Understanding Bad Faith Claims Against Insurance Companies

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Insurance bad faith, also known as “insurance fraud" is the term used to describe the mistreatment of consumers and businesses by insurance carriers. It usually applies to situations in which an insurance company refuses to pay out a settlement pursuant to the terms of its insurance contract with the person or entity they claim to insure.

Unfortunately, insurance bad faith is a common occurrence. Many insurance companies use statistics to determine how much to pay out under certain circumstances. Even if the insured is fully entitled to recovery of more money from the insurance company under the insurance policy, if the statistics tell the insurance company that they will, on average, save money by not paying everything that is owed the insurance company may not pay. That leaves the insured to either go without or take their insurance company to court for bad faith.

Common examples of insurance bad faith include:

Denying the insured individual, family. or company the complete benefits listed in the policy
Offering less compensation than what is due under the policy
Unreasonably delaying payment to an insured

In every insurance contract (really, in every contract, in general), there is a stated or implied "covenant of good faith and fair dealing." This means that neither party can do something to frustrate the intended purpose of the contract, and that both parties are supposed to act fairly and with good faith towards one another concerning the parameters of their contract. In the context of an insurance contract, the insurance carrier is expected to fully compensate the insured in a timely manner when appropriate, and failing to do so may constitute a violation of the covenant of good faith and fair dealing.

Some states also have statutes or other regulations governing bad faith by insurance companies. Insurance providers that exhibit bad faith can be subject to statutory damages, government imposed penalties, and punitive damages. The specific laws affecting bad faith claims in your state may vary, so you should contact a local attorney to get any information on bad faith claims in your jurisdiction, as well as guidance on bringing a bad faith claim.

Damages for Bad Faith

Depending on your jurisdiction, the damages an insurance company may have to pay you for bad faith can vary widely. Generally, there will be actual compensatory damages intended to put you in the same position you would have been in had the insurance company paid as it was supposed to. Many states also allow for punitive damages, or damages intended to make an example of the insurance company and to punish its intentional bad conduct. Some states may limit the amount of punitive damages you can claim and in some the sky is the limit.

Because insurance fraud or bad faith claims can be confusing and complicated, it is wise to contact an attorney in your local jurisdiction for assistance with this type of case. Many will take on this type of case on a contingency basis, meaning you will not pay the attorney, and some states even allow for the recovery of attorney fees from the insurance company, meaning you will not have to share any award of damages with your attorney; they will simply be paid for the work they did in a separate judgment against the insurance company.

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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.

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