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What is bad faith insurance and what are bad faith insurance laws?

By Brain

Bad faith is the fraudulent deception of another person or the intentional or malicious refusal to perform a duty or contractual obligation. Bad faith is distinct from prior judgement or negligence, as they refer to purposefully and maliciously infringing upon other parties rights. Essentially, if a party enters an agreement with another party fully knowing that they do not intend to follow through on that agreement, it is in bad faith.

An insurance company acting in bad faith is called bad faith insurance. This is when an insurance company knowingly and maliciously refuses to pay out a policyholder’s legitimate claim, refuses to investigate or process a policyholder’s claim or purposefully fails to disclose policy limitations or exclusions. However, a difference in opinion between the policyholder and the adjuster over the adjuster’s opinion of the amount lost does not constitute bad faith, unless the adjuster refuses to back up his opinion with any evidence. Bad faith can occur in all forms of insurance from car insurance, to health insurance to disability insurance.

In most jurisdictions in the United States, the law says that insurance companies have a duty to act in good faith with their policyholders.

Here are five examples of bad faith insurance practices:

•             The insurance company deliberately delays, discounts or denies a payment without any reasonable basis. An insurer will simply deny coverage for an incident the insurance policy clearly covers. This is the most common form of bad faith insurance.

•             The insurer fails to do a proper and timely investigation to a reasonable insurance claim. As a result, the insurer fails to pay the claim. In cases where the insured party has provided the insurer with all the information necessary for the insurer to adequately respond to the claim by investigating the incident, yet fails to do so, then the insurer has acted in bad faith. A common example is if you have auto insurance coverage, and you make a claim after being in a car accident, but the insurance company refuses to do any investigation or check up on the vehicles involved in the car accident or the site of the car crash.

•             The insurance company does not clearly confirm or deny coverage within an amount of time that can be considered reasonable. Insurance companies have a legal duty to communicate with their policyholders in a timely manner when needed. Therefore, if an insurer makes their policyholder wait weeks or months before confirming or denying a claim then they have acted in bad faith.

•             An insurance company settles a claim with a far smaller amount than they are legally obligated to. In most cases, this means that the insurance company will provide coverage which is grossly inadequate in comparison to the cost of the premiums paid by the policyholder in return for the insurance coverage.

•             An insurance company unnecessarily extends the processing period of a claim by requesting an absurd amount of documentation from the claimant or physician (if the case is related to a medical condition in any way). Insurance companies might ask for multiple documents with the same information and engage in other time wasting behavior; this is an act of bad faith.

•             The insurance company makes rude or threatening statements to the policyholders. Insurance companies owe their policyholders a degree of respect and an even greater degree of professionalism and they can be found guilty of bad faith if they fail to do so.

Insurance companies covering third parties also have an obligation of good faith and sincerity towards injured persons, but that duty is comparatively less than the duty owned by the injured persons own insurance company. Bad faith claims against third party insurance can only arise if the company has behaved in an unethical manner through its adjuster, such as fraud, making outright false claims about the kind of coverage they are providing and other illegal behavior which interferes with the policyholder’s ability to pursue the claim, such as tampering with evidence or withholding a witness.

There are state laws that specifically target bad faith practices that are meant to protect consumers from unethical practices by insurance companies. These are known as unfair claim practices acts. They are defined as the improper avoidance of a claim by an insurer in an attempt to reduce the size of a claim. In cases where an insurer was obliged to cover a policyholders damages, but did not because they acted in bad faith, these laws give them a way to be compensated for having that claim denied. The coverage in these cases would cover the losses the insurer suffered as a result of having to pay the amount that should have been paid by the insurer out of their own pocket, the money the insurer spent on attorney fees and losses suffered because the insurer was not able to work while pursuing their legal claim in court. In addition, if the insurers conduct has been especially unethical, the judge may award punitive damages to the policyholder to punish the insurer for its conduct and to discourage it from acting in bad faith again with other policyholders. If the judge decides that the refusal to pay the insurance claim was a mistake and not a result of malicious intent or bad faith, then the insurer will only have to pay the policyholders claim and not any extra damages.

Written accusations of bad faith are likely to get prompt attention, not only from the law but also from the insurance company itself. This is due to the fact of how damaging they are to the insurance company’s reputation and moral standing. It is usually very difficult to get a settlement out of a bad faith accusation, and policyholder’s pursuing bad faith cases are usually in for a long hard slog in the courtroom. However, even the possibility of a bad faith accusation during settlement can push the insurance company to give you the settlement you are entitled to because of how much damage such an accusation can do to a company.

Author Bio:

      Mr. Rosenberg serves as general counsel and adviser to numerous domestic and international businesses, organizations and individuals on corporate, immigration, trade, real estate, sports and entertainment, dispute resolution and governmental issues.

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