Navigating the world of insurance can feel daunting, especially when you encounter an insurance company that doesn’t uphold its duty to handle your claim fairly. Unfortunately, bad faith practices—where insurers intentionally act unfairly or unreasonably—are more common than you might think. Understanding how to identify and prove a bad faith insurance claim is critical for policyholders seeking justice and rightful compensation.
This article delves deeply into bad faith claims, offering guidance on your rights, applicable laws, and what steps to take if your insurance provider fails to meet its legal and contractual obligations.
What Is Bad Faith in Insurance?
Under the law, an insurance company has an implied duty of good faith and fair dealing. This means insurers must:
- Investigate claims promptly.
- Pay out valid claims within a reasonable timeframe.
- Honor the terms of the insurance policy without attempting to mislead or deceive policyholders.
When an insurer breaches these obligations—whether by denying a valid claim, delaying payment, or engaging in bad faith tactics—the policyholder has the right to pursue a bad faith insurance claim.
Applicable Laws
In the United States, protections against bad faith insurance practices are rooted in both common law and statutory law:
- Common Law Bad Faith Claims: These claims arise from court precedent and focus on an insurer’s unreasonable actions.
- Statutory Bad Faith Claims: Many states have specific statutes defining and penalizing bad faith practices. For example:
- California: Section 790.03 of the California Insurance Code prohibits unfair insurance practices.
- Texas: Chapter 541 of the Texas Insurance Code protects policyholders against deceptive acts and bad faith practices.
- California: Section 790.03 of the California Insurance Code prohibits unfair insurance practices.
- Texas: Chapter 541 of the Texas Insurance Code protects policyholders against deceptive acts and bad faith practices.
Employee Retirement Income Security Act (ERISA)
The Employee Retirement Income Security Act (ERISA) is a federal law that provides protection to individuals with employer-sponsored insurance plans, including health and life insurance. ERISA requires that insurance claims under these plans be processed in a timely and fair manner. If an insurer under an ERISA-governed plan engages in bad faith practices, such as wrongful claim denial or unreasonable delays, policyholders may pursue legal action. While ERISA does not explicitly cover bad faith claims in all cases, it provides policyholders with the right to file appeals and seek damages for breaches of fiduciary duty by the insurance provider.
Civil Rights Act of 1964
While the Civil Rights Act of 1964 primarily addresses discrimination in employment, housing, and public accommodations, it also offers significant protection against bad faith practices when they are tied to discrimination. If an insurance company engages in discriminatory behavior by refusing to honor a claim based on a policyholder’s race, gender, or other protected characteristic, they may be violating both the insurance contract and anti-discrimination laws.
Common Law Principles of Good Faith and Fair Dealing
Under common law, all insurance contracts are governed by an implied obligation of good faith and fair dealing. This means that insurers are legally required to act in a manner that does not deprive policyholders of the benefits of their contract. If an insurance company denies or delays a claim without reasonable cause or engages in deceptive practices to avoid paying out valid claims, it could be deemed a violation of this implied duty.
Steps to Prove a Bad Faith Insurance Claim
Proving bad faith requires more than dissatisfaction with your insurance provider; it requires clear evidence of misconduct. Below is a detailed guide to building a strong case:
1. Understand Your Insurance Policy
The first step before pursuing a lawsuit is to thoroughly review your insurance policy to understand your coverage, exclusions, and obligations.
This includes checking the terms regarding claims, deadlines for submitting information, and the conditions under which claims are paid.
2. Document the Insurer’s Actions
It’s crucial to keep a record of all communication with your insurance company, including emails, phone calls, and written correspondence. This documentation will serve as evidence of the insurance provider’s actions and the nature of their dealings with you. If you’ve been denied a claim, have you received timely explanations? Have there been unreasonable delays in processing your claim? Every interaction with your insurer can serve as evidence. Maintain detailed records, including:
- Claim Submission: Copies of your initial claim, supporting documents, and all correspondence.
- Responses from the Insurer: Any letters, emails, or phone call summaries, particularly those indicating unreasonable delays, denials, or lowball offers.
- Final Decision: If the insurer denies your claim, request a written explanation outlining the specific reasons.
3. File a Formal Complaint with the Insurance Company
Before taking legal action, consider filing a formal complaint with your insurance provider. Many insurers have a dedicated process for handling complaints, which often involves an internal review of your claim. This step may allow you to resolve the issue without resorting to litigation and may prompt the insurer to reconsider their denial or delay. Within this complaint, it is essential to demonstrate harm and establish unreasonable behavior.
Here’s what will help demonstrate harm:
- Actual Financial Losses: Unpaid medical bills, property damage, or other costs resulting from the denied claim.
- Emotional Distress: Testimonies or medical evidence detailing the stress and anxiety caused by the insurer’s actions.
- Missed Opportunities: Evidence of lost business or financial stability due to the insurer’s failure to honor the claim.
Here’s how you can establish unreasonable behavior:
The cornerstone of a bad faith claim is proving that the insurance company acted unreasonably. Examples include:
- Failure to Investigate: Insurers must conduct a timely and thorough investigation of claims.
- Misrepresentation of Policy Terms: Any attempt to mislead you about your policy’s coverage can constitute bad faith.
- Delaying Tactics: Unjustified delays in processing your claim are a clear sign of bad faith.
4. Send a Final Demand Letter
If the insurer continues to refuse to honor your claim or engages in other bad faith practices, the next step is to send a final demand letter. This letter should clearly outline your claim, explain why the insurer’s actions are considered bad faith, and demand a fair resolution. In the letter, specify a deadline by which the insurance company must respond or take action, and state that legal action will follow if the claim is not settled promptly.
5. Explore Mediation or Alternative Dispute Resolution (ADR)
Before filing a lawsuit, it may be worth exploring mediation or other forms of alternative dispute resolution (ADR). These methods involve working with a neutral third party who can help facilitate a resolution between you and the insurance company. Mediation is often a less costly and time-consuming alternative to going to court. Many insurance policies even include clauses that require mediation or arbitration before litigation, so be sure to check your contract to see if this applies to your situation.
6. Consult an Attorney for Legal Guidance
If your attempts to resolve the issue directly with the insurer have been unsuccessful or if the situation escalates, consulting with an experienced insurance attorney is crucial. A lawyer can help you understand your rights, assess the strength of your claim, and advise you on the best course of action.
7. Legal Action and Remedies
If attempts to resolve the issue directly with your insurer fail, consider filing a lawsuit. Legal remedies may include:
- Compensatory Damages: For unpaid claims and related expenses.
- Punitive Damages: To penalize egregious misconduct.
- Statutory Penalties: Additional damages or penalties imposed under state law.
Real-Life Examples of Bad Faith Insurance Cases
Anderson v. State Farm Mutual Automobile Insurance Co. (Wisconsin, 1974)
In this landmark case, State Farm denied a valid claim for medical expenses after a car accident. The insurer’s refusal to pay was based on unreasonable interpretations of policy exclusions. The court found the insurer guilty of bad faith, awarding the policyholder both compensatory and punitive damages.
Gruenberg v. Aetna Insurance Co. (California, 1973)
This case involved an insurer denying a fire damage claim on the grounds of alleged misconduct by the insured. The California Supreme Court ruled that Aetna acted in bad faith by failing to conduct a proper investigation, setting a precedent for recognizing emotional distress damages in bad faith claims.
Dunn v. American Family Insurance (Missouri, 2001)
In this case, the insurer denied a homeowner’s claim for storm damage, citing inadequate proof. The court found that the insurer’s investigation was insufficient and ruled in favor of the policyholder, awarding both the claim amount and punitive damages.
These cases demonstrate how courts hold insurance carriers accountable when they prioritize profits over their contractual duties.
Signs of Bad Faith Practices
Recognizing bad faith tactics early can help you take swift action. Common signs include:
- Unexplained Delays: Lack of communication or excessive delays in processing your claim.
- Lowball Settlements: Offering far less than the documented value of your loss.
- Claim Denial Without Justification: Denying claims without providing a reasonable explanation.
Emotional and Financial Impact of Bad Faith
When an insurance company engages in bad faith, the impact can extend far beyond financial losses, striking at the very core of a policyholder’s well-being.
The stress, anxiety, and frustration caused by an unjust claim denial or delay can be overwhelming, leaving individuals feeling powerless and betrayed by a system they trusted to protect them. For many, this emotional toll is compounded by the practical consequences of a denied claim. Job security, housing, and even access to essential healthcare can hang in the balance, creating a ripple effect that disrupts every aspect of life.
Understanding your rights and seeking justice in the face of bad faith is about more than recovering what is owed—it’s about holding the insurer accountable and reaffirming the principle that people deserve to be treated with honesty and respect. Taking a stand is not just an act of self-preservation but also a step toward ensuring no one else has to endure the same hardship.
How Bourassa Law Group Can Help
At Bourassa Law Group, we believe that policyholders deserve to be treated with honesty and respect. Our team has extensive experience fighting bad faith insurance claims, ensuring that insurers are held accountable for their actions.
Whether your case involves a denied personal injury claim, a delayed settlement, or outright refusal to honor your policy, we’ll work tirelessly to secure the compensation you deserve. Contact us today to schedule a consultation.
1-800-870-8910