What is Insurance Bad Faith?
This article will be the first in a series of articles addressing and answering basic questions concerning insurance law. “Bad faith” will be the first concept addressed.
When an insurance company denies a claim, that denial decision might not only be incorrect under the terms of the insurance policy, but also might be in “bad faith.” As a matter of law, every insurance contract contains a covenant of good faith and fair dealing. If this covenant is violated, the insurance company is said to have acted in “bad faith.” A tortious breach of this implied covenant involves something beyond breach of the specific contractual duties or mistaken judgment. To establish a bad faith claim in first party cases (such as those involving life insurance, health insurance, disability insurance, property and casualty insurance, auto liability insurance, and homeowner’s insurance), it must be shown that an insurer’s delay or withholding of benefits under the policy was unreasonable or without proper cause.
In general, policies involving health insurance, life insurance, or disability insurance that are paid for and provided by an employer are governed by the Employee Retirement Income Security Act of 1974 (ERISA), which precludes recovery for insurance bad faith.
When an insurance company acts in bad faith (that is, when an insurance company violates the covenant of good faith and fair dealing), the policyholder or insured can sue the insurance company for both breach of contract and the tort claim of bad faith. In addition to contract damages, damages available under a tort claim for bad faith can include foreseeable financial losses, emotional distress, and attorney’s fees incurred by the insured to force the insurance company to pay the policy benefits (Brandt fees). If the insurance company acted with malice, oppression or fraud, the insured may also recover punitive damages. Punitive damages are meant to punish the insurer, and are not available in a breach of contract lawsuit.
When determining whether or not an insurer acted in bad faith, a court will use the “reasonable” standard. This means the court will evaluate the actions of the insurers and determine if they were reasonable under the circumstances. If the insurer did not act reasonably, then the insurer has acted in bad faith in dealing with the insured.
Some examples of bad faith are:
- interpreting the language of the policy in an unreasonable manner;
- unreasonably failing to reimburse the insured for the entire amount of the loss;
- unreasonably failing to settle the lawsuit;
- unreasonable refusal to defend a lawsuit;
- unreasonable delay in paying benefits; and
- unreasonable delay in investigating the claim or improper valuation of the claim.
If an insurer does not act reasonably in complying with the terms of the insurance policy, then they have breached the covenant of good faith and fair dealing (a.k.a. bad faith) and will be held accountable by the court. For additional information on this and other insurance matters you can visit the FAQ section of our website: www.mslawllp.com.
If you need to consult with an attorney about a possible insurance bad faith or ERISA matter, please contact our office.