How to Spot Bad Faith by a Car Insurance Company: Can You Get Punitive Damages?

Car insurance companies that breach their duty of good faith may have to pay punitive damages. Learn how to take action against bad faith practices.

Insurance companies want to maximize their profits. Low offers and aggressive negotiation tactics are used to pay out as little as possible.

When insurers cross the line and engage in dishonest behavior, they are acting in bad faith, and it’s against the law.

You can learn to recognize bad faith tactics. Depending on the circumstances, you may have grounds to sue the insurance company.

If you win a bad faith lawsuit, the insurance company may be forced to pay punitive damages. These are damages above what they should have paid for your claim in the first place.

Understand What Constitutes Bad Faith

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

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 United States for insurance companies to engage in bad faith tactics.

There are times when insurance adjusters are impatient, disrespectful, and even mean. These are rude and arrogant behaviors, not bad faith tactics or actions.

Adjusters are trained to negotiate aggressively. They are representing their insurance company and trying to protect its best interests. However, if the adjuster lies in negotiations, ignores your calls, or won’t come off unreasonable settlement offers, then the acts may equate to bad faith practices.

First-Party 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 own insurance company for bad faith or 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, the state may provide other remedies for bad faith practices.

5 Examples of Bad Faith Insurance Practices

Most jurisdictions in the United States have some version of an Unfair Claims Settlement Practices Act, such as the statutes in states like Texas, Florida, New York, and West Virginia. While insurance laws vary from state to state, some bad faith practices that are common to all.

1. Knowingly Misrepresenting Pertinent Facts or Policy Provisions

When you are making a claim under your own insurance policy, the adjuster is legally obligated to tell you all the available coverages. For example, you may have Medpay coverage that pays for immediate medical expenses, even when the other driver is at fault.

It’s illegal for the adjuster to tell you you have no coverage if another driver caused the crash.

Similarly, the adjuster has to be honest if you’re making a third-party claim against the other driver’s insurance policy.

The adjuster doesn’t have to tell you the policy limits without the insured’s permission. However, the adjuster can’t lie about the insurance coverage. For example, if you’ve made a compensation demand for $40,000, the adjuster can’t tell you there’s only $25,000 in coverage if it’s not true.

2. Failure to Promptly Settle a Claim when Liability is Reasonably Clear

Let’s say you were rear-ended by a driver who admitted to police she was using her phone and didn’t have time to stop when she looked up. She was cited for following too closely and texting while driving.

The driver’s liability (responsibility) for the crash is clear, yet your injury claim has been in limbo for more than nine months. The adjuster’s explanation is that they are still investigating the circumstances of the collision. In this circumstance, liability is clear and the at-fault driver’s insurance is not handling your claim in good faith.

3. Unreasonable Demands for Medical Records and Other Documents

When the adjuster makes repeated requests for medical records or other documents already provided, or asks you to provide personal information not related to your claim, they may be violating your state’s insurance laws.

Another layer of bad faith is added if the adjuster misrepresents the reason for inappropriate requests by alleging state law or policy requirements. You only have to provide medical records directly related to your current injuries.

4. Forcing a Claimant to File Suit to Get Fair Compensation

When the insurance company refuses to offer more than an unreasonably low settlement or denies your claim, you may have no alternative to filing a lawsuit against the at-fault driver to get the compensation you deserve.

In some states, if you win your lawsuit against the at-fault driver, you can then also sue their insurance company for bad faith, on the basis that the first lawsuit proves the insurance company failed to negotiate your claim in good faith.

Many states only allow bad-faith claims to be brought by a policyholder. For example, uninsured motorist claims often pit policyholders against their own insurance company. In this case, you may have a cause of action for breach of contract as well as bad faith.

5. Failing to Defend the Interests of the Insured

Your auto insurance company has a duty to defend you after an accident, even when the accident was your fault.

Defending you after an accident includes paying for defense attorneys if you’re sued and covering the costs of depositions and other litigation expenses.

Your insurance company also has the right to settle the claims against you, rather than risk going to court, even if you want to fight the allegations of fault. With that said, your insurer should require the other party to sign a release at settlement, to protect you from further legal action.

If your insurance company fails to protect your interests, in keeping with your policy language, you may have grounds for a bad faith action.

Penalties For Acting in Bad Faith

Punitive damages, also called 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-contractual” 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 monetary award that serves as a penalty for the insurer’s bad behavior (which is an award over the policy limits)
  • Your legal fees and costs

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

Punitive damages are given in order to:

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

Case Example: Punitive Damages for Bad Faith After Car Accident 

Joe suffered a hip fracture and other injuries in a car accident when he was broad-sided by Bob. Between medical bills and lost wages, Joe suffered a loss of $75,000. Bob was cited by police for running a red light.

Joe’s attorney filed a claim with Bob’s auto insurance company. Bob’s policy had bodily injury liability coverage with a limit of $25,000 per person. The company paid Joe the full $25,000 towards his damages.

Joe’s auto insurance policy included $50,000 coverage for underinsured injury claims.

To cover the remaining $50,000 of Joe’s losses, his attorney filed an underinsured motorist claim with Joe’s insurance company.

Lisa was the adjuster with Joe’s auto insurer who got assigned to his claim. Lisa committed several acts of bad faith while handling Joe’s underinsured motorist claim, including multiple requests for medical records already provided, failing to respond to calls and letters, and refusing to offer more than $10,000 to settle Joe’s claim.

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

  • $50,000 for the amount of his uninsured motorist bodily injury claim
  • $100,000 in punitive damages for the insurance company’s bad faith
  • The cost of Joe’s legal fees and related expenses

Protect Your Rights as a Policyholder

Your auto insurance policy is a legally binding contract. Before worrying about the insurance company’s behavior, make sure you’re holding up your end of the contract by notifying your insurer immediately following an auto accident, even if it isn’t your fault.

Almost all U.S. auto policies have a “notification and cooperation” clause.

A notification clause looks something 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…”

Your insurance company has a duty to defend you if you’re involved in an accident. This typically means the insurer will pay for an attorney to defend you if you’re sued. The insurance company also has to protect your interests by handling claims so that you don’t get sued, if they can help it.

You might lose this protection if you don’t follow directions in your policy’s notification and cooperation clause.

Taking Action Against Insurance Company Bad Faith

1. Go Over the Adjuster’s Head

If you’re negotiating without an attorney and the adjuster is not handling your valid claim properly, 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. Be specific. For example, rather than say the adjuster unfairly denied your claim, provide the value of your claim and why the adjuster said it was denied.

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

You might specify in your letter that you: 

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.

2. Notify Your State Insurance Board

If your letter to the claims manager doesn’t work, you can file a complaint with your state insurance department. The department will start a case investigation once it receives a written third-party bad faith complaint.

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 evidence of bad faith insurance claim practices, it can levy fines against the insurance company and take other actions.

3. Consult a Personal Injury Attorney

You have a right to expect fair dealing from any car insurance company.

Auto insurers 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 legal advice.

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.

Visitor Questions on Bad Faith Insurance Claims

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 >>