Policyholders pay insurance premiums to protect against the risk that something unexpected could happen in their lives. In exchange for these payments, policyholders have a reasonable expectation that their insurance company will fulfill the terms of the insurance contract when they make a claim on their policy. In most cases, the insurance company will help the insured through the claims process, the damage will be assessed, and the claim will be handled quickly and fairly.
Unfortunately, insurance companies sometimes seek to increase their profits and save money by delaying, underpaying, and denying coverage to their policyholders. They use various tactics to avoid paying reasonable claims, including mailing out the wrong forms, dropping coverage, or denying claims outright, even when they know the claim should be paid. This is known as insurance bad faith.
What is Insurance Bad Faith?
Bad faith occurs when an insurance company treats its policyholders in an unreasonable manner.
Although insurance companies have the right to deny claims that are fraudulent or not covered by the policy, they are required to have a reasonable basis for the denial of a claim and are forbidden by federal and state law from acting in bad faith toward their policyholders.
Some Examples of Bad Faith Conduct
Some of the practices insurance companies engage in that are considered bad faith conduct include:
- Failing to quickly and comprehensively consider claims
- Intentionally misinterpreting policy language to avoid coverage responsibility
- Declining to resolve a claim or reimburse a policyholder for their entire loss
- Attempting to under-settle a claim
- Making unreasonable demands to ascertain proof of loss
- Unreasonably denying or terminating a claim without a valid reason
- Refusing to explain policy exclusions and provisions
- Failing to defend an insured who is facing litigation under a liability policy provision