Insurance Bad Faith
Before the tort of bad faith, when an insurance company wrongfully denied or underpaid benefits on a claim, all the insured could do is sue for breach of contract. Eventually, after all the delay and expense of litigation, all the insured would recover is the benefits wrongfully denied. Beginning in the 1970s, courts recognized that delay in unpaid benefits created a whole new category of losses. Homes could not be repaired. Vehicles could not replaced. Medical problems became worse, and so on. Bad faith was recognized as a tort. In addition to the unpaid benefits, insureds who were victims of unfair claim processing can recover the additional damages caused by denial or delay, as well as recovery for their anxiety and distress awaiting benefits owed on the claim.
The insurance business is not like most other businesses that deliver their product or service to the consumer at the time of sale. Insurance is the sale of a promise – an insurance policy is a contract to indemnify specified future loss events, which may or may not ever happen. The insured pays monthly premiums hoping they’ll never need to collect anything back. The insurance company, in turn, pools a large fund of premiums, from multiple insureds, into a single pot to pay claims for the statistical few that the insured loss occurs to. When a person buys an insurance policy to cover a certain kind of covered loss, if that loss happens, then the financial impact is softened when the insurer makes prompt and proper payment in accordance with the policy. When those payments are unfairly delayed the problem is exacerbated.
The claims department is responsible for delivery of the promise to benefits for those persons who suffered a covered loss. Since insurance is complicated, the claims department must have specialized knowledge necessary to properly investigate and pay what was promised in the policy.
Claims departments must be staffed by properly trained professionals who adhere to ethical conduct in the payment of claims. The claims department is not responsible for insurer profitability – it must pay in accordance with the policy, regardless of the impact on profits. The insurance product is not created by the claims department, that is the job of actuarial, marketing, and the underwriting departments. Those departments are rightfully focused on profitability.
There are textbooks on claim adjusting and ethical practices, published by entities such as the Insurance Institute of America, and others. “The primary duty of the claim representative is to deliver the promise to pay. Therefore, the claim representative’s chief task is to seek and find coverage, not to seek and find coverage controversies or to deny or dispute claims.” The Claims Environment (1st Ed. 1993), Insurance Institute of America, James J. Markham, Kevin M. Quinley, Layne S. Thompson.