How Will my Insurance Attorney Determine Whether an Insurer Has Acted in Bad Faith?

By  //  June 11, 2021

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Liability insurance policies are what people pay premiums for, with the expectation that their insurer will be there to cover them in the event that they become subject to lawsuits or civil actions.

Insurance companies are obliged to handle liability insurance claims with due diligence, scrutiny and care. If they don’t, they may be acting in bad faith.

Insurance companies owe a duty of good faith and fair dealing to their customers. That doesn’t mean they have to be nice, but that they cannot engage in unprincipled or unethical business practices. When they violate the implied covenant of good faith and fair dealing or improperly perform their duties to the insured, that company has acted in bad faith. 

Here are some important FAQs about Bad Faith law.

What is bad faith?

It’s generally understood that a negligent employee is in bad faith. They’ve violated a rule or regulation, or not followed procedures. Employers can also act in bad faith by failing to follow local, state, and federal law that applies to how a business operates and treats its employees. 

What constitutes bad faith in the legal sense can be a little more complex than simply understanding what constitutes illegal behavior. For example, the very act of employing an undocumented immigrant can in itself be the act of bad faith.

In this situation, you wouldn’t be entitled to make a claim for unpaid wages. If the illegal immigrants in question were promised legal status at some point, there’s an argument that they were given false promises. These cases are difficult because the facts aren’t all in place, and the employer needs to be found guilty of doing something wrong.

Are there different types of bad faith?

Yes. Bad faith is different from mere negligence. To provide a useful definition, there are two main forms of bad faith – willful or negligent.

In willful bad faith, the wrongdoer was aware of the wrongdoing and chose to cause it. With willful negligence, the wrongdoer did not know about the wrongdoing, but would have knowingly caused it.

There are different levels of wrongdoing:

  • Intentional bad faith occurs where the wrongdoer knowingly sought to cause an injury.
  • Reckless bad faith occurs where the wrongdoer was aware of the wrongdoing but, unable to help themselves, didn’t try to prevent it.

When do Bad Faith issues often arise?

People pay premiums for liability insurance policies with the expectation that their insurers will be there to cover them in the event that they become the subject of lawsuits or civil actions. Insurance companies are obligated to do their due diligence when handling claims. If they don’t, they could be acting in “bad faith” and be liable for that claim.

Bad faith issues can arise in several types of liability insurance, including but not limited to:

■ Commercial General Liability (CGL) Insurance

■ Automobile Insurance

■ Health Insurance

■ Homeowners Liability Insurance

■ Errors and Omissions Insurance

What questions does a Bad Faith Attorney ask to determine if an insurer has acted in bad faith?

Under the insurance contract or policy, insurers have many duties to the person(s) they insure, the policyholder (insured). When executing their duties, insurers are obligated to act in good faith toward and to deal fairly with the insured. Insurance companies must act in good faith and treat insurance policies with respect. If they fail to do so, their bad actions can give rise to extra-contractual claims like bad faith claims.

To determine if there is actionable evidence of bad faith, an attorney seeks answers to questions like:

■ Was there an unreasonable delay in processing, handling, or responding to claims?

■ Was there a failure to investigate or inadequate investigation? 

■ Did the insurer make unwarranted interpretations of an insurance policy?

■ Did the insurer refuse to defend lawsuits or threats against the insured?

■ Was an unreasonable settlement offered?

■ Did the insurer fail to settle third-party actions?

What factors are considered in determining bad faith?

First, a policyholder’s actions must be specific, and they must have occurred. Most bad faith claims concern an incident and a particular person in a specific place and time. 

Second, the bad faith must have been “unreasonable”. Bad faith is generally determined through evidence and the law has long recognized that one of the factors is whether the insurer and policyholder came to an agreement regarding the expected behavior of the insured and their actions. The bad faith must have been “willful” for that particular insurance policy. 

Third, the insurer must have been “corrupt” for the insured to have accepted the bad faith. Finally, the insurer must be “willfully” negligent for the insured to have received bad faith.

Insurers can be considered having acted in bad faith if they fail to follow through with claims. If an insurer fails to pay out its obligations as part of a claim, it can be considered having acted in bad faith. 

One of the things a Bad Faith Attorney looks for is whether the insurer showed due diligence to come to a settlement. Insurers must make unbiased decisions to assess the facts of these cases, and treat all settlement offers equally. They must investigate each case thoroughly and make a realistic assessment of the likelihood of having to pay the total recovery.

Conclusion

Insurance companies are not above the law. They must abide by the letter of the law and cannot act in bad faith when settling lawsuits or collecting judgments against policyholders.

All too often, people simply believe they won’t be exposed to unnecessary risks or assume that if they work with certain chemicals, or at a certain job for long enough, their insurer will come to bat for them should the unexpected occur. But of course that’s not the case. 

While you can rest assured that most insurer will act in your best interest, such is not always the case. That is when you should seek an experienced insurance lawyer who specializes in bad faith cases.