When an insurance company sells an individual an insurance policy, the company is obligated by law to act in good faith. This means that when the insured individual files a legitimate insurance claim, the insurance company is required to make reasonable efforts to compensate the insured.

This duty may also be referred to as the covenant of good faith and fair dealing. Insurance companies are only permitted to deny insurance claims if they have conducted a fair and reasonably thorough investigation which shows that a claim was not covered by the insurance policy.

If an individual’s insurance company denies a claim without a proper investigation or if the company acts unreasonably, then the company may have acted in bad faith. Bad faith may apply to almost any type of insurance policy, including:

  • Automobile insurance;
  • Commercial insurance;
  • Health insurance;
  • Life insurance; and
  • Property insurance.

What is a Bad Faith Claim?

Insurance policies and coverage may be available for and individual’s:

  • Homes;
  • Vehicles;
  • Businesses; and
  • Health.

Individuals purchase insurance policies by entering into a contract with the insurance company which gives the insurance company responsibility for covering expenses if an accident arises. The purchaser of the policy, or the insured, has an obligation to pay their premiums as well as to update the company regarding any changes that affect the policy.

Both the insurance company and the holder of the insurance policy have a duty to communicate and engage in good faith, which means they do not withhold relevant information or operate with any intent to defraud or deceive the other party. When an insurance company fails to pay a valid claim due to a failure to properly or fairly investigate a claim, the insured may be able to sue for a bad faith claim.

What Steps Can I Take in Dealing with My Insurance Company?

If an individual is struggling with their insurance company regarding a bad faith, the should ensure that they first take the following steps:

  • Knowing their policy and following the procedures provided by the insurance company in filing a claim;
    • Many claims are denied when the policy an individual has chosen simply does not cover the type of accident they are claiming or they failed to provide the appropriate documentation;
  • Maintain written records of all correspondence between with the insurance company while the claim is being processed and after it is rejected;
  • Be persistent in the effort to get your claim paid, including:
    • always follow up even if the insurance company fails to respond;
    • get clarification of anything that is not understood; and
    • request details of any denial;
  • File an appeal if one exists within the insurance policy; and
  • Engage a legal professional when these efforts have failed.

How Can I Tell if My Insurance Company Acted in Bad Faith?

There are several warning signs which may suggest that an individual’s insurance company is acting in bad faith, including:

  • Denying a claim without providing a reason;
  • Failing to conduct a reasonably thorough investigation of the claim; or
  • Offering the insured less money than the insurance company knows the claim to be worth.

If an individual’s insurance company has engaged in any of the previously noted behaviors, then the insured may be a victim of bad faith. If an individual believes they may have been a victim of bad faith, it is important for them to keep track of all of the documents which the insurance company sends them in case they want to file a claim at a later time.

An example of a bad faith claim is when an insurance company did not pay medical expenses under a worker’s compensation claim. The insurance company did not provide any reasonable explanation for the denial of the claim.

The insurance company’s failure to pay the claimant’s expenses in a timely manner was considered to be bad faith.

Why Do Insurance Companies Act in Bad Faith?

An insurance company has a strong incentive to make a profit. Because of this, the less money they pay out, the more their profits increase.

Additionally, there are many policyholders who simply do not wish to fight the insurance company and they allow the company to exercise bad faith practices. Because of these issues, insurance companies have been permitted to act in bad faith on numerous occasions.

What Should I Do if My Insurance Company Acted in Bad Faith?

If an individual believes that their insurance company has denied their claim in bad faith, the first step they should take is to appeal the denial of their claim. The majority of insurance companies have an appeals process that individuals can take advantage of to get the company to reconsider their claim.

The option to appeal is available even if the individual believes that their insurance company acted in good faith. If the appeal is denied, the next step is to file a lawsuit against the insurance company.

Insurance companies often fear bad faith lawsuits because the company may be ordered to pay punitive damages in addition to the value of the claim. Punitive damages may be large amounts of money and are used to punish the company for acting in a particularly unfair manner.

What is a Bad Faith Insurance Lawsuit?

A bad faith lawsuit is often associated with the conduct of the insurance company towards the policyholder. The policyholder is the individual who pays the premiums for the insurance policy, as discussed above.

If the insurance company denies a claim without good cause, the policyholder may have a legal claim against the insurance company. Insurance companies frequently withhold policy benefits from insured individuals without just cause.

If an insurance company fails to pay a valid claim, they are violating the implied covenant to act in good faith inherent in the insurance contract. This may provide the insured individual with the ability to file a bad faith insurance lawsuit.

A bad faith insurance lawsuit is a lawsuit filed in civil court where the insured individual claims that their claim was denied in bad faith by the insurance company and they request monetary compensation for the amount they are owed under the policy. In some cases, the individual may also request punitive damages if the insurance company’s actions were particularly egregious.

What Kinds of Damages Can I Recover in a Bad Faith Claim?

If an individual is successful in their bad faith lawsuit against their insurance company, they may be entitled to multiple categories of damages. The basic amount of recovery will likely be what the individual would have been entitled to if the insurance company had paid their original claim.

The individual may also be entitled to expenses they incurred as a result of the company’s failure to pay the claim, which may include:

When Do Punitive Damages Apply?

Punitive damages are available in civil cases as a means to deter bad faith dealings as well as other fraudulent or deceitful behavior. With bad faith claims, punitive damages may be awarded in order to encourage insurance companies to fairly and properly investigate claims and make reasonable efforts to promptly pay meritorious claims when the policyholder files a claim.

Punitive damages will only be awarded when the insurance company engages in egregious behavior that is fraudulent and intentional rather than just negligent. This means that instead of simply missing something or accidentally overlooking something that should have been discovered, the insurance company was aware the claim had merit and denied it anyway.

Should I Consult a Lawyer?

If you believe that your insurance claim was denied in bad faith, it is in your best interest to consult with an insurance lawyer who can help determine if your case has merit and what potential recovery may be available to you.

Your lawyer can also assist you in filing a lawsuit and represent you in court against your insurance company. Insurance companies often have much deeper pockets than the insured and even employ attorneys to defend them in lawsuits, so it is important you have representation of your own.