In the state of California, the accepted position is that an insurance company is compelled to treat their insured policy holders fairly and in good faith after a claim has been presented. All insurance policies include an implied obligation of good faith and fair dealing which suggests that neither the insurance company nor the insured will do anything to jeopardize the right of the other party to receive the benefits of the agreement. Consideration must be given to the interest of the insured at the same valuation as the insurance company in order for the insurance company to successfully fulfill its obligation of good faith and fair dealings.

If an insurance company should deprive the insured of the benefits of the policy unreasonably or without just cause, this is a breach in the implied obligation of good faith and fair dealing. It is much more than simply failing to use due caution. The insured does not have to prove that the insurance company willfully intended not to honor the claim in order to hold the company liable.

If the insured feels their insurance company has deliberately placed roadblocks in the process or has unfairly refused to honor the claim, they can pursue the case in civil court and collect on a judgment there. The insurance company representative may believe his actions are in the right but lies, trickery, and unnecessary procrastination can negatively affect the bond of trust between insurer and client. The obligation of good faith is more involved: bad faith may be obvious and good faith may call for more than just honest dealing. Because it is impossible to catalogue all types of bad faith, here are a few types recognized in judicial decisions: evading the spirit of the bargain, not putting forth effort or slacking off, willful render of imperfect performance, abusing the power of specific terms, and interfering with or failure to cooperate in the other party's performance.

In order to make the law more clear, some examples of insurance company bad faith may be looked at. With automobile insurance policies, if an insurance company provides uninsured motorist coverage for their insured and their insured is involved in an accident with an uninsured driver, then the insured is guaranteed prompt and fair payment by the policy. Though they may eventually pay the claim, insurance companies may be liable for bad faith if they disputed the value of the insured's injury or withheld benefit payments. If a payment on a claim is unreasonably delayed, then the insurer could be committing bad faith.

Insurance bad faith also occurs when an insurance company denies a claim (whether for life insurance benefits, property damage, etc.) based on an irrational interpretation of the policy. This scenario will often occur when a policy is subject to interpretation because the definition of a condition or prerequisite to coverage is not specifically outlined by the policy. Then the insurance company is left to define or interpret the language of the policy on its own. The insurer could be liable for bad faith if they ignore the plain meaning of a word or neglect to give the appropriate weight to the insured's interpretation of the policy. Remember that any ambiguity in the way the policy is written benefits the insured rather than the insurer. The exclusions in an insurance policy must be reasonable and easily understood and not be wide-ranging in scope.

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