If you frequent this blog, you have read a good number of posts that discuss bad faith. This week, I want to get back to basics and answer a fundamental question: Who may sue for insurance bad faith?
Focusing on first party property insurance, the short answer is the policyholder or the named insured (and where applicable, “additional insured”). That seems simple enough. Since bad faith actions are based on breach of the implied covenant of good faith and fair dealing, they necessarily require privity of contract with the insurer. Persons entitled to benefits under an insurance policy may sue for bad faith if those benefits have been wrongfully withheld. Conversely, persons not entitled to benefits under a policy cannot sue for bad faith.1
In the case of “joint insureds,” which refers to several persons who are named insureds, any of the named insured persons may sue. Their status as joint insureds establishes privity of contract with the insurance company. The implied covenant of good faith and fair dealing extends to all jointly insured. Usually, this applies to spouses who are jointly insured under a policy. But what if one spouse is not a party to the contract? In that case, the non-party spouse cannot sue for breach of the implied covenant.2 It follows that someone who is not a party to a contract has no standing to sue for damages resulting from wrongful withholding of policy benefits.3
To recap, only persons in privity of contract with an insurer may sue for bad faith. This includes the named insured, additional insured or jointly insured.
1 Seretti v. Superior Nat’l Ins. Co. (1999) 71 Cal. App. 4th 920.
2 Hartwell v. Blue Shield of Calif. (1988) 198 Cal. App. 3d 1027.
3 Austero v. National Cas. Co. of Detroit, Mich. (1976) 62 Cal. App. 3d 511.