When applied to an insurance company, bad faith occurs when the insurer tries to avoid its insurance obligations without cause or justification. A bad faith insurance claim can multiply the potential settlement or judgment or settlement a plaintiff can extract from the insurer.
When a plaintiff is injured in an accident, regardless of a fault or no-fault state, he or she will file a claim with either his or her insurer or the at-fault party’s insurer. The insurer investigates, which may include questioning the drivers, passengers, witnesses, and consulting with police reports. The insurer will also ask the injured party to submit proof of his or her damages. For example, copies of medical bills, lost wages, repair costs for the vehicle, and other associated costs from the accident.
The investigation could take a few weeks or months. At the conclusion of the investigation, the insurer should offer a settlement that compensates the injured party for his or her out-of-pocket costs and his or her pain and suffering.
Insurance bad faith arises when there is tension between the insurance company’s goals in generating as much profit as possible and complying with its insurance obligations. The insurance company wants to sign as many policies as possible but payout as few as possible. Sometimes insurance companies will unjustly deny or delay paying claims.
Bad faith results when the insurer either denies a claim or takes too long to process the claim. Insurers must process claims within a reasonable period – they aren’t allowed to slow-roll processing. For example, an insurer might misrepresent the coverage language in the policy to trick the insured into surrendering his or her claim or accepting less than he or she is entitled to. Insurance companies are also known to make unreasonable demands on the insured to prove the damages.
Moreover, insurers must disclose all exceptions and limitations to the policy before the insurer purchases the policy. The insurer is not permitted to “spring” changes to the policy on the insured after the policy was purchased. The insurer can include limitations following renewal. Bad faith insurance includes a broad gamut of claims.
Bad faith insurance can apply to any type of insurance: medical, homeowners, auto, and life insurance. Bad faith is an intentional act by the insurance company. Bad faith does not include mistakes by the adjuster or disagreements between the adjuster and claimant. The adjuster can disagree with the claimant, provided that the facts support his or her findings. Insurers are also permitted to deny accident claims or offer partial coverage if facts and policy language support their conclusions.
In general, state law requires insurers who lose bad faith insurance claims to cover costs associated with filing the claim. In some states, this could amount to a multiplier applied to the base damages, and could also include attorneys’ fees and costs. If the court finds that the insurer behaved egregiously, for example, if the insurance company intentionally deceived its insured, it could be subjected to punitive damages to discourage future bad acts.