Bad faith occurs when an insurance company does not follow guidelines set forth by the government and insurance industry to properly handle any insurance claim. There are five key components of a bad faith claim: Untimely response, use of improper investigation procedures, low settlement offer, denial of claim and refusing to settle the case. Any of these components can be used to file a bad faith lawsuit against an insurance company.
Untimely Response to Insurance Claim
After a claim has been filed, the insurance company must respond or notify the insured in a timely matter. The definition of "timely" is subjective. If an insurance company has not responded to phone calls in weeks, it is best to contact them in writing and request a response by a certain date. An insurance company that does not reply or acknowledge a covered claim promptly may be exhibiting bad faith. The insured may file a bad faith lawsuit against the company and be awarded consequential and punitive damages above and beyond the value of the claim. To recover on a bad faith claim, the insured will have to prove that she was injured when the insurance company did not pay the claim in a timely manner.
Use of Improper Investigation Procedures
An insurance company is obligated to research all insurance claims using legitimate, legal methods. Use of a biased investigator and using harassing or demeaning methods and procedures which victimize the insured constitutes bad faith.
Making a Low Settlement Offer
An insurance company that offers a settlement that is significantly less than the value of the claim can be acting in bad faith. An example of bad faith is if the hospital expenses for an insured who has been in an auto accident total $25,000 and the insurance company offers a $5,000 settlement. This settlement offer would require the insured to initiate litigation to recover the medical costs in addition to any pain and suffering.
Denying Insurance Claim Without Reason
An insurance company that denies a claim must notify the insured in writing with the specific contract term or provision upon which it is denying the claim. The company must have conducted an adequate investigation of the claim.
Refusing to Settle an Insurance Claim
When an insurance company refuses to settle an insurance claim within the policy limits, it can expose the insured to liability above the policy limits. The insurance company must protect its insured against additional liabilities and look for ways to pay a valid claim. When a company does not protect its insured, it is acting in bad faith.
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