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Elements of a Bad Faith Insurance Claim

Insurance companies are in the driver's seat when settling a claim. Insurance carriers have more negotiating strength and financial resources than the policyholder. Recognizing this, most courts find an obligation of good faith and fair dealing in every insurance policy. 

If your insurance company fails to act reasonably in processing, investigating, or paying your claim, you may have a cause of action for a bad faith case.

Most aspects of insurance law are a matter of state law. State law shapes how bad faith is defined in the insurance context. A claim proceeds under common law established by courts. You may have a claim based on violating contractual obligations under an insurance contract.

A bad faith insurance claim can result from any type of insurance, including the following:

  • Health insurance
  • Homeowners' insurance
  • Life insurance
  • Liability insurance

In general, most bad faith insurance claims fall in a few areas:

  • Claim denial
  • Underpayment of a claim or unreasonable settlement offer
  • Delay in payment of claim

To better understand this legal claim, let's examine what constitutes bad faith.

Elements of Common Law Bad Faith

The common law elements of bad faith vary from state to state. Some states define bad faith as conduct that is unreasonable or without proper cause. Other states take a narrower view. Some states view this claim as a breach of contract, while others view this claim as a tort.

Under a common law torts theory, an insurer owes its policyholders a duty of good faith and fair dealing due to the special relationship between the parties. Proving a common law claim of bad faith generally requires the policyholder to prove two elements:

  1.  Benefits due under the policy terms were withheld: In this first prong, you must establish that you had a valid claim under the terms of your policy. It would help to document that the insurer denied your claim. Some states require you to make a final demand before filing a lawsuit.
  2. The reason for withholding benefits was unreasonable: Whether the insurance company acted reasonably is evaluated objectively based on the situation. The factfinder analyzes the facts as they existed at the time of the decision.

In Wisconsin, for example, liability will only be found where an insurer intentionally denies a claim without a reasonable basis. Mere negligence is never enough to prove bad faith.

Courts have identified specific actions as bad conduct. For example, in their Civil Jury Instructions 2330 and 2331, the Judicial Council of California provides certain factors to consider in deciding if an insurance company acted unreasonably. The factors include the following:

  • Misrepresenting relevant facts or insurance policy provisions
  • Failing to acknowledge a claim and to act promptly after receiving a claim
  • An adjuster failing to use reasonable standards for the investigation and processing of claims
  • Failing to either approve or deny claims within a reasonable time after the insured has submitted proof of loss
  • Failing to provide a reasonable explanation or reasons for denying the claimant's claim

The presence of any one of the following factors is not conclusive evidence of bad faith, but they can help establish your case.

Elements of a Statutory Bad Faith Claim

A lawsuit may allege a common law bad faith claim and a statutory bad faith claim. A statutory claim relies on a law enacted by the state's legislature. Many states have statutes designed to protect policyholders from unfair or deceptive practices by insurance companies. These statutes will detail the type of prohibited actions and the remedies available to the policyholder.

In Connecticut, for example, a policyholder can bring a separate claim for violating the state's Unfair Insurer Practices Act. The policyholder can allege any of the following actions:

  • Compelling insured to litigate to recover amounts due under an insurance policy
  • Failing to promptly provide a reasonable explanation of the basis for the denial of a claim or offer of a compromise settlement
  • Not attempting to make a prompt, fair, and equitable settlement of claims when liability is reasonably clear
  • Refusing to pay claims without conducting a reasonable investigation
  • Failing to implement reasonable standards to investigate

Connecticut law defines unfair and deceptive acts or practices in the insurance business.

Damages Available in a Bad Faith Insurance Claim

If you pursue damages against the insurance company in a bad faith insurance claim, you can request that your insurance company pay for the following:

  • Their contractual obligations
  • Your attorney fees
  • Emotional distress you suffered as a result of the bad faith insurance claim
  • Any economic losses for losses you have suffered
  • Punitive damages

To preserve your claim for damages, you must file a claim before the statute of limitations expires.

Experiencing Bad Faith? Consult With an Insurance Lawyer

There are a variety of insurance company tactics that could constitute bad faith. The rules on bad faith litigation vary from state to state. If you believe your insurance company acted in bad faith, an experienced insurance attorney can help protect your rights. Consult a bad faith insurance attorney to see if your insurer is acting in bad faith.

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