Bad Faith Claims: Understanding How Insurance Companies Defend Policy Denials

While legitimate insurance disputes can arise regarding covered perils, methods of repair or the value of a claim, there are other insurance disputes rooted in bad faith conduct by insurance companies.  In such situations, insurers sometimes work diligently to find a defensible position to deny coverage or to avoid adequately investigating the claim.  When insurance companies engage in bad faith practices, they can be liable for damages that exceed the value of the claim.  These damages might include liability for attorney fees and punitive damages.  Insurance companies aggressively defend against bad faith claims because a settlement or judgment can be extremely costly.  This blog post provides an overview of bad faith liability from the insurance company perspective to help policyholders understand what they are facing in these cases.

Claims for insurance bad faith typically involve the handling of a claim under a policy provided by an insurance company for the benefit of an insured.  The range of improper conduct that can justify bad faith liability is so extensive that it is not possible to enumerate all of these many forms of inappropriate practices by insurers.  Generally, bad faith insurance practices involve an insurer’s failure to adequately provide some form of benefit under a policy in a timely manner.  Insurance policies generally are comprised of four sections:

  • Definitions
  • Coverage
  • Conditions
  • Exclusions

The benefits offered under a policy, such as indemnity or coverage for property damage is described in this portion of the policy.  The coverage section of the policy will be involved in most bad faith claims because this section of the policy enumerates the benefits a policyholder is entitled to under the policy.

Defenses to bad faith claims raised by an insurance company usually originate in other parts of the policy.  The definition section of the policy, for example, might be referenced by the insurer because key definitions more specifically describe and limit the benefits provided in the coverage section.

Insurers also might base their defense to a bad faith claim on the failure of an insured to satisfy a condition.  Conditions are requirements that impose duties on an insured under a policy.  If a policyholder does not comply with a condition precedent to coverage, the insured’s claim might not be valid, so the insurer typically will not be liable for bad faith.  While policy disputes based on conditions can be factual  based on relevant evidence, they also can be a matter of law which is determined by a judge.  Common types of conditions that impact bad faith litigation include:

  • Duties following a loss (e.g. notice of loss, sworn proof of loss)
  • Responsibilities to cooperate with an insurance investigation
  • Obligation to avoid fraud or concealment

There are a number of policy exclusions that often provide the justification for an insurer’s bad faith defense.  The exclusion might be related to the denial of a benefit or a reservation of right, which involves preserving the right to deny the claim at a later point or to pursue a declaratory judgment.

If the insurance company defends against a bad faith claim based on a policy exclusion, the insurer will assert a factual defense.  In other words, the insurer will allege that the exclusion applies to the specific facts of the case, so the denial was valid rather than a bad faith denial of coverage.  The insurer has the burden of proof on the issue of establishing that the exclusion applies to the facts of a bad faith claim.  By contrast, the insured bears the burden of proof regarding whether the loss occurred during the policy term and the types of coverage provided by the policy.

If your insurance company refuses to conduct a reasonable investigation of your claim or to pay your claim in a timely manner, you might have a right to pursue a claim for insurance bad faith.  My law firm represents policyholders in claims disputes in Miami and throughout Florida.  The Law Firm of J.P. Gonzalez-Sirgo, P.A. offers free consultations and case evaluations.  No Recovery, No Lawyer Fees.  Call 305-461-1095 or Toll Free 1-866-71-CLAIM.

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