PERSONAL INJURY | 2026-10-17

Why an Injured Claimant Cannot Sue the At-Fault Party’s Insurer for Bad Faith in California: Moradi-Shalal, the End of Royal Globe, and What Third-Party Claimants Can and Cannot Do

California once let an injury victim sue the at-fault driver’s insurer directly for unfair claims practices. Moradi-Shalal ended that in 1988. Understanding why there is no private third-party bad-faith action — and what remedies do remain — is essential to handling any injury claim against an insured defendant.

One of the most common and costly misunderstandings in California injury practice is the belief that an injured person can sue the at-fault party’s insurance company directly for handling the claim in bad faith . For a brief period that was the law, but it is not the law today. In Moradi-Shalal v. F

The implied covenant of good faith and fair dealing is one of the most powerful tools in insurance law, but it does not reach as far as many injured people assume. An injury victim who is frustrated by how the at-fault party’s insurer is handling their claim — lowball offers, delay, denial — often wants to sue that insurer directly for bad faith. In California, that door is largely closed, and it has been closed since 1988. The reason lies in a pair of California Supreme Court decisions that, within a decade of each other, first opened and then firmly shut the possibility of a private third-party bad-faith suit. Understanding that history, and the rules it left in place, is essential to handling any injury claim against an insured defendant.

First-Party Versus Third-Party: The Essential Distinction

Everything in this area turns on a single distinction. A first-party claim is one an insured makes under their own policy — for example, a homeowner claiming a fire loss, or a driver claiming under their own uninsured-motorist coverage. A third-party claim is one made by an injured outsider against someone else’s liability policy — for example, a person hurt by a negligent driver who looks to that driver’s auto insurer to pay. The implied covenant of good faith and fair dealing arises from the contract between the insurer and its insured, so it runs to the insured. A first-party insured can sue their own insurer for bad faith. A third-party claimant has no contract with the opposing insurer and, as a general rule, cannot sue that insurer for bad faith. Keeping this distinction straight is the foundation for understanding what Moradi-Shalal decided and why.

Royal Globe: The Rule That Briefly Existed

For about nine years, California was different. In Royal Globe Insurance Co. v. Superior Court (1979) 23 Cal.3d 880, the California Supreme Court held that Insurance Code section 790.03(h) — part of the Unfair Insurance Practices Act, which lists unfair claims-settlement practices — created a private right of action that a third-party claimant could bring against the other party’s insurer for unfair claims handling. Royal Globe effectively allowed an injured person to sue the at-fault party’s insurer directly, turning a statute aimed at regulatory enforcement into a private tort remedy. The decision was controversial from the start. Critics argued it encouraged duplicative litigation, created conflicts of interest during the underlying injury case, and read a private remedy into a statute the Legislature had designed for administrative enforcement by the Insurance Commissioner. Within a decade, the Court revisited and rejected its own holding.

Moradi-Shalal: Overruling Royal Globe

In Moradi-Shalal v. Fireman’s Fund Insurance Companies (1988) 46 Cal.3d 287, the California Supreme Court overruled Royal Globe and held that section 790.03(h) does not create a private right of action — for third-party claimants or for insureds. The Court concluded that the Legislature had not intended the statute to be privately enforceable, that the Insurance Commissioner’s administrative enforcement was the intended mechanism, and that the Royal Globe rule had produced significant adverse consequences: it spawned unnecessary litigation, created incentives to delay or complicate the underlying tort case, and increased insurance costs without commensurate benefit. The Court therefore returned California to the rule that the statutory list of unfair practices is enforced by the regulator, not by a private damages suit. Moradi-Shalal is the controlling authority, and it means that the mere fact an insurer engaged in conduct described in section 790.03(h) does not, by itself, give a claimant a lawsuit for damages.

What Section 790.03(h) Does and Does Not Do

Insurance Code section 790.03(h) lists a series of practices that are deemed unfair claims-settlement practices when committed knowingly or with such frequency as to indicate a general business practice — for example, misrepresenting policy provisions, failing to act reasonably promptly on claims, failing to adopt reasonable standards for prompt investigation, and failing to attempt good-faith settlement where liability is reasonably clear. After Moradi-Shalal, these provisions remain on the books, but they are enforced through the administrative authority of the Insurance Commissioner under the Unfair Insurance Practices Act — not through a private damages action by a claimant or insured. A claimant who believes an insurer has violated these standards can file a complaint with the Department of Insurance, which may investigate and take regulatory action, but that is a regulatory remedy, not a personal damages recovery. The statute sets standards of conduct; Moradi-Shalal decided who may enforce them, and the answer is the regulator.

The Insured Still Has a Bad-Faith Claim

Moradi-Shalal did not eliminate bad-faith liability; it limited who can bring it. The insurer’s own insured retains a robust common-law claim for breach of the implied covenant of good faith and fair dealing. In the liability-insurance context, this is especially important when an insurer fails to settle a claim against its insured within policy limits when it had the opportunity and the duty to do so, and a judgment then exceeds the limits. The insured can sue its own insurer for the excess judgment caused by the insurer’s unreasonable failure to settle. This common-law duty — rooted in cases such as Comunale v. Traders & General Insurance Co. and Crisci v. Security Insurance Co. — survives Moradi-Shalal entirely, because it arises from the contractual relationship between insurer and insured, not from section 790.03(h). What changed is that the third-party claimant cannot sue the insurer directly on this theory; the claim belongs to the insured.

How a Third-Party Claimant Can Reach the Insurer’s Conduct: Assignment

Although a third-party claimant cannot sue the opposing insurer directly for bad faith, there is an important indirect route. When an insurer unreasonably refuses to settle within limits and the claimant obtains a judgment against the insured that exceeds the policy limits, the insured holds a bad-faith claim against its own insurer for that excess. The insured can assign that bad-faith claim to the claimant — often as part of a settlement in which the claimant agrees not to execute the excess judgment against the insured personally in exchange for the assignment of the insured’s rights against the insurer. The claimant then stands in the insured’s shoes and pursues the bad-faith claim the insured owned. This assignment mechanism is the practical path by which an injured claimant can ultimately recover for an insurer’s unreasonable failure to settle, and it is a central strategic consideration whenever a serious injury claim approaches or exceeds the at-fault party’s policy limits.

Zhang and the UCL Boundary

A later decision clarified an important boundary. In Zhang v. Superior Court (2013) 57 Cal.4th 364, the California Supreme Court held that a first-party insured could pursue a claim under the Unfair Competition Law (Business and Professions Code § 17200) based on false advertising and other independently wrongful conduct, and that Moradi-Shalal did not bar such a UCL claim merely because the same conduct might also violate section 790.03(h). Zhang confirmed that Moradi-Shalal forecloses using section 790.03(h) as a private cause of action, but it does not immunize insurers from liability under other legal theories that have an independent basis — such as common-law bad faith (for the insured) or the UCL (in appropriate circumstances). Zhang is a reminder that the Moradi-Shalal rule is specific: it is about the non-enforceability of the unfair-practices statute as a private damages action, not a blanket grant of immunity for insurer misconduct.

Practical Consequences for Injury Claimants

For an injured person pursuing a claim against an at-fault party’s insurer, Moradi-Shalal has concrete consequences. First, the claimant should not expect to sue the opposing insurer for how it handles the claim; the leverage over the insurer runs through the underlying liability case and through the insurer’s duty to its own insured to settle within limits. Second, where the claim has serious value relative to the policy limits, the claimant’s counsel should make a clear, well-documented policy-limits demand that gives the insurer a reasonable opportunity to settle — because if the insurer unreasonably refuses and an excess judgment results, the insured’s resulting bad-faith claim (assignable to the claimant) becomes the path to the full recovery. Third, the claimant retains the ability to complain to the Department of Insurance about unfair practices, even though that is a regulatory rather than a damages remedy. Understanding these dynamics shapes how a knowledgeable lawyer handles the claim from the outset.

Practical Consequences for Insureds

For a person who is insured and is being sued, Moradi-Shalal’s preservation of the insured’s own bad-faith rights is protective. The insured’s liability insurer owes a duty to defend and to give the insured’s interests at least as much consideration as its own when deciding whether to settle. If the insurer unreasonably exposes the insured to an excess judgment by refusing a reasonable within-limits settlement, the insured can hold the insurer responsible for that excess. The insured should therefore cooperate with the defense, communicate settlement opportunities and demands to the insurer in writing, and, when a within-limits demand is made that the insurer is hesitating on, make clear in writing that the insured wants the case settled within limits. These steps both protect the insured and preserve the record for any later bad-faith claim if the insurer’s refusal proves unreasonable.

Why the Rule Matters to Both Sides of an Injury Case

The Moradi-Shalal framework explains a great deal about how California injury cases are actually negotiated and resolved. Because the third-party claimant cannot sue the insurer directly, but the insured can be exposed to an excess judgment and holds an assignable bad-faith claim, the policy-limits dynamic becomes central. A reasonable within-limits demand that the insurer unreasonably rejects transfers enormous risk onto the insurer by way of the insured’s bad-faith claim. This is why experienced counsel on both sides pay close attention to policy limits, to the timing and documentation of demands, and to the insurer’s response. The rule that there is “no third-party bad faith” is therefore not the end of the analysis; it is the beginning of a more sophisticated set of strategies that determine how much an injured claimant ultimately recovers and how much risk an insured and its insurer bear.

Common Misconceptions That Moradi-Shalal Corrects

Several persistent misconceptions trip up injured people and even some practitioners. The first is the belief that because an insurer’s conduct clearly matches a practice listed in section 790.03(h) — a lowball offer, unexplained delay, failure to investigate — the claimant automatically has a bad-faith lawsuit. Moradi-Shalal forecloses that: matching the statutory list is not, by itself, a private cause of action. The second is the belief that a claimant can force the opposing insurer to the table by threatening a direct bad-faith suit. The real leverage lies elsewhere — in a documented policy-limits demand and the insurer’s duty to protect its own insured from an excess judgment. The third is the belief that Moradi-Shalal left insurers immune from all accountability; it did not. The insured retains a full common-law bad-faith claim, that claim is assignable to the claimant, the Insurance Commissioner can enforce the unfair-practices standards administratively, and, as Zhang confirmed, independently wrongful conduct can support other theories. Understanding what Moradi-Shalal actually decided — a narrow holding about private enforcement of one statute — rather than the folklore around it, is what lets a claimant and an insured each pursue the remedies that genuinely remain available under California law.

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Frequently Asked Questions

Can I sue the at-fault driver’s insurance company for bad faith?

Generally no. Under Moradi-Shalal v. Fireman’s Fund Insurance Companies (1988) 46 Cal.3d 287, a third-party claimant has no private cause of action against the opposing insurer for unfair claims practices under Insurance Code section 790.03(h). The duty of good faith runs to the insurer’s own insured, with whom you have no contract. There are indirect routes, but you cannot ordinarily sue the other side’s insurer directly for bad faith.

What was Royal Globe and what happened to it?

Royal Globe Insurance Co. v. Superior Court (1979) 23 Cal.3d 880 briefly held that section 790.03(h) created a private right of action letting a third-party claimant sue the other party’s insurer for unfair claims handling. In 1988, Moradi-Shalal overruled Royal Globe, concluding the statute was not privately enforceable and that the Royal Globe rule had caused significant adverse consequences.

Does section 790.03(h) still mean anything after Moradi-Shalal?

Yes. Section 790.03(h) still lists unfair claims-settlement practices, but after Moradi-Shalal those standards are enforced administratively by the Insurance Commissioner, not through a private damages suit. A claimant who believes an insurer violated them can complain to the Department of Insurance, which may investigate and take regulatory action.

Can an insured still sue its own insurer for bad faith?

Yes. Moradi-Shalal did not eliminate the insured’s common-law bad-faith claim for breach of the implied covenant of good faith and fair dealing. This includes the insurer’s duty to settle within policy limits; if the insurer unreasonably refuses a reasonable within-limits demand and an excess judgment results, the insured can recover the excess from its own insurer.

How can an injured claimant ever reach the insurer’s refusal to settle?

Through assignment. When an insurer unreasonably refuses to settle within limits and the claimant gets a judgment exceeding the policy limits, the insured holds a bad-faith claim against its own insurer for the excess. The insured can assign that claim to the claimant — often in exchange for a covenant not to execute the excess judgment against the insured personally — and the claimant then pursues the bad-faith claim in the insured’s shoes.

What did Zhang v. Superior Court decide?

In Zhang v. Superior Court (2013) 57 Cal.4th 364, the California Supreme Court held that a first-party insured could bring an Unfair Competition Law claim based on independently wrongful conduct such as false advertising, and that Moradi-Shalal did not bar that UCL claim merely because the same conduct might also violate section 790.03(h). Zhang confirmed Moradi-Shalal’s rule is specific to private enforcement of the unfair-practices statute.

What should I do if the other driver’s insurer is treating me unfairly?

Focus leverage on the underlying injury case and, where the claim’s value is near or above the policy limits, make a clear, documented policy-limits demand that gives the insurer a reasonable chance to settle. If it unreasonably refuses and an excess judgment follows, the insured’s assignable bad-faith claim becomes the path to full recovery. An experienced lawyer can structure this. Call Trembach Law Firm at (213) 645-2246.

Why do I need a lawyer who understands these rules?

Because the recovery in a serious injury case often depends on the policy-limits dynamic Moradi-Shalal created — the timing and documentation of demands, the insurer’s duty to its insured, and the possibility of an assigned bad-faith claim. Handling these correctly from the start can dramatically affect the outcome. Call Trembach Law Firm at (213) 645-2246.

Talk to a California Injury Lawyer About an Insurer’s Conduct

California does not let an injured claimant sue the at-fault party’s insurer directly for bad faith — Moradi-Shalal settled that in 1988 — but the policy-limits dynamic it created still determines how much many injury cases are worth. Trembach Law Firm, led by Anatolii Trembach (LL.M.; admitted in California), handles injury claims with these rules in mind, documents policy-limits demands, and pursues assigned bad-faith claims where an insurer’s refusal to settle exposes its insured to an excess judgment. Call (213) 645-2246 for a free, confidential consultation.

Contact Trembach Law Firm at (818) 514-7680 for a confidential consultation.

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