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What Is Bad Faith Insurance Law?

Businesses and individuals rely on insurance companies to pay claims without arguments. If the adjuster has questions, they should ask them promptly and investigate thoroughly. We expect insurance companies to act in good faith. If our insurance company acts unreasonably or fails to investigate a claim, it acts in bad faith.

Bad faith insurance claims may lead to legal action and unpaid claims. At best, it can mean the claims process drags out for weeks or months while you wait for a reasonable settlement offer. This article explains what a bad faith insurance claim is. It also discusses your legal options when faced with a bad faith situation.

What Are Bad Faith Insurance Practices?

Insurance companies have legal duties to their policyholders. Failing to perform these duties may amount to bad faith. Your insurance policy should explain the duties your insurance adjuster will perform and what to expect during the claims process.

Significant duties include:

  • The duty to investigate: Insurers must conduct a full investigation of the insurance claim. Failing to conduct an investigation or delaying an investigation without cause breaches that duty.
  • The duty to indemnify: Your insurance policy should pay legitimate claims against you up to your policy limits.
  • The duty to defend: Part of indemnification is the duty to provide legal assistance during any legal action against you. Unless your policy specifically excludes defense costs in some cases, such as the cost of a defense attorney in a DUI case, your insurer must provide legal advice.
  • The duty to settle: In some states, insurers have a duty to settle. Insurance companies may not force litigation if the claimant is willing to settle to reduce liability.

All states have a state department of insurance. These have different names in each state. They are not attorney referral agencies. They can help you understand the laws in your state. Some can give you information on bad faith insurance cases against insurers.

Each state has its own specific laws regarding bad faith practices. For instance, California considers bad faith to include a failure to defend, a failure to settle, and “negligent mishandling." If you believe your insurer is dealing in bad faith, you should consult an experienced attorney immediately.

Signs You May Need a Bad Faith Lawyer

You have a limited amount of time to file a bad faith claim against an insurance company. The statute of limitations for these claims depends on how your state views the cause of action. The sooner you recognize a possible bad faith action by the insurer, the better your chances of successful litigation.

Things to watch for include:

  • Delayed or evasive communications: If your agent won't respond to calls or emails, contact an attorney at once.
  • Failure to investigate damage without a reasonable explanation: A damage claim requires a physical investigation. It may take time for the investigation to occur, such as after a major storm. If the adjuster has no good reason, call your lawyer.
  • Extending the investigation or the claim period without justification: Sometimes, insurers must extend a claim for reasons beyond the adjuster's control. An example could be a car accident in which the other party isn't providing information. If there is no reasonable excuse, your attorney should find out what it is.
  • Offering a quick settlement or cash payout: You should receive the full coverage of your policy. If your insurer offers you a settlement right away that is less than the total damages, a tactic known as “lowballing," be suspicious.

In most states, your insurance company can be sued for violating its contractual obligations. Some states may have laws against violating covenants of good faith and fair dealing. A few will allow you to sue for damages in tort. This type of bad faith lawsuit lets you sue for additional damages.

Causes of Action

Bad faith litigation requires you and your attorney to show that:

  • You had a valid claim under your insurance policy. You must also show that your policy was valid and that you paid your premiums on time.
  • Your insurer failed to pay your claim, but the denial was unreasonable or improper.

As the claimant, you bear the burden of proof to show a breach of contract or that the company failed in one of its duties under your agreement. Your attorney can tell you whether your state laws permit a tort claim for additional damages.

Getting Legal Advice

If you believe your insurance company is mishandling your claim, you need a bad faith insurance attorney immediately. State laws differ in how much time you have to file a claim, and the sooner you begin the process, the better.

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