If you are involved in an accident in California and the other party contends that you are liable, that party may seek compensation from you for medical expenses, property damage, and other losses. In many cases, this compensation will be paid out by your insurer. For example, if you are involved in a car accident, your car insurer will cover this compensation. In some cases, the settlement requested by the other party may exceed your policy limit, and the insurer may refuse to settle, in which case, the matter may be resolved by mediation, arbitration, or trial. In disputing the settlement amount, the insurer must not jeopardize the insured, or risk economic ruin of the insured, otherwise the insurance company may be found to be acting in bad faith.

Generally, insurance companies will utilize all resources available to them to avoid paying for claims, especially ones that exceed the insured's policy limits. Moreover, the insurance company often has tremendous influence over the legal process the insured must endure: the selection of the defense attorney, choices made during the litigation process, and, ultimately, how the case will be resolved, whether by mediation, arbitration, or trail. Taking the case to trial is not only the most costly and time-consuming of the three options, it also may economically jeopardize the insured if that party is found responsible for an accident or an injury.

Recently, a solo car accident in California left the driver and the passenger with serious injuries. The accident was partially attributed to the condition of the road, which had just been widened by a construction company. Compensation was subsequently sought from the construction company; however, the amount requested exceeded the company's policy limit of $2,000,000. The insurance company refused to settle, instead opting to resolve the case with a trial, despite the fact that doing so would bankrupt the construction company if it was found liable for the accident.

Early on in the proceedings, the construction company's liability in the accident was evident, and it was clear that its insurer was acting in bad faith: the jury had found in favor of the plaintiffs, the accident victims, and against the defendant, the construction company. Prior to the damages portion of the trial, a bad faith attorney persuaded the insurer to settle the case for $10,275,000 to avoid a separate claim against it from the construction company.

Under California law, insurance companies must act in good faith when representing their insured and endeavor to settle a claim promptly, fairly, and in the best interest of the insured, otherwise, the insurer may be subject to the potential liability for the entirety of the verdict or judgment.