Suing for Breach of Contract vs. Bad Faith Insurance

What happens when an insurance company refuses to pay or settle a personal injury claim? Does the insured have any legal recourse? The good news: Yes, they do in the form of bad faith cases.

A surprisingly high number of contract disputes actually involve insurance policies. For legal advice about filing a bad faith lawsuit against your insurance provider, contact a bad faith insurance lawyer.

Bad Faith Insurance Claims

Whether these disagreements are based on an insurer’s breach of contract or breach of the duty of good faith (bad faith) has important repercussions on the type of lawsuit filed in court. The type of claim also affects the outcome of this type of legal action.

“They’re very difficult cases,” says Donna E. McBride, an insurance and personal injury attorney at Miller, Miller & Canby law firm in Rockville. And she should know, having worked for an insurance company before representing plaintiffs. “Very few result in a decision in favor of the insured. In my view, it’s weighted heavily in favor of the insurer.”

“The basic insurance contract dispute is over whether the policy applies or does not apply, and the policy is the contract,” says Jay M. Levin, an insurance coverage attorney at Flaster Greenberg in Conshohocken, Pennsylvania.

Find top Bad Faith Insurance lawyers easily

Connect with a qualified attorney today.

Find a lawyer today

Contract Law Disputes Over Insurance Coverage

Insurance policies are a form of contract between a policyholder and their insurance provider. Like any other type of contract, these types of agreements need interpretation to determine the full extent of coverage.

When the language in an insurance policy is subject to more than just a single interpretation, however, the policyholder and the provider could be at odds. For instance, an insurer could conclude that a certain kind of coverage isn’t included in the contract terms and then deny coverage based on that decision.

In these cases, the insurer and the insured may need to litigate their contract dispute in court, where successful policyholders can expect to obtain the coverage that they were initially denied under the terms of the original contract.

In any contract dispute, the first step is to carefully examine what the policy says, Levin explains. “You look at the facts of the claim and loss to see what it involves. Usually, the insurance company will say what they’re paying, what they’re not, and why. Sometimes it’s a really simple dispute about the amount, where everyone agrees it’s a covered loss. Sometimes it’s more complicated because the company says all or part of the loss isn’t covered because of an exclusion. Then you have to look at the exclusion to see if it applies, and that can get into several other issues.”

What You Have To Prove in a Bad Faith Claim

Insurance companies have a legal duty to act in “good faith” towards their policyholders. Good faith is making an informed judgment based on honesty and diligence supported by evidence that the insurer knew or should have known.

“The essence of bad faith is a tort concept that the insurance company not only breached its contractual obligations but did so egregiously that it should also be liable in tort,” Levin says. “A standard formulation is that it knew, should have known, or recklessly disregarded that it had no reasonable basis to deny the benefits sought.”

In a minority of states, third parties—the accident victims seeking compensatory damages—may also pursue claims for bad faith against insurance companies. Note, in most jurisdictions, victims cannot sue the insurer directly without an assignment of the claim from the policyholder.

A first party can also “assign” its own statutory insurance bad faith claim to a third party. In cases where the third party can prove the insurer acted “with actual malice” in denying a valid claim, a court may award punitive damages.

Find an Experienced Insurance Coverage Lawyer

Reaching out to an attorney is important for a couple of reasons, Levin says. One is to avoid needless and costly mistakes. “Lawyers also give you guidance on what to fight about, how to go about it, the best way to approach a claim, and we can get you to the resolution much faster,” he adds.

In some bad-faith insurance claims, you can recover attorney’s fees to cover your costs of hiring a lawyer. If you have a bad-faith insurance claim, contact an experienced insurance attorney who can address your questions.