Category : Insurance Defense
The relationship between an insurance company and insured is 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 prevail against his or her own insurance company, there are certain legal elements that the insured must prove.
Bad Faith Explained
Bad faith occurs when an insurance claim wrongfully denies a claim without a reasonable basis. Even if the insurance company made a mistake or error in assessing the claim but it had a reasonable basis to make the mistake, bad faith has not been committed. Bad faith principles are based on state law.
States lay out the elements that a claimant must prove in order to prevail on a bad faith insurance claim. The plaintiff has the duty to prove each and every element by a preponderance of the evidence. In some jurisdictions, the insured individual must show that the insurance company failed to conduct a proper investigation before it denied the claim. In other jurisdictions, the insured individual has an even higher burden and must show that the insurance company ignored or missed obvious facts that would have shown that the claim was valid. Other jurisdictions require the plaintiff to show that the insurer intentionally conducted an inadequate investigation or failed to conduct an investigation at all so that it could maintain its ignorance of facts that would haves shown the claim was valid. 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 states have specific damages that are available per a bad faith statute. In these instances, the state law may be to award the claimant three times the amount of his or her compensatory damages. If the insurance company’s actions were particularly egregious, the trier of fact may award punitive damages. Whether plaintiffs receive punitive funds directly is also based on state law. In some states, punitive damages are placed in a victim’s relief fund or split between the plaintiff and such a fund. Punitive damages are rarely awarded and usually require a showing of particularly bad conduct on the defendant’s part.
Defenses 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.
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.