Most insurance policy holders haven't heard of bad faith and so don't even think about challenging their denied insurance claim. But it happens every day in the insurance industry.
Yes, there are many responsible and ethical insurance adjusters out there, but the majority of them are extremely overloaded with claims. They simply can't handle every single one of them according to their company's or the Department of Insurance's guidelines.
After a while, handling claims "in bad faith" becomes routine. And since most people have no idea what constitutes bad faith, they do nothing to fight their insurance claim denial.
That's why it's so important to understand the theory behind bad faith so you can protect your "rights of insured".
What Is Bad Faith? And What Are My Rights of the Insured?
An insurance policy is a contract between you (the Insured) and your insurance carrier (the Insurer). As an insured, or policyholder, you are bound to the terms and conditions set forth in the policy. You also have certain duties when it comes to filing a claim.
However, the insurer is also bound by the terms of the policy and has certain obligations to meet. So in exchange for your monthly premium, the insurer agrees to provide the coverage set forth in the policy. This contract requires that it acts in "good faith" toward you.
When an insurer unreasonably withholds the benefits of the policy from its insured, it is considered to be in "bad faith" and is not upholding your rights of insured.
Insurance attorneys know that insurers attempt to deny or underpay claims for any reason they can. To determine whether an insurer is acting in good faith, the court must determine whether or not their conduct is "reasonable". To prove bad faith, you only have to show that the insurer failed to honor the contract and had no reason not to pay what was due.
Examples in Insurance Claim Denials
There are many ways insurance companies commit bad faith and violate the rights of the insured:
Failing to promptly and thoroughly investigate a claim;
Unreasonable delay of payment of benefits;
Unreasonable insurance claim denial;
Using unreasonable interpretations in translating policy language;
Refusing to settle the case or reimburse you for your entire loss.
If an insurance claim denial is considered "unreasonable" and is demonstrated to be dishonest, deceptive or fraudulent, a judgment may be obtained and punitive damages awarded as well as compensation for the actual loss under the policy.
However, insurance companies have the right to deny your claim if you haven't lived up to your end of the contract/policy, if your claim isn't covered by your policy or is fraudulent.
How to Dispute Insurance Claim Denial
If you still feel you are in the right after having reviewed your insurance policy, collect all of the correspondence you've had with your insurance company and other pertinent documentation. Write a letter and send it certified mail to the Director of Claims of the insurance carrier you deal with citing the pertinent points of the policy and demonstrating that their insurance claim denial of benefits is unreasonable. Also write the Commissioner of the Department of Insurance in your state and ask them for a review and assistance in the matter.
If that doesn't work, take your policy and documentation to a qualified insurance attorney. He or she should be able to determine after a review of the facts whether or not your insurance company has violated your rights of insured and committed bad faith.
How To Fight Back
When an insurer commits bad faith on a denied insurance claim, you have three options: 1) negotiate an acceptable settlement with the insurer, 2) do nothing and give up, or 3) sue the insurer. A vast majority of people unfortunately choose to do nothing and give up.
But often when an insurance attorney becomes involved, an insurer will take the claim much more seriously and try to correct its earlier bad faith direction in order to minimize the amount of the claim and any punitive damages. Typically, even when it is necessary to sue an insurer for bad faith, the case is often settled before the trial.
Why Do They Commit Bad Faith?
There is a good financial reason for insurance companies to unjustly deny claims. Because very few policy holders dispute an insurance claim denial, insurers save a lot of money.
Here's how it works: Let's say that an insurer denies 100 claims. Of these 100 claims, 95 go unchallenged and disappear while five policy holders decide to dispute their insurance claim denial.
Of these five, the insurer reverses its denied insurance claim decision on four of the claims. But it continues to refuse coverage on the fifth claim.
The fifth claimant then files a lawsuit for bad faith and is awarded punitive damages against the insurer. Even if this claimant gets millions of dollars, the insurance company still saved millions by not having paid the other 95 denied insurance claims that were not disputed.
And that, in short, is why they do it and how they get away with it.
The Auto Claims Guide goes into greater detail on bad faith claims handling practices. You will learn what defines bad faith, read a case study of bad faith handling, and learn what your rights are if you believe your claim has been handled improperly by the insurance company.