Property Insurance Damages

A Video Explaining Common Law Bad Faith

See the full video at and at

In the 1950’s the California Supreme Court, recognizing that some insurers took advantage of their customers by refusing to pay claims that were clearly owed under the terms and conditions of the policy; failed to negotiate settlements within policy limits, and left insureds to fend for themselves, a new tort grew was created. The California Supreme Court, concluding that some insurers failed to deal fairly with those they insured. Because contract remedies did not provide, in the reasoning of the California Supreme Court, a procedure by which adequate damages could be provided to the person wronged by his or her insurer, the tort of bad faith arose to the joy of the plaintiffs’ bar.

The concept of the tort of bad faith developed as a means of providing a recovery in tort for the breach of what had previously been regarded as a simple contract action. Contract damages are traditionally limited the injured party’s recovery to those damages within the contemplation of the parties at the time the contract was made.

Since an insurance policy is a contract that establishes the respective rights and obligations to which an insurer and its insured have mutually agreed it must be enforced as written. Generally, an appellate court will construe a policy using the same rules that govern the construction of any other contract. An insurance policy, however, is a unique type of contract because an insurer generally has exclusive control over the evaluation, processing, and denial of claims, and it can easily use that control to take advantage of its insured. Because of this inherent unequal bargaining power, between the insured and the insurer courts, like those in Texas and California concluded the “special relationship” between an insurer and insured justifies the imposition of a common-law duty on insurers to “deal fairly and in good faith with their insureds.”  [USAA Tex. Lloyds Co. v. Menchaca, 545 S.W.3d 479 (Tex., 2018)]

Compensatory Damages Available for Breach of Contract

These are damages for a monetary amount that is intended to compensate the non-breaching party for losses that result from the breach. The aim is to “make the injured party whole again”.

Expectation Damages:

These are damages that are intended to cover what the injured party expected to receive from the contract. Calculations are usually straightforward as they are based on the contract itself or market values.

Consequential Damages:

These are intended to reimburse the injured party for indirect damages other than contractual loss; for example, loss of business profits due to an undelivered machine. In order to recover, the injuries must “flow from the breach,” i.e., be a direct result of the breach, and be reasonably foreseeable to both parties when they entered into the contract.

Liquidation Damages:

Damages that are specifically stated in the contract. These are available when damages may be hard to foresee and must be a fair estimate of what damages might be if there is a breach. Both parties determine what would be an appropriate amount during contract negotiations. [Fleming Co. v. Thriftway Medford Lakes, Inc., 913 F. Supp. 837, 847 (D.N.J. 1995)]


These are not really legal damages per se, but rather are an equitable remedy awarded to prevent the breaching party from being unjustly enriched. For example, if one party has delivered goods but the other party has failed to pay, the party that delivered the goods may be entitled to restitution, i.e., the cost of the delivered goods, in order to prevent unjust enrichment.

Specific Performance:

Specific performance is an available remedy for breach of contract where the non-breaching party asks the court to issue a decree that requires the breaching party to perform their part of the bargain indicated in the contract.

Damages from Insurer for Breach

Before the advent of the tort of bad faith, if an insurer breached the contract and wrongfully refused to pay a claim the most that could be recovered would be the benefits promised by the insurance policy, the only damages envisaged by the insurance policy. Contract damages, in the eyes of some courts, seldom compensate the insured sufficiently if he or she has been abused by the insurer. Courts decided that the measure of damages for a breach of contract is inadequate where the wrongful conduct results in damages that were not foreseen at the time of contracting.

Tort Damages

If a tort theory can be used in an insurance dispute, then the possibility exists for a much broader recovery by the plaintiff. The measure of damages for a tort can include consequential damages, including all of the damages proximately resulting from the wrongful conduct even if they could not have been anticipated at the time of the contract, emotional distress, bodily injury, and consequential damages.

Limitations on Punitive Damages

The US Supreme Court has restricted the extent of available punitive damages in State Farm Mutual Automobile Insurance Co. v. Campbell, 123 S.Ct. 1513, 155 L.Ed.2d 585 (U.S. 2003), where it overturned a $145 million verdict against an insurer. It said that a punitive damages award of $145 million is excessive and violates the Due Process Clause of the Fourteenth Amendment. By reducing the exposure to excessive and debilitating punitive damages claims professionals can hope the Supreme Court’s ruling gives insurers more courage to fight insurance fraud since their exposure to punitive damages is limited. Regardless, Campbell allows recovery of punitive damages for tortious breach of the insurance contract and the tort of bad faith.

© 2021 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

Subscribe to Excellence in Claims Handling at

He is available at and Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to training available at; articles at,  the podcast Zalma On Insurance at;  Follow Mr. Zalma on Twitter at; Go to Barry Zalma videos at ; Go to Barry Zalma on YouTube-; Go to the Insurance Claims Library –  The last two issues of ZIFL are available at  podcast now available at

This entry was posted in Zalma on Insurance. Bookmark the permalink.

Leave a Reply

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.