Is There Third Party Bad Faith In California?

The short answer, no. Here’s the longer answer, which explains why. Let’s start with definitions.

What is a First Party Claim?

A first party claim is a claim the policyholder, or the insured, makes against his insurance company. If you have a homeowners policy and you make a claim for water damage, that’s a first party claim. If you have car insurance and you make a claim for property damage because you ran into a pole, that’s a first party claim.

What is a Third Party Claim?

A third party claim is a claim made by a claimant, or third party, against the policyholder’s liability insurance. If you’re bitten by a dog and you make a claim against the dog owner, you’re making a third party claim against the dog owner’s homeowners policy. If you’re injured in a car crash and make a claim against the driver’s car insurance for your injuries, you’re making a third party claim.

Third party claims deal with liability insurance. First party claims deal with damage to the insured’s own property. There are exceptions, but that’s generally true.

What is Bad Faith in California?

I wrote a post about it here.

Bad faith generally arises when the insurance company acts unreasonably or fails to act in a manner that deprives you of the benefits of the policy. Bad faith is when your insurance company acts unreasonable or unfairly to you. The italicized words are important. Bad faith concerns you and your insurance company. Bad faith is about the duty the insurance company owes you as the policyholder, or insured.

From that, you can tell that bad faith generally arises from first party claims. First party claims involve you making a claim against your insurance company. Is the insurance company going to deny your claim? If they accept your claim, will they handle it fairly? Will the insurance company act reasonably towards you when you make your claim? An analysis of bad faith is concerned about the relationship between the insured and the insurance company.

Compare that scenario to a third party claim. A claimant can make a claim against the policyholder’s liability insurance. The insurance company can deny or accept the claim. The focus, however, is on the relationship between the insured and the insurance company. Is the insurance company treating the insured fairly or reasonably when it comes to the third party claim being made against the insured?

Can there be bad faith in a third party claim in California?

Another way to phrase the question is like this: does a claimant have bad faith claim against an insured’s liability insurance company? No, he doesn’t have that claim because the claimant is not automatically entitled to the benefits of the policy. The insured is. If the claimant make a third party claim against the insured, and the insured’s insurance company denies him the benefits of the policy by not settling the claim within his liability limits (see CACI 2334 or CACI 2336) or otherwise acts unreasonably, the insured has a bad faith claim against his insurance company. In that case, the insured can assign his bad faith claim to the claimant.