Insurance is intended to promote peace of mind with financial protection when it is needed. But what if your insurance provider does not live up to its promise? This is where bad faith insurance comes into the picture. Bad faith refers to the situation where an insurance provider behaves unscrupulously or unfairly when processing a claim. This makes policyholders feel powerless and financially exposed.
In this article, you will find out what is insurance bad faith, the typical indications of bad faith practices, how to make a claim against your insurance company, and what damages you can recover.
What Is Insurance Bad Faith?
Insurance bad faith is a legal term used to describe an insurer’s unethical or unreasonable conduct in handling a policyholder’s claim. Insurance companies have a legal duty to act in “good faith and fair dealing” with their policyholders, which means they must investigate, evaluate, and pay legitimate claims promptly and fairly. When they fail to do so, they may be guilty of bad faith.
Types of Bad Faith
Insurance bad faith can take two main forms:
- First-Party Bad Faith: This occurs when an insurance company wrongfully denies or underpays a claim made by the policyholder. Examples include denying coverage for a valid claim, delaying payment without justification, or offering an unreasonably low settlement.
Third-Party Bad Faith: This occurs when an insurance company fails to properly defend, settle, or pay a claim filed against the policyholder by a third party. For instance, failing to defend a policyholder in a lawsuit when required by the policy.
Common Signs of Insurance Bad Faith
Recognizing bad faith can be difficult, but there are several warning signs to watch for:
1. Unreasonable Delay
If your insurance company takes an excessive amount of time to process or settle your claim without a valid reason, this may indicate bad faith.
2. Denial Without Explanation
A refusal to pay a claim without providing a clear, valid reason is a strong indicator of bad faith.
3. Misrepresentation of Policy Terms
Insurers may attempt to mislead you about what your policy covers, denying coverage you are actually entitled to receive.
4. Failure to Conduct a Proper Investigation
If your insurance company fails to investigate your claim thoroughly or ignores critical evidence, this may constitute bad faith.
5. Lowball Settlement Offers
Insurers sometimes offer a payout far below the actual value of your claim in the hopes that you will accept it out of frustration.
6. Threatening or Coercive Behavior
Using intimidation tactics to discourage you from pursuing your claim or hiring an attorney is another sign of bad faith.
Legal Duty of Good Faith and Fair Dealing
Under the law, insurance companies are required to act in “good faith and fair dealing” when handling claims. This means they must:
- Investigate claims in a timely and thorough manner.
- Clearly communicate policy terms and coverage limits.
- Offer fair settlements based on the evidence.
- Defend policyholders in lawsuits if required by the policy.
Failure to fulfill these obligations can open an insurer to a bad faith lawsuit.
Proving an Insurance Bad Faith Claim
To succeed in an insurance bad faith lawsuit, you must typically prove the following elements:
1. Existence of a Valid Insurance Policy
You must show that you held an active insurance policy with the insurer at the time of the claim.
2. Legitimate Claim Filed
The claim you submitted must be valid and covered under the terms of the policy.
3. Bad Faith Conduct by the Insurer
This is the most critical element. You must provide evidence that the insurer acted dishonestly, unfairly, or unreasonably in handling your claim.
4. Resulting Damages
You must demonstrate that the insurer’s bad faith caused you financial or emotional harm. This could include unpaid claim benefits, legal fees, or emotional distress.
Common Examples of Insurance Bad Faith
Understanding how bad faith occurs in real-world situations can help you identify if it has happened to you:
- Homeowners Insurance: Your home is damaged by a fire, but the insurance company denies the claim, arguing that it was caused by an excluded event, despite evidence to the contrary.
- Auto Insurance: You are involved in a car accident, and the insurer refuses to pay for repairs, citing an irrelevant policy exclusion.
- Health Insurance: The insurer denies coverage for a necessary medical procedure without a valid reason.
- Life Insurance: The insurance company delays paying out a death benefit to your family, asking for unnecessary documents to stall the process.
What to Do If You Suspect Bad Faith
If you believe your insurance company is acting in bad faith, follow these steps:
1. Review Your Policy
Carefully review your insurance policy to ensure your claim is covered and that you understand your rights.
2. Communicate in Writing
Document all communications with your insurer, including phone calls, emails, and letters. This can be crucial evidence in a bad faith claim.
3. Request a Written Explanation
If your claim is denied, ask the insurer to provide a written explanation of the denial, including specific policy provisions.
4. File a Complaint
You can file a complaint with your state’s insurance regulatory agency, which may help resolve the dispute.
5. Contact an Attorney
If your insurance company continues to act in bad faith, consider consulting an experienced insurance bad faith lawyer to help you file a lawsuit.
Damages Recoverable in Bad Faith Claims
Successful bad faith claims can result in significant financial awards, including:
- Compensatory Damages: These cover the actual value of your claim, including any unpaid benefits.
- Consequential Damages: If the insurer’s bad faith caused additional losses, such as lost wages or medical bills, you may be compensated for these.
- Punitive Damages: In cases of extreme misconduct, the court may award punitive damages to punish the insurer and deter similar behavior.
- Emotional Distress Damages: If the bad faith caused you severe emotional suffering, you may be compensated for this as well.
Statute of Limitations for Insurance Bad Faith Claims
The time limit to file an insurance bad faith lawsuit varies by state, typically ranging from two to four years. It is crucial to consult with an attorney promptly to ensure you do not miss the deadline.
How an Attorney Can Help
Insurance companies have extensive legal resources, making it difficult for policyholders to stand up to them alone. A skilled insurance bad faith attorney can help by:
- Reviewing your policy and assessing your claim.
- Gathering evidence of bad faith conduct.
- Negotiating with the insurer on your behalf.
- Filing a lawsuit and representing you in court if necessary.
About the Author
Neil Bhartia
Neil Bhartia isn’t your typical, stuffy attorney that you see on TV. While some have their sights exclusively on money and treat their clients like a number, Neil takes a personal interest in every single client he has. As an empath, Neil understands that people that seek legal help are typically in an involuntary, and stressful situation, and he goes out of his way to diffuse the stress and educate clients on each every detail of the legal process.
