Insurance Bad Faith
Properly performing insurance is vital to the American way of life. People purchase insurance hoping they will never need it. But when they do need it, they are vulnerable: medically, financially, and emotionally. It’s simply wrong to leverage that vulnerability to coerce acceptance of diminished benefits. The primary purpose of claim adjusting is to deliver the promise to pay. The accepted standard of an adjustor’s primary responsibility “is to seek and find coverage, not to seek and find coverage controversies or to deny or dispute claims.”
Most lay people are unfamiliar with the term “insurance bad faith”. It has gradually been recognized by the courts, since the 1970s, as a claim for wrongful delays, reductions, and denials of benefits under an insurance policy.
In addition to the written terms of an insurance contract, the law implies an obligation of good faith and fair dealing. This is the insurance company’s implied promise that they will treat you fairly and honestly. When an insurance company fails to provide prompt benefits, fairly and honestly, they are engaged in bad faith.
The need to recover extra-contractual damages when an insurance company cheats on its claim payments is obvious. Properly working insurance, is the backbone of the American entrepreneurial spirit. Americans are so productive, because they take risks. It doesn’t matter if this risk is a college graduate buying a car on credit, or an entrepreneur opening a factory. We buy insurance to protect us from an unforeseen event that will cause catastrophic financial outcomes.
When the insurance company won’t pay what it promised, the insured often loses more than the denied benefits. Think of the homeowner whose residence is destroyed by fire or hurricane. An insurance company that wrongfully denies coverage, or lowballs the replacement benefit, will cause much greater damage than the unpaid replacement value. The homeowner can suffer a number of other losses, by the delay and distress of prolonged court proceedings to collect what was due.
The law of bad faith recognizes that insureds’ injuries are greater than merely the denied benefits, when insurance claims are wrongfully denied, delayed or diminished. The law of bad faith allows recovery for full damages caused by the bad faith of the insurance company.
More About Insurance Bad Faith.
Insurance bad faith destroys the very security and peace of mind the insurance was purchased for. Bad faith occurs when there is an unreasonable claim decision, and the insurance representative had knowledge that the decision was unreasonable, or the insurance company failed to conduct an adequate investigation to determine if the decision was unreasonable. Unreasonableness can occur in the way the insurance company investigated the claim. It is unreasonable to investigate a claim in a manner designed to avoid responsibility for benefits, or to ignore information favorable to paying benefits.
People who have paid their insurance premiums for many years may find that their insurance company is not there for them when they file a claim, or that the company only acknowledges partial payment of the claim. By engaging in hardball practices, the insurance company is hoping that you will immediately or eventually give up on your claim. Insurance company representatives have superior resources and training than the average person making a claim. If you are not receiving the coverage or benefits you think you are entitled to, you should have comparably matched representation.
Insurance policies are a contract that you hope you will never have to use. If you do, you are entitled to receive the benefits, and peace of mind, you paid for, in full.
Why Bad Faith?
Our social structure is in many ways dependent on the insurance industry. Insurance is the safety net that protects our lives and undertaking from an unexpected casualty. We purchase homeowner’s insurance to protect our homes from burglary, fire, theft, natural disasters or acts of God. We purchase health and disability insurance to assist with medical expenses and loss of income following unexpected disease, illness or catastrophic injury. Long term care insurance is purchased to provide reasonable assistance with the necessities of old age or debilitating disease for ourselves or loved ones. Life insurance protects those left behind in the event of death. Some coverages, such as automobile liability and workers’ compensation, are required by law. These are only a few of the insurance coverages our social fabric has come to rely upon.
Claims are paid for largely by the premiums paid for the purchase of insurance policies. These premiums are pooled to pay the claims of the statistical few who unfortunately experience the insured risk. The percentage of premiums that an insurance company pays back for losses is called a loss ratio. (See our Resource Links)
When a claim occurs, the loss by itself is often frustrating. However, the advance purchase of insurance for that loss, gives the peace of mind knowing that your loss will be recuperated and made up promptly, and fairly, from the pool of insurance funds you have paid into. This in itself is a large benefit.
Eventually, the law came to recognize that a judgment ordering an insurance company to pay what it owed, following lengthy litigation delays, often was woefully inadequate to pay for the losses and suffering that occurred as a result of the wrongful denial of claims and wrongful delays in benefits. The law then recognized the extra contractual claim of bad faith.
Mutual Company or Stock Company
In a mutual insurance company, the profits are owned by the policyholders. The yearly profits (called surplus) or multi-year profits (called cumulative surplus) can be shared with the policy holders in the form of dividends, or reduced premiums.
Wall Street realized that if mutual companies became stock companies, the surplus and cumulative surplus could be distributed to shareholders.
In a stock company, the profits are owned by the shareholders, who may have no other connection to the insurance company other than owning stock. Profits are disbursed to shareholders in the form of increased share prices. Over the last 25 years, a number of insurance companies have “demutualized” and become stock companies, issuing lucrative stock options to privileged participants.
How do Insurance Companies Commit Bad Faith?
One of the modern trends is claim process redesign. Ideally, a claim adjuster is a neutral decider of the amount of money it will take to fully compensate your loss under the terms of an insurance policy. However, a modern trend in insurance has begun to refer to the claim office as the insurance company’s “profit center.” The theory is that reducing claim payments increases company profits for the shareholders or privileged participants. Ever-changing techniques are being introduced into the “profit centers” to focus adjusters on ways to reduce claim payouts.
Investigating these techniques is an important part of the work we do as bad faith lawyers, to protect you. Unfortunately, insurance companies frequently secure orders to prevent the public from learning about this conduct.
So How do you Prove Bad Faith?
The two principal elements of a bad faith claim are: (1) an unreasonable claim decision by the insurance company, and (2) the insurance representative’s knowledge that the decision was unreasonable, or demonstrating that the insurance representative failed to conduct an investigation adequate to determine whether its decision was reasonable or not.
An insurance contract is not an ordinary commercial bargain. The heart of an insurance policy is the peace of mind knowing that prompt and fair assistance will be there when you are vulnerable. The law implies into every insurance policy an obligation that the insurance carrier will play fairly with the insured, including equal consideration, and honesty. An insurer may be held liable in a first party case when it seeks to gain unfair financial advantage of the insured through conduct that uses your vulnerability as leverage to coerce unfair settlement during delay. If bad faith has been committed, the carrier’s eventual payment of the claim does not release it from liability for bad faith.
The benefits recoverable under the policy are part of a breach of contract action. However, a bad faith claim allows additional recovery for the unpaid benefits and extra contractual damages for monetary loss, damaged credit reputation, emotional distress, humiliation, inconvenience, and anxiety experienced or reasonably probable to be experienced in the future.