INSURANCE BAD FAITH INFORMATION CENTER 
 
 

Overview

Most insurance policies including life, disability, automobile, homeowner and accidental death have an implied duty of good faith when reviewing a claim.  If you file a legitimate claim with your insurance company and they deny payment or delay it for no valid reason, you may be the victim of insurance bad faith. 

Bad faith also includes not investigating a claim in a timely manner, processing the claim inadequately, failure to settle a lawsuit against the insured or failure to defend a lawsuit against the insured by a third party. 

Insurance companies receive thousands of claims every week.  They also save a lot of money because only about 5% of insured people dispute their claim. 

Types of Bad Faith 

First Party

Half of all states recognize a common law tort involving an insurance company’s bad faith in first party insurance claims.  In most states, the courts require the plaintiff to prove the insurance company acted unreasonably in denying his or her claim (i.e. the Wisconsin Supreme Court’s case of Anderson versus Continental Insurance Company).  The remainder of states requires the plaintiff to prove unreasonableness in denying his or her claim (i.e. the California Supreme Court’s case of Gruenberg versus Aetna Insurance Company).   

Examples of first-party bad faith include a failure to process a claim properly.  The insurance company must verify the insured’s loss, investigate the claim, determine the policy’s coverage, determine the amount of the loss, and then pay or deny the claim.  Another example is failure to investigate the claim in a proper manner.  If the insurance company closes the file without properly investigating who is responsible for the damage, this is bad faith.  When the insurance company investigates the claim and then delays payment for an extended amount of time that is bad faith.  Lastly, unreasonably denying a claim is bad faith. 

Third Party

Automobile and homeowner policies contain liability or third party coverage provisions.  These policies apply to claims involving a third party versus the insurance company where the third party was injured.  Under a liability policy, the insurance company is responsible for investigating claims, paying claims and defending the insured in claims.  When the insurance company fails to settle a lawsuit against the insured, this is third-party bad faith. 

 

Examples of third-party bad faith include failure to settle a lawsuit against the insured.  State law requires the insurance company to consider the insured’s interests when involved in settlement negotiations.  Failing to tell the insured about settlement demands is bad faith.  If the insurance company does not defend the insured in a case involving a third party, that is bad faith.  Lastly, defending an insured in a negligent manner is bad faith. 

Bad Faith Claims Defenses

An insurance company has several options when being sued for bad faith. 

Insured’s Breach of Contract – The plaintiff has to prove that he or she met all the obligations under the contract.  Insurance companies argue that when an insured sues for breach of contract, he or she has elected his or her remedy and waived a tort claim.  Most courts state that a tort claim is separate from a breach of contract; the plaintiff can proceed with both. 

Insured’s Bad Faith – California law says that equivalent bad faith refers to equivalent fault principles from negligence cases.  It allocates fault and damages depending on the harm sustained. 

Insured’s Failure to Mitigate – If there has been a breach of contract, the plaintiff must try to minimize his or her damages.  This is not a good defense.  The insurance company must prove that the insured was able to avoid the harm suffered. 

Statute of Limitations – Statute of Limitations is the time set to file a claim.  The time depends on whether the state considers a bad faith claim based on contract or tort.  Sometimes the policy itself will include a limitations clause. 

Third Party Lack of Coverage – If there is no coverage, there is no bad faith.   

Attorney Advice – There are courts that allow advice from your attorney as a defense.  This is not a complete defense.  If used, it waives the attorney-client privilege regarding confidential communications. 

Industry Standards – An insurance company cannot state they complied with the industry standards excusing their treatment of the insured. 

Release – If the insurance company rejects a settlement offer, the insured can assign the bad faith claim to a third party.  The third party would then have to agree not to execute a judgment against any of the insured’s assets, excluding his or her insurance policy.  A release can remove cause of action against the insurance company. 

 

Recovery

An insured party can recover benefits from his or her policy along with losses suffered due to the denial of the claim once the bad faith claim is successful.  The law also allows the plaintiff to recover damages from emotional distress that he or she suffered because of the insurance company’s misconduct.  This applies to first or third party bad faith cases.  Depending on which state the plaintiff files the claim he or she may be able to receive punitive damages and fees paid to the attorney. 

Unreasonable Claim Settlements

Every state has laws that define unfair claim settlement practices.  The courts have determined bad faith to include the insurance company’s failure to respond, approve or deny claims in a timely manner.  Other examples include the insurance company not explaining policy provisions properly, failure to implement standards for prompt investigation of claims, settling a claim for less money than the insured is entitled.  If an insurance company unfairly raises premiums or cancels the policy for no substantial reason, this is bad faith. 

Next Steps

First - You do not have to accept a denial of your claim by the insurance company.  Make sure you keep notes on the individual you originally spoke to and include his or her name, dates and times of every conversation that took place. 

Second - Speak to a supervisor at the insurance company and have them review your claim. 

Third - If the insurance company refuses to reverse the denial, contact your state’s insurance regulatory agency or contact an experienced attorney who handles bad faith insurance claims. 

Forth – If the regulatory is unsuccessful, contact an attorney.  Your attorney can send a letter to the claims adjuster stating why you are entitled to payment.  If the insurer refuses to pay, your attorney can file a lawsuit. 

Last – You need to decide whether to file the lawsuit in State or Federal court.  The reasons for the lawsuit will include breach of contract, bad faith, negligence or fraud.  It can also include a violation of unfair settlement practice.  The complaint will ask for payment under the policy provisions and damages for the insurance company’s bad faith. 

Settlement or Trial

Negotiations can lead to your claim settling without going to trial.  If it does go to trial, each side will present evidence and question witnesses, if necessary.  Your attorney will request various documents or discovery regarding your case from the insurance company.  He or she will also request your claim file.  This contains the insurance adjuster’s notes.  It could show that the adjuster handled your claim in a neglectful or fraudulent manner.  The insurance company’s claims manual will show the procedures that are used in processing claims and if they were followed correctly.  The attorney will also question the claims adjuster and supervisor.   

A judge and/or jury will decide the outcome. 

Additional Help

The National Association of Public Insurance Adjusters assists policyholders in preparing, filing and adjusting insurance claims.  They are located throughout the United States.  They can help you with claims ranging from flood to fire to smoke to vandalism or theft.  A Public Adjuster works for the property owner, not the insurance company.  For additional information, visit their website at www.napia.com 

Conclusion

If your insurance company has denied payment for a loss incurred to you, you can seek compensation for bad faith.  An experienced insurance attorney will explain all your options.  There are different statutes of limitations to file a claim; your attorney will know which one applies to your State. 

Links to additional information

For additional information relating to insurance coverage and good faith, visit the ABA Journal Law News Now at www.abajournal.com 

If you believe your insurance company has committed fraud, visit the Insurance Fraud website at www.insurancefraud.org for any questions you may have. 

The American Insurance Association is the leading property casualty insurance trade organization representing over 350 insurance companies.  Their website is www.aiadc.org.

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