What is Insurance Bad Faith?
Buying insurance is different than buying a car. With insurance, the product that a person is buying is the insurance company’s promise to pay claims that are covered by the insurance policy. When a claim arises, the insured has already paid premiums and has lived up to his or her end of the bargain. Because of this, the insurance company must then live up to its end of the bargain – it cannot try to cheat the insured to give itself an advantage. This concept is known as the duty of good faith. In other words, an insurance company must treat the interests of its insured with equal regard to its own. When an insurance company tries to tilt the claims process in its own favor and interpret policy provisions or conduct an investigation in such a way that will support a denial or lessening of the insurance claim, it is committing bad faith.
Bad faith can occur in many different ways and with any type of insurance policy.
- It can occur when an insurance company does not conduct a proper investigation. For instance, when it fails to take statements or follow up on information that has been provided by the insured. An improper investigation can also involve the insurance company just looking for information that favors a denial of the insurance claim and not looking for or even ignoring information that would support paying the insurance claim.
- Bad faith occurs when an insurance company interprets a vague policy exclusion or another policy language in a way that favors the insurance company. Insurance policies sometimes have very vague language that can be interpreted in more than one way. When this occurs, the insurance company is supposed to interpret it in favor of the policyholder. However, we have seen many instances where they do the opposite and interpret the language in a way that supports a denial of the claim. For instance, I had a Farmers Insurance claim once where Farmers tried to claim that damage caused by a backed-up toilet and washing machine was excluded by an exclusion that excluded coverage for sewer and water that came into the house from outside.
- Another way it occurs with an insurance company is when they make up a reason to deny a claim. I have seen instances where insurance companies have claimed that a certain exclusion board coverage for a claim when that exclusion was actually not in the original policy.
In addition, an insurance company can manufacture a reason to deny a claim is shown in the Arizona case of Deese v. State Farm in which evidence suggested that State Farm set up a bogus chiropractor review panel to specifically deny and reduce chiropractor charges submitted by policyholders, who had been hurt in car wrecks. Similarly, Unum Provident also was caught setting up a false medical review process that was designed to reduce disability insurance payments. In the short-term health insurance context, I have seen short-term health insurers claim that they did not receive medical records that had actually been sent to them and also claim that certain health conditions were pre-existing conditions when clearly they were not. The essence of all of these types of bad faith is that the insurance company is tilting the claims process in its own favor.
How often does bad faith occur? Bad faith used to be something that was believed to occur very rarely. Unfortunately, due to changes in the insurance industry, it seems to occur more and more. One of these changes relates to the increased focus by insurance companies on reducing claims expense. Beginning in the early 1990s, with a report provided by a consulting firm, McKinsey & Co to Allstate called From Good Hands to Boxing Gloves – insurance companies realized that the best way of making sure that they were profitable was by reducing the amount that they paid out in claims. Before this time, insurance companies generally believed that the only ways they could make sure that they made a profit were by pricing their insurance policies fairly and by investing the premiums they receive wisely. However, with this new approach, they could guarantee a profit even while trying to attract consumers through low prices and making poor decisions with their investments.
- To support this effort, a whole cottage industry has arisen. There are engineering companies that market themselves exclusively to insurance companies and provide reports that support denial of insurance claims. There are computer programs designed to estimate the value of a claim, often in a way that reduces the amount of the claim payment made by the insurer.
- Another factor that has led to the increased incidence of bad faith is a reduction in training and reduction of claims workforces. At one point in time, insurance companies took great pride in providing extensive training to their claims representatives. These claims representatives would usually receive weeks if not months of training before they were ever allowed to make a decision on an insurance claim. This training included specific training on the duty of good faith and ensuring that the policyholder was treated fairly. However, over the past couple of decades, this level of training has slipped. Insurance companies provide less and less training and sometimes have new hires adjusting claims under the supervision of someone else almost immediately. Some companies have also stopped using claims manuals. Claims manuals are guidelines that help ensure that the company claims representatives adjust claims correctly. If a company does not have a claims manual, then it is less likely that it will consistently adhere to good faith claims handling practices.
- Many companies have also been reducing the number of claims people that they employ. For instance, over the last five years, State Farm has drastically reduced its claims workforce and has closed many of its claims offices. As a result, claims representatives are left dealing with more and more claims and can be stretched thin.
- Yet another factor that can create an incentive for an insurance company to commit bad faith is the way that it pays bonuses and other compensation to its employees. Many insurance companies have been caught paying bonuses and otherwise encouraging claims employees to reduce their claims expenses or to deny more claims. For instance, in the Arizona Supreme Court case of Zillich v. State Farm, evidence surfaced showing that State Farm was incentivizing its claims people to reduce claims. Unum Provident also has been caught doing this.
Fortunately, in many states (including Arizona and Alabama) insurance companies can get into big trouble for committing bad faith. In these states, policyholders can bring a claim for bad faith and can recover damages for mental anguish and punitive damages in addition to the amount of money that should have been paid as part of the claim. In Arizona, the policyholder can also recover attorney’s fees. I am fortunate to say that my life passion in the last twelve years has been to help people recover amounts that they are due from insurance companies and hold insurance companies accountable. When people are dealing with insurance companies, they are in the most vulnerable times in their lives. When the insurance company denies their claim, it can feel like being stabbed in the back. Helping people in this situation has helped give my life meaning and purpose.
If you have any questions about bad faith or need any help, please call me at (205) 383-1809.