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Bad Faith Insurance: A Public Policy Right?

by | Feb 27, 2023 | Insurance Coverage Planning, Insurance Recovery |

What happens when your insurance company wants to use out of state law to completely cut off your right to coverage? That’s exactly the situation a California insured found herself in when her insurance company tried to use an Illinois choice of law provision that it inserted in the insurance policy to prevent the insured from making a bad faith claim.

Picture this, you suffer a loss and notify your insurer. The insurer initially agrees that there is coverage for your loss and begins making payments. Suddenly, however, the insurer changes its mind and stops making any further payments.

The insured appeals to the insurer to reverse its sudden denial of coverage, but to no avail. So, the insured does what insureds sometime must do to get the insurance coverage promised to them by the insurer when the policy was issued—the insured sued her insurance company for bad faith.

In response, the insurer pointed to an Illinois choice of law provision in its insurance policy. The insurer argued Illinois law does not recognize a cause of action for bad faith and so the court should dismiss the insured’s bad faith claim.

Choice-Of-Law Provisions Are Not Uncommon

As a practical matter, insurers sometimes insert choice of law provisions in their insurance policies. At a high level, these choice of law provisions are designed to force an insured to litigate their claims for insurance coverage under a foreign state’s law. The insurer picked the state, so one can often assume that the insurer views that state’s law as favorable to the insurance company’s interests. Most often, that is exactly the case. The insurer then uses this foreign state’s law to try to minimize the insured’s claims for insurance benefits.

In California, however, courts do not just simply accept the chosen state’s law as applying. These choice of law provisions must pass a test of scrutiny. The Illinois choice of law provision here did not meet that closer examination.

Application Of Illinois Law Would Be Contrary to a Fundamental California Policy—An Insured’s Right to Bad Faith

In examining choice of law provisions in an insurance policy, California courts often apply a 2-step process. First, they ask whether the chosen state has a substantial relationship to the parties or their transaction. In this case, which involved a group disability policy issued to the American Dental Association, which was located in Illinois, this first test was satisfied. But, that was not the end of the analysis.

Second, the court asks whether the Illinois choice of law provision is (i) contrary to a fundamental policy of California and, if so, (ii) whether California has a materially greater interest in resolution of the issue. In this case, the court found that insurance bad faith is a fundamental policy in the state of California.

The court then turned to the question of whether California had a greater material interest. The insurer argued Illinois had a greater interest, since the policy was obtained through the ADA, which was located in Illinois, and because applying Illinois law to all claims under the policy would promote a uniformity of results. However, the court found the insurer’s argument unpersuasive.

In concluding that California had the materially greater interest, the court pointed to the fact that the contract was to be performed in California, the insured suffered her loss in California, the subject matter of the contract was in California and the insured and insurer were domiciled in California and Colorado, not Illinois. The fact that no party to the dispute was located in Illinois was significant.

Bad faith is a California fundamental public policy right, a right that can trump an insurer’s attempt to use the laws of a foreign state to deny an insured coverage or to escape the consequences of that wrongful denial of coverage.  In this case, the court refused to let a Colorado insurer use its Illinois choice of law provision to prevent the California insured from pursuing a cause of action for bad faith, because in part California courts recognize that insurance bad faith is a fundamental right of California insureds.

Our team are experts in handling bad faith claims and we have an in-depth understanding in how and what it takes to get the coverage that your insurer promised to provide when they sold the insurance policy to you. Use our contact form to reach out to our team today.