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When does insurance bad faith merit punitive damages?

If you successfully sue an insurance company for bad faith, you are entitled to monetary damages.

In addition to compensatory damages (your actual losses), you may be awarded punitive damages, which are meant to punish and deter the wrongdoing. When do punitive damages apply? How are they calculated?

Understanding insurance bad faith

Insurance companies are bound by California and federal laws. When you file a claim against a disability policy or homeowner's policy, the insurer must give the claim its good faith consideration.

A finding of bad faith - by a judge or by a jury - means that the insurance company's conduct was arbitrary or unfair. For example, denying a valid claim on a minor technicality or denying a claim outright without conducting an investigation may constitute insurance bad faith.

Understanding punitive damages

Upon a finding of bad faith, a court or jury may compel the insurer to fulfill its obligations under the policy. This might mean paying out the amount of the original claim, plus your attorney fees and other financial harm (such as lost wages) that resulted from a bad faith delay or denial.

California law also provides for punitive damages when the bad faith conduct is willful, egregious or widespread. For example, endless requests for additional information that drag out the claim for a year, or systematically denying all wildfire claims, might merit punitive damages. The purpose of punitive damages is to call out the wrongful treatment and discourage similar misconduct in the future. It also recognizes the emotional anguish and hassles that the claimant has endured.

How is the amount determined?

One consideration is the severity or scope of the wrongful conduct. Another consideration is what sum of money will get the insurance company's attention, as opposed to an amount that would be shrugged off as the "cost of doing business."

There is no magic formula for calculating punitive damages. Treble damages (punitive damages of triple the compensatory damages) is sometimes applied, but often the award is much higher. The California Supreme Court struck down the old formula that said the multiplier factor must be single digit. This means that punitive damages could be 10 or 20 times the actual loss. However, when well-meaning juries award multi-million punitive damages, those awards are sometimes reduced on appeal as excessive.

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