Can You Sue an Insurance Company for Denying a Claim?
Insurance companies are for-profit businesses that essentially sell paid promises. In exchange for premium payments, the insurance company promises to cover damages in specific circumstances. Insurance companies must process and investigate all policyholder claims in good faith, that is, they must pay out on legitimate claims for covered damages even if the company suffers a loss. It is in the insurance company’s best interests to thoroughly investigate all claims and process them in good faith. A company that fails to do so risks facing serious legal action from policyholders for bad faith practices.
What Is Insurance Bad Faith?
Insurance bad faith applies to any situation in which an insurance company, an insurance agent, or claims adjuster unethically and/or illegally denies coverage or mishandles a policyholder’s legitimate claim to avoid paying the claim. Insurance companies make money by collecting premiums from policyholders and lose money by paying out on claims. Policyholders generally hope to pay for peace of mind; they hope nothing will happen to require an insurance claim, but knowing they have insurance if something does go wrong is reassuring. When insurance companies effectively defraud a policyholder or mishandle a claim in bad faith, the policyholder may have grounds for legal action.
Examples of Bad Faith
Processing claims in good faith means establishing a clear policy for investigating and processing claims and adhering to the terms of coverage for each policyholder. For example, a homeowner purchases property damage coverage from an insurer and a few months later his garage burns down. The policy states the event is coverable, but an investigation reveals the owner started the fire to collect the insurance money. Denying this claim would not be an act of bad faith; the insurance company has the right to protect its financial interests and verify the legitimacy of any filed claim. The homeowner in this example would likely face criminal charges for insurance fraud.
Bad faith can take many forms:
- Obfuscating or misrepresenting elements of a policyholder’s policy to convince the policyholder to accept a lowball offer would be an example of bad faith. However, the policyholder should clearly understand the terms of his or her coverage and discuss any irregularities with a skilled West Virginia bad faith insurance attorney before accepting any settlement.
- If a claims adjuster intimidates or threatens a policyholder for filing a claim, this would be a clear example of bad faith.
- Unreasonable delays in processing a claim without justification would qualify as bad faith. Some insurance carriers may do this intentionally to pressure a claimant into accepting a lowball settlement in the face of mounting economic strain.
- Termination of coverage or otherwise unlawfully denying a claim against the terms of a policy. For example, if an insurance company were to simply cancel a policy without notice as soon as a policyholder makes a claim, and the policyholder has made premium payments on time and in full, this would be a clear example of insurance bad faith.
- Misrepresenting clauses or provisions of the insurance coverage agreement to deny coverage for a legitimate claim. For example, the insurance company could argue that an error with the initial claim disqualifies the policyholder from coverage, but this may not actually be true.
- Refusal to pay on a legitimate claim or denying a claim with little to no reasonable explanation.
The best way to avoid bad faith issues with an insurance carrier is to have an attorney review your policy and your claim for coverage and assist you with the claims process. Many insurance companies are far less likely to push back when claimants have legal representation. An attorney on your side means you can quickly ascertain whether an insurance company has acted in bad faith. If so, your attorney can help you pursue a lawsuit against the insurance company for bad faith.