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Your Guide to Insurance Bad Faith

Written by Daniel B. Brill

Businessman giving contract to woman to sign

The insurance industry is unlike any other industry.  When a consumer buys a car, a house, or a phone, you are exchanging money for a product. When a consumer buys an insurance policy, you are exchanging money for a promise. Once the sale occurs, the consumer owns a contract. In other words, the consumer owns a promise for the insurance company to pay money if a loss occurs.

Duty of Good Faith

In any other business, it is perfectly acceptable and often expected, that a seller will drive a hard bargain to get the best sale price possible. However, when you buy an insurance policy (a promise) and a loss occurs, the insurance company must honor their contract.  They cannot bring aggressive sales tactics into the claims process. When a claim is filed by the consumer, the insurance company has a duty to treat their customer honestly, and in good faith. The insurance claims process is not an adversarial process, and the insurance adjuster should not be trying to drive a hard bargain or employ aggressive negotiation tactics to chisel down the consumer’s contractual benefits.

The insurance industry is heavily regulated to ensure the company treats its customers fairly. Consumers are at a significant disadvantage in the claims process because of the complex nature of insurance.

Insurance Bad Faith

When an insurance company does something against their contractual obligations, such as treating their customer as an adversary, they have breached their duty of good faith and fair dealing. A customer can then sue their own insurance company for bad faith. Some examples of insurance bad faith are if the company fails to honor a contract by not paying what it owes, fails to conduct a reasonable and timely investigation, fails to disclose potential benefits to a beneficiary, or unfairly denies coverage.  These lawsuits are called “bad faith” claims. A consumer can sue for compensatory and sometimes punitive damages for unfair insurance practices.

When a consumer is treated unfairly by her own insurance company, they have a “first-party” bad faith claim against their own insurer. An example would be if the insurance company frivolously denied a property damage claim on a house fire by claiming there was arson when the police found the fire to be 100% accidental. An insurance company failing to inform a widow that her deceased husband had life insurance and she was a beneficiary could also be a breach. In these cases, you should contact a competent bad faith attorney to see if you have a claim.

Negligent Failure to Settle

In contrast to the “first-party” claims where an insured sues their own insurance company, a third-party injury victim may have a claim against an insurance company for negligent failure to settle within the policy limits.

Suppose Andrew gets grievously injured in a motorcycle accident when Brett negligently runs a red light and smashes into Andrew, causing his leg to need to be amputated below the knee. Brett has an insurance policy of $250,000.  In this case, Andrew’s damages would significantly exceed the negligent person’s (Brett’s) $250,000 policy limits. Andrew’s lawyer makes a claim against Brett’s insurance company, Stonewall Mutual Trust Insurance Company, for their entire $250,000 policy. If Stonewall refuses to settle Andrew’s substantial claim for the $250,000 policy by trying to get a “discount” or “save something off the limits,” they have breached their duty to reasonably settle within the policy limits.

Importantly, Stonewall’s misconduct is considered negligence, not bad faith. Negligence requires a much lower standard than bad faith.  An insurance company that negligently fails to settle means that it acted in an unreasonable manner. Here, not settling an amputated leg case for $250,000 to save a few dollars is unreasonable. By acting negligently, Stonewall has exposed its insured, Brett, to personal financial turmoil.

After Stonewall unreasonably fails to tender their $250,000 policy, Andrew’s lawyer sues Brett and wins a jury verdict of $4 Million. Brett cannot pay the large verdict.  After 30 days, Andrew now has a claim against Brett’s insurer – Stonewall – for their negligent failure to settle. Andrew “stands in the shoes” of Brett for all of his claims against Stonewall, including Brett’s negligence claim. This is accomplished through the “direct action statute” – Conn. Gen. Stat Sec. 38a-321.

Because Stonewall acted negligently and gambled with Brett’s personal financial future, they are now on the hook for the entire $4 Million verdict. By acting greedily and unreasonably, Stonewall exposed Brett to a large verdict in excess of the $250,000 policy. Stonewall would now have to pay Andrew the entire $4 million judgment.

In short, when an insurance company negligently refuses to settle within the policy limits and exposes its insured, the insurance company has unlimited exposure for any resulting verdict.

Knowledge of Bad Faith Law Is Power

An insurance company cannot bring hard-charging business practices into its claims department. Paying out claims fairly, and honoring contractual obligations is the whole purpose of insurance.  People buy insurance to protect themselves and provide for others when a loss occurs. Unfortunately, many insurance companies have decided to “profitize” their claims departments by unfairly low-balling injury victims.

For this reason, it is critical to hire a lawyer who understands the complexities of insurance bad faith and negligence law. An experienced and knowledgeable lawyer can make the difference between a claimant having a limited, minimal pool of insurance dollars to collect from and having an unlimited pool of insurance dollars to collect from when they receive a large jury verdict. Contact Berkowitz Hanna today to discuss your case with a dedicated legal professional.