Insurance companies owe duties of good faith and fair dealing. When they breach these duties through unreasonable claim handling, bad faith claims arise. Bad faith can transform an ordinary car accident case into one with significantly greater recovery potential.
The Concept of Bad Faith
Bad faith occurs when insurers:
Unreasonably Deny Valid Claims
Denying coverage without proper investigation or justification.
Fail to Defend
Refusing to provide the defense owed under liability policies.
Unreasonably Delay
Taking excessive time to investigate, evaluate, or pay claims.
Fail to Settle
Refusing reasonable settlement opportunities when liability is clear.
Lowball Offers
Making offers far below claim value to pressure acceptance.
First-Party vs. Third-Party Bad Faith
Different relationships create different claims:
First-Party Bad Faith
Claims against your own insurer for mishandling your claims under UM, UIM, PIP, or other first-party coverages.
Third-Party Bad Faith
Claims arising when insurers mishandle defense or settlement of liability claims.
Common Bad Faith Conduct
Specific behaviors supporting bad faith claims:
Inadequate Investigation
Failing to investigate claims before denial.
Ignoring Evidence
Disregarding evidence supporting the claim.
Misrepresenting Policy Provisions
Incorrectly stating what coverage provides.
Arbitrary Denials
Denying claims without reasonable basis.
Unreasonable Interpretation
Reading policy provisions in unreasonably narrow ways.
Failure to Communicate
Not keeping policyholders informed about claim status.
Improper Coverage Defenses
Raising defenses without reasonable basis.
The Excess Judgment Scenario
A classic third-party bad faith situation:
Clear Liability
The policyholder is clearly liable for an accident.
Policy Limits Demand
The injured party offers to settle for policy limits.
Insurer Refuses
The insurer unreasonably rejects the settlement offer.
Excess Verdict
The case goes to trial and produces a verdict exceeding policy limits.
Bad Faith Exposure
The insurer may be liable for the entire judgment, not just policy limits, due to its bad faith failure to settle.
Stowers Doctrine
Some states impose specific settlement duties:
Settlement Demands
When a reasonable settlement demand within policy limits is made.
Clear Liability
When liability is reasonably clear.
Duty to Accept
Insurers may have a duty to accept the settlement.
Excess Exposure
Failure creates potential liability for excess judgments.
Remedies for Bad Faith
Successful bad faith claims may recover:
Contract Damages
The benefits that should have been paid.
Consequential Damages
Losses flowing from the bad faith, such as attorney fees, lost time, and emotional distress.
Punitive Damages
Where particularly egregious conduct is proven.
Attorney Fees
Fees incurred in pursuing the bad faith claim.
Proving Bad Faith
Bad faith claims require showing:
Claim Was Valid
The underlying claim was covered and should have been paid.
Denial Was Unreasonable
The insurer knew or should have known the claim was valid.
Lack of Reasonable Basis
No reasonable basis existed for the denial.
Knowledge of No Reasonable Basis
In some jurisdictions, the insurer must have known there was no reasonable basis.
Defenses to Bad Faith
Insurers defend bad faith claims through:
Reasonable Investigation
Evidence of thorough claim investigation.
Genuine Dispute
The existence of a legitimate coverage question.
Reliance on Experts
Reasonable reliance on medical or other expert opinions.
Policy Interpretation
Reasonable interpretation of ambiguous policy language.
Jurisdictional Variations
Bad faith laws vary significantly:
Common Law Bad Faith
Some states recognize only common law bad faith claims.
Statutory Bad Faith
Some states have enacted specific bad faith statutes.
Private Cause of Action
Not all states permit private lawsuits; some limit enforcement to regulators.
Damage Limitations
Some states limit available damages.
Documentation Importance
Building bad faith claims requires documentation:
Correspondence Records
All communications with the insurer.
Claim Timeline
Dates of claim submission, insurer actions, and delays.
Denial Letters
Written denials and stated reasons.
Evidence Submitted
Records of evidence provided to the insurer.
Insurer Requests
Documentation of all insurer requests and your responses.
Strategic Considerations
Preservation of Claims
Actions during claim handling can preserve or waive bad faith claims.
Settlement Implications
Settling underlying claims may affect bad faith claims.
Timing Issues
When to raise bad faith versus when to focus on the underlying claim.
Expert Testimony
Insurance industry experts may testify about claim handling standards.
Practical Guidance
Document all interactions with insurers meticulously.
Respond promptly and thoroughly to insurer requests.
Keep copies of everything submitted.
Note unreasonable delays or requests.
Consult counsel if you suspect bad faith.
Understand your state’s specific bad faith framework.
Bad faith claims transform the power dynamic between insurers and claimants. When insurers act unreasonably, bad faith exposure can convert modest claims into significant recoveries.
Sources:
- Bad faith doctrines: State case law and statutes
- Stowers doctrine: G.A. Stowers Furniture Co. v. American Indemnity Co., 15 S.W.2d 544 (Tex. 1929)
- Excess judgment exposure: Insurance bad faith case law