CACI No. 2330. Implied Obligation of Good Faith and Fair Dealing Explained

Judicial Council of California Civil Jury Instructions (2020 edition)

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2330.Implied Obligation of Good Faith and Fair Dealing Explained
In every insurance policy there is an implied obligation of good faith and
fair dealing that neither the insurance company nor the insured will do
anything to injure the right of the other party to receive the benefits of
the agreement.
To fulfill its implied obligation of good faith and fair dealing, an
insurance company must give at least as much consideration to the
interests of the insured as it gives to its own interests.
To breach the implied obligation of good faith and fair dealing, an
insurance company must unreasonably act or fail to act in a manner that
deprives the insured of the benefits of the policy. To act unreasonably is
not a mere failure to exercise reasonable care. It means that the insurer
must act or fail to act without proper cause. However, it is not necessary
for the insurer to intend to deprive the insured of the benefits of the
policy.
New September 2003; Revised December 2007, December 2015
Directions for Use
This instruction may be used to introduce a “bad-faith” claim arising from an
alleged breach of the implied covenant of good faith and fair dealing.
Sources and Authority
• “There is an implied covenant of good faith and fair dealing in every contract
that neither party will do anything which will injure the right of the other to
receive the benefits of the agreement.” (Comunale v. Traders & General Ins. Co.
(1958) 50 Cal.2d 654, 658 [328 P.2d 198].)
• “It is important to recognize the reason for the possibility of tort, and perhaps
even punitive damages on top of regular tort damages, for an insurance
company’s unreasonable breach of an insurance contract. Insurance contracts are
unique in that, if the insurance company breaches them, the policyholder suffers
a loss (often a catastrophic loss) that cannot, by definition, be compensated by
obtaining another contract. [Citations.] [¶] Thus, without the possibility of tort
damages hanging over its head when it makes a claims decision, an insurance
company may choose not to deal in good faith when a policyholder makes a
claim. The insurance company could arbitrarily deny a claim, thus gambling
with the policyholder’s ‘benefits of the agreement.’ [Citation.] If the insurance
company gambled wrong, it would be no worse off than it would have been if it
had honored the claim in the first place. In effect, if the law confined the
exposure of the insurance company under such circumstances to only contract
damages, it would be pardoned and still retain the fruits of its offense.” (Pulte
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Home Corp. v. American Safety Indemnity Co. (2017) 14 Cal.App.5th 1086,
1125 [223 Cal.Rptr.3d 47].)
• “For the insurer to fulfill its obligation not to impair the right of the insured to
receive the benefits of the agreement, it again must give at least as much
consideration to the latter’s interests as it does to its own.” (Egan v. Mutual of
Omaha Insurance Co. (1979) 24 Cal.3d 809, 818-819 [169 Cal.Rptr. 691, 620
P.2d 141].)
• “[T]o establish the insurer’s ‘bad faith’ liability, the insured must show that the
insurer has (1) withheld benefits due under the policy, and (2) that such
withholding was ‘unreasonable’ or ‘without proper cause.’ The actionable
withholding of benefits may consist of the denial of benefits due; paying less
than due; and/or unreasonably delaying payments due.” (Major v. Western Home
Ins. Co. (2009) 169 Cal.App.4th 1197, 1209 [87 Cal.Rptr.3d 556], internal
citations omitted.)
• “ ‘[T]he covenant of good faith can be breached for objectively unreasonable
conduct, regardless of the actor’s motive.’ . . . [A]n insured plaintiff need only
show, for example, that the insurer unreasonably refused to pay benefits or failed
to accept a reasonable settlement offer; there is no requirement to establish
subjective bad faith.” (Bosetti v. United States Life Ins. Co. in the City of New
York (2009) 175 Cal.App.4th 1208, 1236 [96 Cal.Rptr.3d 744], original italics,
internal citations omitted.)
• “To establish bad faith, a policy holder must demonstrate misconduct by the
insurer more egregious than an incorrect denial of policy benefits.” (Case v. State
Farm Mutual Automobile Ins. Co., Inc. (2018) 30 Cal.App.5th 397, 402 [241
Cal.Rptr.3d 458].)
• “Bad faith may involve negligence, or negligence may be indicative of bad faith,
but negligence alone is insufficient to render the insurer liable.” (Brown v.
Guarantee Ins. Co. (1957) 155 Cal.App.2d 679, 689 [319 P.2d 69].)
• “Thus, a breach of the implied covenant of good faith and fair dealing involves
something more than a breach of the contract or mistaken judgment. There must
be proof the insurer failed or refused to discharge its contractual duties not
because of an honest mistake, bad judgment, or negligence, ‘but rather by a
conscious and deliberate act, which unfairly frustrates the agreed common
purposes and disappoints the reasonable expectations of the other party thereby
depriving that party of the benefits of the agreement.’ ” (Century Surety Co. v.
Polisso (2006) 139 Cal.App.4th 922, 949 [43 Cal.Rptr.3d 468], internal citations
omitted.)
• “[I]f the insurer denies benefits unreasonably (i.e., without any reasonable basis
for such denial), it may be exposed to the full array of tort remedies, including
possible punitive damages.” (Jordan v. Allstate Ins. Co. (2007) 148 Cal.App.4th
1062, 1073 [56 Cal.Rptr.3d 312].)
• “Subterfuges and evasions violate the obligation of good faith in performance
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even though the actor believes his conduct to be justified. But the obligation
goes further: bad faith may be overt or may consist of inaction, and fair dealing
may require more than honesty. A complete catalogue of types of bad faith is
impossible, but the following types are among those which have been recognized
in judicial decisions: evasion of the spirit of the bargain, lack of diligence and
slacking off, willful rendering of imperfect performance, abuse of a power to
specify terms, and interference with or failure to cooperate in the other party’s
performance.” (R. J. Kuhl Corp. v. Sullivan (1993) 13 Cal.App.4th 1589, 1602
[17 Cal.Rptr.2d 425].)
• “[A]n insurer is not required to pay every claim presented to it. Besides the duty
to deal fairly with the insured, the insurer also has a duty to its other
policyholders and to the stockholders (if it is such a company) not to dissipate
its reserves through the payment of meritless claims. Such a practice inevitably
would prejudice the insurance seeking public because of the necessity to increase
rates, and would finally drive the insurer out of business.” (Austero v. National
Cas. Co. (1978) 84 Cal.App.3d 1, 30 [148 Cal.Rptr. 653], overruled on other
grounds in Egan, supra, 24 Cal.3d at p. 824 fn. 7.)
• “Unique obligations are imposed upon true fiduciaries which are not found in the
insurance relationship. For example, a true fiduciary must first consider and
always act in the best interests of its trust and not allow self-interest to
overpower its duty to act in the trust’s best interests. An insurer, however, may
give its own interests consideration equal to that it gives the interests of its
insured; it is not required to disregard the interests of its shareholders and other
policyholders when evaluating claims; and it is not required to pay noncovered
claims, even though payment would be in the best interests of its insured.” (Love
v. Fire Ins. Exchange (1990) 221 Cal.App.3d 1136, 1148-1149 [271 Cal.Rptr.
246], internal citations omitted.)
• “[I]n California, an insurer has the same duty to act in good faith in the
uninsured motorist context as it does in any other insurance context.” (Maslo v.
Ameriprise Auto & Home Ins. (2014) 227 Cal.App.4th 626, 636 [173 Cal.Rptr.3d
854].)
• “ ‘[P]erformance of an act specifically authorized by the policy cannot, as a
matter of law, constitute bad faith.’ [¶] [I]n the insurance context, . . . ‘ “courts
are not at liberty to imply a covenant directly at odds with a contract’s express
grant of discretionary power.” ’ The possible exception would be ‘ “those
relatively rare instances when reading the provision literally would, contrary to
the parties’ clear intention, result in an unenforceable, illusory agreement.” ’ ”
(Baldwin v. AAA Northern California, Nevada & Utah Ins. Exchange (2016) 1
Cal.App.5th 545, 557-558 [204 Cal.Rptr.3d 433], internal citations omitted.)
Secondary Sources
2 Witkin, Summary of California Law (11th ed. 2017) Insurance, § 340
Croskey, et al., California Practice Guide: Insurance Litigation, Ch. 11-B, Theories
For Extracontractual Liability - In General, ¶¶ 11:7-11:8.1 (The Rutter Group)
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Croskey, et al., California Practice Guide: Insurance Litigation, Ch. 12A-A,
Definition of Terms, ¶¶ 12:1-12:10 (The Rutter Group)
Croskey, et al., California Practice Guide: Insurance Litigation, Ch. 12A-B, Capsule
History Of Insurance “Bad Faith” Cases, ¶¶ 12:13-12:23 (The Rutter Group)
Croskey, et al., California Practice Guide: Insurance Litigation, Ch. 12A-C, Theory
Of Recovery - Breach Of Implied Covenant Of Good Faith And Fair Dealing (“Bad
Faith”), ¶¶ 12:27-12:54 (The Rutter Group)
Croskey, et al., California Practice Guide: Insurance Litigation, Ch. 12A-D, Who
May Sue For Tortious Breach Of Implied Covenant (Proper Plaintiffs),
¶¶ 12:56-12:90.17 (The Rutter Group)
Croskey, et al., California Practice Guide: Insurance Litigation, Ch. 12A-E, Persons
Who May Be Sued For Tortious Breach Of Implied Covenant (Proper Defendants),
¶¶ 12:92-12:118 (The Rutter Group)
Croskey, et al., California Practice Guide: Insurance Litigation, Ch. 12A-F,
Compare - Breach Of Implied Covenant By Insured, ¶¶ 12:119-12:121 (The Rutter
Group)
1 California Liability Insurance Practice: Claims and Litigation (Cont.Ed.Bar)
Overview of Rights and Obligations of Policy, §§ 2.9-2.15
2 California Insurance Law & Practice, Ch. 13, Claims Handling and the Duty of
Good Faith, § 13.01 (Matthew Bender)
1 California Uninsured Motorist Law, Ch. 13, Rights, Duties, and Obligations of the
Parties, § 13.23 (Matthew Bender)
2 California Uninsured Motorist Law, Ch. 24, Bad Faith in Uninsured Motorist
Law, §§ 24.10, 24.20-24.21, 24.40 (Matthew Bender)
26 California Forms of Pleading and Practice, Ch. 308, Insurance, § 308.24[1]
(Matthew Bender)
11 California Legal Forms, Ch. 26A, Title Insurance, § 26A.17[9] (Matthew Bender)
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