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Bad Faith Insurance Claims Denials Overview

The reason you pay for an insurance policy is an attempt to manage risk. Normally, that's exactly what happens. However, some unscrupulous insurers will drum up an excuse not to pay. This is referred to as a bad faith insurance claim denial. 

The following article provides an overview of the issues that frequently arise in bad faith insurance claim denial cases.

What Is Bad Faith Insurance?

Bad faith insurance refers to the wrongful actions of an insurance company towards its policyholder. There is a duty of good faith inherent in every insurance contract. Under bad faith law, insurers are obligated to handle claims fairly, honestly, and promptly. 

When an insurance company unreasonably denies a legitimate claim or engages in misrepresentation, it may be deemed to have acted in bad faith. Policyholders have the right to file insurance bad faith claims. They can seek compensation for the initial claim and potential punitive damages as a deterrent. 

This applies to various types of insurance, including health, auto, and homeowners insurance. It's important that policyholders are aware of their rights and hold insurers accountable for bad faith claim handling practices.

Good Faith and Fair Dealing

Insurance is a form of contract. The insured exchanges the payment of premiums for the insurer's promise that they will pay compensation for legitimate claims. As with other contracts, insurance agreements include duties between the parties. Among these duties is the implied covenant of good faith and fair dealing.

The implied covenant of good faith and fair dealing is the expectation that parties to a contract will deal with one another in an honest manner. It is also the expectation that a party will not seek to frustrate the other party's ability to receive the benefits sought in the contract.

A lawsuit arising from a bad faith insurance claim denial is based upon the insured's complaint that the insurer is unfairly seeking to avoid their obligations under the agreement. This is usually through deceit or by using technical excuses for their breach of the agreement.

Breach of the implied covenant of good faith and fair dealing normally creates a common-law tort cause of action. However, some states have enacted laws that limit or remove the availability of this cause of action.

First-Party Bad Faith Insurance Denials

First-party bad faith insurance denial occurs when:

  • The insurer refuses to pay a claim without a reasonable basis
  • The insurer fails to properly investigate the claim within a reasonable amount of time

First-party bad faith insurance denials could include situations where the insurer:

  • Ignores or refuses to pay a legitimate claim
  • Attempts to underpay a legitimate claim
  • Unreasonably delays or improperly investigates the claim
  • Makes a false assertion to deny coverage

Third-Party Bad Faith Insurance Denials

State interpretations of the insurer's duty to defend against third-party claims differ significantly. However, there are some common forms of third-party bad-faith insurance denials relating to this duty. There's also a related duty of indemnification. Indemnification refers to the duty of the insurer to defend the insured in court proceedings.

Third-party bad faith insurance denial occurs when the insurer fails to meet their obligation to defend and pay all defense costs when the lawsuit's demands exceed the amount covered by the policy. An exception exists where the insurance policy is a "burning limits" or "defense within limits" policy. This is when the policy includes the cost of legal defense in the policy's limit of liability.

When a settlement amounts to the policy limit, an insurer may be tempted to go to court. If they win, they don't have to pay. If they lose, the judgment could be greater than the policy limit. This means that the lawsuit would expose the insured to a risk they wouldn't face if the company settled. In this situation, some jurisdictions find that an insurer's unwillingness to settle is a breach of their duties to the insured.

Finally, third-party bad faith insurance denial can occur where the insurer fails to fulfill their duty of indemnification. This is when the insurer fails to pay a final court judgment or settlement covered by the policy.

Get Legal Assistance With a Bad Faith Insurance Claim Denial

Your insurance company was hired to protect your interests. When they act in bad faith and refuse to cover a personal injury, who can you turn to? If an insurer has made a bad faith insurance claim denial, a lawyer can greatly assist your efforts to get them to do the right thing. Contact the law office of a bad faith insurance lawyer to discuss your case and learn more about how they can help.

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