A bad faith insurance claim is a claim you make when an insurer does not behave in a fair and appropriate way in processing a claim. If an insurer engages in bad faith, you may be able to recover compensation for resulting damages you experience. In some situations, you may be able to obtain additional compensation intended to punish the insurer for its unfair behavior.
Proving a Bad Faith Insurance Claim
To make a bad faith insurance claim, you must show the insurer acted improperly in handling your covered claim.
This goes beyond simply making a mistake in denying a claim. While the exact definition can vary by state, the insurer generally must have acted unreasonably or egregiously in wrongfully denying coverage you deserve. In some cases, you must also prove the insurer acted intentionally, purposefully preventing you from getting the coverage you paid for.
The Duty of Good Faith
When you enter into a contract, there is an implied covenant of good faith and fair dealing. This means it is understood that the parties to the contract will act in good faith and behave fairly in attempting to fulfill the terms of the agreement.
An insurance policy is a contract. Insurers may have a number of duties to policyholders including:
- A duty to investigate a claim properly
- A duty to defend if a policyholder had liability insurance that covered the claims arising against him
- A duty to indemnify, or pay settlement costs or court-ordered damages when a covered claim is made that the policyholder’s liability insurance covers
- A duty to settle if a reasonable settlement is on the table and protects the insured from out-of-pocket losses that could result from a lawsuit.
If an insurer unfairly fails to fulfill these obligations, the insurer may be in violation of the duty of good faith and fair dealing. They are said to be acting in bad faith, which can lead to a bad faith insurance claim.
Common Law vs. Statutory Bad Faith Claims
Courts have addressed the duty of good faith and fair dealing in many past contract cases involving insurance companies.
When courts rule on a certain issue in a specific way, the collection of their rulings becomes “common law.” In future cases, the court will rely on past precedent and future cases are decided based on these common law rules. So, in most states, plaintiffs can bring a case based on common law rules related to bad faith.
Many states have also passed laws related to bad faith on the part of insurance companies. For example, legislation such as the Unfair Claims Practice Act establishes a cause of action (or right to sue) an insurer that behaves unfairly towards policyholders. Laws passed by legislatures are called statutory law.
Depending on where you live, you may be able to make a common law or statutory bad faith claim or both. An experienced attorney can provide advice on the right legal arguments to use when you make your case.
First-Party vs. Third-Party Bad Faith Insurance Claims
When you make a claim with your own insurance company, this is called a first-party claim. You are the insured person and you are asking for a covered claim to be paid..
For example, if your house burns down and you want your homeowner’s insurer to pay for it to be rebuilt, this would be a first-party claim. If the insurer fails in its obligations to process your claim fairly, you could pursue a bad faith insurance claim since you have a contract with your insurer and they are acting in bad faith if they fail to abide by its terms.
There are also situations where you might need to make a claim against another person’s insurance company. If someone caused a car accident that hurt you and/or damaged your property, their auto insurer should pay for the resulting personal injury damages. The claim you make in this situation is a third-party claim.
An insurer still has an obligation to behave fairly when processing a third–party claim. But, their duty of good faith is a duty to the insured rather than an obligation to the third party who is making the claim.
If the insurer did not fulfill its duty of good faith here, perhaps by unreasonably refusing to agree to a settlement that protects the policyholder’s personal assets, then the policyholder could sue for bad faith. But the crash victim making the third-party claim might not be able to make a bad faith claim against the insurer in these situations, as eligibility for third-party bad faith insurance claims can vary by state.
