What Is Bad Faith Insurance?
The bad faith insurance practice commonly occurs when an insurance company refuses to pay a claim without a good reason, does not do a thorough or prompt investigation of a claim, or fails to communicate with the policyholder regarding the status of a claim. The insurer has an obligation to pay the claim in a prompt manner for adequately covered losses. If an insurance carrier believes that a claim is not covered under its policies due to the policyholders own actions rather than an accidental occurrence, the insurer must be sure that it has investigated each possibility under which coverage might exist .
Some other common examples of bad faith insurance practices are: the insurer claiming that priority of insurance coverage lies elsewhere; claiming that the insured had prior knowledge of the existence of certain exclusion areas and realizably should have cured the defect before the issuance of the insurance contract; requiring the insured to meet stringent insurance criteria that are not contained in the policy itself; requiring the insured to pay for all costs to defend an insurance action even though coverage exists; knowingly providing incorrect information concerning the insurance coverage; or trading favorable insurance ratings and quotes for inadequate coverage.
In the past, some insurance companies have been known to stall the payment of insurance claims as a tactic to force a settlement with the insured. Another tactic used by insurance companies is to claim the complete absence of insurance coverage. A bad faith denial of a claim could also occur if the insurer refuses to make a settlement offer before trial that is equal to or less than the ultimate judgment amount. Bad faith may also be present if the insurer suggests that one cause of the injury is covered, but suggests that another cause is not.
Legal Claims for Bad Faith
Determining the legal grounds for a bad faith insurance claim may be as simple as tracking down your state’s statutory provision that outlines the legal basis for bringing such a claim. For example, many, but not all, states have statutes that expressly recognize an implied right of action for first-party insurance claims made in bad faith based on the insurer’s failure to perform fairly and [] to make a reasonable settlement of the claim. See, e.g., Coyle v. Historic Augustus Gloop, Inc., 33 A.3d 815, 818 (Pa. Super. Ct. 2011). Here in Pennsylvania, the above authority is Section 8371 of the Judicial Code. See 42 Pa.C.S. § 8371 ("In an action arising under an insurance policy, if the court finds that the insurer has acted in bad faith toward the insured, the insurer shall pay attorneys’ fees incurred by the insured as well as interest on the amount of the judgment at the rate of 1% per month."). In most instances, we find that courts are not shy to reach out and pull from other jurisdictions’ statutory provisions authorizing actions for bad faith. See, e.g., Schneider v. Am. Motorists Ins. Co., 10 A.3d 52, 56-57 (Pa. Super. Ct. 2010) (adopting the criteria set forth by the Oregon legislature to establish bad faith); Am. International Healthcare v. Eagle Electric Co., 781 A.2d 215, 219-21 (Pa. Super. Ct. 2001) (reviewing the elements of a Michigan claim); Krisa v. The Equitable Life Assurance Society of the United States, 1999 WL 9828, at *5-6 (E.D. Pa. Jan. 11, 1999) (citing the "ordinary and proper" standard set forth by the Vermont legislature).
Here, in addition to the statutory provisions that provide the legal basis for recovery against an insurance company acting in bad faith, are two provisions within the common law realm. First, in Pennsylvania, a bad faith claim must meet the requirements of Insurance Bad Faith Act, 42 Pa.C.S. § 8371. See, e.g., Krapf v. State Farm Mut. Auto Ins. Co., 2013 WL 5937344, at *2 (Pa. Super. Ct. Nov. 4, 2013) ("an insurance company’s failure to settle a claim in bad faith is actionable ‘by remedy of a common law tort’ under Section 8371"). Second, a claim for breach of contract where the damages arise from the bad faith misbehavior during the performance of the contract may also be brought. Wisler v. World Ins. Co., 2010 WL 5492328, at *3 (W.D. Pa. Dec. 30, 2010) (citing cases recognizing a breach of contract claim for bad faith performance).
Unfortunately, not every state offers express statutory or common law recourse for insurance companies stuck on the hook for acting in bad faith. And this is why it is so important that you consult with a qualified attorney to get the complete picture.
How to Prepare to Sue
Before you file a lawsuit against your insurer, you will need to gather and organize evidence to support your claim that your insurer is acting in bad faith. You will also need to gather evidence that shows the cause and extent of your damages. While evidence gathering is always an important part of litigation, it is particularly important in insurance bad faith cases. In California, the law allows insurance companies to use other (legal) reasons for denying claims. By filing an insurance bad faith lawsuit, you are arguing that these other reasons the insurer claims are false pretext and that the true reason the insurer denied your claim was because of something else, such as a motive to save money or to deny as many claims as possible so that it can minimize profit.
Documentation is your best tool to refute what the insurer says. When documents are in demand, it gives the insurer less leeway to find alternate reasons for its actions. Documents may include document types like: communications between your own insurance agent and the insurance company or others, communications between you and the insurance company after the loss occurs, letters from the insurance company (including claim forms), police reports, photographs, documents about property values, documents about the depreciation of property, documents about past conditions of the property, documents of loss, documents of estimates and costs to repair/replace property, etc.
Contrary to what many people think, it is often very easy for a big insurance company to access this information. Some insurers consider a lot of this information to be public, which as a general rule means that it is readily available online. If your insurance company can find this by spending a few minutes on the internet, that is even easier than for your insurance agent to find it by calling up a few friends in the business to access the information. Your best approach is to gather all of these documents yourself and get them in good order so your attorneys can find the most damaging information to your insurer’s argument if and when a lawsuit is filed.
Filing a Complaint
Once an attorney has drafted a complaint, the first step is for it to be filed with the Board Administrator of the Insurance Commissioner along with the appropriate filing fee. The Board Administrator then assigns a Commissioner (or hearing officer) to the case. The hearing officer or attorney hearing officer will grant or deny the complaint request for damages exceeding $50,000. Within 30 days of the assignment of a hearing examiner or attorney hearing officer, a Prehearing Conference is scheduled after the Commissioner appoints a hearing officer or attorney hearing.
A letter is sent to the insurance parties outlining the date and time of the Prehearing Conference and which party or parties the Commissioner has assigned to the case. The Commissioner may grant an extension of time for filing the answer upon entry of a consent order with all parties to the complaint. Each party is notified of the time, date, and place where the Prehearing Conference is held. At the conference, the parties will state their positions regarding the merits of the complaint and the extent of the damages sustained by the insured. A Commissioner appointed as the hearing officer will suggest an informal resolution of the matter. If the complaint is denied, the hearing officer or attorney hearing officer will issue a memo of the hearing officer’s recommendation and inform the parties that the complaint could be taken up before a hearing officer or attorney hearing officer that was appointed by the Commissioner.
The hearing officer will issue a notice of hearing, setting down a date and time for the parties to produce clear and convincing evidence to support the claim for relief as pled in the complaint. A hearing officer or attorney hearing officer is appointed at the Prehearing Conference by the Commissioner. The hearing officer or attorney hearing officer shall conduct the hearing that is briefed or complicated. The parties can either agree or disagree with the recommendation made by the hearing officer. The hearing officer will rule on all objections made during the hearing by a party. The hearing officer is responsible for making all factual findings and conclusions of law based on the evidence presented at the hearing. The hearing officer shall then send a Recommended Decision and Order to the Commissioner who will adopt or reject the recommendation and notify the parties.
Potential Results in a Lawsuit
Depending upon the circumstances, a number of outcomes can result when an insurance company is sued under a claim of bad faith. In some cases, the insured receives a financial settlement from the insurance company to cover damages. The settlement may be enough to help the individual in recovering lost assets. Other damages can be related to punitory reasons. As part of the lawsuit, the individual may seek punitive damages to file as part of the claim against the insurance company. These circumstances are rare, at best, but result in a large sum of money being paid by the insurer. The amount of the punitive damages award is largely left to the discretion of the jury.
Under a case of bad faith, with a successful judgment made against the insurer, the insurance company could be required to pay damages and costs associated with the claim, which in many instances can be far higher than the benefits originally sought by the individual. In most claims, the results are awarded on the basis of damages to the plaintiff in their matters. In some cases , damages may award punitive compensation. The compensatory damages are awarded in order to make the individual or group whole in terms of losses suffered. This is most common in cases of fraud or misrepresentation. Punitive damages are awarded only in specific circumstances, according to the law. A jury in many cases has discretion in awarding this type of award, though.
Even with a broken contract, an insurer may defend themselves by claiming that they were not acting in bad faith at all. Factors that get weighed into the matter include the fact to whether the insurer failed to take responsibility for their actions. A jury has the right to look at the actions of the insurer and determine whether or not bad faith exists. This is when punitive damages could be awarded against the carrier. The bad faith claim can also force the insurer to pay for punitive damages as compensation to the insured, resulting in a very quick settlement before any litigation even begins. When this happens, the insurer avoids lengthy litigation and the expenses involved. If the insurer does not settle, the case could start in court on the first day and end by the end of the week. The court will not tolerate bad faith actions by an insurer.
Hiring the Right Lawyer
When considering a lawsuit against your insurance company, having a skilled attorney play a vital role in your success. If this was your broken leg or sprained ankle, you would go with the best. If you were going to have a surgical procedure you would select a doctor with expertise and experience in the type of procedure that you are having. It is no different with lawsuits. You need an experienced attorney that has handled bad faith cases on a regular basis for many years. Your attorney can be key to your success. Most of all, you want a lawyer that you believe is working for you and is not owned by the insurance industry. A good lawyer always does an advanced intake interview. Good lawyers understand that the first 15 minutes of the case is the most important. If you try to handle your own case without a lawyer or you use a lawyer without an intake, you may not succeed in your recovery or your entire case could be compromised. Lawyers have training and expertise to clarify your thinking. In every case there are too many facts, conflicting facts, emotions, and beliefs. A good lawyer helps you sift through the information. You may have a claim when you think you do not. You may have no claim and now be wasting time and money on an attorney. In a good lawyer intake, your lawyer should be giving you additional information while asking questions. Advanced intake also involves the lawyer determining whether the case should go to litigation or not with the clear understanding that if it does go to litigation, very strong penalties apply for bad faith. If your lawyer does not recognize this fact, litigation may be the wrong choice for you. If you try to sue your insurance company without this clear understanding, you may think you are going to be paid the benefits that are owed to you. However, there is a substantial difference between being owed benefits and vindicating yourself and getting punitive damages. If your case does not meets the stringent standard for bad faith, and if you do not win, the insurance company gets off free and clear without paying anything for their bad faith. Find a lawyer with experience in this area. Be careful of "click and click" lawyers. They want to raise their marketing profile, use your case to promote themselves, and get your business. The insurance companies know about "click and click" lawyers. While they are excited to get this type of press coverage out there, they know that chances of winning with a "click and click" lawyer are very slim. Not only are the chances of winning slim, there are only two results: a loss and claim denial; or a win with punitive damages. Which one is it going to be? Obviously, there will be kinks either way. Buckets of money are made and dollars lost. Find a lawyer that will spend the time upfront to determine whether to proceed with litigation. Some cases are better off not winning in order to receive the benefits you’ve been deprived of.
Other Options
Prior to suing an insurance company for bad faith, there are several alternative dispute resolution methods that may be available. For example: Willingness to Enter Into Settlement Negotiations: It may be possible to enter negotiations with the insurance company by just picking up the phone and discussing the matter directly. There is no guarantee that the other party will be willing to negotiate. Claiming the Civil Mediation Process: Mediating a case is a way to avoid the courtroom by taking the situation to a neutral mediator for conflict resolution. Often the parties resolve at this stage before preparing for arbitration or trial. A written settlement agreement is produced if a satisfactory solution is reached. The agreement is enforceable in court as a contract , and a judicial decree may even be entered that incorporates all terms of the settlement agreement. Settlement mediations tend to solve problems a lot earlier in the claims process, saving time and litigation costs. Arbitration: Arbitration is an alternative dispute resolution process following mediation. It can be a good solution before preparing for trial, and often is part of the contract between the insurance company and the policyholder. Arbitration is binding (versus non-binding recommendations in mediation). The policyholder waives the right to trial by jury by signing the voluntary agreement to arbitrate.