The Insurance Company Duty of Good Faith to You

At its core, an insurance company has the duty of performing its contractual obligations to you in good faith and not trying to take advantage of vulnerabilities created by the sequential character of contract performance – you are paying your premium now and sometime later the insurance company may have to pay a claim. Every contract, and this includes insurance policies, imposes upon each party a duty of good faith and fair dealing. Good faith is implied in every contract. Although this duty of good faith and fair dealing applies to both parties to a contract, a majority of courts, when looking at an insurance contract, have viewed its requirements as a one-way street in your favor because you need the protection from the insurance company, not the other way around.

The majority of states hold the insurance company liable to you, as the insured, for extra-contractual damages, if the insurance company acts in bad faith in the course of the claims process. What is bad faith? Different states have different standards, but there are two basic standards and states generally adhere to one or the other, or somewhere between the two.

The first standard is essentially one of reasonableness. When the insurance company unreasonably withholds or delays payment of your claim, the action may be determined to be in bad faith. Following this approach, a single objective inquiry is made to determine whether a reasonable insurance company, under the circumstances, would have engaged either in the claims practice that led to the decision not to pay your claim or in an unwarranted delay in the payment of your claim.

The second standard provides a stricter standard of liability for bad faith. Under this standard it must be shown that (1) there was no reasonable basis for the insurance company’s denial of benefits under the policy and (2) the insurance company had knowledge of, or a reckless disregard, for the lack of a reasonable basis for denying your claim. This alternative standard requires a determination of the insurance company’s intent, but this intent can be inferred from the actions of the insurance company.

As practiced by many insurance companies, the act of post claim underwriting has the potential to meet either standard of bad faith. When an insurance company, instead of paying your claim, engages in the practice, after the claim is submitted, of looking for any misrepresentation in your application that would allow it to rescind the policy, it may have crossed the line. It may be acting in bad faith. Rather than processing the claim pursuant to the coverage provisions in your policy, the company tries to avoid payment of benefits by undertaking a determination of your eligibility that should have been completed before the policy was issued. The facts in each case will be the deciding factor. Completing your underwriting BEFORE your policy is issued is an act of good faith. Doing it AFTER a claim is filed raises serious questions of bad faith.

One final point. Post claim underwriting guarantees that payment of your claim will be delayed, possibly in an unreasonable manner, because of the extra time required to underwrite your policy above and beyond the normal claims processing time. So, even if the company ultimately decides it cannot find enough information to justify rescission of your policy, its after-the-fact efforts will lead to a lengthy delay in the handling of your claim.

If you are subject to an unusually lengthy claim process or your policy has been cancelled, you would be wise to seek out an attorney.

Case Studies: Challenging Insurance Company Practices in Good Faith Obligations

Case Study 1: Unreasonable Denial of Claim

John Smith filed an insurance claim for property damage caused by a storm. However, the insurance company unreasonably withheld payment, stating that the damage was not covered under the policy.

John’s lawyer argued that a reasonable insurance company, under the circumstances, would have approved the claim. This case highlights the importance of holding insurance companies accountable for acting in good faith and promptly paying valid claims.

Case Study 2: Lack of Reasonable Basis for Denying Benefits

Sarah Johnson suffered a serious injury in a car accident and submitted an insurance claim for medical expenses. Surprisingly, the insurance company denied her claim without a reasonable basis.

Sarah’s attorney argued that the insurance company had no valid reason to deny the benefits specified in the policy. This illustrates the stricter standard of liability for bad faith, where it must be shown that the insurance company had no reasonable basis for the denial and acted with knowledge or reckless disregard.

Case Study 3: Post Claim Underwriting and Delayed Claims Processing

Mark Davis filed an insurance claim for a house fire. Instead of processing the claim according to the policy’s coverage provisions, the insurance company engaged in post claim underwriting. They tried to rescind Mark’s policy by looking for any misrepresentation in his application after the claim was filed.

As a result, the claims process was unduly delayed, causing additional hardship for Mark. This emphasizes the negative impact of post claim underwriting and the potential for lengthy delays in claim settlement.