Law Office of Robert J. Hommel, PC.

Bad Faith FAQ's

Bad faith occurs when insurance benefits are wrongfully delayed or denied benefits on a claim. Bad faith occurs when the entity adjusting the claim fails to follow established standards for the honest investigation, evaluation, and payment on a claim.

Insurance is an essential service in a capitalistic society. Insurance is what enables entrepreneurs, at every level, to safely take risks for the betterment of their lives, their families, and their companies.

For example, at one of the end spectrum, someone new to the labor force may buy a car on credit. Without insurance, if that car is damaged, the owner has not only lost their means of transportation, but the investment into that means of transportation. They may even still be saddled with monthly payment of debt on the vehicle. Insurance provides protection from that risk.

Insurance is a system of pooled risk. Many insureds contribute a small amount to a large pool of money that is intended to be spent for the benefit of the few who suffer the insured risk.

In the 1970s, American courts began to recognize that insureds suffered much more than the loss of money, when their insurance claims are wrongfully delayed or denied. The tort of bad faith was instituted to compensate insureds for those additional losses.

Contracts attempt to specifically define mutually agreed obligations between parties. Every contract has an implied covenant of good faith and fair dealing. In other words, every contract has an implied promise that each side will honestly and in good faith provide the other side what they are entitled to under the contract.

Since every future circumstance cannot be anticipated in advance, the obligation of good faith is referred to as a covenant. Performance of the covenant is evaluated under the concept of reasonableness. But reasonableness does not countenance any argument conceivable. Standards of care, rules of the road for good faith, have carefully evolved through industry texts, legislative enactment, and judicial caselaw.

You have a first party claim when you are the intended beneficiary of the insurance policy. The term comes directly from contractual language, “the party of the first part hereby contracts with the party of the second part, . . .”. In other words, the insurance company’s promises are owed to you.

Examples of first party claims are worker’s compensation insurance, auto insurance purchased on your own vehicles, homeowner’s insurance, health insurance for yourself or family members, or life insurance. There are many others.

A third-party claim occurs when you are making a claim against someone else’s insurance policy. A classic example of a third-party claim occurs in an auto accident. If a distracted driver crashes into you, the claim you make against the offending driver will be covered by the insurance company that insures the offending vehicle. You are the third-party making a claim against someone else’s policy.
The relationship between the offending driver and their own insurance company is a first-party relationship.

The primary duties of the insurer are to defend its insured, and indemnify (pay) any damages that insured is responsible for, up to the limits of coverage in the policy. If the insurer wrongfully fails to defend or indemnify its insured, or unreasonably exposes them to risk by refusing settlement offers within coverage, there may be a third party bad faith claim.

When a loss occurs, the insured is typically vulnerable: medically, financially, and emotionally. The insurer’s first obligation of good faith, is to act promptly. It should immediately conduct an adequate investigation, reasonably evaluate the data, and promptly cover legitimate claims. It should deal with its insured in complete honesty. Any tactics that infringe on the insured’s entitlement to that security, may be bad faith. There are volumes of insurance texts, published by the Insurance Institute of America, and others, legislative enactments, and caselaw that recognize good faith standards of care in particular circumstances.

During the 1990s, some of the world’s largest corporate consulting firms turned their focus to the insurance industry. The concept of turning the claim office into a Profit Center was born. Redesigning a claims operation with a purpose to meet corporate revenue goals, turns the idea of insurance on its head.

There is no question that insurance companies are in business to, and are entitled to, make a profit. But revenue is the responsibility of every department except the claims department. The primary obligation of the claims department is to deliver the promise to pay, regardless of its impact on profits. When company profitability seeps into the consciousness of the claims department, mischief occurs.

An insurance company has multiple departments that govern its product. The underwriting department determines, “what risks do we want to insure?” The actuarial department computes the risks of those losses occurring within various demographics of the population. A price is determined for the policies to insure those risks. A marketing department decides how to most efficiently and profitably sell the policies. Because insurance companies receive premium up front, the investment department determines how to make money from premiums paid in advance, before any claims are paid. Premiums paid in advance are known as the float. Finally, a management division is responsible for overhead, human resources, licensing and regulatory compliance, and the other necessary details of running a business. Each and every one of these departments should be concerned with making a profit for the company.

The claims department is a different story. The primary obligation of the claims department is to make sure that the insured is promptly, fully and fairly indemnified for the insured loss. Because an insurer cannot control the actual losses that occur in any given year, the losses paid in any given year will vary. A year with exorbitant claims does not justify shortchanging insureds. Cumulative surplus is available, and required by law, to be available for such events.

Insurers that miscalculate in any of the profit making departments, may go insolvent. That is what contributed to the failure of a large insurer in the 2000s. It insured the payment of bundled home mortgages, for unreasonably low premiums, and without accurately underwriting the risk of the mortgages not getting paid back, never anticipating a catastrophic failure in people’s abilities to pay mortgages. This was fueled somewhat by a reckless mortgage industry issuing mortgages in amounts, and with escalating interest rates, doomed to fail. The bubble burst. With the collapse of the mortgage repayments, so did the insurer. It had to be rescued with a government bailout.

Worker’s compensation is sometimes referred to as the grand bargain. With the advent of the industrial age, government and industry recognized that, even when reasonable measures for the safety of workers are present, accidents still happen. Under civil law, employees had to sue their employers for fault, which could take years. During that interim, without means to obtain medical care or pay bills, because of a disabling injury, everything a family worked for could be irretrievably lost.

The Worker’s Compensation Act, in all 50 states, represents a policy compromise among government, industry, and workers, that it is better to have industry bear the cost of job related injuries, as part of the cost of doing business.

The concept of worker’s compensation is simple. Injured workers are entitled to receive necessary medical care, and a percentage of lost wages, without regard to any person’s fault. In exchange, the employee waives all their rights to sue their employer for full damages when the injury is the result of employer negligence. Thus, there is no recovery for emotional distress, pain and suffering, or full lost wages. This rule applies even in catastrophic injuries such as paralysis. The employee gets medical care, and a limited percentage of lost wages. Nothing more.

But a principal feature of worker’s compensation, in exchange for limited benefits, is that the benefits are intended to be delivered on an expedited basis, without litigation. Unfortunately, this principal is commonly violated by insurance representatives. Injured workers are made to litigate on insurance company pretext and frivolous defenses. But since the Industrial Commission can only order the benefits paid, insurers have little to lose by forcing litigation. Bad faith is the only remedy against these practices.

UM refers to uninsured motorist coverage. UIM refers to underinsured motorist coverage.
If you are injured by a driver that has no insurance, or has low monetary limits of coverage, inadequate to pay for the injuries and damages caused, you can protect yourself by purchasing uninsured motorist coverage or underinsured motorist coverage to protect you from such event.

It is a good idea to request UM and UIM coverage, in your own policy, at the same amount as you purchase liability insurance for. An agent who does not provide advice on this may have committed Producer Malpractice.

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