Bad Faith Insurance - An Overview

Most states recognize an implied covenant of good faith, requiring insurance companies to use fair dealing when evaluating claims. When an insured's claim is wrongfully denied by their insurer, it is considered bad faith. An insurance policy is a contract between the insured and the insurance carrier. If good faith and fair dealing are not used in processing a claim, the insurer may be sued under a theory of bad faith. When successful in bringing a bad faith claim, an insured is entitled to all damages resulting from that claim and, possibly, additional damages not available for breach of contract alone. In cases of extreme misconduct, the insured may also be entitled to receive punitive, or exemplary, damages.

Examples of bad faith include failure to promptly or thoroughly investigate a claim, unreasonable denial of payment under a policy, and the refusal to settle a claim in a timely fashion. Disability, life, homeowner, automobile, and accidental death insurance policies all require good faith on the part of an insurer.

Why Insurers Act in Bad Faith

There is a substantial economic incentive for insurers to act in bad faith. Insurers receive thousands of claims daily. Very few insured parties contest claim decisions, and insurance companies save large amounts on claims that would logically be approved. Consider this example: an insurance company wrongfully denies 100 claims. Ninety-five are undisputed, and five disputed by the insured. Upon review, the company reverses its denial on four of the claims and pays the amount due. Even if the remaining disputed claim results in a bad faith lawsuit and the insured collects millions of dollars, the company has saved additional millions by denying 95 of 100 claims.

How to Avoid a Denied Claim

Insurers have the right to deny a claim if the insured has not lived up to their obligations under the insurance contract. They may also deny coverage when a claim is not covered or is fraudulent. There are several precautionary steps to take to avoid wrongful denial of your future claims.

• Notify your insurance agent immediately if there has been a covered loss, and review the policy to identify the relevant language.
  
  
• If there are questions about the coverage, make sure to document telephone calls, and maintain all records that relate to the claim transaction such as pictures of an automobile accident, or police reports.
  
  
• Submit your claim promptly, as most states have limited periods within which to file a claim for a loss. If you wait too long, you may lose your right to file a claim.
  
  

If you feel your claim was unreasonably denied, send a certified letter to the director of claims for your insurance carrier citing the relevant policy provisions, documenting the reasons for that belief.

If you have no success, bring your policy and supporting documentation to an experienced insurance attorney. After consultation with you and review of your insurance policy, an attorney can determine if your insurance company acted in bad faith, and can advise whether litigation is necessary.

If a court finds that an insurer acted in bad faith, an insured will often be eligible to recover the benefits of the policy, as well as consequential losses and damages suffered due to claim denial. Damages may also include attorney's fees.

Conclusion

If you believe you have been wrongfully denied payment for a covered loss, you have a right to seek compensation for insurance bad faith. If you wish to review your options, consult an experienced insurance lawyer as soon as possible. The law imposes a statute of limitations, which varies from state to state, giving you a limited time in which to pursue your claim. If you believe you have a right to recover for the bad faith denial of a claim, contact an experienced insurance lawyer to discuss your options.

Copyright ©1994-2007 FindLaw, a Thomson Business

DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent legal counsel for advice on any legal matter.