Failure To Reasonably Investigate Covid-19 Business Interruption Claims Is Bad Faith

We previously discussed business interruption insurance during the COVID-19 outbreak. Many insurance providers were summarily denying claims without investigation. Recently, the DOI issued a notice requiring investigative compliance and today, Attorney, Robert Enos, explains the issues related to the notice and COVID-19.

As always, if you have any questions about your real estate, business, estate planning, or any other legal issue, please let us know by e-mailing managing shareholder Keith Dunnagan at

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Failure To Reasonably Investigate Covid-19 Business Interruption Claims Is Bad Faith
By: Robert J. Enos, Esq.

With the April 14, 2020, California Department of Insurance (DOI) Notice requiring insurance companies to comply with California Fair Claims Settlement Practice Regulations in their investigation of business interruption claims caused by the COVID-19 virus, holders of business interruption insurance need to understand when their insurance carrier has fairly investigated their claim and when they have been the victim of bad faith insurance practices. We previously addressed the issues of business interruption insurance as it relates to the COVID-19 outbreak. Bad faith commonly refers to an insurer’s unreasonable or wrongful failure to provide benefits under the policy, including indemnity for business interruption. Actions to recover these benefits under a policy proceed like any other breach of contract action. In addition, the insured may seek extra-contractual damages from the insurer that the policyholder incurs by reason of the insurer’s bad faith denial of policy benefits. Those extra-contractual damages can include punitive damages.

Many bad faith insurance claims arise out of an insurer refusing to defend an insured from a third party lawsuit. However, business interruption claims are first party claims and have a different standard for insurers to adhere to. An insurer will be liable for bad faith if it both denies a claim without a thorough investigation and has no good faith reason to believe that it is not liable for the claim. The insurer must reasonably investigate all possible bases on which the claim may be covered. Failure to do so is a breach of the implied covenant of fair dealing. An insured cannot, in any case, maintain a claim for tortious breach of the implied covenant of good faith and fair dealing absent a covered loss.

A “rule of reasonableness” governs the insurer’s duty to investigate. A reasonable investigation goes beyond merely ascertaining the facts of a loss but instead requires a full inquiry into any possible basis that might support the insured’s claim for benefits. An insurer must not deny a claim without full investigation supporting that denial. In addition, the insurer’s duty to investigate may extend beyond the facts and coverage theories advanced in an insured’s claim. This is also good customer service. At least one California appellate court has charged liability insurers with constructive notice of facts that it might have learned if it had pursued the requisite investigation of a claim. An insurer may be found to have acted unreasonably, in breach of its duty to investigate, if it ignores evidence available to it. Thus, California courts have found an insurer breached its duty to investigate where it failed to obtain statements from witnesses who could corroborate the insured’s claims. The insurer need not go to extraordinary lengths to conduct such an investigation, but, it must provide at least a reasonable basis for its denial. The denial will not be reasonable, however, if the insurer fails to investigate a possible basis under which the claim may be covered.

In order to establish an insurer breached the obligation of good faith and fair dealing by denying payment of a business interruption claim the policyholder must prove they suffered a loss covered under their insurance policy, the insurance carrier was notified of the loss, the insurer unreasonably failed to pay or delayed payment of the policy benefits, and the insured was harmed by that failure to pay. To act or fail to act “unreasonably” means that the insurer had no proper cause for its conduct. In determining whether the insurer acted unreasonably, you should consider only the information that the insurer knew or reasonably should have known at the time when it failed to pay or delayed payment of policy benefits. A defense an insurer will offer is the insured failed to provide adequate information to justify paying the claim such as established business ledgers and profit and loss statements.

In the event an insurer has been found liable for bad faith an insured can recover an amount of money that will reasonably compensate them all harm caused, even if the particular harm could not have been anticipated. To recover attorney fees the insured must prove that because of the insurer’s breach of the obligation of good faith and fair dealing it was reasonably necessary for them to hire an attorney to recover the policy benefits.

The information contained in this article is for informational purposes only and not to be construed as legal advice. If you have questions, you should seek competent legal representation to assist you.


The attorneys of BPE Law Group, PC. have been advising our clients on real estate, business and estate planning issues for over 20 years and have assisted numerous clients in probate, business and real estate matters and have represented and advised brokers on their professional obligations as well as consumers on their rights. If you have questions concerning legal matters, give us a call at (916) 966-2260 or e-mail Keith at Our flat fee consult for new clients may get you the answers you need for the questions you have.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are facing a legal issue of any kind, get competent legal advice in your State immediately so that you can determine your best options.