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What Is Insurance Bad Faith?

You’ve been a responsible policyholder – paying your premiums on time, abiding by the terms of your policy, and steering clear of insurance fraud. So, when the time comes to file a claim under your policy, you expect your insurance company to hold up its end of the bargain. Unfortunately, there are some insurance agents and companies out there who make this process unnecessarily difficult, denying legitimate claims or otherwise shirking their legal responsibilities. This could leave you on the hook for large sums of money. The following article describes how these types of actions may amount to insurance bad faith, providing you with a legal route to hold your insurance company accountable.

Insurance Bad Faith Defined

The insurance industry is generally regulated by the individual states, and while there are many similarities across the states with regard to bad faith insurance laws, you would need to check your state’s statutes and case law to know exactly what’s prohibited. Since your insurance policy is a type of contract, insurance companies are required to act in good faith and fair dealing, upholding certain duties they have to you, such as the duty to pay claims promptly. If an insurance company fails in these duties, or otherwise acts in a deceptive or dishonest way, these actions could be considered bad faith.

Types of Insurance Bad Faith

Given the amount and types of business transacted by the average insurance company, there is a variety of ways that an insurer can act in bad faith. One way to categorize bad faith claims is by looking at first party claims versus third party claims. A first-party claim usually involves you seeking compensation from your insurance company for some covered incident, like property damage. In a third-party claim, the insurer has a duty to defend you against a third-party liability lawsuit. A few key areas of bad faith that can affect you, the policyholder, include the following:

First-Party Claims

If a fire damages your home, you expect your homeowners insurance to cover at least some of the damage. Once you file your claim according to your policy, your insurance company has certain duties, including:

  • Conduct a reasonable and prompt investigation into the claim
  • Provide a fair, adequate valuation of the damage and settlement offer
  • Approve or deny the claim (with an explanation) within a reasonable amount of time
  • Promptly pay claims that have been approved

Failing to fulfill these duties, or simply refusing to pay a legitimate claim can constitute insurance bad faith in the first-party context.

Third-Party Claims

If you’re sued by someone who, for example, was injured while visiting your home or business, your insurance company’s duties to you generally include the following:

  • The duty to defend: With some exceptions, the insurance company must provide your defense as long as part of the lawsuit is potentially covered by your insurance policy. This usually includes all defense costs, regardless of your policy limits.
  • The duty to indemnify: If you’re found liable in the lawsuit, the insurance company must pay for those claims which are covered by your policy, up to the policy limits.
  • The duty to settle: Some states impose a duty to settle a claim if it’s reasonably clear that the insured was at fault for a covered incident, to avoid exposing the insured to a final judgement above the limits of his or her policy.

Failing in these duties may amount to bad faith and can result in the insurance company paying for all judgment costs against you, regardless of your policy limits.

What to Do If You Suspect Insurance Bad Faith

If your insurance company is being uncooperative, you can file a complaint with your state’s insurance commissioner who is charged with regulating the industry and assessing penalties on offending parties. However, if your insurance company is guilty of bad faith, you’ve likely suffered damages as a result. In that case, many jurisdictions allow for two types of lawsuits against the insurer, namely a breach of contract lawsuit and a bad faith tort lawsuit. These allow you to seek compensation for things like the costs of pursuing an insurance claim and attorney’s fees. Bad faith claims can sometimes include additional costs, such as punitive damages.

Protect Your Interests Against Insurance Bad Faith

Dealing with the events and damage that give rise to an insurance claim is bad enough. You shouldn’t have to battle with an uncooperative or unscrupulous insurance company at the same time. Contact a local insurance attorney to help protect your rights and interests against an insurance company who may be acting in bad faith.

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