Understanding What "Bad Faith" Is

"Bad faith" laws are state laws that seek to penalize insurance companies for denying, delaying or withholding payments or other benefits to policyholders that file legitimate claims covered by valid policies. Some industry observers argue that the reason there is no federal legislation in this area is because of the size and strength of the insurance industry, and its powerful lobbyists and political allies. Be that as it may, it is important to deal with the reality of bad faith law, and understanding what "bad faith" is, and how it is defined by the 50 states that establish its limits and liabilities, is crucial to dealing effectively with an intransigent insurer.

Many state laws are based, in whole or part, on legislation researched, argued over and passed in other states, so there really are not 50 "unique" state laws. Certainly they embody differences, even some major ones, yet they all still share more than a few important characteristics. Generally speaking, fiduciary relationships – which insurance policies create between people (and/or their companies) and insurers by dint of the premiums being paid and promises being made – require the parties to both act in good faith and uphold any obligations they have agreed to, and/or have been paid for. Some states get more specific in their bad faith legislation, in effect admonishing insurance companies to act, and be able prove that they are acting, in the best interest of policyholders.

Interests and duties

Some state bad faith laws list specific "duties" that an insurance company must fulfill. Insurers are instructed to "look for coverage" if policyholders make honest claims, instead of seeking ways to deny them. In accordance with other "good faith" and "fair dealings" principles and practices, bad faith law might also require insurance companies to settle claims one way or another in a specified time frame, in some states, or a "reasonable" amount of time, in others. The judicial systems of many states, of course, establish these time frames in a manner more de facto than de jure, but the parties to any particular state's procedures will know how the system works. The proceedings benefit greatly from their transparency, too.

Bad faith laws require insurers, in all dealings with policyholders, to cooperate fully, respond promptly answer questions completely. This means, in practice, that insurance companies must tell policyholders the precise reason(s) that a claim or benefit is being denied. In doing this, the companies are also required to cite the specific policy provisions on which its adjusters based their decisions. Bad faith law does much more than encourage or persuade insurance companies to act responsibly, fairly, honestly and in a timely manner in all policyholder affairs. It compels them to do so, quite simply, and has various ways to punish them when they do not.

Bad faith recourses

If they suffer damages at the hands of their insurance companies, policyholders are empowered under bad faith laws to seek relief with a personal injury (tort) lawsuit. If an insurance company is found to have acted in bad faith, it can be ordered to pay the policyholder the full amount of the original claim plus any losses resulting from that initial benefits denial. In fact, some bad faith laws have provisions whereby an insurer can be forced to pay punitive damages on top of the claim settlement. Like any other punitive judgment, this is supposed to send a strong message to other firms that may have unfair practices, as well as deter the wrongdoer from repeating the proscribed behavior. The aim of the law, of course, is to obtain justice for the wronged parties, in this case honest policyholders who have been, in point of fact, robbed of their benefits and claims payments.

It is helpful to think of bad faith laws as part of the enlightened consumer protection legislation that is a hallmark of advanced societies. However, so as not to be abused and manipulated, these laws are subject to the same kinds of limitations as other civil and criminal proceedings. The statute of limitations for these bad faith laws – the time period in which policyholders can file bad faith claims – varies from state to state. It may also vary within a state, due to differences in the way cases are presented, specific features of the company or the policy, the nature of the claim and the severity of the alleged action or (inaction). There are no "unimportant details" in any modern legal proceeding, and bad faith law can be as confusing and difficult as any other. Remember, too, that bad faith cases pit ordinary citizens against huge, billion-dollar corporations with expensive attorneys (good ones, too), so this is an area where you really must avail yourself of top lawyers specializing in the field.