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INSURANCE NOTES

Expert Opinion Testimony On Violations Of Fair Claims Settlement Practice Regulations Is Admissible To Prove Bad Faith

04.18.2007
Nineteen years have passed since the California Supreme Court issued the landmark ruling in Moradi-Shalal v. Firemen's Fund Ins. Companies, 46 Cal.3d 287 (1988), eliminating a private right of action for violations of California Insurance Code § 790.03(h) and the related regulations that the California Commissioner of Insurance adopted. The Court overruled Royal Globe Ins. Co. v. Superior Court, 23 Cal.3d 880 (1979), which held that a third party could pursue a cause of action under Section 790.03 for damages against an insurer who committed unfair practices in violation of the Code. The Moradi-Shalal Court, however, did not rule out civil damages or other remedies against insurers under the common law.

In the ensuing years, insureds have attempted to circumvent the Moradi-Shalal ruling by bringing actions for unfair business practices. Another approach has been to pursue a common law bad faith claim based on evidence of violations of the Insurance Code and the Commissioner's regulations. Last month, the California Court of Appeal revisited this issue in Jordan v. Allstate Ins. Co., 2007 WL 852632 (March 22, 2007). In that case, the insured presented testimony from an expert on insurance industry claims settlement practices. The expert opined that Allstate's conduct violated provisions of Section 790.03(h). Among the alleged "violations" were failing to disclose all insurance policy benefits, failing to have a copy of the Commissioner's Regulations in the insurer's claim manual, and failing to provide the claimant with a statement listing all of the grounds for the denial of the claim.

The trial court in the Jordan case ruled that the expert testimony was relevant and admissible. The Court of Appeal agreed. It held that the insured was not "seeking to recover on a claim based on a violation" of Section 790.03(h). Rather, the Court stated, "her claim was based on a claim of common law bad faith arising from Allstate's breach and the implied covenant of good faith and fair dealing, which she is entitled to pursue." The Court affirmed that it was proper for the insured to use the expert opinion as evidence to support the bad faith claim. The Court held that, "this is a proper use of evidence of an insurer's violations of the statute and the corresponding regulations." [Emphasis in original.]

The Jordan case raises a practical question: Is a claim based on evidence of violations of the statute and the regulations materially different from the old Royal Globe cause of action? Particularly in a jury trial, evidence of violations of the Fair Claims Handling Practices regulations can have a dramatic impact. Whereas the point of the Moradi-Shalal decision was to leave enforcement of the regulations to the Insurance Commissioner, not the courts, the Jordan decision arguably puts that enforcement back in the hands of a judge or jury.

For insurers, the Jordan decision highlights the importance of making a continuous effort to comply with Section 790.03(h) and the regulations. Compliance with these regulations certainly is not a formality. Most of the regulations address matters that insurers would already follow as part of their regular practices. Yet, when placed in evidence in the trial of a bad faith case, an otherwise innocuous violation of a regulation may be the deciding factor in the outcome of the case. The admission of "expert" testimony to a jury about how the insurer does not "follow the rules" could be the difference between a defense verdict and a finding of bad faith.

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