Written By: Andy Gurczak

June 27, 2021

Bad Faith Insurance: Recognizing Tactics

What Is Bad Faith Insurance?

Bad faith insurance refers to an insurer’s attempt to back out of its obligations to its policyholders. It could be through the refusal to pay a legitimate claim or to process a policyholder’s claim within a reasonable period. When an insurance company denies a claim, that denial decision could be in “bad faith.”As stated by the law, every insurance contract must contain a good faith protocol and fair dealing. If the insurance company violates the deal, then it’s said it acted in “bad faith.” The neglect of this protocol involves something beyond neglect of the specific contractual duties or mistaken judgment. To establish a bad faith protocol it must be shown that an insurer’s delay or withholding of benefits was unreasonable or without proper cause.

For example, insurance companies act in bad faith when they misrepresent an insurance contract’s language to the policyholder to avoid paying a claim. They also act in bad faith when they don’t disclose policy limitations to policyholders before they purchase a policy. Likewise, when they make unreasonable demands on the policyholder to prove a covered loss. There are many ways in which an insurance company may act in bad faith.

Bad faith insurance Contract Breach

Other ways insurance companies act in bad faith:

  • failing to issue a reasonable payout
  • unreasonably failing to settle a claim
  • unreasonable refusal to defend a lawsuit
  • delay in paying benefits without a reasonable cause
  • unreasonable delay in investigating a claim
  • improper valuation of a claim
  • excessively restrictive interpretation of claim form
  • claim denial based on improper standards
  • inadequate communication with the insured
  • failure to notify the insured of certain policy rights
  • advising a claimant not to obtain the services of an attorney.
  • misleading a claimant as to the applicable statute of limitations.

When an insurance company acts in bad faith the policyholder or insured can sue the insurance company for breach of contract. In addition, there are also damages available under a tort claim for bad faith. This can include financial losses, emotional distress, and attorney’s fees that affect the insured. Furthermore, if the insurance company acted with malice, oppression or fraud, the policyholder may also recover punitive damages. Punitive damages are meant to punish the insurer and discourage it to act in bad faith again.

When trying to determine if an insurer acted in bad faith, a court will evaluate the actions of the insurers and determine if they were reasonable under the circumstances. If the insurer did not act reasonably, then the insurer has acted in bad faith.

Overall takeaways of bad faith insurance:

  • Bad faith insurance refers to the strategies insurance companies use to avoid their contractual obligations to their policyholders.
  • Examples of bad faith insurance: misrepresentation of contract terms, nondisclosure of policy exclusions, unexplained delays in the claims process, unreasonable payouts, failure to settle claims, etc.
  • States have established laws to protect policyholders from bad faith insurance.
  • Simple mistakes do not constitute bad faith.

Understanding Bad Faith Insurance

  • Bad faith insurance can apply to any type of insurance policy. For instance, homeowners’ insurance, health insurance, auto insurance, life insurance, liability, etc. 
  • A difference in opinion between the policyholder and the adjuster over an estimate of loss does not constitute bad faith.  However, if the adjuster refuses to provide reasonable evidence for their conclusions, it can be in bad faith.  
  • Furthermore, ignoring evidence that supports the policyholder’s basis for making a claim is also considered bad faith. 
  • Any act of negligence, like failing to promptly reply to a policyholder’s claim, is bad faith. 
  • Additionally, insurers must also explain why they refuse to cover a claim or partly cover it, to avoid acting in bad faith.

Fighting Bad Faith Insurance

States have specific laws that address bad faith practices, commonly known as unfair claims practices acts. They are meant to protect policyholders against malicious behaviors by insurance companies. Some laws require a bad faith insurance company to pay above and beyond the amount owed for the claim in order to compensate the victim for having their claim denied. As aforementioned, this compensation covers out-of-pocket expenses or borrowed funds to repair damages. As well as missed work and attorney’s fees. In fact, a jury may even award you, the policyholder, with punitive damages. This is to punish the insurance company for its wrongdoing and to discourage it from acting in bad faith with other policyholders.

How to Identify Bad Faith Insurance?

The first step to take if you know or suspect that your insurance company has acted in bad faith, is to contact an experienced public adjuster or insurance lawyer. They can review your particular case and give you specific legal guidance. Regardless, it requires two things to prove bad faith insurance. First, that the insurer unreasonably refused to issue a fair payout or any payment at all. Second, that this decision to withhold or issue an unfair payment was  lacked proper cause under the policy terms or state law.

If you need to file a bad faith lawsuit, it is crucial that you document all the evidence you can foster of your dealings with your insurance company. Keep records of any correspondence that can help you reconstruct an accurate timeline of events. Record communications in a diary or calendar. In fact, email is the ideal way to communicate with your insurance company.

A qualified public adjuster or insurance attorney can help the policyholder investigate the claim. In addition, they can evaluate and calculate the benefits owed, and determine whether the insurer is acting in bad faith. Consequently, the insured can make a fully informed decision about suing a rich insurance company.

Suing for Bad Faith Insurance

Who May Sue For Insurance Bad Faith?

A privity of contract is necessary. This means that a if a policy entitles an insured to benefits, and those benefits are wrongfully withheld, then the insured may sue for bad faith. Everyone insureds as well as express beneficiaries under the policy can all sue.

Furthermore, a designated beneficiary of a policy can sue for both the policy benefits and extra-contractual damages. However, an express beneficiary does not need to be specifically named. Moreover, an insured may also have standing to sue if they are a member of an insured group. For instance, even though a spouse may have suffered a loss, she cannot sue the insurer for bad faith, unless named as beneficiary. However, if an insurer breaches duty it owes to a spouse, it is possible for that spouse to sue for damages.

Can An Insurance Bad Faith Claim Be Assigned?

In third-party claim, it is possible to assign a bad faith claim under certain circumstances. For instance, failure by an insurer to compensate an insured for third-party liability. However, because personal tort claims are not assignable, the insured’s claims for emotional distress damages and punitive damages are not assignable. An assignment allows a third-party claimant to obtain more than the policy limits from the insurer. Without an assignment, a third-party can only sue the insurer for the amount of a third-party beneficiary policy limitations.

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