You pay your company’s insurance premiums faithfully, secure in the knowledge you are covered if something goes wrong. Most of the time, such thinking will be right. Not only is it good business practice for insurers to cover legitimate claims, but it is illegal for them to deny them.

Unfortunately, not all insurers are good businesspeople and some are even dishonest. Those few may be guilty of bad faith — wrongfully denying insurance claims — that can cost businesses significant aggravation, not to mention legal fees, to combat.

Disagreement vs. bad faith

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.

There may be times when you and your insurer disagree about what is covered or what constitutes a reasonable delay or amount in settlement. However, 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.

Shady tactics

Outright denial of legitimate claims is only one bad-faith practice that indicates fraudulent insurance practices. Shady operators also may:

• Unreasonably delay investigating claims
• Attempt to settle claims for less than the amount specified by the policy
• Bog down the claim process by requiring multiple, duplicative proof of loss forms
• Fail to settle one portion of a claim to influence acceptance of lesser settlements under another section of the policy
• Misrepresent policy provisions related to the claims

In some cases, claims go to arbitration to resolve issues without legal action. A bad-faith insurer might threaten to appeal arbitration awards to pressure the insured to settle for less than the awarded arbitration amount.

Your best defense

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 or your state’s department of insurance. Ask advisors and colleagues for their recommendations as well. And if you have a claim, be sure to file it promptly and document all correspondence and communication relating to it.