Bad Faith Insurance - An Overview

There is an implied covenant of good faith and fair dealing in every insurance contract that requires an insurance company to act fairly and in good faith when evaluating a claim. When an insured’s (the person covered by the insurance policy) claim is wrongfully denied by an insurer (the entity issuing the insurance), it is considered bad faith. Examples of bad faith include the failure to promptly or thoroughly investigate a claim, inadequate claims processing, unreasonable denial of payment, delay in payment, failure to settle an underlying suit against the insured and failure to defend a suit against the insured. All types of insurance policies, including disability, life, homeowner, automobile and accidental death policies require that the insurer act in good faith. If you believe that your insurance company has acted in bad faith in handling your claim, talk to an experienced attorney about your situation.

Why Insurers Act in Bad Faith

There is a substantial economic incentive for insurers to act in bad faith. Insurers receive thousands of claims every day. Very few insured parties contest claim decisions, and insurance companies save large amounts of money on claims that would logically be approved. For example, an insurance company wrongfully denies 100 claims. Ninety-five are undisputed, and five are disputed by the insureds. Upon review, the company reverses its denial on four of the claims and pays the amount due. Even if the remaining disputed claim results in a bad faith lawsuit and the insured collects millions of dollars, the company has saved additional millions by denying 95 of 100 claims.

Types of Bad Faith

First-Party Bad Faith: About one-half of the states recognize a cause of action for an insurer’s bad faith in first-party insurance claims. Most of these states follow the more narrow approach of the Wisconsin Supreme Court in Anderson v. Continental Insurance Co., 271 N.W.2d 368 (Wis. 1978), which requires the plaintiff to show the insurer acted unreasonably in denying the claim and the insurer’s “knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.” The remaining states follow the approach set forth by the California Supreme Court in Gruenberg v. Aetna Ins. Co., 510 P.2d 1032 (Cal. 1973), which only requires that the plaintiff show unreasonableness in denying a claim.

Third-Party Bad Faith: Liability insurance policies, such as automobile and homeowner insurance policies, apply to claims against the insured by third parties, including third parties who were injured in accidents caused by insureds. Liability insurance is also known as third-party coverage. A liability policy generally state the insurer’s duties under the policy, which typically include paying covered claims, investigating claims and defending the insured in claims that fall within the scope of the policy. A third-party bad faith claim usually relates to an insurer’s failure to settle an underlying suit (for example, by an injured party) against the insured; the insurer’s wrongful failure to defend a suit against the insured; or the insurer’s bad faith or negligence in defending the insured.

Damages

If an insured’s bad faith claim is successful, he or she can generally recover the benefits of the policy, as well as consequential losses and damages suffered due to claim denial. A plaintiff can also recover emotional distress damages caused by the insurer’s misconduct in first-party or third-party bad faith cases. Depending on the state, a successful plaintiff may be able to recover attorneys’ fees and/or prejudgment interest. Again, depending on the state, punitive damages may be available in cases of extreme misconduct by the insurer. In determining punitive damages, the following factors may be relevant: the culpability of the insurer, the insurer’s wealth and the ratio of punitive damages to compensatory damages.

Conclusion

If you believe you have been wrongfully denied an insurance payment for a covered loss, you have a right to seek compensation for bad faith. If you wish to review your options, talk to an experienced insurance lawyer as soon as possible. The law imposes a statute of limitations, which varies from state to state, giving you a limited time in which to pursue your claim. Contact an experienced insurance attorney to discuss your options.

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