Bad Faith Insurance Claim Against Your Own Insurer

An insurance policy is a contract, and an insurer that fails to pay what the contract requires has breached it, which supports a claim for the benefits owed. Bad faith is more. Courts in nearly every state hold that an insurer owes its policyholder an implied duty of good faith and fair dealing, because the policyholder has paid for protection and is dependent on the insurer's honest handling when the loss occurs, and an insurer that handles a claim unreasonably breaches that duty and is liable for the harm the breach causes beyond the policy benefits.

The conduct that constitutes bad faith is defined by case law and, in many states, by statute: denying a claim without a reasonable basis or without investigating; delaying payment without justification; offering far less than the claim is plainly worth to pressure a settlement; misrepresenting the policy's terms or the facts; failing to communicate; and requiring unnecessary documentation to wear the claimant down. A mistaken denial made after a reasonable investigation is not bad faith; a denial made to avoid paying is.

The claim exists against your own insurer. The other driver's insurer owes you no duty of good faith, and in most states you cannot sue it for bad faith, however it handles your claim; the remedy there is a lawsuit against its driver. A few states provide statutory remedies for unfair claims practices by third-party insurers, and the state insurance department takes complaints about any insurer.

Uninsured and underinsured motorist claims are the main source. When the at-fault driver has no or too little insurance, you claim against your own policy, and your insurer, which has been your insurer for years, becomes the adverse party, valuing your injury as the other driver's insurer would. Insurers that deny or lowball UM/UIM claims without basis, delay them for months, or demand examinations and records as obstacles are the classic bad faith defendants, and the duty of good faith applies with full force because the claim is first-party.

Collision, comprehensive, medical payments and PIP claims are the others. A total loss valued far below market without basis, a repair claim denied on a pretext, PIP benefits cut off after an examination the insurer arranged, or medical payments delayed until the provider sends the bill to collections, are claims handled in bad faith. In no-fault states, PIP bad faith is often governed by specific statutes with their own penalties.

The third category is failure to settle within limits. When you are the at-fault driver and the injured person offers to settle for your policy limit, your insurer must accept if a reasonable insurer would; if it refuses and a judgment above your limit results, you are personally liable for the excess, and the insurer's refusal is bad faith for which it pays the excess. This claim protects policyholders from their insurers' gambling with their assets, and it is the reason injured people's attorneys send time-limited policy-limit demands.

Suppose you were hit by an uninsured driver and suffered a shoulder injury requiring surgery, with $48,000 in medical bills and lasting limitation. Your own policy carried $100,000 in uninsured motorist coverage. You presented the claim with the complete records and a surgeon's opinion. Your insurer, after four months of requests for records it already had, offered $12,000, asserting the surgery was for a pre-existing condition, without having obtained any prior records or any medical opinion.

An attorney sent a demand for the policy limit with a deadline and a letter identifying the insurer's conduct as unreasonable. The insurer did not respond. A lawsuit was filed for the UM benefits and for bad faith. In discovery, the insurer's claim file showed the adjuster's note that the surgery 'looks legit' and a supervisor's instruction to 'hold at 12' pending a reserve review; no medical review had been done.

The case settled for the $100,000 limit plus a substantial additional sum for the bad faith, including attorney's fees under the state's statute. Had the insurer investigated and offered a reasonable figure, there would have been no bad faith claim even if the parties disagreed on value. All figures are hypothetical; the claim file that reveals the insurer's reasoning is the usual decisive evidence.

Bad faith is proven from the record of the insurer's conduct, which you build from the first contact.

• Put everything in writing: every submission, every request, every response, with dates; keep copies and a log of calls with names and times.
• Provide what the policy requires promptly and completely, so that the insurer's delays are its own and not attributable to you.
• Ask the insurer in writing for the basis of any denial, delay or offer, citing the policy; an insurer's failure to explain is itself evidence.
• File a complaint with the state insurance department, which many states require insurers to answer in writing within a set period; the response becomes part of the record.
• Do not accept a lowball offer out of frustration; accepting ends both the benefits claim and the bad faith claim.
• Consult an attorney who handles bad faith; the claim is evaluated against the state's standard and the insurer's conduct, and the claim file is obtained in litigation.
• If you are the at-fault driver and the injured person has demanded your policy limit, tell your insurer in writing that you want the claim settled within limits, and keep the letter.

Bad faith law is state law and varies widely. Most states recognize a tort claim for first-party bad faith with damages beyond the policy, including consequential losses, emotional distress in some states, and punitive damages for egregious conduct; some limit the remedy to contract damages plus interest and fees under a statute; a few have no extra-contractual remedy. Many states have unfair claims settlement practices statutes, enforced by the insurance department, and some of those give policyholders a private right of action with statutory damages and fees.

The standard varies too: some states require only that the denial or delay was unreasonable; others require that the insurer knew or recklessly disregarded the lack of a reasonable basis; a few require something close to intentional misconduct. The failure-to-settle-within-limits claim is recognized nearly everywhere, with the standard being whether a reasonable insurer would have accepted the offer. Florida, California, Washington and a number of other states have well-developed bad faith law with significant remedies; others are more restrictive.

Third-party bad faith, against the other driver's insurer, is recognized in a small number of states by statute, West Virginia and a few others, and not elsewhere. Deadlines for bad faith claims follow the state's statute for the type of claim, often two to four years from the insurer's conduct, and the underlying benefits claim has its own contractual and statutory deadlines.

The failure-to-settle claim shapes how serious injury claims are handled on both sides. An injured person's attorney, facing a driver with a policy far below the claim's value, sends the driver's insurer a demand for the policy limit, with a deadline and the evidence, and if the insurer refuses without a reasonable basis and a judgment above the limit follows, the insurer is liable for the whole judgment. That exposure is why insurers pay limits promptly in clear cases, and why an unreasonable refusal can turn a $50,000 policy into a seven-figure recovery.

The at-fault driver, who faces personal liability for the excess, has the bad faith claim against their own insurer, and can assign it to the injured person as part of resolving the judgment; the injured person then pursues the insurer for the excess. Several states have statutes formalizing the policy-limit demand procedure, with specific requirements for the demand's content and timing that must be followed exactly for the exposure to attach.

A policyholder whose insurer is defending a claim against them should insist in writing that the claim be settled within limits when a reasonable opportunity exists, and should consult their own attorney, separate from the one the insurer provides, if the insurer refuses.

A bad faith claim holds your own insurer to the duty of good faith it owes you, with damages beyond the policy in most states, and it is proven from the record of the insurer's conduct and, in litigation, from its own claim file. The questions to answer early are whether the insurer's denial, delay or offer had a reasonable basis, what the state's standard and remedies are, and whether the record of the insurer's conduct has been preserved. Attorneys who handle bad faith claims work on contingency.

Ask Legal Matters is a free claim-review request service, not a law firm. Requests may be shared with independent attorneys and legal services partners who handle inquiries in your state, and an attorney must evaluate the facts before anyone can say what the claim is worth. If your own insurer is denying, delaying or underpaying a claim you believe it owes, you can request a free claim review.

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