What Is Insurance Bad Faith?
By Oni Harton, J.D. | Legally reviewed by Melissa Bender, Esq. | Last reviewed April 02, 2024
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You pay for insurance coverage to protect you and provide compensation if you must file an insurance claim. You've been a responsible policyholder, paying your premiums on time and abiding by the terms of your policy. You've never even thought of engaging in insurance fraud.
You expect your insurer to abide by the terms of the agreement and maintain a good client relationship. When you have a claim, you expect your insurance company to hold up its end of the insurance contract.
In most cases, insurers will resolve the claimant's issue following a claim adjuster's thorough case evaluation. The insurer typically resolves the claim when there is a reasonable basis for the claim.
Unfortunately, some insurance companies make resolving valid claims difficult. Insurance company acts can amount to insurance bad faith claims.
Bad faith insurance practices can include any of the following:
- Denying legitimate claims
- Failing to make a reasonable settlement offer for a covered claim
- Engaging in unreasonable delays
Such examples of bad faith claim practices could leave policyholders on the hook for large sums of money.
The following article describes how these actions may amount to an insurance bad faith claim. Under bad faith law, you may have a legal route to hold your insurance company accountable.
What Is a Bad Faith Insurance Claim?
In general, states regulate the insurance industry. While there are many similarities across the states concerning bad faith insurance laws, you should check your state's statutes and case law to know exactly what's prohibited.
Since your insurance policy is a type of contract, insurance companies must act in good faith and fair dealing, upholding specific duties to you, such as paying claims in a prompt manner. If an insurance company fails in these duties or acts in a deceptive or dishonest way, these actions could be considered bad faith.
Duty of Good Faith
There's a duty of good faith and fair dealing implied in every contact. Both parties to the contract should seek to act in good faith and fulfill the terms of the agreement. Insurers have several duties owed to policyholders. These include the following:
- A duty to investigate claims
- A duty to offer a reasonable settlement for valid claims
- A duty to pay settlement costs or court-ordered damages for a covered claim
- A duty to defend a policyholder in a legal action covered under the policy
If an insurer fails to uphold these duties, they may be subject to a cause of action for the bad faith case. A bad faith lawsuit can result in damages that include the following:
- Compensatory damages resulting from actual losses from the insurer's bad faith refusal to handle the claim
- Court costs and attorney fees
- Punitive damages to deter the insurer from bad acts and to punish the insurer for the misconduct
- Damages for emotional distress
An experienced bad faith insurance lawyer can provide legal advice regarding damages you may be entitled to.
Types of Insurance Bad Faith
An insurance company can act in bad faith in several ways. One way to categorize bad faith claims is by looking at first-party claims versus third-party claims. This article discusses both types below.
First-Party Claims
A first-party claim often involves seeking compensation from your insurance company for some covered incident. Incidents can include any of the following:
- A personal injury
- A car accident
- A liability insurance claim
- A life insurance claim
- Property damage
For example, if a fire damages your home, you expect your homeowners' insurance to cover all the damage. Once you file your claim according to your policy, your insurance company has specific duties, including the following:
- Conduct a reasonable and prompt investigation into the claim
- Provide a fair, adequate valuation of the damage and settlement offer
- Approve or deny the claim (with an explanation) within a reasonable amount of time
- Promptly pay claims that have been approved
Failing to fulfill these duties or refusing to pay a legitimate claim can constitute insurance bad faith in the first-party context.
Third-Party Claims
In a third-party claim, the insurer must defend you against a third-party liability lawsuit.
If someone who was injured while visiting your home or business sues you, your insurance company's duties to you generally include the following:
- The duty to defend: The insurance company must provide your defense with some exceptions. If your insurance policy covers part of the lawsuit, your insurance company should protect your interests. This often includes all defense costs, regardless of your policy limits.
- The duty to indemnify: If you're found liable in the lawsuit, the insurance company must pay for the claims covered by your policy up to the policy limits.
- The duty to settle: State law in some jurisdictions imposes a duty to settle a claim if it's reasonably clear that the insured was at fault for a covered incident. This requirement seeks to avoid exposing the insured to a final judgment above policy limits.
Failing in these duties may amount to bad faith. A bad faith claim can result in the insurance company paying all judgment costs against you, regardless of policy limits.
What To Do if You Suspect Insurance Bad Faith
If your insurance company is uncooperative, you can file a complaint with your state's insurance commissioner. Your state agency regulates the industry and assesses penalties on offending parties.
If your insurance company is liable for the bad faith, you've likely suffered damages. In that case, many jurisdictions allow for two types of lawsuits against the insurer. The central claims include a breach of contract lawsuit and a bad faith tort lawsuit.
These causes of action allow you to seek compensation. You can seek recovery for the costs of pursuing an insurance claim and attorney's fees. Bad faith claims can sometimes include additional costs, such as punitive damages.
Protect Your Interests Against Insurance Bad Faith
Dealing with the events and damage that give rise to an insurance claim is stressful. It would help if you didn't have to battle with an uncooperative or unscrupulous insurance company as well. Contact a local bad faith insurance attorney to help protect your rights.
Next Steps
Contact a qualified attorney to assist with any issues related to insurance.
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