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Summary

Bad Faith Insurance is when an insurance company (the Insurer) unreasonably withholds the policy benefits or wrongfully denies payment on an insurance claim. Insurers are required to deal fairly and in good faith with the people they insure (the Insured). If you feel you have been treated unfairly, you may seek resolution for your insurance dispute by consulting with a bad faith insurance attorney.

There are tempting financial incentives for an Insurer to deny a claim. If the Insurer denies a claim in bad faith, and that denial goes unchallenged, the Insurer gets to pocket the money.

An insurance policy is a binding contract between two parties; both the Insurer and the Insured are required to act in good faith. Policy holders have the right to be treated fairly and insurance companies have the right to deny a policy holder’s claim when they violate the terms of the contract, or if the claim is fraudulent.

Three things to remember when dealing with a Bad Faith Insurance claim:

  1. Always submit your claim in a timely fashion; if the Statute of Limitations expires, you may loose your right to compensation.
  2. If your claim is denied and you believe wrongfully so, write a letter to your insurance carrier explaining the situation and citing the section of your policy dealing with your claim.
  3. If you do not receive a satisfactory response from your Insurer, contact an insurance attorney to assist with your claim.

‘Bad Faith’ is defined primarily in case law and may not be clear cut in every situation. Examples of bad faith insurance include:

  • undue delays in handling your claim
  • a stalled or biased investigation
  • the refusal to defend a lawsuit brought against you
  • harassment or threats against you by the Insurer
  • refusing to make you a reasonable settlement offer
  • interpreting your policy in an unreasonable way
  • threatening to cancel your policy after your refusal to accept their low offer
  • denying your legitimate claim
  • failure to inform you of additional benefits
  • altering your policy without your knowledge

Some states allow punitive damages to be brought against insurance companies who use bad faith in order to avoid payment on a claim.


Interesting Facts

In the seventies, California granted insurance policyholders the right to sue Insurers that acted in bad faith. Other states followed California’s example. Gradually, some state legislatures became involved and passed laws relating to bad faith claims. That is why today most insurance laws are state specific. After Hurricane Katrina left thousands homeless in Louisiana and Mississippi in 2005, policyholders turned to their insurance carriers for assistance. It’s no surprise that many of these homeowners’ disaster claims were denied. The same thing had happened in 2003, when thousands of homes burned in the California wildfires. Several Insurers disputed the claims of policyholders left without homes and refused to cover their losses. In both examples, lawsuits were filed by angry policyholders alleging bad faith.

Potential Recovery

The following are examples of bad faith lawsuit awards and settlements:

  • $9-million: Award paid to a 52-year-old Montana woman by Health Net Inc., in Feb 2008, after the Insurer cut off the woman’s medical coverage in the midst of her treatment for breast cancer. The settlement reflected not only the amount of the unpaid medical bills but also a whopping $8.4 million in punitive damages. (In a separate Los Angeles case, Health Net, Inc. was revealed to have given bonus incentives to its administrators for canceling policies.)
  • $5.3-million: Awarded to a 32-year-old Montana woman in April 2008, after she suffered permanent brain damage during a head-on collision five years earlier. When the policy of the at-fault driver of the other car did not cover all the woman’s medical expenses, she filed a separate claim for under-insured motorist benefits and medical costs through Fireman’s Fund Insurance Co., her family plan. However, her Insurer stalled so long that that her bills were turned over to a collections agency. After Fireman’s was found to be acting in bad faith, the woman received $5.3 million in settlement.
  • $80 Million: Paid out to 600 Mississippi policyholders in January 2007, by State Farm Fire & Casualty Co., in order to settle a disputed bad faith Hurricane Katrina lawsuit brought by policyholders over unpaid claims.
  • $50 Million: A separate award was paid out by State Farm Fire & Casualty Co., to other Mississippi policyholders who were denied claims but did not sue the company.
  • $79.5 million awarded to 5 year old cerebral palsy patient after being terminated by Humana for the specific care she needed.
  • $120.5 million: An award to a California government employee by Aetna after the man was denied coverage for a rare form of stomach cancer. $4.5 million was for medical expenses and loss of companionship and $116 million was ordered to be paid in punitive damages.
  • $87 million:  An award paid to a breast cancer patient who was denied a badly needed bone marrow transplant by Health Net, Inc. ($77 million was in punitive damages)
  • $37.6 million in punitive damages awarded to a doctor suffering from Parkinson's disease whose disability insurance (through the insurer Paul Revere) was wrongfully denied.
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