What Is Bad Faith Insurance in Personal Injury?

James Wong — Founder & Pharmacist, LienScripts | March 22, 2024 | 7 min read

Bad faith insurance occurs when an insurer unreasonably denies, delays, or underpays a legitimate claim. In California, bad faith can expose the insurer to damages beyond the policy limits — including punitive damages. Learn what constitutes bad faith and how it applies to injury medication denials.

This post is for informational purposes only and does not constitute legal advice.

When an Insurer Puts Its Interests Ahead of the Insured's

Insurance is a contract. When a policyholder files a covered claim, the insurer has a legal obligation to handle it fairly, promptly, and in good faith. When an insurer fails to do so — by unreasonably denying, delaying, or underpaying a valid claim — it may be acting in bad faith.

In California, the duty of good faith and fair dealing is implied in every insurance contract. An insurer who breaches this duty can face civil liability not just for the underlying claim, but for additional compensatory and punitive damages.

[!KEY] Bad faith insurance occurs when an insurer unreasonably denies, delays, or underpays a valid claim — in California, this can expose the insurer to damages beyond policy limits, including punitive damages for malicious or fraudulent conduct.

What Constitutes Bad Faith Insurance

Bad faith is not simply making an error or having a legitimate dispute about coverage. It requires unreasonable conduct — conduct that no reasonable insurer would engage in when evaluating a covered claim.

Common examples of bad faith in personal injury contexts:

Unreasonable claim denial. Denying a covered claim without a reasonable investigation or a credible basis for the denial. Denying a clearly covered auto accident injury claim because the insurer wants to pressure the claimant into a low settlement is classic bad faith.

Unreasonable delay. Stalling a legitimate claim without justification — not responding to communications, requesting unnecessary documentation repeatedly, or failing to make a coverage decision within a reasonable time.

Inadequate investigation. Making a coverage or damages decision without adequately investigating the claim. An insurer that denies injury medication coverage without reviewing medical records or consulting clinical guidelines may have conducted an inadequate investigation.

Lowball settlement offers. Offering a settlement far below the known value of the claim, particularly when the insurer has full knowledge of the claimant's injuries and damages.

Denying coverage without explanation. California Insurance Code § 790.03 and related regulations (the Fair Claims Settlement Practices Regulations) require insurers to explain the basis for any denial in writing.

Misrepresenting policy terms. Telling the policyholder their claim is not covered when it is, or misstating the policy's terms to justify a lower payment.

Bad Faith and Medication Coverage Denials

In PI cases where a patient is trying to access injury medications through their health plan, bad faith principles may apply when:

• The insurer denies prior authorization for a medication without adequate clinical review.
• The insurer requires excessive documentation and creates procedural barriers designed to discourage the claim rather than evaluate it.
• The insurer delays approval for time-sensitive medications (post-surgical pain management, acute injury treatment) causing harm.
• An appeals process is designed to be circular and non-productive.

For patients who cannot access their injury medications due to insurance delays or denials, a pharmacy lien from LienScripts provides an immediate alternative. The insurance dispute can continue in parallel while the patient receives uninterrupted prescription access. See our post on what prior authorization is and how pharmacy liens bypass it.

[!KEY] An insurance denial for injury medications, combined with a same-day pharmacy lien enrollment, creates a two-document record — the denial letter and the lien enrollment confirming the patient's need — that establishes both the bad faith conduct and the resulting harm in a single intake step.

California's Bad Faith Remedies

In California, a bad faith insurance claim can result in:

Extracontractual damages. Damages beyond the underlying policy benefits — including consequential damages caused by the insurer's wrongful conduct (medical costs incurred due to delayed treatment, lost income due to denial, etc.).

Emotional distress damages. Compensation for the emotional harm caused by an insurer's bad faith conduct.

Punitive damages. If the insurer's conduct was malicious, oppressive, or fraudulent, a court may award punitive damages. These can be substantial — sometimes several times the underlying compensatory damages.

Attorney fees. In first-party bad faith cases (where the insured sues their own insurer), attorney fees may be recoverable under Brandt v. Superior Court (1985) for the fees incurred to establish the bad faith violation.

First-Party vs. Third-Party Bad Faith

First-party bad faith occurs when an insurer fails to properly handle a claim by its own policyholder. A driver suing their own insurer for unreasonably denying an uninsured motorist (UM) claim is a first-party bad faith case. California has the strongest bad faith remedies for first-party claims.

Third-party bad faith occurs when an insurer fails to properly defend its policyholder against a third-party claim or unreasonably refuses to settle within policy limits, exposing the insured to an excess judgment. California recognizes third-party bad faith claims under the Royal Globe line of cases (though the law in this area continues to evolve).

The Stowers Doctrine (Texas Note)

For PI attorneys operating in Texas or with cases in other jurisdictions: the Stowers doctrine imposes a duty on insurers to accept reasonable settlement offers within policy limits to protect the insured from excess exposure. Failure to do so can expose the insurer to the full excess verdict. California has analogous protections under its bad faith framework.

[!TIP] For Attorneys: When a health insurer denies injury medication coverage without adequate clinical review, enroll the patient in a pharmacy lien immediately — the insurer's denial becomes a documented bad faith act while the patient's treatment continues uninterrupted.

Pharmacy Liens as a Bad Faith Response

When health insurance bad faith results in denied or delayed medication access for an injury patient, the practical remedy — while a bad faith claim is pursued — is a pharmacy lien. LienScripts' pharmacy lien program allows patients to access all needed medications immediately, without insurance involvement. The insurer's failure to cover medications becomes a documented element of the bad faith damages claim.

[!KEY] The pharmacy lien record produced during the period of insurance bad faith documents exactly what the patient had to access independently — every fill is a dated measure of consequential harm flowing from the insurer's denial, strengthening the extracontractual damages calculation in the bad faith claim.

For a broader look at how insurance coverage affects pharmacy access, see our post on how different insurance types interact with pharmacy liens.

Key Takeaway

Bad faith insurance occurs when an insurer unreasonably denies, delays, or underpays a valid claim. In California, bad faith can give rise to extracontractual damages, emotional distress damages, and punitive damages. For patients whose injury medication access is disrupted by insurance bad faith, a pharmacy lien provides immediate access while the coverage dispute is resolved.