Insurance Bad Faith

What to Do If Your Insurance Company Underpays Your Claim

Keosian Law LLP • June 1, 2025 • 8 min read

Part of our Insurance Bad Faith practice

How to Know If Your Claim Was Underpaid

Insurance companies are businesses. Their adjusters are trained to minimize payouts — it's how the company protects its bottom line. An underpaid claim occurs when the settlement offer is less than the actual cost to repair, replace, or recover from your loss.

Signs your claim was underpaid include:

The settlement doesn't cover independent contractor repair estimates
The insurer applied excessive depreciation to reduce your payout
Certain damage was excluded without clear explanation
Additional living expenses were denied or severely capped
The adjuster spent minimal time inspecting your property
You were pressured to accept a "final" offer quickly

If any of these apply, you should not accept the settlement without first consulting an attorney.

Your Rights Under California Insurance Law

California imposes strict obligations on insurance companies. Under the Fair Claims Settlement Practices Regulations (Cal. Code Regs. tit. 10, § 2695.1 et seq.), insurers must:

Conduct a thorough and timely investigation of your claim
Provide a written explanation for any denial or reduced payment
Not misrepresent the terms of your policy
Not require unnecessary documentation to delay your claim
Accept or deny your claim within a reasonable time after you provide proof of loss

When insurers violate these obligations, they may be liable for bad faith damages — compensation beyond your original claim that includes emotional distress, consequential damages, and potentially punitive damages.

Steps to Challenge an Underpaid Insurance Claim

If you believe your claim was underpaid, follow these steps:

Get independent estimates. Hire a licensed contractor or public adjuster to assess the damage and provide repair/replacement cost estimates.
Review your policy. Understand exactly what your policy covers — including coverage you may not have known about, like additional living expenses, code upgrade coverage, or extended replacement cost.
Document everything. Keep records of all communications with your insurer, including dates, names, and what was discussed.
Send a written demand. Submit a formal letter to your insurer detailing why the settlement is inadequate, supported by your independent estimates and policy provisions.
Invoke the appraisal clause. Most California policies include an appraisal provision for disputes over the amount of loss. This can be faster and less expensive than litigation.
File a complaint with the California Department of Insurance. The CDI can investigate unfair claims handling practices.
Hire an attorney. An experienced insurance attorney can negotiate from a position of strength and file a bad faith lawsuit if necessary.

When to Hire an Insurance Attorney

You should consult an attorney if:

The gap between your insurer's offer and independent estimates is more than 20%
Your insurer has denied portions of your claim without adequate explanation
Your claim involves significant damage — $50,000 or more
The insurer is not responding to your communications or requests
You've been told you must accept the offer or lose your right to further payment

No attorney fees or costs unless we recover for you.

Frequently Asked Questions

Find answers to common questions about our legal services and processes.

In many cases, yes. If you discover additional damage after your claim was settled, or if your insurer failed to account for covered losses, you can file a supplemental claim. If the insurer refuses, you may have grounds for a bad faith lawsuit. California's statute of limitations for breach of insurance contract is four years.

The appraisal clause allows either you or your insurer to demand an independent appraisal when there's a dispute about the amount of a loss. Each side selects an appraiser, and the two appraisers select an umpire. A decision by any two of the three is binding. This process is often faster and less expensive than litigation.

Studies show policyholders who hire attorneys typically recover 30-40% more than those who negotiate alone. In bad faith cases, recoveries can be significantly higher because you may be entitled to damages beyond the policy limits, including emotional distress and punitive damages.