What is Bad Faith in Insurance?
In common parlance, the term "bad faith" refers to the implied promise that a party will deal with the other in good faith or without an intention to defraud. By contrast , the term "bad faith" is commonly understood in law as involving a breach of the duty of good faith and fair dealing inherent in every contract (i.e. the covenant of good faith and fair dealing requires that both parties to a contract act in accordance with the agreed upon obligations).
Bad faith insurance is kind of a generic term that incorporates the general concept that the insurance company (insurer) has not met its obligations under the terms of the policy. The specific obligations of any insurer are determined by the terms and provisions of the policy itself.
Bad faith insurance is sometimes referred to as "insurance bad faith." Insurance bad faith is a legal cause of action that holds an insurer liable for violating its obligations and good faith duties under a policy or insurance contract. Both the first party relationship and the third party relationship often give rise to a bad faith insurance claim. Bad faith can occur in both first and third party insurance claims. First party insurance claims involve a claim to the insurer for payment under a policy issued to the insured. A third party insurance claim arises in tort when a judgment is made against an insured for the acts of an insured.
An insurer’s conduct will give rise to a "bad faith" claim if one of the following has occurred:
- Fiduciary breach (deliberate deprivation of benefits of the insurance contract).
- Cancellation of insurance policy without legal basis.
- Failure of insurer to conduct a proper investigation.
- Wrongful refusal to settle a claim.
- Refusal to accept a reasonable settlement offer.
- Actions constituting unfair trade practices.
- Failure to timely pay insurance claims.
- Actions constituting other causes of action under state statute.
Pursuing a "bad faith" lawsuit against an insurance company will require a full understanding of the specific facts and circumstances surrounding a particular claim and the individual insurance contract or policy in question.
Examples of Bad Faith in Insurance
Many bad faith insurance lawsuits involve the coverage denial of legitimate claims. In one of the most notorious examples, an 8-month old boy was left with a permanent limp after a nurse collided with him during a photo-op. Despite medical records showing the hospital’s clear fault, the insurer denied the claim and cited a loophole in the policy exclusion. They failed to settle the claim within three years and were hit with a 60 million dollar judgment.
Another example is the medical case of an injured truck driver who suffered serious injuries at work. The insurer was told by medical professionals, their own WCC doctor, that the man could not lift over 15 pounds (making it impossible for him to work as a truck driver). Despite the information, the insurer claimed their doctor said he could return to work driving truck. Denying the claim changed his life.
Sometimes insurers don’t support their own insureds financially until the claim has been processed. One man in a vehicular accident was 79 years old and was entitled to $80,000 to cover his medical treatment until the matter is settled. He was told by a letter from his insurance company (3 months after the accident) that they weren’t going to help pay for his medical treatment. It took another five months to get paid.
In the course of these examples, not only did the insurer act in bad faith, causing injury and suffering, but they also damaged their own insured. Not only do bad faith policies constitute contractual violations, but they also violate the Texas Insurance Code Chapter 541. The different examples of bad faith above also show bad faith violations of the Texas Insurance Code Chapter 542. By making use of these violations, the insured is not just entitled to coverage, but attorney fees and statutory penalties as well.
When You Can File a Bad Faith Lawsuit
In order to successfully file a lawsuit against your insurance company for bad faith, you will have to prove that there was (1) breach of contract and (2) violation of consumer protection laws. The insurance in question could be home, life, auto or commercial.
Breach of Contract
You are required to show that the insurer failed to make payment for a claim when they were supposed to, based on the language used in your agreement. This could include:
- Claims against life insurance policies, where the company failed to pay death benefits;
- Claims against homeowner’s insurance policies, where the company failed to pay for damages;
- Claims against health insurance policies, where the company failed to pay for medical treatments;
- Denial of personal injury protection or med pay claims on auto policies;
- Failing to settle an accident liability claim under a commercial policy; and
- Denial of workers’ compensation claims on workers’ compensation policies
Consumer Protection Act
You are required to show that your insurer violated consumer protection laws. These laws were designed to protect you from aggressive insurance practices, but as we all know, insurers don’t always play by the book. Examples of unfair practices include:
- Not paying a claim promptly or within a reasonable time
- Failure to conduct a prompt investigation
- Misrepresenting policy provisions, including benefits, exclusions and applicable limits;
- Not promptly making payments when a claim is covered;
- Offering low and unfair settlements, or;
- Moving the goal post, like finding new or previously undiscovered exclusions that apply to a claim after first accepting it.
Ways to Prove Bad Faith in Court
Court evidence that proves or strongly supports the conclusion that the insurer acted in bad faith includes a separate range of information. For example, a history of misrepresentations and misleading conduct is useful, as is a poor recordkeeping system on the part of the insurer. Mistakes and errors that are repeated over and over again can serve as strong indicators of bad faith. The same is true of the catalogue of damaging communications with consumers, as well as the various other means by which insurers engage with consumers, such as delivering certain forms in person to collect outstanding debts.
Expert testimony can also be effective in establishing bad faith. Testimony from experts in the insurance industry can demonstrate the fact, or even the propensity, of bad faith on the part of insurance providers . Such testimony can be particularly persuasive when it describes how similar claims have been handled in the past by the insurer.
Finally, a comprehensive record of the claims history of the insurer may be useful for the purposes of establishing bad faith. Such a record should document the circumstances under which claims were accepted and approved, as well as the circumstances under which claims were denied. As a general rule, courts will look for systematic inequities in the treatment of claims, as opposed to isolated instances of inaccurate or unfair treatment. In addition, courts look for evidence of irrationality on the part of insurance providers – that is, courts assess whether a reviewing claim management system is reasonably fair, all things considered.
Outcomes of a Bad Faith Lawsuit
When a bad faith lawsuit is brought against an insurance company, there are several outcomes that are possible depending upon the circumstances. In the best case scenario, the lawsuit will be settled out of court, which involves both parties (the plaintiff and defendant) agreeing to allow a judge or jury to determine compensation for damages to the plaintiff. When the case is brought to court the judge or jury will determine the amount of money the plaintiff will receive from the insurance company in compensation for damages and punitive damages.
If the court finds in favor of the plaintiff, who is the insured, the judge or jury can hold the insurance company liable for compensatory damages, which are designed to replace what the plaintiff lost. Compensatory damages include the following: Punitive damages are also awarded to punish the insurance company for misconduct in claims handling and to generally deter similar future behavior. When a bad faith lawsuit is brought against the insurance company and awarded by a jury or judge, it can change the way the insurance company does business. Insurance companies are not usually found liable for insurance bad faith lawsuits. For that reason, some insurance companies are now taking a second look at their claim-handling processes to see if they are treating their insured with fairness and equity.
Choosing a Lawyer to Handle Your Bad Faith Claim
One important aspect of pursuing a bad faith lawsuit against your insurance company is hiring a lawyer to represent you. Many policyholders are not aware that the insurance company has retained an entire team of attorneys to handle their claims from start to finish. Table after table devoted entirely to your insurance companies’ attorneys are ready to discuss your claim and litigation.
The insurance company also has the upper-hand when pursuing a bad faith lawsuit against your insurer for several reasons: 1) their in-house legal staff and attorneys representing the insurance company are well-versed and experienced in negotiating with claims staff, defense attorneys and even pro se litigants (people who represent themselves), 2) the insurance company has already gathered all of the necessary information and therefore has a better understanding of your claim than you do, 3) the insurance company will have a "game plan" or strategy in place for the litigation and will be ready to implement their strategy once you file your lawsuit at the courthouse, and 4) an insurance company’s attorneys will quickly learn details about you and your insurance claim to use against you .
It is very important that you find an attorney or law firm with extensive experience handling insurance claims and bad faith lawsuits. The insurance company is going to fight hard to protect its profits and will spend money to limit your recovery. You need an attorney or law firm who won’t be intimidated by the insurance company’s methods. Instead, you want an attorney willing to fight for you and go toe-to-toe with the insurance company’s legal teams.
Bad faith lawsuits against insurance companies can be costly and can take a long time to resolve. The earlier you hire an experienced insurance bad faith lawyer the better your chances of a successful outcome. An experienced attorney can help you avoid mistakes, navigate complex legal procedures and maximize your chances of success.
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