Bad faith lawsuits are often associated with insurance policy conduct towards the policyholder. A policyholder pays premiums to the insurance policy. When it is time to pay on claims, the insurance policy may deny these claims without a good reason. If this occurs, the policyholder may have a legal claim against the insurance company.

Insurance companies frequently withhold policy benefits from beneficiaries and without just cause. However, every insurance contract or policy has an implied covenant to act in good faith. This means it will act in a reasonable and prudent manner toward your claims.

What is Bad Faith?

When an insurance company sells you an insurance policy, they are obligated by law to act in "good faith." This means that when you file a legitimate insurance claim they have to make reasonable efforts to compensate you. This duty is also referred to as the "Covenant of Good Faith and Fair Dealing." An insurance company can only deny an insurance claim if they have a made a fair and reasonably thorough investigation which showed that your claim was not covered by the insurance policy. 

If your insurance company denied a claim without properly investigating it or acted unreasonably, then they have acted in "bad faith." Bad faith applies to just about every type of insurance policy, including automobile insurance, commercial insurance, health insurance, life insurance, and property insurance.

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

There are several warning signs that may suggest your insurance company is acting in bad faith:

  • Denying a claim without giving a reason
  • Failing to conduct a reasonably thorough investigation of your claim
  • Offering you less money than they know the claim to be worth

If your insurance company has done any of the above, then you may be a victim of bad faith. If you believe you are, then it’s important to keep track of all documents your insurance company sends you in case you wish to file a claim.

For example, this is a bad faith claim in Louisiana:  

  • An insurance company was found to be in bad faith when it did not pay medical expenses under a worker’s compensation claim. No reasonable explanation was provided for the denial of the claim. The company’s failure to pay the expenses in a timely manner was considered bad faith.

What is an Example of Failing to Conduct a Reasonable Investigation?

A showing of an insurance company’s disregard of facts or proof can support a claim of bad faith. Here are some examples:

  • Though an insurance company inspected property destroyed by a fire, it did not investigate to determine the cause of the fire. Rather, the company baselessly accused its client of arson and denied the claim. A Nebraska court found the insurance company acted in bad faith.
  • An insurance company was found to be in bad faith when a worker’s compensation claim was denied based on an arbitrary decision by a claims adjuster. The claims adjuster reclassified the claimant’s condition from "injury" to "non-confining illness" after reading medical records, though he had neither spoke to the claimant’s doctors nor called for an independent medical examination. The company offered three months’ compensation. The claimant, who was unable to return to work, was seeking permanent disability benefits.
  • A California court found that a commercial insurance provider of general liability insurance acted in bad faith when it did not honestly evaluate its client’s vulnerability to liability to third persons. The company also failed to accurately determine its indemnity obligation and limited its settlement under mistaken information.

What is an Example of Offering Less Money than They Know the Claim is Worth?

A title insurance company in California was found to be in bad faith because of its successive attempts to evade responsibility for its obvious negligence. The company failed to disclose about an easement on the insured’s property. When the insured discovered the easement, an appraiser estimated a loss of nearly $63,000. The insurance company first denied liability. It later offered to settle for a nominal amount. It finally conducted an appraisal of the loss but only after a court found it liable.

Read More About: Title and Boundary Disputes

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

If you believe your insurance company has denied a claim in bad faith, the first thing you should do is appeal the denial. Most insurance companies have an appeal process that you can use to get your insurance company to reconsider your claim. This option is available to you even if you believe your insurance company was acting in good faith.

The next thing to do is to file a lawsuit against the insurance company. Insurance companies are often afraid of bad faith lawsuits because the insured can be ordered to pay "punitive damages" in addition to the value of the claim. Punitive damages are large amounts of money intended to punish the insurance company when they act in a particularly unfair way.

What Can I Recover if I Sue my Insurer for Bad Faith?

In addition to an award to cover your losses as a result of the insurance company’s bad faith, some states also award punitive damages on your behalf. Punitive damages are awarded as punishment for the bad faith and are meant to discourage similar behavior in the future. Some examples of punitive damages being awarded are:

  • In the District of Columbia, punitive damages were awarded because a health insurer denied a claim for treatment though it had not investigated to determine whether the claimant was exempt from a "preexisting condition" limitation.
  • In California, punitive damages were awarded because a car insurance company failed to diligently settle the insured’s uninsured motorist’s claim. The company refused to compensate the client, though it did not have nor provide the reason for denial of the claim.

Why Do Insurance Companies Act in Bad Faith?

Insurance companies have a strong incentive make a profit. Therefore, the less they pay, the more profits are increased. In addition, many policyholders don’t want to fight insurance companies, allowing insurance companies to exercise these bad faith practices. Insurance companies have been getting away with it for years and it will continue in the future.

Do I Need a Lawyer to Help Me with My Bad Faith Claim?

Bad faith claims are often hard to prove and difficult to pursue. If you have a claim that your insurance provider should cover under your policy, but refuses to, the provider may have acted in bad faith, and you should immediately contact a business lawyer or financial lawyer who has experience dealing with insurance claims and bad faith. Your attorney can advise you of your rights and let you know if you have a case and would be entitled to any monetary damages in a lawsuit against your insurance provider.