When an Insurance Company Won’t Pay: Bad Faith Denial of Benefits

If your insurance company is denying you money you’re owed, there’s something you can do about it. Learn about bad faith insurance practices.

Insurance is a unique business. Although we pay a lot of money for insurance policies, we hope that we will never have to use those policies. If that moment ever comes, we hope and expect that the carrier will follow the contract and pay insurance benefits as promised.

Unfortunately, insurance companies don’t always behave well. Sometimes, they ignore or twist the language in the insurance contract. They may deny coverage without investigating your valid claim. Or they may delay the processing of your claim without cause.

Although not common, this behavior happens often enough that the law has created a term to describe it: Bad Faith Insurance Practices. Insurance companies must handle your claims according to the insurance policy. They must do so in a reasonable amount of time and explain their actions, especially when they deny a claim.

Because they are in a special and powerful position relative to their policyholders, insurers must follow bad faith laws. This article will examine claims under those laws and what insurance bad faith looks like. We will also look at damages for bad faith and potential values of claims.

What Is Bad Faith Behavior?

Close up shot of file folders labeled with Insurance, Fraud, Claims and Under investigation

Because rules for insurance companies are controlled by state laws, the exact definition and legal requirements for a bad faith claim will differ from state to state.

Many states only allow first-party bad faith claims, meaning you can only sue your own insurance company for bad faith. For example, if you encounter auto insurance bad faith with the other driver’s company, your options may be limited.

Bad faith practices take place when an insurance company puts its own interests before a policyholder’s interest. California’s law, for example, requires that an insurer act “unreasonably” and cause damage to the claimant to be considered acting in bad faith.

This can take place in several different ways, but all of the possible actions have one thing in common: They violate what’s known as the implied covenant of good faith and fair dealing. The implied covenant is a legal requirement that says parties to a contract must behave honorably and not try to “weasel” out of the contract or try to avoid performing their obligations.

Violating the duty of good faith is not the same thing as a breach of contract. It’s possible to follow the letter of a contract but violate the spirit of the agreement. That behavior is bad faith. Here are some more common examples of bad faith behavior by insurance companies.

1. Bad Faith Claim Denial

The first way that an insurance company can act in bad faith is to deny a claim that it should have accepted and paid out.

For example, let’s say you have disability insurance that covers accidents at your workplace, a warehouse that stores and ships paper. One day, while you are loading a forklift, the machine fails and rolls over you, crushing your leg. The leg is so badly injured that it then has to be amputated.

There is no question that the insurance company should pay disability benefits. Your disability happened because of an accident at your workplace. Instead of approving your claim, the insurance company denies the claim and states that the forklift that crushed your leg was defective, so you must sue the maker of the forklift instead.

The insurance company’s argument is not based on the policy language, which covers disabilities caused by work accidents. In this case, the insurance company is not acting in good faith because it’s trying to avoid paying out on your claim by urging you to seek compensation elsewhere.

2. Failure To Investigate

A second way that insurance companies can act in bad faith is by failing to investigate claims that are made against a policy. While this failure often happens along with a bad faith denial, it’s a separate offense.

Let’s consider again the example where you are a warehouse worker whose leg is crushed by a forklift. You submit the claim under your disability policy, which requires that the accident causing your disability takes place at your work. When preparing your claim, you accidentally omit the fact that you were at work when the forklift ran over your leg.

The insurance adjuster then reviews your disability claim and sees that the “at work” requirement of the policy was not satisfied. Because your claim documents don’t fulfill a key requirement, the adjuster denies your claim.

This failure to investigate is different from a bad faith denial because the adjuster genuinely believed that your claim did not meet the requirements of the policy. However, this belief could have easily been dispelled if the adjuster had bothered to call and ask you where the accident happened.

The adjuster should’ve also been able to figure out that the only likely place you would even have access to a forklift would be at your job. In any event, they did not bother to investigate your claim, and that failure is itself an act of bad faith.

It’s also important to realize that insurance companies do not fulfill their duty to investigate merely by looking for reasons to deny a claim. Any investigation into a claim must be full, fair, and thorough.

3. Unreasonable Delay

Sometimes insurance companies know your claim is valid, but they want to hold onto their money for a long as possible to maximize the time value of that money. Or perhaps they believe that by dragging out your claim process, you’ll accept a lesser settlement.

The practice of unreasonably delaying the resolution of a claim also constitutes an insurer’s bad faith. Once a company has performed a thorough investigation and determined that the claim meets the requirements of the policy, it cannot reasonably withhold payment on your claim.

Bad Faith Verdicts and Settlements

The words Court House outside the Supreme Court

Insurance companies don’t like going to trial in bad faith lawsuits. The reason is simple. As a rule, juries do not like insurance companies.

Many people have had bad experiences with insurance carriers in the past, so an insurance company that acts in bad faith risks a potentially large verdict by going to trial.

Bad faith verdicts can be quite a bit larger than verdicts for a breach of contract claim. Breach of contract damages are usually limited to the amount you lost as a result of the breach.

Bad faith claims, however, can give rise to punitive damages. Punitive damages are meant to punish behavior that is fraudulent, malicious, or oppressive. If you can show that an insurance company denied your benefits because they were looking out for their own interests rather than taking care of you as they agreed with the policy, you can get a punitive damages award.

This leads to a common question: What kind of verdict or settlement can you get from a bad faith action? When calculating the potential amount, take the amount of your original claim. That amount would be your compensatory damages, or the base of your verdict or settlement.

Next, you would look at any consequential damages (economic losses) that had been caused by the bad faith behavior. For example, were you depending on the insurance payment to make rent, and therefore you got evicted from your home? These damages will vary greatly from case to case.

Though it may be difficult to prove with a bad faith claim, you should also consider whether you have emotional distress or other non-economic damages.

Finally, if you get punitive damages, they will likely be a multiple of your other damages. Under the United States Supreme Court decision in State Farm Mut. Automobile Ins. Co. v. Campbell, these cannot be more than nine times your compensatory damages.

Sample Jury Verdict Calculation*

Amount of original, wrongly denied insurance claim (economic compensatory damages): $5,000

Non-economic damages like emotional distress (1-2 times economic damages): $5,000-$10,000

Punitive damages (1-9 times compensatory damages): $5,000-$45,000

Total potential jury verdict range: $15,000-$65,000

*Note: This example assumes sufficient evidence to prove each category of damages. 

Keep in mind that settlements will often be less than a verdict. Your settlement in that situation would probably be in the lower five figures, likely between $10,000 and $20,000.

Also, note that while your attorney will likely be working this case for a contingency fee, you will not be able to receive a separate award of attorneys’ fees unless you go to trial and win a verdict.

Make Your Insurance Work for You

Woman with a leg cast on the phone while reading a letter

You pay for insurance to be there when you need it. We all have to deal with insurance companies when we’re at our weakest and most vulnerable.

Don’t allow unscrupulous insurance companies to take advantage of you. Hold them responsible for their actions and get the compensation to which you’re entitled.

If you or a loved one has been the victim of bad faith practices by an insurance company, take action. Contact a qualified attorney in your state for a free consultation and case evaluation.

Matthew Carter, Esq. has been a licensed attorney since 2004. He’s admitted to practice law in California and Nevada, where he was awarded the Martindale.com rating of AV – Preeminent. Matthew has successfully handled a variety of personal injury and wrongful death cases, as well as trials, appeals, and evidentiary hearings throughout state and federal... Read More >>


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