When is an insurance denial an act of bad faith?

May 18, 2021 | Motor Vehicle Accidents

The insurance industry is subject to more regulations than many other areas of business. The reason why is obvious. Members of the public pay a substantial amount of money to insurance companies to protect themselves from future risk and liability. Those companies then have every reason to deny claims: The more a person needs from an insurance policy, the less the company makes from them.

State and federal laws regulate the insurance companies and require that they operate in good faith. That means that they should intend to uphold the contract that they signed with their customer. When an insurance company intentionally refuses a claim that clearly has coverage under a paid policy, the policyholder or claimant may have no choice but to take legal action against the company for bad faith insurance practices.

What does bad faith insurance look like?

Any activity intended to deny a policyholder coverage requested via a valid claim might constitute bad faith insurance practices. Outright refusal to pay a claim that clearly falls under the scope of the coverage does occur, although insurance companies are sometimes more subtle in their practices.

For example, they might drag out or delay paying the claim after they approve it, putting a claimant or policyholder at a financial disadvantage. Sometimes, insurance companies also make low settlement offers to protect themselves from liability with little regard for how accepting such a low offer might affect the life of the individual who needs compensation.

Other forms of bad faith insurance might involve the company telling you about limitations or exclusions not previously disclosed to you, creating obligations that were not disclosed in your policy or altering your contributions, such as trying to increase your deductible, when you try to make a claim.

Why to take action on bad faith insurance

Obviously, you want to fight back when an insurance company keeps you from getting money that you need to cover property damage or injuries.

However, there is an additional incentive to hold companies accountable for bad faith insurance practices. The courts may award punitive damages as a punishment to the insurance company, meaning you will receive more than you would have from the successful insurance claim if the company had handled it properly.

Reviewing your policy and the company’s response to a claim can help you determine if your situation constitutes a bad faith insurance situation.