Law Offices of McEldrew and Fullam, P.C.

Bad Faith of Insurer - Failure to Pay a Claim

Every contract imposes upon the parties to the contract the duty of good faith and fair dealing, which requires the parties to act so as not to injure each other's right to the benefit of the agreement. Such a duty applies to an insurer and an insured, who agree to the terms of an insurance policy.

When an insured seeks to recover the proceeds under his insurance policy, he obviously wishes to obtain payment as soon as possible. The insurer, on the other hand, may believe that it has legitimate reasons to delay or deny payment. If the insured believes that the insurer delayed or denied payment in violation of its duty of good faith and fair dealing, the insured may bring a bad faith action.

Legitimate reasons for delay

An insurer may delay or deny payment if it does so in good faith for legitimate reasons. The insurer may entertain doubts as to whether the injury or damage is covered by or excluded under the policy. There also may be issues surrounding the extent of the insured's injury or damage. Thus, upon such reasonable grounds, the insurer is entitled to delay payment for a reasonable time to investigate the insured's claim. In addition, coverage under the policy made depend upon another lawsuit that is pending. For example, because a beneficiary is not entitled to the proceeds of a life insurance policy if he killed the insured, the insurer may delay payment until a resolution of the beneficiary's prosecution.

Bad faith delay or denial

Bad faith of an insurer is generally defined as a frivolous or unfounded delay in payment or denial of benefits of a policy. The insurer usually has a dishonest purpose and breaches the duty of good faith and fair dealing through some motive of self-interest or ill will. Mere negligence or bad judgment is not enough to justify a finding of bad faith. A delay in payment must be for an unreasonable time before it is considered to be in bad faith.

Most courts require the insured to show that:

a contract existed between the parties
the insurer intentionally delayed or denied payment of the insured's claim
there was no reasonably legitimate reason for the delay or denial
the insurer had actual knowledge or recklessly disregarded knowledge of the absence of any legitimate reason, and
if applicable, the insurer failed to properly investigate whether it had a legitimate reason to delay or deny payment of the claim

Some courts have adopted the "fairly debatable" standard for determining if the insurer's decision to delay or deny a claim was made in bad faith. If the insured is denied benefits, he may show that the insurer acted in bad faith by establishing that no debatable reasons existed for the denial. If the insured's claim is delayed, he may show that no debatable reasons existed to delay processing the claim and that the insurer knew or recklessly disregarded the fact that no valid reasons supported the delay.

The insurer may also be held liable for acting in bad faith if, while it is investigating individual claims of an insured, it delays or denies a partial payment for a covered injury or damage because of a policy to make its whole payments at one time.

Damages

Many states have statutes that provide for contract or tort damages for an insurer's bad faith delay or denial of an insured's claim. Generally, the insured is entitled to compensatory damages to cover payment of his claim that was delayed or denied. In addition, the insured may be entitled to recover interest on the claimed amount and attorney fees. The insurer may be required to pay punitive damages, statutory penalties, and/or prejudgment interest if its conduct was vexatious or outrageous. In the case of health and accident insurance, some courts award double the amount of the claimed proceeds.