Insurance Bad Faith – What Is It Exactly?

Insurance bad faith, also called insurance fraud, is a term that refers to the mistreatment consumers and businesses get from their insurance companies. It often applies to cases in which an insurance company does not want to pay out a settlement to an insured person or entity.

Unfortunately, insurance bad faith is something that happens often. A lot of insurance companies make use of statistics to know how much they need to pay out, depending on particular circumstances. Even with the insured person being fully entitled to a certain amount, the insurer may not pay that money in full. The individual or entity either accepts the decision of the insurer or goes to court for bad faith.

Three of the most common scenarios involving insurance bad faith are:

> insurer denying an insured party all the benefits stated in the insurance policy;

> insurer offering a compensation amount lower than the policy guarantees; and

> unjustified delays in payment to insured.

Each insurance contract comes with a stated or implied “covenant of good faith and fair dealing.” That means the two parties, the insurer and insured, have to comply with all the terms of their contract.

This contract dictates that the insurance company compensate the insured party fully and in timely fashion when it is appropriate, where failure to do so is tantamount to violating the good faith and fair dealing covenant. In some states, there are statutes or other regulations that govern bad faith by insurance firms.

When bad faith is exhibited by these companies, they may be subject to punitive damages, government penalties and statutory damage. Different laws affect bad faith claims in different states, so anyone having related problems with their insurers should talk to a lawyer.

Depending on the jurisdiction, an insurance company may have to pay different bad faith damages. The damages will be generally equivalent the actual compensatory damages the insurer, in a non-bad faith setting, would have paid out to the insured. In several states, punitive damages, or damages meant to punish an insurer for bad conduct, also apply. In some states, punitive damages come under a cap, but not in other states where there are no limits. Since insurance bad faith or fraud can be complex and confusing, anyone planning to go to court because of such experience should always consult with a lawyer.

Lawyers who accept this type of case usually work on a contingency basis. That means the attorney will not be receiving payment directly from the client – not even from the award of damages he receives – but rather from the money that the court will order the insurer to pay the lawyer in a separate judgment.

If you think your insurer has acted in bad faith in relation to your policy claim, your first step is to see an insurance lawyer who can define the steps you must take.

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