You pay your insurer for peace of mind. If an accident causes someone to get hurt, you expect your insurer to pay any damages covered by your policy. When an insurer unreasonably refuses to pay your claim, or refuses to properly defend and protect you from the claims of others, they are operating in bad faith. This article explores different kinds of bad faith insurance laws and what you can do if you find yourself in a conflict with your insurer.
Duties to Policyholders
Insurance companies must fulfill a number of important duties to their policyholders, and failure to meet these duties may amount to bad faith. Significant duties include:
- The Duty to Investigate — An insurer who fails to conduct a proper investigation of a claim and provide their findings (and a valuation) has failed to meet their duty to investigate. Unreasonable delays may also constitute bad faith.
- The Duty to Indemnify — An insurer who fails to pay a settlement agreement or judgment entered against the policyholder, up to the limit of their coverage, has failed to meet their duty of indemnification, which may constitute bad faith.
- The Duty to Defend — An insurer who refuses to defend the policyholder against a claim, even if most of the lawsuit is not covered by the policy, may have failed to meet their duty to defend. The exception to this duty is when a policy explicitly includes the costs of defense in calculating policy limits, though in most situations the insurer must cover all defense costs regardless of the coverage limits.
- The Duty to Settle Reasonably — Some jurisdictions recognize another insurer duty. Where a settlement would be advantageous to the insured because a lawsuit would expose them to damages beyond the limits of the policy, the insurer breaches their duty to settle reasonably if they refuse to settle because they hope to reduce their liability at trial.
It should be noted that jurisdictions may hold very different views regarding what violates bad faith insurance laws, or apply different tests to determine when a bad faith insurance law violation has occurred.
Causes of Action
If an insurer has acted in bad faith, it can be sued for its actions. How you proceed will depend on the laws in your specific jurisdiction. Claims against insurers for their bad faith typically proceed as one or both of the following kinds of cases:
- Breach of Contract — Most jurisdictions will permit the victim of an insurer's bad faith to proceed with a breach of contract claim. An insurance agreement is a contract in which the insured pays premiums in return for the insurance coverage, defense, and the monetary value of the policy payment. As such, an insurer's refusal to hold up their end of the deal may be a breach of contract.
- Tort — In some jurisdictions an insurer's bad faith is considered to be a kind of tort. A tort is a civil wrong where one party causes the other harm through their actions.
The distinction between breach of contract and torts actions is important because, although either kind of claim can result in compensatory damages, jurisdictions that permit a tort claim may also provide additional consequential and punitive damages. Punitive damages, in particular, can be very significant, frequently more than the value of the policy itself.
Learn More About Bad Faith Insurance Law
The courts can help set things right if your insurer has turned its back on you. How you can go about getting this help depends entirely on your jurisdiction's laws and traditions relating to bad faith insurance. An experienced bad faith insurance attorney can help clarify your rights and guide you through the process.