Insurance companies owe a duty of good faith to their policyholders. Unfortunately, they don’t always fulfill that duty, which can give rise to a bad faith insurance claim. If you think your insurance company has acted in bad faith, the following information should be helpful to you in understanding insurance company bad faith tactics and how to file a bad faith insurance claim.
First, you should know that in every insurance policy, there is an implied covenant of good faith and fair dealing that neither the insurance company (insurer) nor the insured will do anything which will injure the right of the other to receive the benefits of the insurance policy. An insurer’s breach of the implied covenant of good faith and fair dealing constitutes what is commonly called `bad faith.’ An insurer is said to act in `bad faith’ when it not only breaches its policy contract but also breaches its implied covenant to deal fairly and in good faith with its insured.
To establish bad faith, an insured party must show that (1) benefits due under the insurance policy were withheld; and (2) the insurer’s reason for withholding benefits was either unreasonable or without proper cause.
Whether an insurer has withheld benefits “reasonably” is an objective inquiry that focuses on the insurer’s conduct, not a subjective inquiry into the insurer’s good or bad intentions.
As the California Supreme Court has recognized, the terms “good faith” and “bad faith,” as used in this context, are not meant to connote the absence or presence of positive misconduct of a malicious or immoral nature, considerations which are more properly concerned in the determination of liability for punitive damages. The phrase `good faith’ is used in a variety of contexts, and its meaning varies somewhat in the context. Good faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party; it excludes (from consideration) a variety of types of conduct characterized (in other contexts) as involving `bad faith’ because they violate community standards of decency, fairness or reasonableness.
Therefore, an insured only needs to show, for example, that the insurance company unreasonably refused to pay insurance policy benefits; there is no requirement to also establish subjective bad faith.
Nevertheless, the insurer’s subjective mental state may be relevant to the question of reasonableness; for example, the insurance company’s knowledge that it may have set aside inadequate reserves to pay a claim could be considered as evidence of its objective reasonableness in refusing to pay.
The ultimate standard is as follows: “If an insurer is to avoid liability for bad faith, its actions and position with respect to the claim of an insured, and the delay or denial of policy benefits, must be founded on a basis that is reasonable under all the circumstances.”
One form of objectively unreasonable conduct or insurance company bad faith tactics is failure to fully investigate the grounds for denial. To fulfill its obligations, an insurance company must give at least as much consideration to the interests of the insured as it gives to its own interests, and an insurer cannot reasonably and in good faith deny payments to its insured without fully investigating the grounds for its denial. An insurance company may not ignore evidence which supports coverage. If it does so, it acts unreasonably towards its insured and breaches the covenant of good faith and fair dealing.
One court has elaborated on the standard for a thorough investigation as follows:
An unreasonable failure to investigate amounting to unfair dealing may be found when an insurer fails to consider, or seek to discover, evidence relevant to the issues of liability and damages. The insurer’s willingness to reconsider its denial of coverage and to continue an investigation into a claim has been held to weigh in favor of its good faith.
An insurer’s efforts to seek more information from several sources and reconsider plaintiff’s claims at various times has been held to demonstrate good faith; conversely, an insurer’s early closure of investigation and unwillingness to reconsider a denial when presented with evidence of factual errors will fortify a finding of bad faith.
Ultimately, whether an insurance company breached its duty to investigate is a question of fact to be determined by the particular circumstances of each case.