What Is a Bad Faith Insurance Claim?

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What Is a Bad Faith Insurance Claim?

In the United States, insurance companies legally have an “implied covenant of good faith and fair dealing” duty to their clients. If the insurance company fails to deal fairly with you or act in good faith, you have grounds for a bad faith insurance lawsuit.

Insurance companies are held to a high standard for a couple key reasons:

  • If an insurance company denies, undervalues or delays a claim, the policyholder could be ruined financially
  • Insurance companies can bring deep pockets, teams of lawyers and extensive negotiating experience to bear against their policy holders, making disputes a very unfair fight

Bad Faith Examples

You may have a bad faith insurance case if:

  • The insurance company undervalued or denied your claim after failing to adequately investigate your property damage
  • The insurance company intentionally misinterpreted or inaccurately represented their own policy to minimize the cost of your claim
  • They took an unreasonable length of time to pay your claim
  • Your claim was denied but you weren’t given a satisfactory reason

Bad faith lawsuits can also be brought against an insurance company by defendants in personal injury cases. If the insurance company is obligated to defend a policyholder from a liability lawsuit and they fail to do so or don’t meet their duty to the policyholder, the policyholder may be able to file a bad faith insurance lawsuit against the insurance company.

How to Know If You Have a Legitimate Insurance Bad Faith Claim

Not every claim denial rises to the level of bad faith. There are legitimate situations where your policy may simply not cover the type of damage your home suffered. When in doubt, thoroughly review your insurance policy. Insurance policies are long, complicated documents with lots of excluded perils – meaning types of damage that aren’t covered.

Insurance contracts are meant to be complicated, in part to minimize the claims that insurance companies must honor. Complicated policies with lots of exceptions also help protect insurance companies from situations where they may be vulnerable to a lawsuit.

If a policyholder thinks they may be the victim of insurance company bad faith, it often makes sense to speak with an insurance expert, like an independent claims adjuster or property damage attorney. These experts should be able to understand your policy and provide clarification.

Settlements in Bad Faith Insurance Lawsuits

Settlements in bad faith insurance cases are based on on the details of your case, your insurance company’s reputation and any past bad faith infractions the company may have on the record. The settlement could potentially be a lot more than what you would have been paid had your claim been honored in the first place.

Damages can get complicated in bad faith lawsuits. One of the reasons bad faith insurance verdicts can get so high – and dwarf the initial policy limit – are the punitive damages allowed for by common law.

The purpose of punitive damages is to act as a deterrent. When a company has billions of dollars in assets, the punitive damages need to be really high to make the insurance company feel anything and be dissuaded from repeating the behavior in the future.

The punitive damages in a bad faith insurance suit are different than what would normally be offered in a personal injury case. In most personal injury cases, the only real goal is to make the injured party financially whole, meaning the injured party gets the money they need to pay for medical costs, property damage, lost wages and other financial hardships brought on by their injury.

Making the policy holder whole is also a goal in a bad faith insurance case, but it’s not the only goal. The “implied covenant of good faith and fair dealing” is a truly important, bedrock aspect of modern life. Nearly everyone has some type of insurance, and people need to be able to rely on their insurance to be there when the unexpected happens.

When insurance companies act in bad faith, they’re compromising that foundational trust. The courts have a lot of motivation to discourage that type of behavior in the future.

Consider the Example of State Farm Mutual Automobile Insurance Co. v. Campbell in 2003

There are several cases that exemplify how massive these punitive damage payments can end up being.

Curtis Campbell, a State Farm auto policy holder, was liable in an auto accident that left on person dead and another disabled for life. The plaintiffs agreed to settle for Campbell’s policy limit, which was $50,000.

In most wrongful death and permanent disability cases, the insurance company would count their blessings and settle for the policy limit, because it could have been a lot worse.

Instead, State Farm decided to fight the negligence lawsuit on Campbell’s behalf. They told Campbell his personal assets would be safe, and they would handle the defense of his case. They ended up losing in court, and instead of the initial $50,000 settlement offer, Campbell had a verdict judgment against him for $185,849.

State Farm told Campbell they’d cover the $50,000 policy limit but the other $135,849 in excess liability was his problem.

Campbell had a pretty clear bad faith case against State Farm. He sued State Farm, alleging they failed to defend him properly, committed fraud and intentionally inflicted emotional distress.

Campbell won – not $200,000 as you may expect for a compensatory verdict – but $1 million. In addition to those compensatory damages, the court also awarded Campbell $145 million in punitive damages. That’s a far cry from the $50,000 State Farm would have spent had they settled Campbell’s initial case out of court.