Insurance Bad Faith

  • You don’t pay insurance premiums for the fun of it. You expect your insurance carrier to comply with the terms of the policy and applicable state laws. Everyone makes mistakes -- even insurance companies; but when are an insurance company’s actions so extreme that they can lead to a civil lawsuit for bad faith?


    An insurance policy is a contract; like any contract, a party to it can sue the other party for breaching it. A claim an insurance company acted in bad faith, however, would be a different cause of action.


    If an insurance company fails to honor its commitment to a customer by acting unreasonably or by denying a claim without justification, by delaying payment or failing to act in good faith in some other way, it could be held liable for acting in bad faith. Insurance companies are legally bound by the language in the policies and are regulated by state laws and state insurance commissions.


    Insurance companies owe their policyholders a duty of “good faith and fair dealing,” which requires them to treat their customers fairly and honestly. This obligation can’t be waived by the policyholder or amended out of the policy.


    The reason is that insurance companies are so large and so much more powerful than their customers that it’s generally impossible for a customer to negotiate fair terms and details of an insurance policy. Insurance companies offer “take it or leave it” insurance policies (though some coverages may be removed or additional ones added at an extra cost), so customers lack the ability to negotiate the terms.


    Due to this unequal bargaining power, there are additional requirements on insurance companies to treat their customers fairly, in good faith, with potentially serious consequences if they fail to do so. Many states have laws regulating insurance companies.


    Maryland statutes, for example, make it illegal to engage in a trade practice considered an unfair method of competition or an unfair or deceptive act or practice in the business of insurance (the law may vary in your jurisdiction). This includes making false and misleading statements about the terms of an insurance policy and unfair claim settlement practices. Illegal practices include:


    • Misrepresenting relevant facts or policy provisions that relate to a claim or coverage issue
    • Failing to acknowledge and communicate with reasonable promptness about claims
    • Failing to adopt and implement reasonable standards for the prompt investigation of claims
    • Refusing to pay a claim without conducting a reasonable investigation based on all available information
    • Failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements are completed
    • Failing to make a prompt, fair and equitable good faith attempt to settle claims for which liability has become reasonably clear
    • Forcing policy holders to sue to recover amounts due under policies by offering substantially less than the amounts ultimately recovered in actions brought by the insureds
    • Trying settle a claim for less than what a reasonable person would expect to be entitled to after reading the company’s advertising material
    • Trying to settle a claim based on a claim application that’s been altered without notice to or the knowledge or consent of the insured
    • Failing to settle a claim promptly if liability is reasonably clear under one part of a policy in the hopes of influencing the settlement of claims under another part of the policy
    • Failing to provide a prompt and reasonable explanation of why the claim or offer of a compromise settlement was denied
    • Refusing to pay a claim for an arbitrary or capricious reason based on all available information
    • Failing to act in good faith in settling a first-party claim (one you make against your insurance company) under a property and casualty insurance policy.


    Under Maryland law, if someone has suffered a loss because of the illegal, bad faith acts of an insurance company and files a lawsuit to prove a case involving the denial of benefits, generally speaking, the plaintiff would have the burden of proving:


    • The terms of the policy obligated the insurance company to pay the claim
    • The lack of a reasonable basis for denying benefits under the policy
    • The insurer knew of or recklessly disregarded that lack of a reasonable basis when denying the claim.


    There are limits to bad faith lawsuits against insurance companies.


    • It must be shown that the company’s actions were intentional, not the result of an honest mistake or difference of opinion.
    • There is no bad faith if the company has a reasonable basis for its actions or coverage is debatable.
    • The fact the company made a mistake and denied a claim that should have been approved isn’t proof of bad faith.
    • The insurance company can debate or litigate a claim if it reasonably believes there’s a question of fact or law that needs to be decided before it must pay a claim.


    If the case is successful, a plaintiff may be able to seek actual damages, litigation costs, expenses, interest and reasonable attorneys’ fees. If the insurance company’s actions are extreme, malicious, oppressive or fraudulent, punitive damages meant to punish the company may be awarded to a plaintiff. In cases of bad-faith conduct, a state’s insurance department may order the company to pay a fine and restitution to the policyholder.


    Bad faith claims are very fact intensive and require a thorough investigation into what an insurance company knew and when, in addition to what it did, when and why. They can be complex cases that will be defended very strongly by an insurance company, because not only is money at stake but its reputation as well. If an insurance company goes out of bounds and acts in bad faith, these cases can hold an insurance company accountable while compensating a policyholder wronged through no fault of their own.