Insurance: Bad Faith Claims FAQs

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  • What if an insurance company doesn't honor the policy and pay a legitimate claim?

  • How do I prove bad faith?

  • What is insurance company good faith ?

  • If the insurance company won't settle within policy limits and ultimately the case goes to trial with the result of an award above policy limits, is this bad faith?

  • I read the terms of my policy one way, my insurance company sees it completely different. Who determines which is right ?

  • I think the offer the insurance company gave me is really, really low . Is this bad faith?

  • Can I appeal a claim denial?

  • What should an insurance company do do if there's a claim of bad faith or there might be such a claim?

  • A claim of bad faith is going to trial. What kind of information do I need to get from the other side, and what information do I have to give them?

    Q: What if an insurance company doesn't honor the policy and pay a legitimate claim?

    A: An insurance policy is a contract between the insurance company and the insured - the person bought the insurance. Both parties are required to follow the terms of the contract and must act in good faith. If a legitimate claim is filed, but then denied, the insurance company is in breach or violation of the contract. The insured can then file a law suit for the damages that should have been paid on the claims, and might be able to collect the additional expenses that arise out of suing the insurance company, like court costs and attorneys fees. If you find yourself in this situation, contact the department of insurance (or similar agency) in your state.

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    Q: How do I prove bad faith?

    A: An insurance company's mere refusal to pay a claim does not necessarily amount to bad faith. Although the elements of proof required for a bad faith claim vary from state to state, the insured person must usually establish that:

    • The insurance company had no reasonable basis for denying a claim
    • The company either knew or should have known there was no basis for denial of the claim, or that the it acted with reckless disregard for the facts or the insured's rights

    A bad faith claim can also arise from an insurer's failure to investigate or to process a claim.

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    Q: What is insurance company good faith?

    A: The law requires insurance companies to act in good faith and to deal fairly with the insured person. This means that when a person files a claim of loss, the insurance company cannot make up a reason to deny the claim or look for ways to escape its obligation to pay. The insurance company must look at the claim fairly when deciding whether to pay it.

    If there is a question concerning what is covered under an insurance policy or what the various terms mean, the courts will interpret confusing, complicated or ambiguous contract terms against the insurance company to give the insured person coverage.

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    Q: If the insurance company won't settle within policy limits and ultimately the case goes to trial with the result of an award above policy limits, is this bad faith?

    A: Generally, insurance carriers have a duty of good faith and fair dealing when it comes to dealing with their insureds ¿ person who bought the policy. The company doesn't automatically have to settle within the policy limits. But where there's a possibility that the claim will be more than the policy limits, the company can't act unreasonably in not settling within the policy limits. If they fail to do so and you are hit with a verdict that exceeds the policy limits, the company might have to pay the difference between the verdict and the policy limits, and you might be able to file a law suit against the company for acting in bad faith in handling your claim.

    In addition, in some states you might be able to recover punitive, or exemplary damages, which are damages that are meant to punish the insurance company for its misconduct.

    The laws on these matters vary ¿ so you need to examine the laws in your state, or seek the advice of an attorney who is familiar with the insurance law in your state.

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    Q: I read the terms of my policy one way. My insurance company sees it completely differently. Who determines who's right?

    A: The courts and the states' departments of insurance (or similar agencies) know that there can be confusion over the meaning of some of the terms, phrases or clauses that are used in insurance policies. So, when a law suit is filed relating to the meaning of a policy or the parties rights and duties under it, there are "rules of construction" that are used to interpret the policy.

    Typically, if there is more than one way to interpret a word, phrase or clause, the interpretation that will include coverage is generally used. And, if a word, phrase or clause excludes coverage, it usually will be given a very narrow or restrictive meaning, that is, it will be read so that as little as possible will be excluded from coverage.

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    Q: I think the offer the insurance company gave me is really, really low. Is this bad faith?

    A: Intentionally offering a settlement that is far lower than what is reasonable could be a case for bad faith. Insurance companies have an obligation to deal with their insured in a reasonable, fair manner. "Low-balling," as it is often called, is simply a form of bad faith.

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    Q: Can I appeal a claim denial?

    A: Yes. Your policy will give the details on how and what you can do if your claim is denied. First, be sure to get the specific reasons for the denial in writing. Then, read your policy for the review or appeal process. You typically must follow the appeal steps as provided in the policy before filing a court action.

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    Q: What should an insurance company ("insurer") do if there's a claim of bad faith or there might be such a claim?

    A: First, the insurer should review the insured's claim for coverage to make sure that it was handled fairly and that the company's own policies and procedures were followed. If the dispute is only about how much money is owed to the insured, the insurer should be certain that it has all of the special damages documented and has copies of all medical reports and records.

    If the insurer has denied coverage based on some policy defense, like an exclusion - or a clause that denies coverage under certain and specific circumstances - the insurer should get an opinion on coverage from an experienced and competent attorney at the earliest possible time.

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    Q: A claim of bad faith is going to trial. What kind of information do I need to get from the other side, and what information do I have to give them?

    A: "Discovery" is the process in which opposing parties in a civil law suit learn about each other and their legal claims and defenses. Each party asks for certain types of information, and in most instances, the other party has to give that information.

    Information that should be requested by the insured ¿ or person covered by the insurance policy ¿ includes:

    • The entire claim file and the entire insurance underwriting file
    • The insurer's handbook or manual that describes how claims are supposed to be handled

    The insurance company's discovery strategy should include:

    • An extensive set of interrogatories ¿ a written set of very specific questions ¿ asking about things such as the facts of the claim and damages being claimed by the insured
    • A request that the insured produce the original insurance policy, including endorsements
    • A subpoena (a legal order to produce documents) for copies of all documents about medical treatment and claimed financial losses that were a result of the injury or loss for which the insured filed a claim

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    • Related Resources on Lawyers.comsm
    - Dealing With Insurance Companies
    - Automobile Insurance articles and information
    - Automobile Accidents articles and information
    - Finding an Insurance Lawyer near you
    - Visit our Insurance Claims message board for more help
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