Defining Bad Faith

There are a number of actions and omissions that amount to bad faith on the part of the insurance company. One example of bad faith is an insurer’s unreasonable denial of an insurance claim. Another example is an insurer’s wrongful failure to defend the insured in a suit by an injured third party. The following article briefly explains first-party and third-party bad faith and sets forth several examples of conduct that courts have held constituted bad faith. If you believe that your insurance company has acted in bad faith in handling your claim, talk to an attorney who has experience handling bad faith claims.

First-Party Bad Faith

About one-half of the states recognize a common law tort for bad faith in first-party insurance claims. Of these, most follow the more narrow approach of the Wisconsin Supreme Court in Anderson v. Continental Insurance Co., which requires the plaintiff to show the insurer was unreasonable in denying the claim and the insurer’s “knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.” The other states follow the approach the California Supreme Court took in Gruenberg v. Aetna Ins. Co., which only requires the plaintiff to show unreasonableness in denying the claim. Claims for first-party bad faith are commonly based on inadequate claim processing, improper investigation of a claim, delay in payment and unreasonable denial of a claim.

Third-Party Bad Faith

Liability insurance policies, such as those found in automobile and homeowner insurance policies, apply to claims against the insured by third parties. Liability insurance is also known as third-party coverage. Liability policies set forth the insurer’s duties, which typically include paying covered claims, investigating claims and defending the insured in claims by third parties that fall within the scope of the policy. Third-party bad faith claims usually relate 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.

Examples of Unreasonable Claim Settlement Practices

In almost every state, laws exist that define unfair claim settlement practices. Courts have labeled the following actions by insurers as bad faith:

  • Misrepresenting pertinent facts or policy provisions relating to coverage
  • Failing to acknowledge or act with reasonable promptness in response to communications related to claims
  • Failing to adopt and implement reasonable standards for prompt investigation of claims
  • Failing to approve or deny coverage of claims within a reasonable time after adequate proof of the loss has been submitted
  • Failing to, in good faith, effect prompt, fair and equitable settlement of claims in which liability is reasonably clear
  • Unreasonably failing to protect the assets of a policyholder who is sued
  • Attempting to settle a claim for less than the amount to which the insured is entitled
  • Obviously putting an insurer’s financial interests above the interests of the policyholder
  • Failing to promptly settle some claims in order to influence settlements under another portion of the insurance policy coverage
  • Unreasonably attempting to undervalue a claim
  • Failing to promptly offer reasonable explanation for denial of the claim
  • Making threats, false accusations or oppressive demands on the insured
  • Exploiting the insured’s vulnerable position
  • Abusing the arbitration process
  • Unfairly raising premiums for filing a claim
  • Wrongfully cancelling or failing to renew a policy

Conclusion

Your insurer has a responsibility to resolve your claim in good faith. If you believe you have a right to recover for the bad faith denial of a claim, contact an experienced insurance attorney to discuss your options.

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