When policyholders buy liability insurance, they anticipate their insurer standing behind them if they are sued. The “duty to defend” is an essential element of most liability insurance policies, obliging insurers to pay for legal counsel and the defense of claims. But some insurers try to sidestep it by unfairly denying defense, dragging out replies, or providing inadequate legal assistance. If an insurer will not defend against a claim under no proper motive, then they are said to be doing that in bad faith and could become legally liable.
A bad faith denial of defense can have disastrous results for policyholders, holding them liable for legal costs, settlements, and judgments that were supposed to be paid. This article discusses the duty to defend, instances of bad faith conduct, legal ramifications, and what policyholders can do if their insurance company refuses to honor its commitment.
Understanding the Duty to Defend
The duty to defend is a basic responsibility of an insurer in a policy of liability. In contrast to the duty to indemnify, which obligates an insurer to pay damages or settlements only if the claim is covered, the duty to defend kicks in as soon as there is a possibility of coverage. This is to say that even if allegations in a lawsuit are not entirely covered, the insurer is still obliged to defend.
Key Aspects of the Duty to Defend:
- Broad Obligation: Insurers must defend against lawsuits where at least one claim is potentially covered by the policy.
- Legal Defense Coverage: The insurer must provide and pay for a qualified attorney to represent the policyholder.
- Protection from Financial Harm: The insurer must cover legal fees, court costs, and related expenses, even if the case is later determined to be outside the policy’s coverage.
- Potential for Coverage Rule: If any part of the lawsuit could be covered, the insurer must defend the entire case, even if some claims are ultimately excluded.
What Constitutes Bad Faith in the Duty to Defend?
Bad faith occurs when an insurer unreasonably refuses or fails to fulfill its contractual duty to defend a policyholder. Courts determine bad faith based on whether the insurer’s actions were justified and whether it engaged in unfair practices.
Common Examples of Bad Faith Duty to Defend:
- Wrongfully Denying Defense: An insurer refuses to provide legal representation without a valid reason, even when there is a potential for coverage.
- Failure to Investigate: The insurer denies a claim without conducting a thorough review of the facts or policy terms.
- Unreasonable Delays: The insurer takes too long to respond to the claim, causing the policyholder to miss deadlines or struggle with legal costs.
- Misinterpretation of Policy Terms: The insurer intentionally misreads or distorts the policy language to avoid providing coverage.
- Providing Inadequate Legal Defense: The insurer assigns unqualified or inexperienced attorneys, resulting in poor representation.
- Pressuring the Insured to Settle Unfairly: The insurer forces the policyholder to accept an unreasonable settlement rather than providing proper defense.
Legal Consequences of Bad Faith
An insurer that acts in bad faith can face serious legal consequences. Courts recognize that policyholders rely on insurers to act in good faith, and when that trust is broken, policyholders have the right to pursue legal action.
Potential Penalties for an Insurer Acting in Bad Faith:
- Damages for Defense Costs: The insurer may be required to reimburse all legal fees and expenses the policyholder incurred.
- Compensation for Emotional and Financial Harm: If the bad faith refusal caused financial hardship or emotional distress, the policyholder may receive compensation.
- Punitive Damages: If the insurer’s misconduct was intentional or particularly reckless, the court may award punitive damages as a penalty.
- Liability Beyond Policy Limits: If the insurer wrongfully refuses to defend, it may be held responsible for the full amount of a judgment, even if it exceeds the policy limits.
How to Prove an Insurer Acted in Bad Faith
Policyholders who believe their insurer wrongfully refused to defend them must provide evidence of bad faith. To succeed in a bad faith lawsuit, they typically must prove:
- A valid policy was in place at the time of the claim.
- The lawsuit contained allegations that created a potential for coverage.
- The insurer unreasonably refused to provide a defense.
- The insurer’s decision was not based on a proper investigation or legal justification.
Courts may also consider the insurer’s handling of similar claims, whether they followed industry standards, and if they engaged in deceptive practices.
Legal References:
- Espejo v. The Copley Press, Inc. (2017) 13 Cal.App.5th 329. See also ABC Test, California Department of Labor.
- California Labor Code 2775 LAB. See also California Civil Jury Instructions (CACI) No. 2705. See also, for example, Bowen v. Burns & McDonnell Engineering Co., Inc. (Cal.App. 2024) .
- California Labor Code 2775 LAB.
- California Labor Code 2775(b)(1)(A) LAB.
- Dynamex Operations West, Inc. v. Superior Court of Los Angeles County (2018) 4 Cal.5th 903, 958. See also Vazquez v. Jan-Pro Franchising Internat. (2021) 10 Cal. 5th 944.
- Dynamex, supra note 5, citing Western Ports v. Employment Security Department (2002) 41 P.3d 510.
- Dynamex, supra note 5, citing Fleece on Earth v. Department of Employment & Training (2007) 181 Vt. 458.
- Dynamex, supra note 5, citing Great Northern Construction, Inc. v. Dept. of Labor (2016) 161 A.3d 1207.
- Dynamex, supra note 5, at 959-961.
- Dynamex, supra note 5, citing Dole v. Snell (10th Cir. 1989) 875 F.2d 802.
- Dynamex, supra note 5, at 959.
- Alamo Foundation v. Secretary of Labor (1985) 471 U.S. 290.
- Dynamex, supra note 5, at 961-3.
- Dynamex, supra note 5, at 962. Going into business for oneself often involves taking the following steps: incorporating as a business, advertising, obtaining any necessary business licenses, and making offers to provide business services to the public.
- Dynamex, supra note 5, citing Brothers Construction Co. v. Virginia Employment Commission (1998) 494 S.E.2d 478.
- Dynamex, supra note 5, citing Southwest Appraisal Group, LLC v. Administrator, Unemployment Comp. Act (2017) 155 A.3d 738.
- California Labor Code 2780 LAB. Examples include recording artists or their managers, songwriters, lyricists, composers, or proofers, record producers and directors, musical engineers and mixers, musicians and musical groups, vocalists, and photographers working in the music industry.
- California Labor Code 2782 LAB.
- California Labor Code 2783 LAB.
- Same.
- Same. The licensed professionals include lawyers, architects and landscape architects, engineers, accountants, and private investigators.
- Same.
- Same.
- Same.
- California Labor Code 2778 LAB.
- Same.
- Same.
- Same.
- Same.
- Same.
- California Labor Code 2776 LAB.
- California Labor Code 2777 LAB.
- California Labor Code 2778 LAB.
- California Labor Code 2779 LAB.
- California Labor Code 2781 LAB.
- S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341. Some of those factors of the Borello test are:
- whether the worker is in a distinct occupation or business,
- whether the type of work normally happens under the direction of the employer or by a specialist without supervision,
- how much skill is necessary for the work,
- who supplies the tools and workspace,
- whether or how much the worker invested in their tools or helpers,
- how long the services will be performed,
- whether the worker is compensable based on time spent on the job or upon the job’s completion,
- whether the work is within the purported employer’s regular business,
- whether the parties believe that they are creating an employer-employee relationship, and
- whether the worker can profit or lose from the work based on their managerial skill.
None of these factors are dispositive. - Same.
- Dynamex, supra note 5, at 954.
- Dynamex, supra note 5, at 956, footnote 23. Because the Dynamex decision changed independent contractor misclassification law, it had a huge impact on ridesharing companies like Uber and Lyft that rely on delivery drivers and taxi-like drivers.
- California Labor Code 2785 LAB.
- Daniel Wiessner, 9th Circuit weighs claims that Uber was targeted by Calif. contractor law, Reuters (March 20, 2024).
- California Code of Civil Procedure 338 CCP; California Code of Civil Procedure 337 CCP. While independent contractors do not enjoy these legal and financial benefits, they have more control in how they work. True independent contractors can: choose which days and hours to work, choose and use their own equipment, and take breaks whenever they want. Actual independent contractors only have to satisfy the companies that they contract with in the products and services that they provide. True independent contractors cannot be told how to provide them. They are central to the current gig economy. This is why independent contractor misclassification is a problem in employment law: Employers classify workers as independent contractors but treat them as employees. By doing so, they can control the work that is provided while also avoiding the legal obligations that are owed to employees.
- California Labor Code 226.8 LAB.
About the Author
Neil Bhartia
Neil Bhartia isn’t your typical, stuffy attorney that you see on TV. While some have their sights exclusively on money and treat their clients like a number, Neil takes a personal interest in every single client he has. As an empath, Neil understands that people that seek legal help are typically in an involuntary, and stressful situation, and he goes out of his way to diffuse the stress and educate clients on each every detail of the legal process.
