First-party insurance bad faith occurs when an insurance company refuses to pay a valid claim. Let's say your business is flooded. The insurance company has a duty to timely investigate the claim and make payment if the loss is covered under the policy. In our example, you call the agent who promises to visit within 24 hours. He never shows and the carrier won't pay and won't even offer an explanation. This is a first party insurance bad faith claim.
Third-party insurance bad faith claims happens when an insurance company refuses to defend you. In this example, you have liability insurance on your automobile. You are involved in an accident and a passenger in your car sues you after claiming they were hurt. Once again, the insurance company owes you a duty to defend and to pay any losses up to the limit of the policy.
We commonly see a variation of case third-party insurance bad faith when an insurance company had the opportunity to settle a case but refused. The case then proceeds to trial where the plaintiff (the person suing you) recovers a verdict in excess of the policy.
Using our example above, let's say you have $20,000 liability coverage on your car. Your passenger is seriously injured but offers to take the policy limits in order to quickly settle. The insurance company refuses, the case goes to trial and the passenger is awarded $250,000. At that point the insurance company tenders the $20,000 policy and walks away. That also presents a bad faith claim. In this example, although the insurance company defended you, it exposed you to great personal liability by not settling when it could for an amount equal to or less than the policy limits.
Common Examples of Insurance Bad Faith
Insurance bad faith claims can take many forms. Here is a list of common bad faith claims:
1. Failure of an insurer to pay a claim without a reasonable basis to do so.
2. Failure of an insurer to timely investigate and resolve claims.
3. Failure of the insurer to timely pay a covered claim.
4. Failure of the insurer to provide a defense of a third party claim without a reasonable basis to do so.
5. Failure of the insurer to properly indemnify the insured for covered third party claims.
6. Attempting to settle a claim for less than the amount due ("lowballing")
7. Refusing to settle a third party claim within the policy limits thus exposing the insured to additional liability.
8. Not acting in good faith or in compliance with industry standards.
9. Demanding excessive or burdensome proofs of loss not necessary to process a claim.
10. Failure of an insurer to provide a reasonable explanation when coverage or claims are denied.
11. Telling an insured not to hire a lawyer.
12. Requiring the insured to hire a lawyer and file suit before paying claims or providing defense of third party claims.
13. Misrepresenting the statute of limitations (time period to sue) or deliberately delaying payment of a claim until after the statute has run.
14. Altering terms of the policy or endorsements without proper advance notice and / or consent of the insured.
15. Failure of the insurer to unreasonably refuse to waive subrogation and thereby preventing the claimant from settling with the party at fault (i.e. uninsured motorist cases).
16. Withholding information favorable to the insured when processing claims.
17. Using third parties such as private investigators, claims adjusters or independent medical examiners in a scheme to deny or reduce claims.
18. "Jacking up" premiums or cancelling a policy after a claim that was not the fault of the insured.
19. Engaging in tactics meant to intimidate insureds into not filing claims. This includes misrepresenting facts, creating false facts or misrepresenting the law.
20. Using the same adjuster to handle both sides of a conflicting claim.
21. (Health insurance) Denying a claim simply based on cost.
22. (Health insurance) Denying coverage of expensive treatment and requiring loss costly options where those options are contraindicated and not as effective.
Proving Bad Faith
Under the common law in most states, proving an insurance bad faith claim requires three elements:
First, you must prove a valid contract of insurance. Normally that isn't a problem but sometimes policies lapse or there is a dispute as to who is covered.
Second, you must show that benefits due under the policy were withheld.
Finally, you must show the insurance company's denial was unreasonable. This is often the most contentious issue and where the insurance company's duty of good faith and fair dealing applies.
The test as to whether an insurance company was unreasonable varies from state to state. In some states such as Wisconsin, the burden of proof can be quite high.
Insurance bad faith claims can be brought in all states. Some states have enacted laws to protect insureds. In addition to common law claims, these states there are statutory insurance bad faith laws. Often these laws include an attorney fees provision. Unfortunately, in other states the powerful insurance companies have successfully lobbied to make it harder to sue.
Damages in Insurance Bad Faith Claims
Bad faith insurance practices can destroy a business and shatter lives. We have seen businesses fail because an insurance carrier wouldn't timely and fully pay a valid claim. By the time the business was able to get enough money to reopen its doors, its employees and customers were long gone.
If you are the victim of insurance bad faith, it is important to know what damages you can expect. Under the common law of most states you can receive:
Contract Damages - that means the benefits due under the policy for first party claims and the amount you spent defending yourself for third party claims. Depending on the state and the facts, in third party claims you may be entitled to the full amount you spent in defending yourself against a third party claims even if that amount exceeds the policy limits.
Bad Faith Damages - courts recognize that when insurance companies unreasonably fail to pay or defend, the insured can suffer severe economic losses. Typical bad faith damages include lost earnings or profits, loss of one's business, estimated future economic losses, interest paid on any loans, emotional distress and attorneys fees.
In many states, you may also be entitled to punitive damages if the jury believes the insurance company acted with malice or needs to be punished to deter future bad faith acts.
Typical Insurance Company Defenses
Winning a bad faith claim against a big and well funded insurance company requires a great lawyer. Insurance companies are in the courts everyday and not afraid to spend money. But with the right facts and right lawyer, they can be beat.
Earlier in this post we discussed how to prove insurance bad faith. Here are some of the most common defenses used by insurance companies in attempting to avoid liability:
1. Missed Deadlines
Insurance policies often have very short deadlines. Sometimes you just have days in order to make a claim. Wait too long and the carrier will try to avoid coverage.
There is a second deadline to worry about, the amount of time to sue your insurance company. That varies greatly state by state. In some states you have just one year.
The takeaway, if you think you have a claim, notify your insurance carrier at once. Even if you don't follow through, its important to read your policy and know the time period for filing a claim. Once you make a claim, don't wait forever to hire counsel if the carrier isn't doing what it is supposed to.
2. No Coverage
Simply because you have a policy doesn't mean you have coverage. Policies can lapse for nonpayment of premiums or failure to complete renewal paperwork. It's easy to forget but if a policy lapses, it doesn't matter that you have been paying on that policy for years.
Insurance companies will also look at the language of the policy to deny coverage. Houses flooded after a hurricane are sometimes not covered because carriers try to define their hurricane coverage to only include wind damage and not storm surge or flooding from rivers and streams. Liability insurance providers will look for creative ways to not defend you.
3. Failure to Mitigate Damages
There is a duty in many states and under most insurance policies to mitigate damages. Let's say you own an electronics store in Florida and have hurricane shutters. Before a storm you are ordered to evacuate and unable to close the shutters. The windows are blown out and the contents of the store (high end TVs and audio equipment) is wiped out by the resulting wind and water damage. The carrier may claim you are responsible for the damages because you didn't mitigate by closing the shutters before the storm. We have heard his same argument made over smoke detector batteries.
4. Insured Acted in Bad Faith
Good faith is a two way street. Lie on your application and the insurance company may try to escape liability claiming you engaged in bad faith.
5. Reliance on Counsel
This is a tricky one and often used by bad insurance companies to hide their tracks.
In some states, an insurance company can avoid bad faith damages if it can show it relied on the advice of counsel in denying a claim. For that defense to work, however, the insurance company's reliance must be reasonable, the attorney they relied on must have had all the facts before rendering an opinion and that the lawyer actually gave the advise claimed by the insurance company.