United States: When Are Insurance Bad Faith Damage Awards Excessive?

Last Updated: March 20 2019
Article by Richard J. Doren and Michael Holecek

To evaluate the potential risks for insurance company clients sued for bad faith claim handling, defense counsel must understand the categories of potential damages that could be awarded and have a basis from which to assess their potential magnitude. Bad faith damages are case-specific, and they depend on the nature of the insurer's conduct and the insured's injury, among other factors. A particular damages award might be appropriate in one case, but excessive and even unconstitutional in another.

That said, courts have provided helpful guidance - including suggested ratios and mandatory ceilings - that can help lawyers determine their clients' likely and worst-case damages scenarios. This article focuses on the ratios and damages ceilings in first-party bad-faith insurance cases under California law.

The types of damages available in a bad faith insurance case fall into a number of different categories. In addition to recovering contract damages (which are generally the policy benefits due to the plaintiff), a plaintiff may also be able to recover a variety of tort damages, including damages for economic harm, noneconomic harm (which, in bad faith cases, often constitutes emotional distress damages), punitive damages, attorneys' fees and prejudgment interest.

Economic Harm

Beyond recovery of the policy benefits, the economic damages for bad faith breach could include other financial loss proximately caused by the breach.1 For example, in Gruenberg v. Aetna Insurance Co., the California Supreme Court held that a plaintiff could recover the loss of future earnings and business profits if proximately caused by the insurer's tortious conduct.2

In other cases, courts have suggested that insureds could recover property loss (such as the equity in the insured's home), and even borrowing costs, if the bad faith breach caused the plaintiff to borrow money to meet living expenses or to preserve assets from foreclosure.3 In general, courts have not placed a cap on these extracontractual financial damages, but rather have permitted plaintiffs to recover any and all proximately caused financial loss from the bad-faith breach.

Emotional Distress Damages

Early cases generally held that juries had wide discretion to award emotional distress damages, which did not have to bear any relation to financial harm. For example, in 1970, the California Court of Appeal held in Fletcher v. Western National Life Insurance Co. that no fixed standard governed emotional distress damages, and that the only limiting factor was that the damages amount could not be "so large that the verdict shocks the moral sense and raises a presumption that it must have resulted from passion or prejudice."4 This was consistent with the general principle under California law that noneconomic damages did not need to bear a reasonable relationship to economic damages.5

More recent cases, however, have held that emotional distress damages for bad-faith breach of contract must bear a reasonable relationship to economic harm. As the Court of Appeal held in Major v. Western Home Insurance Co., the bad-faith cause of action is primarily designed to remedy "financial loss."6 Thus, "in determining whether the noneconomic damages award is excessive, we compare the amount of that award to the economic damages award, to see if there is a reasonable relationship between the two."7 In Major, the court upheld a 2:1 ratio between noneconomic and economic damages ($450,000 noneconomic damages to $220,359.55 in economic damages), holding that a 2:1 ratio was "not excessive."8

By contrast, in Merlo v. Standard Life & Accident. Insurance Co., the Court of Appeal held that a 33:1 ratio was excessive.9 The court reversed the $250,000 noneconomic damages award because the plaintiff had been awarded only $7,470 in economic damages.10

Major and Merlo thus represent two ends of a very broad spectrum, leaving plenty of uncertainty for insurers. A recent Court of Appeal decision held that a 9:1 ratio was not excessive as a matter of law, rejecting a bright-line rule and holding that "[a]ssessing the reasonableness of that relationship requires a review of the evidence."11

The decision, however, was unpublished and thus provides only minimal guidance to insurers. In the absence of further published guidance, insurers should be prepared to argue that anything above a 2:1 ratio is excessive, citing Major's holding that the purpose of the bad-faith cause of action is to redress financial loss, and that noneconomic damages are excessive if they dwarf economic damages. At the same time, insurers should realize that noneconomic damages could potentially meet or exceed a 9:1 ratio.

A further issue is whether all of a plaintiff's noneconomic damages must be caused by financial loss (e.g., anxiety from unpaid medical bills), or whether a plaintiff who shows some financial loss can then seek all of his noneconomic damages. In Clayton v. U.S. Auto. Association, the Court of Appeal took the latter view, holding that "[o]nce economic loss is shown, ... the plaintiff is entitled to recover for all emotional distress proximately caused by the insurer's bad faith without proving any causal link between the emotional distress and the financial loss."12

More recently, the Court of Appeal rejected that view in Major, holding that Clayton was inconsistent with California law, which requires that all noneconomic damages be caused by financial loss. Citing the California Supreme Court's decision in Gourley v. State Farm Mut. Auto. Insurance Co., the court in Major explained that "once that threshold is met, the amount of emotional distress damages is still tied to the amount of economic damages. This is because ... in the insurance bad faith setting, emotional distress is not recoverable as a separate cause of action, but only as 'an aggravation of the financial damages.'"13

Finally, insurers should note that, although noneconomic damages in a bad faith case are generally limited to emotional distress damages, they could also include damages for pain and suffering, invasions of a person's bodily integrity, disfigurement, disability, impaired enjoyment of life, susceptibility to future harm or injury, and shortened life expectancy.14


1 California Civil Code § 3333; see also Crisci v. Security Ins. Co. of New Haven, Conn., 66 Cal. 2d 425, 433 (1967).

2 9 Cal. 3d 566, 580 (1973); Shade Foods, Inc. v. Innovative Prod. Sales & Mktg., Inc., 78 Cal. App. 4th 847, 888 (2000).

3 Merlo v. Standard Life & Acc. Ins. Co. of Cal., 59 Cal. App. 3d 5, 16 (1976); Little v. Stuyvesant Life Ins. Co., 67 Cal. App. 3d 451, 465 (1977).

4 10 Cal. App. 3d 376, 409 (1970).

5 See, e.g., Sommer v. Gabor, 40 Cal. App. 4th 1455, 1470-71 (1995) ($2 million noneconomic damages for defamation with $0 economic damages).

6 169 Cal. App. 4th 1197, 1216 (2009).

7 Id.

8 Id.

9 Supra, 59 Cal. App. 3d at 16-17.

10 Id.

11 Federici v. IDS Property Cas. Ins. Co., 2016 WL 5404719, at *8 (Cal. Ct. App. 2016) (unpub.).

12 54 Cal. App. 4th 1158, 1161 (1997).

13 Major, 169 Cal. App. 4th at 1216.

14 Bigler-Engler v. Breg, Inc., 7 Cal. App. 5th 276, 300 (2017).

To view the full article, please click here

Originally published in Law360

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions