What is Insurance Bad Faith?
Auto, health, home, property, life. We buy insurance to protect the people and things most important to us. When you buy insurance, you are paying for more than just security and peace of mind. You have entered into a contract, and you expect to get the benefit of what you bargained for, should the need ever arise to make a claim. When insurance companies act unreasonably towards your claim, you can take them to court and recover compensation for the full extent of harm their bad faith conduct has caused you.
In California, every insurance contract includes an implied covenant of good faith and fair dealing. Not only must an insurer fulfill its duties under the policy regarding payment of first-party benefits or settling or defending third-party claims, but the carrier must carry out these duties in a good faith, reasonable manner.
Contract or Tort?
Even though the covenant of good faith is implied in a contract, the California Supreme Court held in its Foley decision that tort remedies are proper in cases where insurance policies are involved. The court’s reasoning is based on the fact that insurance is a quasi-public service, that insurers and insureds are in a special relationship to one another, and that insurance policies are basically contracts of adhesion, with little or no ability for a policyholder to negotiate or alter terms. Tort damages are capable of going well beyond damages in a breach of contract action and can include measures such as economic loss, emotional distress, attorney’s fees and even punitive damages in appropriate cases. Economic loss damages could include harm such as the loss of property or delay in receiving medical care, leading to further injury.
If an action taken by the insurer is wrong but not in bad faith, contract-based damages would be appropriate. These would be the benefits due according to the policy plus any special or consequential damages, if they were foreseeable when the contract was executed.
What are Examples of Insurance Bad Faith?
An insurer has a duty to pay valid claims. It is certainly reasonable to expect an insurer to investigate the claim to make sure it is valid, including determining that the insured holds a current, valid policy, and that the claim is covered under the terms of the policy. However, the insurance company cannot conduct its investigation with an improper motive, i.e. solely to find a way to avoid paying the claim.
Common examples of insurance bad faith include:
- Failure or refusal to investigate claim
- Denial of claim without reason or adequate basis
- Unreasonable delay in processing claim
- Requiring an excessive amount of documentation
- Refusal to settle or defend a third party claim
- Making an unreasonably low settlement offer
- Misrepresenting the terms of a subscriber’s policy
- Misrepresenting the value of a claim
- Canceling or rescinding a policy to avoid paying a claim
