What is a Bad Faith Insurance Claim?

What is a Bad Faith Insurance Claim?

Insurance companies often act like they have all the power in the world over you when you have filed a claim. In theory, they are your equal because they are in a contractual relationship with you. While your insurance company has legal obligations to you, it often will try to alter the balance of power between you and it. Once it has created the power, it tries to use it to take advantage of you and either pay you less than you deserve in the event you make a claim or avoid paying you altogether.

Like any party to a contract, as an insurance policyholder, you have rights and obligations. Your obligation is to pay the insurance premiums charged by the insurance company. The company’s obligation is to pay your claim when you have suffered damages according to the terms of your policy.

Bad Faith Claims Can Be Under Texas or Common Law

Not only is an insurance company in breach of contract if it does not pay your claim as required, but it also opens itself up to additional claims against it under state law and/or common law if its behavior is particularly bad. Texas law – including Texas Insurance Code Chapter 542 – imposes additional obligations on insurance companies regarding how they must act when they are handling claims.

Not only can you sue to enforce your right to recover under your policy, but you can also sue an insurance company under state law and common law. Both paths offer you ways to take action directly against the insurance carrier for its bad faith conduct.

A bad faith insurance claim allows you to recover additional damages from an insurance company on the basis that its behavior was unacceptable and it, therefore, needs to be punished. The Texas Insurance Code imposes a number of obligations on insurance companies, while common law requires that any party to a business contract or arrangement act in good faith.

Bad Faith vs. Regular Business Practices

There is a fine line between the business practices that insurance companies usually use and bad faith. Insurance companies are known to use tactics that make your life more difficult in the hopes of paying you less on a claim. These companies are known for being challenging to deal with, but they may also take things too far.

There is a point when an insurance company moves from using hard-nosed negotiating tactics to acting in bad faith. In a bad faith insurance claim, the carrier is knowingly acting unreasonable in processing, responding to, or paying your claim. However, the usual insurance company tactics do not always constitute bad faith behavior under the law.

The Legal Standard for a Bad Faith Claim

According to the Texas Supreme Court, the legal standard in a bad faith claim is that the insurance company has acted “egregiously.” What may be considered egregious depends on the circumstances. Usually, bad faith insurance claims involve some sort of shocking wrongdoing as part of an intentional plan to deny your rights under an insurance policy.

An insurance coverage attorney would review the facts of your situation and determine the most effective path to compensation. In a common law bad faith claim, the insured must prove the insurer “knew or should have known that it was reasonably clear that the claim was covered.” If there is a bona fide coverage dispute, the insurance company may not be held liable. In other words, the insurance company would need to show some type of reasonable argument that the claim should not be covered.

Examples of Insurance Company Bad Faith Practices

Examples of insurance company actions that may be considered bad faith can include:

  • Unreasonably delaying its response to a claim
  • Denying a claim without a reasonable basis for doing so
  • Intentionally and incorrectly reading the insurance policy to find requirements that do not exist
  • Stalling the claim, either to enhance negotiating position in a settlement or to get the policyholder to drop their claim entirely
  • Failing to perform a timely investigation of a claim

Making an error is not enough for an insurance company to be found liable for bad faith. It must act intentionally or with gross negligence. Insurance companies try to make sure they have their bases covered with some sort of justification for what they did, but there are times when they take things way too far.

You may also be able to allege bad faith if an insurance company tries to grossly underestimate your damages. The insurance company must show that its valuation of your claim was reasonable. Insurance companies are no strangers to tough negotiations, and they often know what they can get away with, so they tailor their behavior accordingly.

In a statutory bad faith claim, you must show you had a right to payment under the terms of an insurance policy, and the insurance company acted unreasonably to withhold benefits. Alternatively, you could show that the insurance company caused you harm independently of its legal obligation to pay you.

Damages in Your Bad Faith Case

If you win your bad faith case, the insurance company would need to pay you damages for its conduct, in addition to you being able to recover the amount you’re due under the terms of the policy. In a bad faith case, you could receive:

  • Three times the amount the insurance company should have paid you had it properly considered and paid your claim
  • Attorneys’ fees and court costs
  • Interest on the amount that the insurance company should have paid you
  • Other punitive damages for the insurance company’s conduct

Insurance companies sit up and take notice when the term “bad faith” is used to describe how they are handling a particular claim because they know they may be legally liable if a court deems their actions as having been done in bad faith. While hopefully, your insurance company resolves your claims promptly and in a way that benefits you, contacting a bad faith insurance lawyer to file a claim could be an effective weapon when an insurer is acting slowly and unreasonably when processing your claim.