A bad faith denial of an insurance claim is a breach of the insurer’s duty to exercise good faith and fair dealing, which is implied in every insurance contract. There are a number of ways an insurance company may act in bad faith. For more information about bad faith claims, talk to an experienced lawyer.
First-Party Bad Faith
The following acts by an insurer are examples of first-party bad faith:
Inadequate Claim Processing — A failure to properly process a claim can constitute bad faith. Generally, the following steps should be taken by an insurer when processing a claim:
- Verify the insured’s proof of loss
- Investigate the claim and inspect site of the loss
- Determine the coverage (including limits and exclusions)
- Appraise the amount of the loss
- Pay or deny the claim
Improper/Inadequate Claim Investigation — A failure to sufficiently investigate a claim or an improper investigation can give rise to a bad faith claim. For example, an insurer closes the file without investigating a homeowner’s claim for water damage due to a burst pipe because it believes the homeowner association, not the homeowner, is the insured party. In this situation, the insurer should have determined which party was actually covered. In addition, an insurer’s overzealous or intrusive investigation can amount to bad faith.
Delay in Payment — If an insurer delays paying a legitimate claim, it may constitute bad faith. For example, a one-year delay between investigation of a fire in an insured’s home and denial of the claim, where there was evidence about the cause of the fire available earlier and the insured cooperated in the investigation, could be considered bad faith.
Unreasonable Denial of Claim — If the insurer acts unreasonably when denying a claim, it will likely be considered bad faith.
Third-Party Bad Faith
The following acts by an insurer are examples of third-party bad faith:
Failure to Settle — An insurer’s failure to settle an underlying suit against the insured can constitute bad faith. A good number of bad faith claims arise from the situation in which the insurer has failed to settle an underlying claim against the insured within policy limits, which then subjects the insured to excess liability. Courts have generally imposed an obligation on the insurer to take the interests of the insured into account when engaging in settlement negotiations. A failure to tell an insured about settlement demands may also be considered bad faith.
Failure to Defend — Many insurance policies include provisions that require an insurer to defend an insured in an underlying action by a third party. If the insurer wrongfully fails to defend the insured, it may be considered bad faith.
Bad Faith/Negligent Handling of the Defense — An insurer who undertakes the defense of an insured, but handles that defense negligently, may be liable for bad faith. For example, an insurer may be negligent by failing to hire appropriate counsel to defend the insured.
Conclusion
If you are wrongfully denied payment on a covered insurance loss, you have a right to seek recovery based on the legal concept of bad faith. Talk to an experienced insurance attorney about your legal options.
