You’ve paid premiums faithfully for years. Now that you need your insurance company to honor the policy you purchased, they’re denying your legitimate claim, delaying payment without reason, or offering a settlement far below what your policy should provide.
Our friends at Ganderton Law, LLC discuss how policyholders increasingly face bad faith practices from insurers prioritizing profits over obligations. As a car accident lawyer will tell you, insurance companies owe you more than just policy benefits, and when they violate those duties, you have legal recourse.
The Legal Duty Insurance Companies Owe You
Your relationship with your insurance company isn’t just a business transaction. It’s a special relationship where the insurer owes you a duty of good faith and fair dealing. This means they must investigate claims thoroughly, evaluate them honestly, and pay valid claims promptly.
Insurance companies hold a position of power over policyholders. You paid premiums trusting they would protect you when needed. The law recognizes this imbalance and imposes heightened obligations on insurers to treat you fairly.
When insurance companies breach these duties, they commit bad faith, which creates legal liability beyond just paying the original claim amount.
What Constitutes Insurance Bad Faith
Bad faith occurs when insurance companies engage in dishonest or unfair practices to avoid paying legitimate claims. The behavior must be more than a simple disagreement about coverage. It requires the insurer to act unreasonably or with improper motive.
Common bad faith practices include:
- Denying valid claims without proper investigation
- Unreasonably delaying claim processing or payment
- Offering settlements far below actual policy value
- Misrepresenting policy language to avoid coverage
- Failing to communicate with policyholders about claim status
- Requesting unnecessary documentation repeatedly
- Relying on biased medical examinations
These actions transform a standard claim dispute into a bad faith case where you can sue for damages beyond your original policy benefits.
First-Party Vs. Third-Party Bad Faith
First-party bad faith involves your own insurance company denying or undervaluing a claim under your policy. You’re making a claim for benefits you purchased, such as uninsured motorist coverage, underinsured motorist coverage, or personal injury protection.
Third-party bad faith occurs when the at-fault party’s insurance company refuses to settle within policy limits when liability is clear. If their unreasonable refusal causes you to obtain a judgment exceeding policy limits, the insurer might be liable for the excess.
Both types create lawsuits against insurance companies, but the legal theories and damages differ significantly.
Damages Available In Bad Faith Cases
Winning a bad faith lawsuit against your insurance company can result in damages far exceeding your original claim value. You can recover the policy benefits that should have been paid initially, plus additional compensation.
Economic damages include consequential losses caused by the bad faith denial. If the insurance company’s refusal to pay medical bills forced you into bankruptcy, those damages are recoverable. If you lost your home because they wouldn’t pay a legitimate claim, that loss creates compensable harm.
Emotional distress damages compensate you for the anxiety, frustration, and mental anguish caused by fighting your own insurance company when you’re already dealing with injury recovery.
Punitive damages punish insurance companies for particularly egregious bad faith conduct. These damages can be substantial, sometimes reaching multiples of the original claim value. They’re designed to deter the insurance company from repeating such behavior with other policyholders.
Attorney fees and costs also become recoverable in many bad faith cases. Unlike standard injury claims where you pay your attorney from your settlement, bad faith lawsuits often allow the court to order the insurance company to pay your legal fees separately.
When To Consider A Bad Faith Lawsuit
Not every claim denial justifies a bad faith lawsuit. Insurance companies can legitimately dispute coverage when policy language is ambiguous or when factual questions exist about whether coverage applies.
Bad faith lawsuits make sense when the insurance company’s position is clearly unreasonable, they’ve ignored obvious evidence supporting your claim, they’re relying on pretextual reasons to deny coverage, their delays have caused you significant harm, or they’ve engaged in a pattern of unfair practices.
These cases require substantial investment of time and legal resources. The potential recovery must justify the effort, which typically means either a high-value underlying claim or particularly egregious insurer conduct warranting punitive damages.
The Investigation Process Matters
Insurance companies must conduct reasonable investigations before denying claims. They can’t simply refuse coverage based on assumptions or minimal review. When they deny claims without talking to witnesses, reviewing medical records, or analyzing accident reports, that failure might constitute bad faith.
The reasonableness of their investigation gets evaluated based on what a prudent insurer would do in similar circumstances. If standard industry practice requires certain investigative steps and your insurer skipped them, their denial becomes suspect.
Document every interaction with your insurance company. Save letters, emails, and text messages. Keep notes of phone conversations including dates, times, and what was discussed. This documentation becomes invaluable evidence of bad faith if litigation becomes necessary.
Common Bad Faith Scenarios
Uninsured and underinsured motorist claims face bad faith denials frequently. Insurance companies interpret policy language narrowly to avoid paying even when coverage clearly applies. They dispute whether the other driver was truly uninsured or argue about the accident’s severity.
Disability insurance claims suffer particularly high rates of bad faith denials. Insurers hire doctors to perform brief examinations and provide opinions that you’re not disabled despite your treating physicians’ assessments.
Homeowner’s insurance claims involving significant damage often face bad faith tactics where insurers lowball repair estimates or claim damage resulted from excluded perils rather than covered events.
The Burden Of Proof
You must prove the insurance company acted in bad faith, which requires showing their conduct was unreasonable and done knowingly or recklessly. Simply being wrong about coverage isn’t enough. They must have lacked a reasonable basis for their position.
This burden can be challenging. Insurance companies employ attorneys and professionals to create paper trails suggesting their position was reasonable even when it wasn’t. They’ll point to policy language, claim file notes, and hired consultants’ opinions to defend their decisions.
Strong bad faith cases include clear policy language supporting coverage, obvious liability or damages that the insurer ignored, documented refusals to conduct proper investigation, and internal communications showing the insurer knew they should pay but refused anyway.
State Law Variations
Bad faith laws vary significantly by state. Some states allow bad faith claims only after the insurer has been found to owe benefits in separate proceedings. Others allow combined bad faith and breach of contract claims in a single lawsuit.
Damages available differ by jurisdiction. Some states cap punitive damages or require specific findings before awarding them. Others allow juries broad discretion in punishing insurance company misconduct.
Understanding your state’s specific bad faith laws is important before pursuing these claims. What constitutes bad faith in one state might not meet the threshold in another.
Time Limits For Bad Faith Claims
Statutes of limitations apply to bad faith lawsuits just like other legal claims. The time limit might differ from the limitation period for the underlying insurance claim itself.
The clock typically starts when you discover the bad faith conduct, which might be when the insurer denies your claim, when they offer an unreasonably low settlement, or when they finally acknowledge they should have paid earlier.
Don’t delay consulting an attorney if you suspect bad faith. Evidence deteriorates, witnesses’ memories fade, and time limits can expire while you’re trying to resolve disputes directly with the insurer.
Alternative Dispute Resolution
Some insurance policies require arbitration or mediation before you can file bad faith lawsuits. These provisions are enforceable in most jurisdictions and must be followed to preserve your claims.
State insurance departments provide complaint processes where you can report bad faith practices. While these complaints don’t create lawsuits, they sometimes pressure insurance companies to reconsider unreasonable positions.
The Reality Of Fighting Your Insurance Company
Suing your own insurance company feels wrong to many people. You’ve trusted them for years and now must treat them as adversaries. This emotional hurdle prevents some people from pursuing valid bad faith claims.
Remember that insurance companies are businesses making calculated decisions about claim payments. When they deny your legitimate claim, they’re prioritizing profits over their obligations to you. Holding them accountable protects not just you but other policyholders facing similar treatment.
If your insurance company has denied your claim without proper justification, delayed payment unreasonably, or engaged in other unfair practices, reach out to discuss whether their conduct constitutes bad faith and what legal options you have to hold them accountable for violating their duties to you as their policyholder.
