The relationship between an insurance company and the insured are governed by the insurance contract. However, if the insurance company fails to pay out on a valid claim, the insurance company risks being liable for bad faith. In order for an insured individual to succeed against his or her own insurance company, there are certain legal elements that the insured must prove. Bad faith refers to an intentional dishonest act by not fulfilling legal or contractual obligations, misleading another, entering into an agreement without the intention or means to fulfill it.
ELEMENTS OF BAD FAITH
To successfully prove a bad faith claim, the claimant will have to show two elements. Firstly, the insurance company must have acted unreasonably when handling the claim. Examples of unreasonable behaviors when handling a claim are unreasonable delay in paying the settlement, cancelling the claimant’s policy suddenly or without reason, refusing to conduct an investigation, not keeping the claimant informed of the status of the claim and offering a settlement drastically and unreasonably lower than the claim is worth. Secondly, the insurance company must also have had knowledge that it handled the claim unreasonably and unfairly. Mistakes and oversights are not bad faith.
In other words, the insurance company must have been purposely trying to pull one over on you. Oversights such as missed calls or lost paperwork will not satisfy the elements of a bad faith claim. Showing a systematic failure of the insurance company of not complying with state regulations can establish bad faith in some states.
Bad Faith Damages
Claimants may be able to receive a number of different types of damages in bad faith claims if they win the case. The first portion of damages covers the amounts that should have been paid on the initial claim. The insured may also be able to recover consequential damages that arose because of the denial. These damages may include the cost of defending a lawsuit because the insurance company denied the claim, including attorney’s fees and the judgment. Attorney’s fees incurred to sue the insurance company may also be included.
In some cases, the claimant may be able to recover damages for emotional distress that resulted from the improper denial. This is more likely to be awarded if the denial caused other issues in the policy owner’s life, such as having to defend against a lawsuit. State laws determine whether this type of damage claim is available. Some situations have specific damages that are available per bad faith statute. In these instances, the state law may award the claimant three times the amount of his or her compensatory damages.
Defense To Bad Faith Insurance Claims
Insurance companies will likely raise a number of defenses against a claim of bad faith. One common defense is to show that the claimant does not have clean hands. This may be accomplished by showing that the claimant made an intentional misrepresentation during the claims process. Another defense to a bad faith insurance claim is that the denial was based on a reasonable ground. Even if the denial was wrong, the insurance company can argue that the denial itself was based on information after a thorough investigation was completed. As long as the denial is not unreasonable, the insurance company can argue that it should not be found guilty of bad faith.
In some instances, the insurance company may seek advice on whether or not it should deny a claim. It may consult with legal counsel or review judicial decisions based on similar circumstances. If it can show that its decision was reasonable, it will not be found guilty of bad faith. Additionally, if an insurance company specifically asks a court for a declaratory judgment as to whether it should cover the claim and the court finds that it should not, a bad faith claim is improper.