We pay for an insurance policy in an attempt to manage our risk. In return for the regular payment of our insurance premiums we expect that our insurer will compensate us when we suffer damage covered by our policy. Normally, that's exactly what happens, but some unscrupulous insurers will drum up an excuse not to pay. This is referred to as a bad faith insurance claim denial. The following article provides an overview of the concepts and issues that frequently arise in bad faith insurance claim denial cases.
Good Faith and Fair Dealing
Insurance is a form of contract in which the insured exchanges the payment of premiums for the insurer's promise that they will pay compensation for legitimate claims. As with other contracts, insurance agreements necessarily include duties between the parties. Among these duties is the implied covenant of good faith and fair dealing.
The implied covenant of good faith and fair dealing is the expectation that parties to a contract will deal with one another honestly and not seek to frustrate the other party's ability to receive the benefits sought in the contract.
A lawsuit arising from a bad faith insurance claim denial is based upon the insured's complaint that the insurer is unfairly seeking to avoid their obligations under the agreement, either through deceit or by using technical excuses for their breach of the agreement in clear violation of the understanding between the parties.
Although breach of the implied covenant of good faith and fair dealing normally creates a common-law tort cause of action, some states have enacted laws that limit or remove the availability of this cause of action.
First Party Bad Faith Insurance Denials
First party bad faith insurance denial occurs when the insurer refuses to pay a claim without a reasonable basis, or fails to properly investigate the claim within a reasonable amount of time. First party bad faith insurance denials could include situations where insurers ignore or refuse to pay a legitimate claim, attempt to underpay a legitimate claim, unreasonably delay or improperly investigate the claim, or make false assertions to deny coverage.
Third Party Bad Faith Insurance Denials
State interpretations of the insurer's duty to defend against third party claims differ significantly, however there are some common forms of third party bad faith insurance denials relating to this duty, and the related duty of indemnification. Indemnification refers to the duty of the insurer to defend the insured in court proceedings.
Third party bad faith insurance denial occurs when the insurer fails to meet their obligation to defend and pay all defense costs when the lawsuit's demands exceed the amount covered by the policy. An exception exists where the insurance policy is a "burning limits" or "defense within limits" policy, which includes the cost of legal defense in the policy's limit of liability.
Where a settlement would amount to the policy limit an insurer may be tempted to go to court. If they win, they don't have to pay. If they lose, though, the judgment could be greater than the policy limit, meaning that the lawsuit would expose the insured to a risk they wouldn't face if the company settled. In this situation some jurisdictions find that an insurer's unwillingness to settle is a breach of their duties to the insured.
Finally, third party bad faith insurance denial can occur where the insurer fails to fulfill their duty of indemnification by refusing to pay a final court judgment or settlement covered by the policy.
Get Legal Assistance with a Bad Faith Insurance Claim Denial
Your insurance company was hired to protect your interests, but when they act in bad faith who can you turn to? If an insurer has made a bad faith insurance claim denial a lawyer can greatly assist your efforts to get them to do the right thing. Contact a bad faith insurance lawyer to discuss your case and learn more about how they can help.