A life insurance policy is a contract between an insurance company, or the insurer, and a policy holder, or the insured. This type of contract serves as proof that the insurer promises to pay a designated beneficiary a designated amount of money when the insured passes away.
The payments, typically monthly, are made in exchange for premiums that are paid by the policyholder during their lifetime when they hold the life insurance policy. When an individual purchases an insurance policy, their insurance company owes certain duties to them.
An insurance company is required to respond reasonably and promptly to claims and to act in good faith. In order for an insurance company to act in good faith, they are required to comply with the covenant of good faith and fair dealing.
What are Common Life Insurance Policy Problems?
There are many different types of life insurance which are categorized as either term life insurance or as permanent life insurance. Term life insurance lasts for a specific amount of years prior to expiring.
With term life insurance, the policyholder chooses the term length, typically in increments of 10 years. In contrast, permanent life insurance will remain in force for the duration of the policyholder’s life.
If however, the policyholder stops paying premiums or otherwise surrenders the policy, the policy expires. Permanent life insurance is usually more expensive when compared to term life insurance.
The laws governing life insurance differ by state, mostly because there are no federal regulations which govern life insurance policies and providers. This means that even when a single life insurance provider operates in every state, they will be required to issue policies which are different in each state.
The problems which are associated with life insurance policies are relatively common across policy holders. For example, the policies themselves typically contain vague and technical language.
When an individual is ready to cash in their policy, the policyholder or the beneficiary may not be prepared for the various issues or loopholes that their insurance company finds. The provider of the policy may bring up numerous different issues in order to avoid paying out a claim, including, but not limited to:
- Failing to attempt to reach an equitable settlement when fault is clear;
- Refusing to pay a claim without an exhaustive investigation of what seems to be extraneous information associated with the claim;
- Failing to react to claims that are made in a reasonable amount of time; or
- Providing a reason for the denial of the claim or for the offer of a settlement, in an unreasonably short amount of time.
What is the Covenant of Good Faith and Fair Dealing?
The covenant of good faith and fair dealing, also referred to as the duty to act in good faith, requires that an insurance company act in certain ways when dealing with claims.
An insurance company is required to:
- Respond to a claim, either by denying it or paying it, within a reasonable time;
- Cooperate with the insured regarding their claim, including responding to all calls and inquiries within a reasonable time;
- Provide reasons for denying the claim in writing and specify what provisions of the policy the insurance company is relying on;
- Attempt to find reasons for paying the claim as opposed to reasons for denying it; and
- Be “fair” towards the insured.
Generally, the duty of food faith and fair dealing requires the insurance company to thoroughly investigate the individual’s claim as well as to consider all of the reasons which support the claim as opposed to simply looking for a reason to deny the claim.
An individual’s insurance company is not permitted to consider its own financial interests, which would almost always favor a denial of a claim, but is also required to consider the insured’s financial interests as well.
Do I Owe any Duties to my Insurance Company?
Just as an individual’s insurance company owes them a duty to act in good faith, the individual may have a duty to act in good faith towards their insurance company. Courts in numerous states have ruled that the insured owes their insurance company a duty of good faith similar to the one the insurance company owes to the insured.
The insured’s duty to their insurance company includes the following:
- Submitting their claims in a timely manner
- Providing all the information they are asked to give, so long as it is permitted under the policy or the law;
- Providing a statement under oath regarding the claimed loss if the policy requires one; and
- Cooperating with the insurance company regarding any claimed losses, for example, allowing them to examine the damage if an individual is involved in a car accident.
What Happens if my Insurance Company Breaches the Duty of Good Faith and Fair Dealing?
If an insurance company breaches the duty of good faith and fair dealing, then they are considered to be acting in bad faith and an individual can sue them. This is an implied duty, which means that it is not necessary that the duty be written in the policy and that it is up to the insured to ensure that their rights are not violated.
Therefore, if an individual’s insurance company acts in bad faith, an individual may sue them for breaching the implied covenant of good faith and fair dealing. If an individual’s insurance company is found to have acted in bad faith, an individual may receive damages in the amount of their claim as well as, in some cases, punitive damages.
Can My Insurance Policy be Canceled?
There are numerous instances when an individual’s insurance policy may be canceled, either by the insurance company or by the policyholder. However, the majority of policies are written for a specified term and include restrictions limiting when the policy may be terminated before that term is completed.
What about Cancellation by the Insurance Company?
In general, an insurance company does not have the right to cancel an insurance policy unless the policy itself explicitly reserves and ensures their right to do so. Therefore, it is not uncommon for a policy to include a provision which allows an insurance company to cancel the policy upon certain terms and conditions.
In the absence of this type of a provision, the insurance company will only be able to cancel a policy if there are valid grounds, including:
- The insurance company discovers the policyholder has made a fraudulent claim;
- The insurance company discovers the policyholder lied or used false documentation in applying for the policy; or
- Other factors which may indicate a policyholder poses a substantial risk to the insurance company.
Even when cancellation is permitted, either by a provision in the policy or based upon other grounds, the insurance company will typically be required to provide the policyholder notice of cancellation within a reasonable amount of time prior to termination.
What about Cancellation by the Policyholder?
A policyholder may terminate their insurance policy at the end of the term in one of two ways:
- Failing to pay premiums once the designated term for the policy has run; or
- Canceling the policy midterm.
Similar to the insurance company, the policyholder is not obligated beyond the term which is specified by the policy. Therefore, the policyholder may cancel their policy simply by not paying to renew it.
It may be possible to cancel a policy midterm. However, in order to do this, the policyholder will have to meet certain requirements.
My Insurance Company Breached the Covenant of Good Faith and Fair Dealing, Do I Need a Lawyer?
If you believe your insurance company breached the covenant of good faith and fair dealing, it may be helpful to consult with an insurance lawyer. Your lawyer can assist you with filing a bad faith claim as well as represent you if you are required to appear in court.
It is important to keep in mind that insurance companies often have lawyers on their staff whose sole purpose is to defend the company against litigation. Because of this, it is often difficult for individuals to fight insurance companies alone.