Construction defect claims in California follow a specific statutory process under SB 800 (Civil Code §895 et seq.), commonly known as the Right to Repair Act. When a homeowner sends a builder a written notice of alleged defects, the builder is expected to respond within statutory timeframes—inspecting the property, offering repairs, and working to resolve the claim before litigation. For a full overview of this process, see our guide to the SB 800 Right to Repair process.
But what happens when the builder’s insurance carrier refuses to step up? What if the insurer denies coverage, delays its investigation, or simply ignores the SB 800 notice? This article explains the intersection of insurance bad faith law and the SB 800 construction defect process—written for both builders whose insurers have abandoned them and homeowners who are stuck dealing with an unresponsive carrier on the other side.
What Is the Insurer’s Duty to Defend a Construction Defect Claim?
Under California law, an insurance carrier’s duty to defend is broader than its duty to indemnify. The duty to defend arises whenever a claim—even a third-party demand letter or SB 800 notice—alleges facts that potentially fall within the policy’s coverage. The insurer does not need to agree that the claim has merit; it needs only to determine that the allegations, if true, could trigger coverage.
In the construction defect context, a typical CGL policy covers “property damage” caused by an “occurrence.” California courts have broadly interpreted these terms to include damage resulting from defective construction. When a builder receives an SB 800 notice alleging defects that have caused property damage, the CGL carrier generally has a duty to defend throughout the SB 800 process—not just after a lawsuit is filed.
What Constitutes Insurance Bad Faith in the Construction Defect Context?
California Insurance Code §790.03(h) defines 16 unfair claims settlement practices constituting bad faith when committed knowingly or frequently. In construction defect cases, the most common forms include:
Unreasonable Delay in Investigation
When a builder tenders an SB 800 claim to its insurer, the carrier has an obligation to promptly investigate. Unreasonable delay in acknowledging the claim, retaining an expert, or inspecting the property can constitute bad faith—particularly when the SB 800 process imposes specific deadlines on the builder. If the insurer’s delay causes the builder to miss statutory response windows, the consequences can be severe.
Failure to Respond to an SB 800 Notice Within Statutory Timeframes
The SB 800 process requires the builder to acknowledge a homeowner’s claim within a specified period and to complete an inspection and provide a written response. When the insurer controls the defense and fails to act within these timeframes, the builder may lose the right to offer repairs—forcing the homeowner directly into litigation. For more on builder liability exposure, see our construction defect liability guide.
Denial of Coverage Without Reasonable Basis
An insurer may deny coverage for an SB 800 claim based on policy exclusions—but the denial must be supported by a reasonable interpretation of the policy language and the facts. Denying coverage based on an exclusion that clearly does not apply, or refusing to conduct any investigation before issuing a denial, is a hallmark of bad faith.
Failure to Defend Against a Meritorious Claim
Even when the insurer disputes coverage, it may still owe a duty to defend under a reservation of rights. An insurer that simply refuses to provide any defense—no attorney, no investigation, no participation in the SB 800 process—exposes the builder to undefended liability and exposes itself to bad faith claims.
Lowball Settlement Offers
Once liability is reasonably clear, the insurer has an obligation to attempt a fair settlement. Offering an amount that is grossly disproportionate to the actual cost of repairs—without any reasonable basis for the valuation—can constitute bad faith under Insurance Code §790.03(h)(5).
What Are a Builder’s Rights When the Insurer Acts in Bad Faith?
If your insurance carrier has denied or unreasonably delayed your construction defect claim, you have several options. For background on how liability is allocated among parties in construction defect cases, see our liability allocation overview.
- Document everything. Record every communication with your insurer—dates, names, requests, and responses (or non-responses). This is the foundation of any bad faith claim.
- Demand a written coverage position. Under Insurance Code §790.03(h)(13), the insurer must explain any denial. Demand a written explanation if one has not been provided.
- Hire independent counsel. If the insurer refuses to defend, retain your own attorney. Independent counsel costs may be recoverable in a bad faith claim.
- File a DOI complaint. California’s Department of Insurance investigates unfair claims practices. While it cannot award damages, its involvement can prompt insurer action.
- Pursue a bad faith lawsuit. Egregious insurer conduct may support a separate action seeking damages beyond policy limits.
What Should Homeowners Do When the Builder’s Insurer Stonewalls?
Homeowners lack a direct contractual relationship with the builder’s carrier, but practical steps are available:
- Continue the SB 800 process. Document the builder’s failure to respond within statutory timeframes. If they miss required deadlines, you may proceed directly to litigation.
- Communicate directly with the builder. Remind the builder (in writing) that the insurer’s inaction does not relieve the builder of SB 800 obligations.
- Investigate the insurer’s involvement. Determine whether the carrier has disclaimed coverage or is insolvent—information critical for your legal strategy.
- Consult a construction defect attorney. An experienced attorney can advise on pursuing the builder directly, seeking assignment of bad faith claims, or other recovery paths.
What Damages Can Be Recovered in a Construction Defect Insurance Bad Faith Claim?
When an insurer acts in bad faith in the construction defect context, California law provides several categories of recoverable damages:
Contract Damages
The insured can recover the policy benefits that should have been paid—including defense costs, indemnity payments, and settlement amounts—plus interest on any amounts unreasonably withheld.
Tort Damages
Because bad faith is a tort in California, the insured can recover compensatory damages beyond the policy limits, including lost business income, reputational harm, emotional distress, and additional costs caused by the insurer’s unreasonable conduct.
Brandt Fees
Under Brandt v. Superior Court (1985) 37 Cal.3d 813, an insured can recover attorney’s fees incurred to obtain policy benefits the insurer unreasonably withheld. These fees are compensatory damages, not a fee-shifting award. Under Nickerson v. Stonebridge (2016) 63 Cal.4th 363, Brandt fees may be included when calculating the punitive-to-compensatory damages ratio.
Punitive Damages
If the insurer’s conduct is oppressive, fraudulent, or malicious, punitive damages may be available under Civil Code §3294. These can be substantial where the insurer had no reasonable basis for denial and acted with conscious disregard of the insured’s rights.
What Role Do CGL Policies Play in Construction Defect Claims?
CGL policies are the primary insurance for construction defect claims in California. A standard CGL policy provides:
- Coverage A (Bodily Injury/Property Damage): Covers damages from “bodily injury” or “property damage” caused by an “occurrence” during the policy period.
- Coverage B (Personal/Advertising Injury): Generally not applicable to construction defect claims.
- Defense obligation: Applies to any claim potentially within Coverage A, even if some allegations are not covered.
For more background on how construction liability works among multiple parties, see our discussion of construction disputes.
What Are Common CGL Exclusions in Construction Defect Cases, and Can They Be Challenged?
Insurers frequently invoke policy exclusions to deny or limit coverage. The most common include:
| Exclusion | What It Means |
| Your Work | Excludes damage to the contractor’s own completed work. Often includes a subcontractor exception that restores coverage for damage caused by subcontractors. |
| Expected or Intended Injury | Excludes damage the insured expected or intended. Rarely successful in construction defect cases, where damage is typically accidental. |
| Contractual Liability | Excludes liability assumed under contract. May not apply to indemnity obligations arising by operation of law rather than contract. |
| Professional Services | Found in some CGL policies. May exclude claims arising from design or engineering services rather than construction work. |
| Known Loss / Prior Knowledge | Excludes losses the insured knew about before the policy period. Timing of knowledge is often disputed. |
Many exclusion denials can be challenged by examining the specific policy language, the facts, and California case law. An insurer’s reliance on an exclusion that does not clearly apply—or that it failed to investigate—can itself constitute bad faith.
What Are Recent Trends in Construction Defect Insurance Litigation?
Several developments are shaping construction defect insurance disputes in California:
- Increased SB 800 pre-litigation activity: More carriers are engaging in the Right to Repair process early. However, some continue to treat the SB 800 notice as a formality, creating bad faith exposure.
- Subcontractor exception litigation: Courts continue refining the “your work” exclusion and its subcontractor exception, which is critical in multi-trade defect cases.
- Rising repair costs: Higher material and labor costs have made claims more expensive, leading some insurers toward aggressive denial strategies—and more builders to pursue bad faith remedies.
- Brandt fees as leverage: The ability to recover attorney’s fees under Brandt, combined with their role in the punitive damages ratio under Nickerson, has strengthened bad faith claims for insured builders.
When Should You Consult an Attorney About Insurance Bad Faith?
Consult a construction attorney experienced in insurance coverage disputes if you face any of these situations:
- Your insurer has denied coverage for an SB 800 claim without providing a clear, written explanation
- Your insurer has failed to respond to your tender of the claim within a reasonable time
- The insurer is refusing to participate in the SB 800 inspection or repair process
- You received a reservation of rights letter and are unsure what it means for your defense
- The insurer offered to settle the claim for an amount that appears grossly inadequate
- Your insurer appointed defense counsel but the attorney appears to be prioritizing the insurer’s interests over yours
If you are a homeowner dealing with a builder whose insurer appears to be stonewalling, an attorney can help you navigate the SB 800 process, document the builder’s failures, and position your claim for the strongest possible outcome.
Protect Your Interests — Talk to a Construction Attorney
Schedule a consultation with Bay Legal’s construction law team to discuss your situation. Call us at (650) 668-8000 or visit baylegal.com/practice-areas/construction-law/.
Frequently Asked Questions
Q: Does an insurer have a duty to defend during the SB 800 pre-litigation process, or only after a lawsuit is filed?
A: In California, the duty to defend can be triggered by an SB 800 notice—even before a formal lawsuit is filed. The duty to defend is broader than the duty to indemnify and arises whenever the allegations potentially fall within the scope of coverage. Most CGL policies define “suit” broadly enough to encompass the SB 800 process.
Q: Can a homeowner sue the builder’s insurance company directly for bad faith?
A: Generally, no. California does not allow direct third-party bad faith claims against a liability insurer. However, if the builder assigns its bad faith claim to the homeowner (which sometimes occurs in settlement), the homeowner may then pursue the insurer. Additionally, if the insurer’s conduct causes the homeowner independent harm, other legal theories may apply.
Q: What are Brandt fees, and how do they work in a construction defect bad faith case?
A: Brandt fees are attorney’s fees incurred by the insured to obtain the policy benefits that the insurer unreasonably withheld. Under Brandt v. Superior Court (1985), these fees are recoverable as compensatory damages—not as a statutory fee-shifting award. They are particularly significant because, under Nickerson v. Stonebridge (2016), they may be included when calculating the punitive-to-compensatory damages ratio.
Q: What is the difference between the duty to defend and the duty to indemnify?
A: The duty to defend requires the insurer to provide (and pay for) a legal defense whenever a claim potentially falls within coverage—even if the claim ultimately proves to be uncovered. The duty to indemnify requires the insurer to pay damages only if the claim is actually covered under the policy. The duty to defend is broader, arises earlier, and is determined by comparing the allegations to the policy language.
Q: Can an insurer be liable for punitive damages in a bad faith case?
A: Yes. Under California Civil Code §3294, punitive damages are available if the insurer’s conduct is oppressive, fraudulent, or malicious. In insurance bad faith cases, this typically requires showing that the insurer acted with conscious disregard for the insured’s rights—for example, denying a claim without any investigation or reasonable basis.
