Bad Faith Insurance Definition


Bad faith insurance occurs when an insurer avoids its obligations, leading to claim denials or unreasonable demands on policyholders. Discover the tactics, implications, and ways to fight back against bad faith practices.

Understanding bad faith insurance

Bad faith insurance is a term used to describe insurers’ actions aimed at evading their contractual responsibilities. These actions can range from refusing to pay legitimate claims to delaying the claim investigation process. Essentially, insurance companies engage in bad faith practices when they twist policy terms or fail to disclose limitations, thereby preventing policyholders from receiving rightful compensation.

This unethical behavior can manifest in various ways, such as misleading policyholders about contract language, ignoring evidence supporting claims, or demanding excessive proof for covered losses. However, it’s important to note that honest mistakes aren’t necessarily acts of bad faith. Having said that, it’s important to note that the burden of proof is on the insurance company to show that any mistakes were honest. If the insurance company cannot show that its mistakes were honest, then the policyholder may be able to prove that the insurance company acted in bad faith.

Recognizing bad faith indicators

One crucial aspect is the adjuster’s evaluation of a claim. Disagreements between policyholders and adjusters over loss assessments aren’t automatically indicative of bad faith. However, if adjusters unreasonably withhold support for their findings or selectively dismiss evidence, it may raise suspicions.

Additionally, an insurance company’s failure to promptly respond to a claim indicates negligence. Regardless of intention, this delay is considered a bad faith practice. To maintain ethical standards, insurers must provide clear explanations for claim denials or partial coverage.

Fighting against bad faith insurance

Several states have established laws, often referred to as unfair claims practices acts, to shield consumers from unscrupulous actions by insurance companies. An example in this regard is California, whose legislation serves as a blueprint for other states.

These laws can mandate insurance companies found guilty of bad faith practices to compensate victims with essential damages, surpassing the claim amount. Compensation extends beyond direct expenses to cover missed work and legal fees, reflecting the broader impact of bad faith actions on policyholders’ lives.

In extreme cases, when an insurance company displays particularly egregious behavior, punitive damages may be awarded by a jury. These damages aim to punish the insurer for its wrongdoing and deter future bad faith conduct. In instances of genuine mistakes without malice, the appropriate recourse involves solely fulfilling the claim obligations. However, punitive damages are not always awarded, even in cases of extreme bad faith. The jury will consider a number of factors, including the severity of the bad faith conduct, the financial resources of the insurance company, and the impact of the bad faith conduct on the policyholder.

Weigh the risks and benefits

Here is a list of the benefits and drawbacks to consider.

  • Policyholders protected from unfair insurance practices
  • Potential compensation beyond the claim amount
  • Punitive damages discourage bad-faith behavior
  • Complex legal process
  • Challenges in proving bad faith
  • Potential for lengthy claims resolution

Key takeaways

  • Bad faith insurance involves insurers shirking contractual obligations, leading to claim denials and unjust demands.
  • Recognizing bad faith indicators requires differentiating honest mistakes from deliberate unethical actions.
  • State laws, like California’s, shield consumers from bad faith practices and can lead to compensation beyond claim amount.
  • Punitive damages may be awarded for extreme cases of bad faith, aiming to punish and prevent future misconduct.
View article sources
  1. Bad Faith – Cornell Law School
  2. The Regulation of Insurance Claim Practices UC Irvine Law Review
  3. Choosing a Mortgage Lender: Where to Start? SuperMoney
  4. Life Insurance Facts Companies Don’t Want You to Know SuperMoney