Hunton Insurance Recovery Blog

This summer, in Yacullo v. AIG Property Casualty Company, the United States District Court for the Southern District of California held that an insurer’s violations of the state’s insurance regulations “is a factor that may be considered by a jury” in determining whether the insurer acted in bad faith. The case should serve as an important reminder to policyholders to carefully consider state-specific insurance regulations when asserting a bad faith insurance coverage claim against their insurers.

The coverage dispute in Yacullo involved a private collections policy, which covered various items of jewelry listed in a “Schedule of Items” endorsement. The endorsement included a description of each item and assigned a specific insured amount to the items. On September 8, 2021, the insured proposed to his then-fiancée and requested that the insurer add the engagement ring to the policy’s “Schedule of Items” the very same day. A day later, the insurer issued a revised declarations page confirming that the engagement ring was added to the “Schedule of Items” in exchange for an additional premium.

Over a year later, on July 19, 2022, the insured reported to its insurer that the ring had been lost. The insurer denied coverage, claiming that the ring was unconditionally gifted before the reported loss and thus the insured had no insurable interest in the ring. Following the denial, the insured filed a lawsuit against the insurer alleging causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory relief.

On summary judgment, the insurer argued that its denial was proper because the insured lacked an insurable interest in the ring at the time of the loss. The insurer also argued that it was entitled to summary judgment on the insured’s claim for breach of the implied covenant of good faith and fair dealing because its “position in denying coverage was reasonable given the genuine dispute as to whether the Plaintiff possessed an insurable interest in the ring at the time of the loss.” 

Ultimately, with regard to the bad faith claim, the district court found the insured’s argument that the insurer unreasonably delayed its investigation of the claim persuasive because the insurer did not process the claim within 40 days, as required by the California insurance regulations. The district court noted that the regulations even provided a mechanism by which the insurer could inform the insured that it needed additional time to make a determination on coverage. Yet, despite the insured’s multiple requests for status updates, the insurer, in clear violation of the California insurance regulations, did not process the claim within 40 days, provide a periodic update, or an estimated timeline for when it would make a coverage decision.

Even so, the insurer argued that it was still entitled to summary judgment despite the alleged violations of the California insurance regulations because no private right of action exists for such violations. The district court explicitly rejected that argument, stating “[a]lthough not dispositive, Defendant’s violation of the California insurance regulations is a factor that may be considered by a jury in determining whether Defendant acted in good faith.” Accordingly, the district court denied the insurer’s motion for summary judgment on the breach of implied covenant of good faith and fair dealing cause of action.

This holding serves as an important reminder that policyholders should carefully consider state insurance regulations when preparing and pursuing a bad faith insurance coverage claim. Policyholders are best served by consulting coverage counsel early on in the claims-handling process to help navigate the complexities of state-specific insurance regulations.