FAQs About Bad Faith Insurance

Q: What does bad faith mean in the insurance context?

A: There is really no standard definition of bad faith, but most states define bad faith as unreasonable or unfair conduct by an insurance company. There are a number of actions by an insurer that are considered bad faith by the courts

Q: What are some examples of conduct that are considered bad faith?

A: The following actions by an insurer are considered bad faith: the unreasonable denial of a claim; inadequate or improper claim investigation; delay in payment; deception; misrepresentation of coverage to avoid paying; conditioning payment of an undisputed portion of a claim on settlement of a disputed portion; failure to communicate; oppressive demands of the insured; wrongful cancellation and nonrenewal of policy; unfair imposition of higher premiums for filing a claim; and exploitation of the insured’s vulnerable position.

Q: What is a statute of limitations?

A: A statute of limitations is the maximum time period in which a formal claim can be filed. These time limitations typically vary by jurisdiction and are set by state law. However, keep in mind that an insurance policy may have a contractual time frame that requires a claim or lawsuit to be filed within a given time.

Q: How important is the information in an insurance application?

A: You are responsible for information you supply in an insurance application and will likely answer many questions from a sales agent when applying for a policy. Answer questions completely and truthfully. Do not allow an agent to rephrase your answers in his or her own words. You are responsible for the information on the application; make sure that your answers are true and accurate.

Q: How can I avoid having my insurance claim denied?

A: An insurer has the right to deny a claim if the insured fails to uphold his or her obligations under the policy, if a claim is for something not covered by the policy or if the insured makes a fraudulent claim. In order to avoid wrongful denial of a claim, an insured should immediately notify the insurance agent if there is a covered loss; review the policy to identify the relevant language; document telephone calls; keep all records that relate to the claim if there are questions about coverage; and submit the claim promptly.

Q: What is a claim file?

A: A claim file includes all of the insurer’s documents and notes regarding your claim. The claim file can be a critical piece of evidence for an insured who institutes a bad faith lawsuit against the insurer because it may contain evidence that the insurance adjustor did not follow proper procedures or acted unreasonably in denying the claim.

Q: What is a duty to defend and how is it triggered?

A: A duty to defend is an insurer’s responsibility to provide legal representation to an insured in a lawsuit that seeks damages within the scope of insurance policy coverage. For example, if an insured causes a car accident that injures a third party, and that third party sues the insured, the insurer may have a duty to defend the insured in that lawsuit (the duty would be set forth in the policy). If the insurer learns of facts, from any source, which would trigger coverage, a duty to defend exists. Failing to defend an insured in an underlying case is considered third-party bad faith.

Q: Can an insurer wait until litigation begins to defend its insured?

A: No. An insurer’s duty to defend is assessed at the outset of a case. If it is subsequently determined that there was no coverage at the time of the incident giving rise to the claim, an insurer may withdraw from representation.

Q: What damages are recoverable for an insurer’s bad faith?

A: If an insurer breaches its duty to act in good faith when handling an insurance claim, the insured may recover any damages proximately caused by the breach. Typical damages in a bad faith action include the benefits of the policy and consequential losses and damages suffered due to claim denial. Depending on the state, the insured may also be able to recover punitive damages in cases of extreme misconduct by the insurer; attorneys’ fees; and prejudgment interest.

Q: What is reverse bad faith?

A: Reverse bad faith is an action for affirmative relief raised by the insurer in either a complaint or counterclaim. The insurer alleges that the insured acted in bad faith and thereby caused losses to the insurer. The tort of reverse bad faith is based on the theory that an insurer should not be liable for bad faith where the insured obtained the policy by fraud; breached his or her obligations under the insurance contract; or engaged in other forms of misconduct.