, for the homeowner carrier to thereafter delay in ALE payments.  During the October 2003 wildfires, 3,700 homes were deemed a total loss.  There were 123 consumer complaints to the Department of Insurance.  After complaints of under-insurance, the next predominant consumer complaint was delay and denial of ALE.  (See, e.g., Kenneth Reich, “Insurance Firms Get Good Grade on Fire Response,” Los Angeles Times, February 13, 2004.)

A trend we have seen emerging is that some carriers are reluctant to make any ALE advances - they require proofs of cost immediately, as a condition to ALE payment.

This gives rise to hardship for the insured, and the entire claims process often degrades to the point that a breach and bad faith case ensues.

Specific ALE Provision - Exemplar

In a case where the insurance company required the insured to provide proof of actual out-of-pocket payments, the ALE provision stated as follows:

                        “1.       Additional living expense

                                    If covered accidental direct physical loss or damage to the dwelling makes the dwelling uninhabitable by you, we will reimburse you for the reasonable and necessary increase in living expenses incurred by you.  This coverage is for your household to maintain its normal standard of living it had at the time of the loss event. . .  Upon our request, you must provide receipts for expenses incurred.”  (Underscored emphasis added.)

At trial, the insurance company took the position that the policy’s ALE provision required as a condition to ALE coverage receipts and proof of out-of-pocket payments.  The carrier cited specifically to the “we will reimburse you,” and the “[u]pon our request, you must provide receipts for expenses incurred” language.

Arguments Against The Out-Of-Pocket Requirement

Policy interpretation

As a fundamental matter, insurance policy interpretation must give effect to the “mutual intention” of the parties.  (See, Waller v. Truck Ins. Exchg. (1995) 11 Cal.4th 1, 18.)  Such intent is to be inferred, if possible, solely from the written provisions of the insurance contract.
Thus, the rules governing policy interpretation “require us to look first to the language of the contract in order to ascertain its plain meaning or the meaning a layperson wold ordinarily attach to it.”  (Ibid.)  The “clear and explicit” meaning of policy provisions, interpreted in their “ordinary and popular sense” control - unless “used by the parties in a technical sense or a special meaning is given to them by usage.”  (Ibid.)

A policy provision is ambiguous if it is capable of two or more reasonable constructions.  The California Supreme Court also emphasizes that even “plain and clear” language, when considered in isolation, may be ambiguous when read in the context of the policy as a whole and the circumstances of the case.  (See, MacKinnon v. Truck Ins. Exchg. (2003) 31 Cal.4th 635, 652.)

“Although examination of various dictionary definitions of a word will no doubt be useful, such examination does not necessarily yield the ‘ordinary and popular’ sense of the word if it disregards the policy’s context.”  (Id., 31 Cal.4th at 649.)  Rather, the Supreme Court in MacKinnon cautioned, a court should put itself in the layperson insured’s position, and understand how he or she might reasonably interpret the language.  (Ibid.)

The Supreme Court reaffirmed in State of Calif. v. Allstate Ins. Co. (2009) 45 Cal.4th 1008, 1018, that ambiguous provisions are to be interpreted to protect “the objectively reasonable expectations of the insured.”  (See also, e.g., Montrose Chem. Corp. of Calif. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 667 (“[W]e generally interpret the coverage clauses of insurance policies broadly (in order to protect) the objectively reasonable expectations of the insured. . .”); Silberg v. Calif. Life Ins. Co. (1974) 11 Cal.3d 452, 464.)

Finally,  provisions that purport to limit or take away coverage reasonably expected by the insured must be “conspicuous, plain and clear” to be enforceable.  (See, Haynes v. Farmers Ins. Exchg. (2004) 32 Cal.4th 1198, 1206.)

Application of the foregoing rules of contract interpretation illuminates that the ALE language in many homeowner policies arguably is ambiguous.  This undermines homeowner carriers’ insistence that before they will advance ALE, insureds must first prove out-of-pocket expense.

The coverage - by its express terms - is designed to allow insureds to “maintain” their “normal standard of living” that they “had at the time of the loss event.”

Insureds’ “normal standards of living” do not include having to pay rent out-of-pocket for another dwelling because their home is uninhabitable.  Insureds’ “normal standards of living” do not entail paying the mortgage on their home - and paying rent out-of-pocket on a comparable home or apartment. 

The implication of “normal standard of living” is that insureds’ cash flow will not be adversely affected - or decimated - by having to pay for two dwellings, after they have suffered a catastrophic loss. 

Thus, a carrier’s contentions that insureds must first pay rent for an alternative living arrangement, and that only after paying rent will they receive the benefits of this coverage, underscore the ambiguity of this ALE coverage.  More critically, such an interpretation essentially renders the coverage illusory.  (See, Scottsdale Ins. Co. v. Essex Ins. Co. (2002) 98 Cal.App.4th 86, 95.)  Many insureds cannot afford to front the costs of a rental, while also paying on their home mortgage.

Equally demonstrative that the provision is ambiguous, and the carrier’s out-of-pocket cost insistence is erroneous, is the Coverage D - Loss of Use limit in most policies.  According to the Insurance Information Institute, most ALE limits are typically at least up to 20 percent of the structure limits. 

By the carrier’s analysis, the insured must first be out-of-pocket ALE payments upwards of tens of thousands of dollars - possibly more - before the carrier’s ALE obligations are triggered.  This is not the reasonable expectation of any insured, and this does render the coverage illusory - few and far between are the insureds who could afford such an out-of-pocket expenditure. 

The carriers may say such a result is preposterous, and that insureds need only submit their expense invoices to secure incremental payments. 

Yet, in the case we tried, that is precisely what the insured did.  The insured had contacted a relocation specialist.  The specialist found a comparable home for rent, and provided the insured with invoices demonstrating the 6 month cost to lease that comparable home.  The insured in fact had nowhere else to live, and was going to move into the “comparable home” secured by the relocation specialist.  The insured presented his homeowner carrier with the relocation specialist’s invoices.

The carrier deemed such invoices inadequate because they were not receipts for actual out-of-pocket payments.  The insured’s finances were such that he could not sign a contract for the 6 month lease without some assurance from the carrier that the cost would eventually be covered and paid.  The carrier refused - the invoices were not proof of out-of-pocket payments.

Finally, the exemplar ALE provision states that “upon” the carrier’s request, receipts must be provided.  Given that the coverage provides that the carrier may request receipts, it does not follow that insureds are only entitled to reimbursement after actual out-of-pocket payment, and provision of such receipts. 

It should be noted that many homeowner policies require, under the Section I - Property Conditions - Duties after loss provision, that the insured must send within 60 days after the carrier’s request, a “signed, sworn statement showing:. . . receipts and records that support additional living expenses. . . .”

However, an insurer claiming that it is relieved of providing ALE coverage because the insured did not fulfill the policy’s conditions bears the burden of proving the insured’s policy condition breach.  (See, Clemmer v. Hartford Ins. Co. (1978) 22 Cal.3d 865, 881 - 882 (late notice); Billington v. Interinsurance Exch. of So. Calif. (1969) 71 Cal.2d 728, 737 - 738 (breach of duty to cooperate).)

Moreover, an insured’s policy condition breach does not automatically release the insurance company from its obligations.  The insurance company must also establish prejudice resulting from the insured’s failure to comply with policy conditions.  (See, Hall v. Travelers Ins. Cos. (1971) 15 Cal.App.3d 304, 308.)  To prevail on its prejudice claim, the insurance carrier must prove there is a substantial likelihood that a trier of fact would find in the carrier’s favor if the insured had not breached the policy condition.  (See, United Services Auto. Ass’n v. Martin (1981) 120 Cal.App.3d 963, 965 - 966.)

Concomitantly, principles regarding policy interpretation are not the only method for undermining carriers’ out-of-pocket contention.

Evidence extrinsic to the policy

If the claim is in litigation, the insured should propound discovery for the homeowner carrier’s claims manual or claims handling guidelines.  Some claims handling guidelines allow advance ALE payments under certain circumstances, for lodging made necessary by loss of use of the insured dwelling. 

Further, carriers may admit through deposition or trial testimony that such advances are allowed, or have been made in the past.  Form letters to the insured may acknowledge ALE obligations, without mentioning proof of costs actually incurred.

The carrier may have a “direct bill” program, through which the insurer pays for alternative accommodations directly to the landlord, or a relocation service provider.

Carrier claims documentation or training videos may outline a company philosophy of offering help to insureds when claims are made, and when insureds are in need, regardless of technical procedures involved.

Such extrinsic evidence supports the position that the homeowner carrier does owe an obligation to advance ALE, and that at a minimum, the policy’s ALE provision is ambiguous.

Expert testimony regarding industry standards

A claims handling expert may testify regarding industry standards.  (See, Jordan v. Allstate Ins. Co. (2007) 148 Cal.App.4th 1062, 1077.)  The insured’s claims handling expert may be of the opinion that it is the industry standard for carriers to make advance ALE payments.  Whether this standard persists, given recent trends, arguably remains to be seen.

As a practical matter, ALE advances do fulfill the insured’s objectively reasonable expectations of coverage.  (See, e.g., Olson v. American Bankers Ins. Co. (1994) 30 Cal.App.4th 816, 824 - 825.) 

Most insureds do not expect that at their greatest time of need, the insurance company will require that they fund the costs for temporary housing, when the policy purports to provide “coverage for. . . your household to maintain its normal standard of living it had at the time of the loss event.”  (See, e.g., Stamm Theaters, Inc. v. Hartford Cas. Ins. Co. (2001) 93 Cal.App.4th 531, 543 (Property policy covered structural collapse due to hidden decay - “decay” was broadly construed to include gradual deterioration, not just dry rot - this protected the reasonable expectation of the insured).)

It is true that some courts have found that insureds must first establish that they have actually incurred the ALE cost - and have paid those costs out-of-pocket.  (See, e.g., Hilley v. Allstate Ins. Co. (Ala. 1990) 562 So.2d 184.) 

In California, however, for years, the industry practice was to advance ALE coverage during claim investigation.  Because of the economic climate, and insurance carriers’ increasing reliance on language such as in the exemplar ALE provision, those days may be waning.

Emergency Services

Pursuant to the typical homeowner policy’s Section I - Property Conditions, the policy provides that in the event of a covered loss or damage to insured property, the insured should make reasonable and necessary emergency repairs or perform loss mitigation needed to protect the property from further damage.

A typical Section I - Property Conditions - Emergency Services provision states as follows:

                        “1.       Emergency Services

                                    In the event your covered property sustains covered loss or damage, you should protect the property from further damage.  You should make any reasonable and necessary emergency repairs or perform loss mitigation needed to protect the property from further damage (hereinafter ‘emergency services’).  We will reimburse the reasonable costs you incur for necessary emergency services for covered loss or damage to mitigate or abate the cause of the loss or damage.”

Many carriers - and empirical experience indicates increasingly so - require insureds to pay out-of-pocket for emergency services or repairs after a catastrophic loss.  Only after proof of the insured’s payment will the carrier reimburse for such expense.

This repair requirement includes the insured paying out-of-pocket for items such as board up, or dry out of a home saturated by fire-extinguishing water.  Immediate dry out is particularly important to prevent the formation of harmful mold.

After a catastrophic calamity, insureds often are at a loss - financially, mentally, and emotionally - to find, make arrangements with, and pay for emergency services providers who can assist them with making such repairs.  Many insureds are not equipped to make the repairs themselves. 
While insurance carriers may interpret their policy’s emergency services provisions as requiring out-of-pocket payments by the insured, this essentially leaves the insured to his or her own devices after a covered loss. 

This is not what the California Department of Insurance envisions as demonstrated by the Regulations promulgated pertaining to covered loss.  The California Fair Claims Settlement Practices Regulations, section 2695.4, states that: “Every insurer shall disclose to a first party claimant. . . all benefits, coverage, time limits or other provisions of any insurance policy issued by that insurer that may apply to the claim presented by the claimant.”  (See, Fair Claims Settlement Practices Regulations, California Administrative Codes, Title 10, Chapter 5, subchapter 7.5, §§ 2695.1, et seq.; see, 10 CCR § 2695.4(a).)

Indeed, it is the custom and practice in the California insurance industry for an insurance company to offer the insured, for example: emergency board-up where a home has been damaged and left exposed to vandalism; or dry out services where a home has been saturated with water.  Expert trial testimony regarding such custom and practice should be offered. 

Conversely, the insurance industry’s argument that insureds must first pay out-of-pocket is often asserted at trial through the testimony of insurance company executives and training personnel.  This testimony leaves the jury with the distinct - and very distasteful -  impression that the carrier’s interpretation of its own obligations would result in only the wealthy being protected by insurance. 

Reimbursement after insureds pay for their own losses is not what insurance is about - this does not give effect to the reasonable expectations of any insured.

Dwelling Restoration Scopes And Repair Estimates

Similarly, many carriers will prepare dwelling restoration scopes and repair estimates with zeroes (or an “as incurred” requirement) for: temporary fencing; temporary power; temporary toilets; architectural fees; permit costs; asbestos testing fees; etc.

In the standard homeowner policy (with the possible exception of language regarding code upgrades), there is no language that allows an insurance company to estimate literally nothing for these cost items. 

The typical homeowner policy is written on a replacement cost basis.  The carrier is required to estimate the true cost to repair and restore the insured’s home.  This is called Replacement Cost Value (“RCV”).  Based on specified criteria (see, e.g., Ins. C. § 2051(b)(2); Regulations, § 2695.9(f)(1)), the carrier makes various deductions for physical depreciation.  RCV minus allowable depreciation equals Actual Cash Value (“ACV”).

By having zeroes in its dwelling restoration scopes and repair estimates, the carrier is able to reduce the ACV payment to its insured.  This is significant - the zeroes allow the carrier to underpay ACV, inuring to the insured’s detriment in a myriad of ways.  For example, an undervalued and underpaid ACV may make it more difficult for the insured to find a reputable, qualified general contractor willing to commit to perform the home repair work, as proscribed by the insurance company’s estimate.

It is important that the insured have a qualified general contractor prepare a complete dwelling scope and repair estimate that includes, inter alia, numbers for the “zero” items in the insurance company’s estimates.  It is vital that the insured or his or his representatives understand and insist on the protections afforded in the Regulations, section 2695.9(d)(1), (2), and (3).


The above presents just some of the ways insurance companies are progressively, and improperly, narrowing their obligations under their homeowner policies.  Viau & Kwasniewski hopes this article will provide some nuts and bolts ideas to help defeat improper carrier contentions, and ease the pain of your clients/insureds. 

Friday, March 28, 2014

Fair Claims Settlement Practices Regulations: What They Are And How To Use Them In An Insurance Bad Faith Case

The business of insurance historically has been subject to state regulation, not federal.  Hence, states were free to enact laws regulating insurance companies.  In the early 1900’s, California promulgated the Cartwright Act which provides that “every trust is unlawful.”  See, Bus. & Prof. C. §§ 16700, et seq.  The statute defines a “trust” as “a combination of capital, skill or acts by two or more persons for any of the following purposes:. . .  (a)  To create or carry out  restrictions in trade or commerce.  (b)  To limit or reduce the production, or increase the price of merchandise or of any commodity. . . .”  The Cartwright Act is designed to protect against, for example, insurance companies acting in concert regarding premium rates to the harm of consumers.

In 1959, California enacted the Unfair Insurance Practices Act (“UIPA”), set forth at Insurance Code sections 790, et seq.  In 1972, the provisions set forth at Insurance Code section 790.03(h), the Unfair Claims Settlement Practices Act (“UCPA”), were enacted.  The UCPA provisions constitute factors for the jury to consider in determining whether the insurance company acted in good faith or bad faith.  See, CACI 2337; BAJI 12.94.  The factors include: misrepresenting pertinent facts or policy provisions to insureds (Ins. C. § 790.03(h)(1)); failing to acknowledge and act reasonably promptly on claims communications (Ins. C. § 790.03(h)(2)); not attempting in good faith to effectuate prompt, fair, and equitable settlements once claim liability has become reasonably clear (Ins. C. § 790.03(h)(5)), etc.

While there is no private right of action under section 790.03(h), in light of Moradi-Shalal v. Fireman’s Fund Ins. Cos. (1988) 46 Cal.3d 287, 304, the statutory provisions do set forth industry standards that insurance companies are to follow.  As CACI’s use notes point out, these factors “assist the jury in determining whether the insurer’s conduct was unreasonable or without proper cause.”  See, Jordan v. Allstate Ins. Co. (2007) 148 Cal.App.4th 1062, 1078.

On December 15, 1992, the Insurance Commissioner adopted the “Fair Claims Settlement Practices Regulations.”  See, 10 CCR §§ 2695.1 - 2695.13 (California Code of Regulations, Title 10, Chapter 5, subchapter 7.5).  The purpose of the Regulations is to enforce the UCPA statutory provisions. 

By their own terms, the Insurance Commissioner promulgated the Regulations to accomplish the following objectives:

                        “(1) To delineate certain minimum standards for the settlement of claims which, when violated knowingly on a single occasion or performed with such frequency as to indicate a general business practice shall constitute an unfair claims settlement practice within the meaning of Insurance Code Section 790.03(h);

                        (2) To promote the good faith, prompt, efficient and equitable settlement of claims on a cost effective basis. . . .”

See, 10 CCR § 2695.1(a).  The Regulations delineate “minimum standards” - they are not “guidelines” or “suggestions” as insurance companies contend.

The Regulations provide a very useful, tangible way to show a jury that the insurance company acted unreasonably in the handling of a particular claim.  Juries appreciate clarity, and a check list or road map against which they may consider or evaluate insurance carrier conduct.  In addition to Insurance Code section 790.03(h), the Regulations provide that road map.

Classes Of Insurance To Which The Regulations Do Not Apply

The Regulations do not apply to:

                      Workers’ compensation insurance (see, 2695.1(b)(1))
                      Health care providers’ professional malpractice insurance (see, 2695.1(b)(2))
                      Certain ERISA plans, and self-insured or self-funded employee plans (see, 2695.1(b)(3) and (4))
                      Surety insurance, partially (see, 2695.1(c))

Otherwise, the Regulations do apply to other classes of insurance, including auto, homeowner, commercial, and non-health care providers’ professional malpractice insurance.

The Standards With Which Carriers Must Comply Under The Regulations

            There is no substitute for actually reading the Regulations themselves.  The following provides a brief summary, however, of some of the more significant features and requirements of the Regulations:

                      Section 2695.1.  Preamble.

                        The Regulations’ Preamble expressly states that the Regulations are the “minimum standards” applicable to claims handling and resolution.  See, 2695.1(a)(1).  A carrier’s failure to meet the “minimum standards” evinces carrier misconduct and possibly bad faith. 

The Preamble clarifies that the Regulations are not the “exclusive definition of all unfair claims settlement practices.”  Other unreasonable carrier conduct may furnish evidence of breach and bad faith.  See, 2695.1(b).
                        Importantly, the Preamble states at sub-paragraph (f) that: “Policy provisions relating to the investigation, processing and settlement of claims shall be consistent with or more favorable to the insured than the provisions of these regulations.”  Thus, for example, a policy provision that states the insurance company need not alert an insured claimant as to a one year suit provision is not enforceable.  See, 2695.4(a).

                      Section 2695.2.  Definitions.

                        There are 25 terms defined in the Regulations.  Of particular significance:

                                    “Claimant” includes not only a first or third party insured, but an insured’s attorney, or the insured’s public adjuster, as well.  See, 2695.2(c).  Thus, Regulation provisions stating that the insurance company must notify the “claimant” as to certain policy provisions or limitations apply even if the insured is represented.

                                    “Notice of claim” is any written or oral notification to an insurer that reasonably apprises that the insured wishes to make a claim against a policy, and that conditions giving rise to carrier obligations under the policy may have arisen.  See, 2695.2(n).  The Regulations do not require a formal written notice procedure, with identification of the coverage triggering facts, to qualify as a claim.  Yet, we have seen insurance carriers make the argument that a formal notice of claim procedure is required, even under standard auto or homeowner policies.  Such a position violates the Regulations.

The terms “willful” and “willfully” under the Regulations do not require an intent to violate the law, or injure another, or gain an advantage over the insured.  These terms mean “simply a purpose or willingness to commit the act, or make the omission referred to in the California Insurance Code or this subchapter.”  See, 2695.2(y).  Thus, the insured does not have to show that the carrier specifically intended to harm the insured in order to establish willful violation of the UCPA or the Regulations.

                      Section 2695.3.  File and Record Documentation.

                        Insurance company claims files are subject to examination by the Commissioner.  Thus, the Regulations require that the claims files “shall contain all documents, notes and work papers (including copies of all correspondence) which reasonably pertain to each claim in such detail that pertinent events and the dates of the events can be reconstructed and the licensee’s [insurer’s] actions pertaining to the claim can be determined. . . .”  See, 2695.3(a).1

                        Importantly, this Regulation goes on to specify that:

                                    “All insurers shall” maintain accessible, legible, and retrievable claim data, available for all open and closed files for the current and preceding four years;

                                    “All insurers shall” record in the claim file the date every material and relevant document was received, processed, transmitted, or mailed.  See,  2695.3(b)(1) and (2).

                        Thus, when you are first contacted with respect to a potential bad faith case, you and/or the insured may ask the insurance company to provide all claim related documents, prior to filing suit.  See, e.g., Ins. C. § 2071 (standard fire/homeowner policy); § 10082.3 (earthquake insurance).

                        Additionally, other claims information pursuant to Colonial Life & Acc. Ins. Co. v. Superior Court (1982) 31 Cal.3d 785 is important and relevant in most insurance bad faith cases.  Section 2695.3 is a valuable tool in countering carrier burden Declarations positing that the other claims information is not readily accessible or retrievable.

                      Section 2695.4.  Representation of Policy Provisions and Benefits.

                        Every insurance carrier “shall disclose to a first party claimant or beneficiary, all benefits, coverage, time limits or other provisions of any insurance policy issued by that insurer that may apply to the claim presented by the claimant.”  See, 2695.4(a).  Recently, the Second District Court of Appeal in Superior Dispatch, Inc. v. Ins. Corp. of New York (2010) 181 Cal.App.4th 175, 181, held that carriers must comply with the 2695.4(a) Regulation requirement with respect to notifying insureds of “contractual limitations provisions and other policy provisions that may apply to the claim, regardless of whether the insured is represented by counsel.”

Much too common is the carrier practice of not revealing to insureds potentially applicable coverage under a policy.  This is a violation of the Regulations.

This Regulation also provides that when additional benefits might reasonably be payable under a policy, based on additional proofs of claim, “the insurer shall immediately communicate this fact to the insured and cooperate and assist the insured in determining the extent of the insurer’s additional liability.”  See, 2695.4(a).  This is a very important Regulation requirement.  Many carriers do not assist the insured, but handle claims in an adversarial fashion.  That is a violation of the minimum standards applicable to claims handling - and demonstrates bad faith.

                      Section 2695.5.  Duties Upon Receipt of Communications.

                        This Regulation sets forth a requirement that often goes unheeded by the carrier:

                                    “Upon receiving any communication from a claimant, regarding a claim, that reasonably suggests that a 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. . . .”  See, 2695.5(b).

Clearly, the purpose of this Regulation is to promote prompt claim handling and resolution.  All too often, claims files include letters from insureds where the insurance company’s response is greatly delayed.  Every late response is a separate Regulation violation.

                        Upon receiving notice of a claim, the insurance company “shall immediately, but in no event more than fifteen (15) calendar days later:”
                                    Acknowledge receipt of the notice of loss;
                                    Provide necessary forms, instructions, and reasonable assistance to the insured; and
                                    Begin necessary claim investigation.  See, 2695.5(e)(1), (2), and (3).

                        The Regulations state more than once that the insurance company must assist the insured in claims handling - not harass or impede.

                      Section 2695.6.  Training and Certification.

                        Insurance companies “shall adopt and communicate” to its claims handling personnel written standards for the prompt investigation and processing of claims.  See, 695.6(a).

Insurance companies “shall provide thorough and adequate training regarding the regulations” to all claims handling personnel.  See, 2695.6(b).

                        Carriers “shall demonstrate compliance” with these requirements by executing an annual written certification under penalty of perjury stating that the carrier’s claims manual contains a copy of the Regulations, and that clear written instructions regarding procedures to be followed were provided to claims handling personnel.  See, 2695.6(b)(2)(A) and (B).

                        Noteworthy is that this Regulation mandates that carriers have a claims manual.  Many carriers take the position that they are not required to maintain claims manuals.  Failure to maintain and provide claims manuals to claims handling personnel is a violation of this Regulation.

                        In discovery, request production of the carrier’s claims manuals, and also the annual written certification, signed “under penalty of perjury, by a principal of the entity. . . .”  If the carrier has such signed certifications - and, concomitantly, no claims manual - there is an argument that the carrier engaged in fraud or misconduct.

                      Section 2695.7.  Standards for Prompt, Fair and Equitable Settlements.

                        This Regulation section is most important relative to fair claims settlement practices.  The very first subparagraph (a) provides:

                                    No insurer shall discriminate in its claims settlement practices based upon the claimant’s age, race, gender, income, religion, language, sexual orientation, ancestry, national origin, or physical disability, or upon the territory of the property or person insured.”

                        This is not optional - yet, carriers argue the Regulations are merely “suggestions.”

                        Subparagraph (b) of this provision requires that upon receiving claim notice, carriers “shall immediately, but in no event more than forty (40) calendar days later, accept or deny the claim, in whole or in part.  The amounts accepted or denied shall be clearly documented in the claim file unless the claim has been denied in its entirety.”  If the claim is suspected to be false or fraudulent - “where there is a reasonable basis, supported by specific information available for review by the California Department of Insurance” - the forty day requirement does not apply.  See, 2695.7(k).

                        Most insureds are not aware of the forty (40) day accept or deny mandate.
                        If a carrier requires more time than forty (40) days to conduct the claim investigation, the carrier must provide written notice specifying additional information the carrier requires, and state any continuing reasons for the insurer’s inability to make a final claim determination.  If the claim continues, the carrier “shall” provide this written notice every thirty (30) calendar days until a determination is made, or notice of legal action by the insured is served.  See, 2695.7(c)(1).

                        Insurers often argue that this thirty (30) written notice requirement is optional, superfluous, onerous, and constitutes “form over substance.”  In fact, the thirty (30) day notice requirement has multiple benefits:  The insured is kept apprised of the claims handling, and the claims adjusters are reminded to pursue necessary further investigation on a claim that has not yet been resolved.  Carriers that comply with this thirty (30) day written notice requirement tend to avoid claims languishing for months or years.  We have seen that insurance companies that do not compel their adjusters to follow this provision have greater claims handling delays.

                        Where a first party claim is denied in whole or in part:

                                    The carrier must do so in writing;
                                    All bases for denial, including factual and legal, must be specified;
                                    Denial based on a statute, law, or policy provision must refer to the same, and fully explain the carrier’s reasoning.  See, 2695.7(b)(1).

                        Where a third party claim is denied in whole or in part, the denial must be in writing.  See, 2695.7(b)(1).

                        When a claim is denied in whole or in part, the carrier “shall”advise the insured or third party claimant that the matter may be reviewed by the Department of Insurance, with provision of the applicable Department unit address and telephone number.  See, 2695.7(b)(3).  Carriers with a principal place of business outside of the State of California often omit this Department of Insurance information.  This is yet again another Regulation violation.

                        Subsection (d) mandates that “[e]very insurer shall conduct and diligently pursue a thorough, fair and objective investigation and shall not persist in seeking information not reasonably required for or material to the resolution of a claim dispute.”  Where a claim is beset by carrier misconduct and bad faith, this Regulation is often repeatedly violated by various, and separate instances of, claims personnel acts and omissions.  Delay violates this Regulation.2  Refusal to consider all facts the insured presents, including matters demonstrating coverage, violates this Regulation.3  Conducting a biased investigation violates this Regulation.4  Repeatedly requesting information not reasonably necessary for claims evaluation, and requesting information the insureds advise they do not possess, violate this Regulation.5

                        Section 2695.7(g) additionally proscribes a carrier from “making a settlement offer that is unreasonably low.”  The Regulations outline seven (7) factors that illuminate whether a carrier is making an unreasonably low settlement offer:

                                    (1)       The extent to which the insurance company considered the insured’s evidence regarding claim value.
                                    (2)       The extent to which the carrier considered legal authority or evidence made available.
                                    (3)       The extent to which the carrier considered the claims adjuster’s advice regarding amount of damages.
                                    (4)       The extent to which the carrier considered its attorneys’ advice regarding potential excess policy limits recovery.
                                    (5)       Procedures used by the carrier in determining the dollar amount of property damage (this prong is particularly important in auto and homeowner cases).
                                    (6)       The extent to which the carrier considered the insured’s probable liability and likely jury verdict (or other final determination).
                                    (7)       Other credible evidence specifically pertaining to first and third party claims.

                        Section 2695.7 goes on to discuss other aspects pertaining to the prompt, fair, and equitable resolution of first and third party claims.

                      Section 2695.8.  These provisions specifically set forth minimal standards that apply to automobile insurance.  Section 2695.85 sets forth the Auto Body Repair Consumer Bill of Rights.

                      Section 2695.9.  Additional Standards Applicable to First Party Residential and Commercial Property Insurance Policies.  This is a must read for any practitioner handling a first party homeowner insurance claim/bad faith case.

You can download the Regulations from, inter alia, the Department of Insurance web site.  Print them, read them, and keep them handy.

Practical Application: Pleading/Dispositive Motions

You may include a discussion of Regulations violations committed by the insurance carrier in your bad faith Complaint.  This helps to defeat a general demurrer based on failure to state facts sufficient to constitute a cause of action.  On the other hand, we have also seen many motions to strike the Regulations language from the Complaint as there is no private right of action for Regulations violations.  The language is not properly stricken if it supports a breach or bad faith cause of action, and where it merely constitutes evidence of carrier misconduct rather than a request for relief based on the Regulations violations themselves.

Regulations violations also help to defeat a motion for summary judgment/adjudication.  Such evidence underscores carrier breach and bad faith.  Make a list of the Regulations violations, and cite to the evidentiary proof.  You may work with your bad faith expert in deriving such a list.  We had one case where there were 174 separate Regulations violations, which were set forth on an appendix with citations to the evidence.  There was abundant evidence of carrier breach and bad faith to defeat the motion.

Furthermore, at least one treatise suggests that the Regulations violations shift the burden of proof in a bad faith case.  The Regulations were promulgated to enforce the UIPA.  The theory is that such carrier violations create a rebuttable presumption of bad faith, which shifts to the insurance company the burden of proving excuse or justification for its misconduct.  See, Crosky, et al. California Practice Guide: Insurance Litigation (The Rutter Group 2009) ¶ 14:131. 

Practical Application: Discovery

Requests for Production may include requests for claims manuals, and writings that constitute the carrier’s compliance with section 2695.6(a) (written standards for the prompt investigation and processing of claims).  Ask for production of the carrier’s annual written certifications, which are to be signed under penalty of perjury by a principal of the company.  We obtained such signed certifications - in a case where the carrier did not even have a claims manual!

Practical Application: Trial

Jurors do not like an insurance company (or any defendant) that refuses to follow the rules.  The Regulations provide a compact set of the rules carriers must follow.  In the case we had involving 174 Regulations violations, during closing argument, we had one huge blow up with nothing but the number 174.  We also enlarged the relevant Regulations language.  The insureds’ bad faith expert discussed the Regulations violations, and jointly prepared the Regulations violations memorandum with our office.  Through the expert, we were able to get the fact of 174 Regulations violations into evidence.

The jurors got it.  The trial was long - one month.  The case involved a first party homeowner case, with an accidental loss due to a fire caused by the insureds’ son.  The insurance company paid for Dwelling restoration and personal property losses; but, the payments were unreasonably low.  The carrier’s theme was “we paid, and paid, and paid.”  Nevertheless, the jurors never lost sight of, and were very unhappy with, the insurance company that repeatedly flouted the rules.  There were many juror comments during the post-verdict court hallway discussions to the effect that “we would never buy insurance from that carrier,” “that carrier didn’t want to follow the rules it was supposed to follow,” and “we didn’t like that the insurance company insisted on doing things it was not supposed to do under the Regulations.”  The jury found breach and bad faith.

Incredibly, the insurance company’s only comment about the Regulations was that they were merely “guidelines.”  Otherwise, the carrier never refuted the 174 Regulations violations.  


As Abraham Lincoln said, “no law is stronger than is the public sentiment where it is to be enforced.”  (December 1859.)  Public sentiment will always be against the habitual or willful rule breaker - particularly where the rules exist to protect the vulnerable.  Even “conservative” jurors do not like corporate disobedience.  Use the Regulations throughout litigation and at trial to expose and reinforce the insurance company’s “rule breaking” misconduct and bad faith.

1           The “shall,” where quoted from the Regulations, is emphasized to underscore the mandatory nature of the Regulations.  Carrier exhortations to the contrary, these are not “guidelines.”
2           Such conduct also violates Insurance Code sections 790.03(h)(2), (3), (4), (5) and decisional law: Fleming v. Safeco Ins. Co. of America, Inc. (1984) 160 Cal.App.3d 31, 37.
3           See also, Insurance Code section 790.03(h)(5) and decisional law: 
Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 819; Jordan v. Allstate Ins. Co. (2007) 148 Cal.App.4th 1062, 1072.
4           See also,  Mariscal v. Old Republic Life Ins. Co. (1996) 42 Cal.App.4th 1617, 1624.
5           See, e.g., Bernstein v. The Travelers Ins. Co. (N.D. Cal. 2006) 447 F.Supp.2d 1100.