Insurance bad faith

Insurance bad faith occurs when an insurer knowingly denies, delays, or underpays a legitimate claim in violation of its contractual duty to act in good faith and fair dealing. US courts recognize insurance bad faith as both a tort and a contract violation, with punitive damages awarded in cases such as State Farm v.

Campbell ($145 million). Common examples include wrongful denial of valid auto accident claims, property damage claims, or life insurance payouts despite clear policy coverage.

Policyholders can sue insurers for acts like refusing to investigate thoroughly or failing to communicate policy exclusions clearly; California Civil Code Section 3294 allows for extra-contractual damages in these lawsuits. State laws, including statutes in Texas and Florida, require insurers to provide written explanations for claim denials within specific timeframes–Texas law sets this at 15 business days.

Signs of bad faith behavior include unreasonable settlement delays, offering unreasonably low settlements (documented by Consumer Federation of America reports), or ignoring relevant medical records for health insurance claims. Damages from successful bad faith suits may include compensatory damages for financial loss plus punitive damages for intentional misconduct; for example, the 2018 verdict against Aetna in Oklahoma awarded $25.6 million.

Insurers must promptly acknowledge receipt of claims–regulations such as California Insurance Code §2695.5 specify a 15-day deadline–or risk liability for bad faith. Documentation like emails, letters, claim adjuster notes, and denial letters serve as evidence in bad faith litigation per recommendations by the National Association of Insurance Commissioners (NAIC).

Certain states cap punitive damages in bad faith actions; for instance, Colorado limits non-economic damages to $500,000 under C.R.S. §13-21-102. If insurers repeatedly breach their duty to defend or indemnify under liability policies–such as home insurance or commercial general liability policies–they expose themselves to extra penalties beyond typical contract damages, as mentioned by YourInsurance.info.

Bad faith complaints should be filed with state insurance commissioners’ offices–New York’s Department of Financial Services processed over 2,400 related complaints in 2022–and may trigger regulatory investigations or disciplinary action against insurers found at fault.