Bad faith denials of claims by insurers are illegal but some dishonest companies or agents attempt them anyway. It is possible that just when you have the greatest need, you will find yourself out of luck. Unfortunately, there are not a lot of great legal remedies, so it is critical to avoid bad and fraudulent insurance in the first place.
An insurance policy is a contract. The insured agrees to pay premiums and take reasonable steps to prevent injury or damage, and the insurer agrees to settle legitimate claims according to the policy’s terms. Not only is it good business practice for insurers to cover legitimate claims, but it is illegal for insurers to deny them.
There may be times when you and your insurer disagree about what is covered or what constitutes a reasonable delay or amount in settlement. But errors in judgment and offers of compromise do not necessarily equal bad faith. Bad faith arises when the insurer sacrifices its insured customers’ interests to enhance its own bottom line — and that can involve fraud.
Bad Faith Practices
Outright denial of legitimate claims is only one bad faith practice that indicates fraudulent insurance practices. Shady operators also may unreasonably delay investigating a claim or attempt to settle a claim for less than the amount specified by your policy.
Another bad faith tactic is to slow down the claim process by requiring multiple, duplicative proof of loss forms. Or an insurer might fail to settle one portion of a claim to induce you to accept a lesser settlement under another section of the policy. In many cases, fraudulent insurers misrepresent policy provisions related to claims.
Trouble with Arbitration
When a claim is denied, one way to avoid legal action is arbitration. But a bad faith insurer might threaten to appeal arbitration awards to pressure you to settle for less than the awarded arbitration amount.
Defending against such practices can be difficult. One problem is that there is no federal — only state — regulation of the insurance industry. Penalties imposed by states typically are not stiff enough to deter fraudulent practices, and they generally do nothing to compensate claimants who were wrongfully denied.
It is important, therefore, to deal with only reputable insurance companies. Before you buy, check with industry rating services such as A.M. Best Company, Inc. or your state’s department of insurance. Ask advisors and colleagues for their recommendations as well. In addition, if you have a claim, be sure to file it promptly and document all correspondence and communication relating to it.
Adequate insurance coverage is a cornerstone of an effective risk management plan. If you are not sure you have the right insurance by a trustworthy carrier, contact us for help.