California Insurers Under Fire: 40-Day Rule Violation Sparks Bad Faith Ruling Against AIG
America ı By Samuel Lopez
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Yacullo v. AIG: A Case Study in Bad Faith
Picture this: you’ve filed a claim—maybe your roof caved in, or like in this case, you lost a pricey engagement ring—and you’re waiting on your insurer to cut a check. Days turn into weeks, then months, and you’re left in the dark. Sound familiar? I’ve seen it too many times in my career, sitting between attorneys and clients. That’s why California’s 40-day rule, tucked into the Fair Claims Settlement Practices Regulations (Cal. Code Regs., Tit. 10, § 2695.7(b)), is a big deal. It’s not just a deadline—it’s leverage, a way to hold insurers accountable and force quick resolutions when used right. And in Yacullo v. AIG Property Casualty Company, decided last year in 2024, a federal judge made it crystal clear: break this rule, and you might just pay for it in a bad faith lawsuit.
Here’s what happened:
- In September 2021, the insured added an engagement ring to his policy.
- A year later, in July 2022, his fiancé reportedly lost the ring.
- The insurerdenied the claim, arguing the insured no longer had an insurable interest in the ring because it had been gifted before the reported loss.
When the insured sued for breach of contract and bad faith, the insurer defended its denial, arguing its position was reasonable. However, the court found a major flaw in the insurer's process: it failed to comply with the 40-day rule.
Here’s where it gets juicy. AIG moved for summary judgment—basically asking the judge to toss the case before trial—arguing their denial was legit because Yacullo didn’t own the ring when it disappeared. On the bad faith claim, they say, Hey, we had a reasonable dispute here—no foul play. But Yacullo’s legal team pointed to the calendar: AIG didn’t deny the claim within 40 days. In fact, despite his pestering for updates, they left him hanging—no decision, no status reports, nada, and that’s a straight-up violation of the 40-day rule.
The court, in its 2024 ruling, didn’t buy AIG’s excuses. The Judge didn’t decide if Yacullo had an insurable interest—that’s for a jury—but on bad faith, he dropped the hammer: AIG’s delay was “unreasonable,” and breaking California’s regulations “is a factor that may be considered by a jury” in deciding if they acted in bad faith. AIG tried a Hail Mary, saying, There’s no private lawsuit for regulation violations! The judge shut that down cold: “Not dispositive, sure, but it’s evidence of bad faith.” Motion denied—case heads to trial.
While insurers often argue that claim delays don’t amount to bad faith, this ruling underscores that failing to adhere to statutory deadlines can support a policyholder’s claim for bad faith damages.
The 40-Day Rule: California’s Insurance Stopwatch
First, let’s get the lay of the land. In California, when you file a claim—say, for a flooded basement or a stolen car—your insurer doesn’t get to sit on it indefinitely. Under California Insurance Code § 2695.5(e) and the regulations underTitle 10, § 2695.7(b), they’ve got 40 days from the moment you submit “proof of claim” (think receipts, photos, whatever proves your loss) to either accept it, deny it, or send a legit reason for needing more time to investigate the claim. Miss that mark without a solid excuse, and they’re in hot water—not just with regulators, but potentially in court.
This isn’t some optional guideline—it’s law, part of the state’s Fair Claims Settlement Practices Regulations. And it’s got teeth. If they need extra time, they’re supposed to tell you why in writing every 30 days (Cal. Ins. Code § 2695.7(c)(1)). No updates? That’s a violation. The idea’s simple: insurers can’t leave you twisting in the wind while they twiddle their thumbs.
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