Elements of a Bad Faith Insurance Claim
Insurance companies are in the driver’s seat when it comes to settling a claim. They have greater expertise, negotiating strength, and financial resources than the policyholder. Recognizing this, most courts find an obligation of good faith and fair dealing in every insurance policy.
If your insurance company fails to act reasonably in processing, investigating or paying your claim, you may have the right to file a lawsuit. State law shapes how bad faith in the insurance context is defined. A claim may proceed under common law established by courts, or you may have a claim based on the violation of a state statute. To better understand this legal claim, let’s take a close look at what constitutes bad faith.
Elements of Common Law Bad Faith
The common law elements of bad faith are not the same from state to state. Some states define bad faith as conduct that is “unreasonable or without proper cause.” Other states take a narrower view. Finding liability only where a denied claim is not “fairly debatable” and the insurance company knows this is the situation. Further complicating matters, some states view this claim as a breach of contract, and in other states it’s a tort.
Under a common law torts theory, an insurer owes its policyholders a duty of good faith and fair dealing due to the special relationship between the parties. Proving a common law claim of bad faith generally requires the policyholder prove two elements:
1. Benefits due under the policy were withheld. In this first prong, you must establish that you had a valid claim under the terms of your policy. You also need to document that your claim was denied by the insurer. Some states require you make a final demand, before filing a lawsuit.
2. The reason for withholding benefits was unreasonable. Whether the insurance company acted reasonably is evaluated objectively based on the situation and facts as they existed at the time of the decision in question. In Wisconsin, for example, liability will only be found where a claim is intentionally denied without a reasonable basis. Mere negligence is never enough to prove bad faith.
Courts have identified certain actions as bad conduct. For example, in their Civil Jury Instructions 2330 and 2331, the Judicial Council of California provides certain factors that can be considered in deciding if an insurance company acted unreasonably. The presence of any one of the following factors is not conclusive evidence of bad faith, but can help establish your case:
- Misrepresenting relevant facts or insurance policy provisions;
- Failing to acknowledge a claim and to act promptly after receiving a claim;
- Failing to adopt and implement reasonable standards for the investigation and processing of claims;
- Failing to either approve or deny claims within a reasonable time after the insured has submitted proof of loss; or
- Failing to provide a reasonable explanation or reasons for denying the claim.
Elements of a Statutory Bad Faith Claim
A lawsuit may allege both a common law bad faith claim and a statutory bad faith claim. A statutory claim is based on a law made by a state’s legislature. Many states have statutes designed to protect policyholders from unfair or deceptive practices by insurance companies. These statutes will detail the type of prohibited actions and the remedies available to the policyholder.
In Connecticut, for example, a policyholder can bring a separate claim for a violation of the state’s Unfair Insurer Practices Act. The policy holder can allege any of the following actions:
- Compelling insured to litigate to recover amounts due under an insurance policy
- Failing to promptly provide a reasonable explanation of the basis for the denial of a claim or offer of a compromise settlement
- Not attempting to make a prompt, fair and equitable settlement of claims when liability is reasonably clear
- Refusing to pay claims without conducting a reasonable investigation
- Failing to implement reasonable standards to investigate
Experiencing Bad Faith? Consult with an Insurance Lawyer
There are a variety of insurance company tactics that could constitute bad faith. And the rules on bad faith litigation vary from state to state. If you believe your insurance company acted in bad faith, an experienced insurance attorney can help protect your rights. Consult with a bad faith insurance attorney to see if your insurer is acting in bad faith.