Insurance bad faith is a term used in the legal field that indicates the failure of an insurance company to act honestly, beneficently, or appropriately with regards to the insured. As such it covers several types of actions in which an insurance company might become involved. Insurance bad faith is considered a tort, a legal term that indicates a failure of one party to fulfill its civil duties to another. An insurance company owes an individual certain services and basic entitlements that are an expected part of their policy. If the company fails to provide these services or adequately and honestly fulfill their general obligations, the insured can sue the company for insurance bad faith and receive damages. These may even amount to more than the original value of the insurance policy.
There are a few different situations that often arise in insurance bad faith situations:
First Party Context
In what is known as first party type cases, the issue involved is either insured property that is damaged or in health or life insurance cases. In these legal situations, an insurance company has the obligation to investigate a claim and decide whether or not to cover any damages that may have occurred. Bad faith occurs when the company fails to do this or to acknowledge a claim that should be covered by the policy. In such cases, the insurance company is not fulfilling its civil obligations and a bad faith case can be brought against them. This type of case is most common in property damage cases. Health or life insurance bad faith suits are rarer.
Third Party Context
In a third party context, the bad faith suit stems from a failure of the insurance company to legally defend the insured from a lawsuit as in the occurrence of liability cases. Prior to legal precedents regarding this, insurance companies sometimes attempted to avoid such representation because a part of the lawsuit may not have been covered by the policy. Additionally the companies tried to deduct legal fees from the policy limits.
Neither of these actions is currently allowed by law. The insurance company must defend an insured party entirely even if only parts of the lawsuit’s claims are covered by the policy. It also must pay for any legal representation required as part of the services included in the insurance package. It must maintain the same coverage limit and cannot alter that in relation to legal fees.
Another type of third party context involves what is called a duty of indemnification on the part of the insurance company. What this means is that the insurer must pay the judgment amount (legal demand for money against the insured) if that judgment is covered by the policy. In other words, it cannot only offer to pay for legal fees or other damages, it must actually fulfill a judgment as long as it falls under the purview of the policy itself.
Goldberg & Osborne, a personal injury law firm, has provided this article for informational purposes only, written by an independent author, and has not reviewed or edited this article and is not responsible for its content or accuracy.