Guide to Bad Faith Auto Insurance Claims and Seeking Punitive Damages

Insurance companies don’t always treat auto claimants right. You might be eligible to seek a punitive damage award for bad faith claim handling.

It’s no surprise to learn that insurance companies often deny claims or make low-ball settlement offers.

The adjusters who work for these companies sometimes treat claimants with little patience and even less respect.

Insurers want to maximize their profits. Claim denials, low offers, and aggressive negotiation tactics are all tools used to payout as little of the company’s money as possible.

There are times, though, when insurers cross the line and engage in dishonest and reprehensible behavior. This is known as acting in bad faith, and it’s against the law.

When an insurance company acts in bad faith, you may be entitled to seek punitive damages.  In insurance terms, punitive damages are called extra-contractual damages. Extra-contractual means the insurance company is forced to pay an amount above and beyond the insurance policy limits.

Contact Your Insurer First

Your auto insurance policy is a legally binding contract. Before worrying about the insurance company’s behavior, you must first make sure you’re holding up your end of the contract by notifying your insurer immediately following an auto accident.

This is true even if you’re planning to file a claim with the at-fault driver’s auto insurance.

Almost all U.S. auto policies have what’s called a “notification and cooperation” clause.

The clause requires you to:

  • Tell your insurance company about an accident
  • Provide information necessary for your claim’s investigation, including a recorded statement of what happened
  • Do what the insurance company requests in defending the claim
  • Attend related hearings and trials, as needed

A common notification clause looks like this:

“Insured (you) agrees to notify the insurer (your insurance company) of any accidents and thereafter comply with all information, assistance, and cooperation which the insurer reasonably requests, and agrees that in the event of a claim the insurer and the insured will do nothing that shall prejudice the insurer’s position…”

A cooperation clause is important because it:

  • Gives the insurer a right to get claim-related information while it’s still fresh
  • Allows the insurer to determine its responsibilities
  • Helps prevent fake injury claims by others

Your insurance company has a duty to defend you if you get in an auto accident and another driver sues you. Defending you typically means that the insurer will pay for an attorney to protect your interests. You might lose this protection if you don’t follow directions in your policy’s notification and cooperation clause.

Insurance Policy Coverage Limits

Policy limits affect how the insurance company handles car accident claims.

All insurance policies have specific limits for different types of auto coverage. The limit refers to the maximum amount of compensation the insurer will pay out on a given accident.

For example, the at-fault driver might have bodily injury liability coverage with a limit of $25,000 per person. The most compensation the company can pay for your injury claim is $25,000, no matter how badly you’re hurt.

Keep in mind that your losses may include:

If your damages exceed the limit on an insurance policy, there are ways you can try to pursue compensation to cover the rest of your losses. For example, you can sue the at-fault driver for the amount not covered by their liability limits, or file a claim under your policy’s underinsured motorist coverage.

Definition of Underinsured & Uninsured Motorist Coverage

Underinsured Motorist Coverage (UIM) helps pay for your damages when you’ve been injured by a driver who has insurance, but not enough to cover your damages.

Uninsured Motorist Coverage (UM) helps pay for your damages when you’ve been in an accident caused by a driver who has no liability insurance.

Not all policies have the same limits. State laws often set forth the specific insurance limits that a driver must carry and these laws can vary.

California, for instance, requires drivers to have 15/30/5 liability coverage, or:

  • A $15,000 policy limit for the death or bodily injury of one person
  • A $30,000 limit for all people hurt or killed in the accident
  • A $5,000 limit to cover any property damage involved in an accident

New York law, on the other hand, requires that drivers carry a minimum amount of liability insurance of:

  • $25,000 for bodily injury to one person,
  • $50,000 for bodily injury to all persons
  • $10,000 for property damage in any one accident

Bad Faith Insurance Claims and Punitive Damages

Your auto insurance company has a legal duty to act in good faith. Good faith means the company has to treat you reasonably and fairly.

Understanding Bad Faith

Insurance companies act in “bad faith” when they fail to uphold their duty to act in good faith. It’s against the law in the U.S. for insurance companies to engage in bad faith tactics.

In most states, insurance companies act in bad faith when they:

  • Fail to follow claim processing procedures
  • Fail to acknowledge or respond to your claim filing
  • Deny your claim without giving a rational reason for doing so
  • Make unreasonable demands for medical records and other documents
  • Make an unreasonably low settlement offer
  • Unreasonably delay in settling a claim
  • Fail to investigate your claim or conduct a poor investigation

There are times when insurance adjusters are impatient, disrespectful, and even mean. These are not bad faith tactics or actions. It’s just the nature of the beast.

Adjusters are trained to negotiate aggressively. This is because they’re representing their insurance company and are trying to protect its best interests. However, if the adjuster lies in negotiations, ignores your calls, or offers unreasonable settlements, then the acts may equate to bad faith tactics.

First Party Claimants vs. Third-Party Claimants

Many states only allow a person to sue an insurer for bad faith in connection with first-party insurance claims. That is, state laws only allow you to file a lawsuit against your insurance company for bad faith acts and any other unfair insurance practices.

State laws don’t always allow injured parties to take legal action against an at-fault driver’s insurance company. If state laws prevent a third-party claim, a state nonetheless may provide other remedies for bad faith practices.

Most severe injury claims are more successful when handled by an experienced attorney, regardless of the insurance company’s behavior.

Your best bet is to consult a personal injury attorney to find out your options if an insurance company won’t settle your claim in good faith.

Extra-Contractual Punitive Damages

Extra -contractual damages are awarded by a judge or jury when an insurer is found to have acted in bad faith. No insurance company will admit to bad faith and hand over extra money outside of a courtroom.

“Extra” is used because a bad faith insurer has to pay these types of damages in addition to the compensation it provides for the underlying claim.

Court awards for bad faith can include:

  • The money for your injury claim (which is capped at the amount of the applicable policy limit)
  • A money award that serves as a penalty for the insurer’s bad behavior (which is an award over the policy limits)

Since extra-contractual damages punish the insurance company, they are a type of punitive damage.

Punitive damages are given to:

  • Penalize a person or business
  • Prevent others from acting in the same manner as the person/company that was punished

Example: Extra-Contractual Punitive Damages After Car Accident 

Joe suffers a head injury in a car accident with another driver, Bob. Between medical bills and lost wages, Joe suffers a loss of $50,000. Bob clearly was the cause of the incident.

Joe files a claim with Bob’s insurance company. Bob has a personal injury liability policy with a limit of $25,000 per accident. Bob’s company pays Joe the full $25,000 towards his damages.

Joe’s auto insurance policy includes $25,000 coverage for underinsured injury claims.

To try and recover the remaining $25,000 of his losses, Joe files a claim under his own underinsured motorist policy.

Lisa is the adjuster with Joe’s auto insurer who gets assigned to his claim. Lisa commits several acts of bad faith from the very first day of working on the case.

For example, she:

  • Failed to follow company protocol in opening the claim
  • Did little to investigate the claim
  • Ignored Joe’s phone calls
  • Made a low-ball settlement offer
  • Eventually denied the claim for no good reason

Joe spoke with Lisa’s supervisor about her bad behavior, but nothing changed.

Through his attorney, Joe sued his insurance company for bad faith. At trial, the judge rules in Joe’s favor, awarding him :

  • $25,000 for the amount of his uninsured motorist bodily injury claim
  • $25,000 in punitive damages for the insurance company’s bad faith

Responding to Insurance Company Bad Faith

When an adjuster is acting badly, first contact the adjuster’s supervisor or the claims manager. Send a letter to the supervisor so you have written evidence of the communication.

Be polite in the letter. Avoid threats and excessive complaints. Try to keep the tone professional so the supervisor takes you seriously.

Clearly state the reasons why you believe the adjuster is acting in bad faith and be specific. For example, rather than say the adjuster unfairly denied your claim, provide the value of your claim and the reasons for why the adjuster said it was denied.

It’s also important in the letter to tell the supervisor that you’re acting in good faith.

For example, state:

Complete the letter by saying you hope the company will work with you in good faith to settle your claim. But also mention that you’ll seek legal representation if the company refuses to work with you in good faith.

Notify Your State Insurance Board

If your letter to the claims manager doesn’t work, you or your attorney can file a complaint with your state insurance department. The department will start an investigation of the case once it receives a written complaint from a claimant.

If you’re having issues with the other driver’s insurance company, a formal complaint to the Insurance Commissioner may be your only option. If the Commissioner’s office finds bad faith evidence, it can levy fines against the insurance company and take other actions.

Consult a Personal Injury Attorney

Insurance companies have several reasons to work with claimants and ensure that their adjusters act in good faith. Bad faith allegations hurt an insurer’s reputation. Also, bad faith lawsuits are costly to defend, especially if they lose and have to pay punitive damages.

However, there are still times when an insurer refuses to work cooperatively with an injured claimant. In these situations, you should contact an experienced personal injury attorney for help.

An injury lawyer can draft a letter on your behalf to ask for a reasonable settlement. Your attorney will know the insurance laws in your state and can recognize any bad-faith behavior from the insurance company. The adjuster knows that, and may offer a fair settlement to avoid litigation.

Most personal injury attorneys provide a free consultation to discuss your options.

Further, most injury lawyers work on a contingency fee basis. This means you don’t have to pay your attorney a cent unless they settle your claim or succeed in court.

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Dustin Reichard, Esq. is an experienced attorney with 20 years of work in the legal field. He’s admitted to the Illinois State Bar and the Washington State Bar. Dustin has worked in the areas of medical malpractice, wrongful death, product liability, slip and falls, and general liability. Dustin began his legal career as a JAG... Read More >>