If an insurance company denies a policy owner’s claim, the insurance company could be liable to the insured driver for more than the amount of the initial claim, if the denial rises to the level of "bad faith." This article discusses the elements that an insured driver must prove in order to win a bad faith case, the kind of damages that are available, and an insurance company’s possible defenses in the face of a bad faith claim.
“Bad faith” is a technical legal term for when an insurance company denies a claim without a reasonable basis. While the term “bad faith” might imply that the claim was denied in order to advance the insurance company’s interests at the expense of the driver’s interests, that is not always a requirement in successful bad faith cases.
Generally, if an insurance company denies a claim simply due to a mistake or error in assessment, but has a reasonable basis for having made the mistake, that does not qualify as bad faith. In some states, the policy owner must prove that the insurance company failed to make a thorough investigation before denying the claim. In other states, the policy owner must show more, i.e. that the insurance company missed or ignored obvious facts and information that would have proven the claim to be valid. In even stricter states, the plaintiff must show that the insurance company intentionally conducted an inadequate investigation in order to remain ignorant of facts that would have proven the claim to be valid. Finally, a policy owner can demonstrate bad faith in some states if it can show the insurance company followed a pattern or practice of not complying with state regulations that govern claims investigation.
The exact nature of a bad faith lawsuit varies from state to state, but a common theme (despite the difference in wording in the legal opinions) is that the facts and circumstances at the time of the claim denial matter most. If the policy owner can show there are good reasons to guess the claim investigation was sloppy for a reason, the bad faith lawsuit is more likely to succeed than if it appears that an innocent mistake was made in an otherwise thorough investigation of the car accident.
So, what kinds of compensation ("damages" in legalese) can you recover?
First, a policy owner in a bad faith case can recover what the insurance company should have paid out for the driver’s initial claim, i.e. the policy coverage for the car accident injury claim that another person originally brought against the driver.
Next, the policy owner can recover the “consequential” damages that occurred as a result of the bad faith denial of the claim. These are damages that were a predictable consequence of having the claim denied. Examples are the cost of defending an injury lawsuit that was brought against the covered driver, including attorney’s fees and the amount of judgment, as well as the cost of suing the insurance company to prove that coverage should have been granted. Some states provide that attorney fees are recoverable as an item of damages separate from consequential damages, but the results are the same.
The policy owner may be able to recover damages for the emotional distress caused by the claim denial. In the case of having to defend and pay for a car accident lawsuit when it should have been covered by insurance, the owner’s emotional distress could be quite severe. Whether emotional distress damages are available depends on the state.
Punitive damages may also be available if the policy owner can prove that the insurance company intentionally or recklessly acted to harm the policy holder. While most policy holders who win a bad faith claim may feel that punitive damages should be granted as well, the fact is that there generally must be clear proof of egregious conduct by the insurance company, not just opportunistic sloppiness.
Some states have specific statutory penalties for insurance bad faith claims. Typically, these penalties prevent other damages from being awarded to the policy owner, although the statutory damages are rarely insignificant or more favorable to the insurance company than standard damages. In some states, these laws specify that a successful plaintiff in a bad faith case be awarded three times the amount of his or her compensatory damages.
If an insurance company can prove that the policy owner made an intentional misrepresentation during the claims process, it will not be found liable for a bad faith denial.
An insurance company can also argue that its claim denial was based on a fairly debatable assessment of the claim. In other words, if the policy owner is arguing that a bad faith claim decision was made after a thorough investigation, the insurance company can argue and present evidence that the decision, although perhaps ultimately incorrect, was not unreasonable. For example, the insurance company might have reasonably based its decision on the outcome of previous judicial opinions or the advice of legal counsel.
Finally, if an insurance company has sought a “declaratory judgment” to determine if it owes the policy holder coverage on the claim, i.e. has asked a judge to decide, a subsequent bad faith claim will not be allowed.