Your client is denied coverage under a property insurance policy and is seeing red, or more accurately, seeing a lawsuit. It’s your job to lay out the facts about suing the insurer to help your client make a prudent decision.
Insurers are typically sophisticated about litigation, but insureds are generally not. Insureds are often unfamiliar with the legal system and may have highly unrealistic expectations about the outcome of a case against their insurance company.
It is crucial to address the insured’s expectations before filing suit and incurring substantial litigation expenses.
So, before you agree to help your insured client sue his or her insurance company, explain the following facts of insurance life to your client:
- Recovery may be much more limited than the insured realizes. Insurance litigation is essentially contract litigation. This means that any recovery in the suit will be constrained by contractual limitations such as policy limits, policy exclusions, and the absence of attorney fees clauses.
- Showing bad faith will take proof beyond the denial of the claim. The substance of a bad faith action is the insurer’s unreasonable refusal or delay in paying benefits due under the policy. You can’t just show that the claim was denied, you need additional proof that the insurer acted “unreasonably” or “without proper cause” to succeed on a bad faith claim and recover Brandt fees (attorney fees and costs incurred for recovery of wrongfully withheld policy benefits).
- The standard of proof for punitive damages is high. It takes “clear and convincing” evidence of malice, oppression, or fraud to succeed on a punitive damage claim. The insured must establish three levels of proof : (1) the insured was entitled to policy benefits, (2) the insurer’s conduct amounted to bad faith, and (3) the insurer’s conduct constituted oppression, fraud, or malice within the meaning of CC §3294.
- Major bad faith and punitive damages awards are relatively rare. The client’s frustration with the insurer’s position or the pace of investigation doesn’t automatically create a successful bad faith claim. These types of claims are tough to win and substantial awards are very uncommon.
Consider whether you can pursue the bad faith claim in conjunction with other claims. For example, if the insured can prove that the insurer acted in bad faith, in addition to establishing a duty to indemnify, then the insured may seek to recover tort damages, including consequential economic damages, emotional distress damages, attorney fees, and costs incurred in proving coverage, and, on proper proof, punitive damages.
Litigating coverage claims against an insurer is seldom easy or inexpensive. Unless the disputed amount is quite large, even if the insured wins, the victory may be so costly that the attorney fees, costs, and expenses may nearly equal or even exceed the amount of the verdict.
There are, of course, some cases that are ripe for litigation. Just be sure your client doesn’t have unreasonable expectations and you are ready for a fight.
For everything you need to know about suing a property insurer, turn to CEB’s California Property Insurance: Law and Litigation, chap 15. Check out my video discussion of this book with its contributing editor, Tim Sullivan, on CEB’s YouTube channel.
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