What is bad faith? In many states, including California, Washington, Arizona, Nevada and Colorado, when your insurance company breaches their contract with you, it could potentially be more than a breach of contract. It could also be a breach of the implied covenant of good faith and fair dealing, which is known as “bad faith.”
To prove breach of contract, an insured generally needs to be able to prove the existence of a contract, breach of that contract, reliance, and damages. An insurer can also breach a contract if the stated terms in the contract were based on an error that the insurance company did know or should have known about - when that happens, the insured can sue for reformation, which is a variation on breach of contract and puts the insured where she would have been if the contract had been correctly written as intended.
Both of these can also be the basis for a claim of bad faith against the insurer. To prove bad faith, the insured needs to prove that the breach of contract was not just incorrect, it was unreasonable. With bad faith, unlike breach of contract, an insured can obtain punitive damages intended to discourage the insurer from behaving in such a manner again. Breach of contract and bad faith litigation can be brought for almost any sort of insurance contract that is not a welfare benefits program offered by an employer and is subject to ERISA.
Whether your insurance contract is for homeowners insurance, disability insurance, life insurance, or long-term care insurance, the basic issues to prove bad faith remain the same.
You’ll need to show that the decision was not reasonable. How do you do that? There are many ways.
- If the insurer deliberately avoided investigating the facts of your claim to avoid paying it, that would be unreasonable.
- If the insurer cherry-picked only the facts that supported a denial and ignored all the evidence supporting the claim, that can be evidence of bad faith.
- If the insurer learned that it made a mistake and covered it up instead of admitting it and fixing it, that would be bad faith.
Ongoing delays without explanation can be evidence of bad faith. In California, the courts have created a doctrine known as “the genuine dispute doctrine.” The genuine dispute doctrine holds that if an insurer can show that the denial was based on a “genuine dispute” about the facts, then there can be no bad faith. Therefore in California, an insured must show that there was no objective dispute about the facts. Also, in California to obtain punitive damages, the insured must show that the wrongful conduct was not just the act of a low-level employee, but that managers were aware of it and ratified the conduct.
California passed the Unfair Insurance Practices Act (UIPA), Cal. Ins. Code § 790, in 1959. In 1972, the legislature further clarified the UIPA by enacting Insurance Code § 790.03(h), which outlines 16 claims practices that constitute evidence of bad faith by insurance companies.
These unfair practices include, but are not limited to:
- Denying policy benefits without a reasonable cause;
- Failing to provide a clear reason for denial of a claim;
- Failure to communicate with policyholder about the claim;
- Failure to adequately explain the denial of the claim;
- Misrepresenting facts or policy benefits;
- Refusing to pay the full value of the claim;
- Failure to conduct a prompt and fair investigation in the claims process;
- Failure to respond to a claim promptly;
- Failing to establish reasonable standards for how a claim is processed;
- Failing to approve or deny a claim in a reasonable amount of time once all proof of the claim is submitted (i.e., a "stall tactic");
- Forcing to claimant into litigation by failing to make a settlement offer;
- Deliberately "low-balling" their settlement offer when the claimant has provided legitimate proof that the claim is worth much more;
- Forcing the policyholder to go through unnecessary medical tests (another "stall tactic"); and
- Failure to comply with California's “Fair Claims Settlement Practices Regulations.”
Each claim is governed by the language in your specific policy, and so determinations of breach of contract and bad faith are likewise based on the language of your specific policy.
Every state is different because bad faith is governed by individual state laws. In Washington and Colorado, their statutory bad faith laws limit punitive damages to a total of treble damages. In Colorado, compensatory damages are defined as contract damages, while in Washington it can include emotional distress and attorney’s fees.
In California, Nevada and Arizona, you can potentially get up to 9 times the compensatory damages, which includes the emotional distress and some fees. In Oregon, there are no bad faith damages available as a multiplier of the contract damages, but an insured can recover attorney fees.
If you are in California, and are over 65 or are disabled, you can also sue for financial abuse of an elder or disabled individual. Courts have held that this cause of action would also apply to Insurance Bad Faith conduct, and results in a separate trebling of the damages and attorney fees.
Every state has a Department of Insurance, and those Departments review the conduct of the insurance companies.
Conduct that is criticized in reports as an unfair business practice can also be the basis for a finding of bad faith. There are many ways an insurer can breach the implied covenant of good faith and fair dealing included in every insurance contract. While the laws are different in each state, the key is to demonstrate that the insurer’s behavior was unreasonable.
Kantor & Kantor, LLP, has over 30 years of in-depth knowledge and experience taking on Insurance Bad Faith cases for long-term disability, health, life insurance, long-term care and catastrophic losses for homeowners. Our lawyers have in-depth knowledge of complex administrative appeal procedures, ERISA federal court proceedings, and state and federal appellate practice. We have experience dealing with a variety of ever-changing insurance company tactics, and we’ve built a respected reputation litigating and winning ERISA cases nationwide. If you are looking for help, let us help you. Call and schedule a free consultation or visit our website to learn more.