How Do I Prove a Bad Faith Insurance Claim?

Whether it’s auto insurance, homeowners’ insurance, or health insurance, you regularly pay a certain amount in premiums to your insurance company, and in turn, it promises that if you are involved in an accident or become sick, it will reimburse you for your expenses under the terms of the insurance agreement.  

Often, insurance claims work the way they’re supposed to, resulting in your reimbursement. But what happens if you’re in a car accident or become ill and the insurance company doesn’t hold up its end of the deal to cover your costs? 

As often in the law, it depends. It could be that your claim was denied for legitimate reasons. For example, you may have waited too long to file a claim, the claim may fall outside your policy limits, or you didn’t provide enough evidence to support your claim. In the last example, providing additional information such as photos, police reports, or medical records may get a denial reversed within the claims process.

In some cases, however, policyholders have a legitimate claim under their insurance policy, and the insurance company unreasonably denies their benefits. In this situation, policyholders may have a bad faith insurance claim against their insurance provider. This article will give you an overview of bad faith insurance claims so that you understand the issues involved before meeting with an attorney to discuss your situation. 

How You Prove Bad Faith Depends on Your State Laws 

It’s important to realize upfront that the elements of a bad faith insurance claim vary by state law.  

Nathan D. Meyer, a lawyer at Jaburg Wilk in Phoenix who represents insurance companies, explains that “most states have adopted some version of the Unfair Claims Settlement Practices Act,” a model code created by the National Association of Insurance Commissioners (NAIC). “There are also model regulations that many states have adopted as well.” 

That said, “Different states have different common law on the application of those statutes to private causes of action for bad faith,” says Meyer. Common law refers to the cases that courts in a particular jurisdiction have decided over the years. These past judicial decisions serve as precedents for judges handling similar cases in the same jurisdiction.   

Meyer gives an example of how courts in different states might apply the same statutory law differently: “Say John Smith is mad because his homeowners’ insurance company denied his claim for water damage. Some states say that if an insurance company didn’t do something it was required to do under the [unfair claims] statute, that can be evidence of bad faith.”  

Some examples of bad faith practices include: 

• Unreasonable delays; 
• Improper investigation of your claim; 
• Misrepresentation in the claims process;  
• Refusal to explain the reason for a claim denial;  
• Failure to communicate with you or provide necessary information; or
• Failure to take action on a claim, running out the clock on the claims process. 

Meyer continues, “But in Arizona, for example, it’s different. In cases I’ve been involved with, the statute doesn’t apply to a private cause of action–it only applies to general business practices.” In other words, a plaintiff in a bad faith lawsuit could not rely on the statute. 

So, if you’re considering legal action against an insurance company for bad faith, how do you know what law applies in a given jurisdiction? Meyer says that what he looks at first are the state’s model jury instructions. These instructions “give the black letter law and are what the jury will be instructed to consider if the case goes all the way to trial.” 

Despite Differences in State Laws, There Are Some General Principles in Bad Faith Cases

Despite the variation in how laws are applied, there are two basic types of plaintiff-based insurance lawsuits: breach of contract and bad faith.  

Breach of Contract versus Bad Faith Claims

“Speaking very generally, you’re often looking at one of two claims in an insurance case,” says David B. Ezra, an insurance lawyer at Berger Kahn in Lake Forest, California. “One is a regular breach of contract claim. The question here is: did the insurance company owe coverage through the policy that it declined? Without more, that’s a breach of insurance contract claim.” 

The second type of claim introduces the bad faith element, says Ezra. “The bad faith component goes one step further and asks: Were the policy benefits unreasonably withheld?” 

The elements of bad faith are: 

1. Your insurance company withheld benefits under your insurance policy; 
2. The insurance company’s decision to withhold benefits lacked a reasonable basis. 

What Is an “Unreasonable” Claim Denial?

How do you know what counts as unreasonable? Once again, it goes back to your state’s common law. “In California and other states, it’s a judicially imposed standard. It depends on various factors the court will consider in determining reasonableness.” For example, Ezra says a court might look at the following issues:  

• Was the claim denied because the policyholder didn’t give the insurance company enough information to substantiate the claim?  
• Was it denied because the case law was not clear-cut?  
• Was it denied because there was a misunderstanding?  
• Was there just no explanation for the denial, and an adjuster didn’t want to compensate the policyholder? 

In the first three scenarios, bad faith may not exist. But if the last scenario holds—there was simply no explanation for the denial—it could very well be bad faith. 

There Are Objective and Subjective Components to Proving Bad Faith

Meyer says that there’s both an objective component and a subjective component to bad faith.

“For an insurance company to be liable for bad faith, they had to act objectively in an unreasonable manner.” In other words, people would look at what the insurance company did and agree that its actions were unreasonable. “But there’s also a mental component, where the insurance company either knew that it was acting unreasonably, or it acted recklessly regarding whether it had a reasonable basis,” he says. 

To illustrate the difference between the subjective and objective components, say there is a car accident with three eyewitnesses. The insurance company interviewed the first two eyewitnesses, both of whom reported that the policyholder was liable. Based on these two interviews, the insurance company concludes that the policyholder is not entitled to any benefits and decides not to bother with interviewing the third eyewitness.

“That’s a little bit reckless,” observes Meyer. “Perhaps that third witness had a better perspective on the accident. Maybe they would have testified that the policyholder wasn’t liable. In this situation, maybe the insurance company didn’t know that what it was doing was unreasonable. Nevertheless, it was reckless on whether it had a reasonable basis to say their policyholder was liable for the action.” 

How Do I Prepare For a Bad Faith Lawsuit? 

If you’re considering legal action for an insurance company’s bad faith tactics, the most effective first step you can take is to contact an attorney experienced in your state’s bad faith laws. 

Here are some proactive steps you can take that will help make the attorney consultation more productive. These steps will also help your bad faith case in the long run, from proving that bad faith practices occurred to establishing emotional distress and economic losses to negotiating a reasonable settlement offer:

• Keep a record of all communications with the insurance company, including emails, letters, and if you spoke to an insurance agent by phone.  
• Retain all medical records, bills, copies of police reports, or any other documentation that is relevant to your claim. 
• Be sure to keep any photos or videos of a car accident or the event at issue in your insurance claim. 

Once you retain an attorney, they will take over all aspects of the case, including:

• Collecting further evidence to support your case;
• Sending a demand letter to your insurance company;
• Negotiating with the insurance adjusters;
• Filing court documents in a timely fashion;
• Interviewing witnesses;
• Guiding your case through litigation.

Having a lawyer will take much of the stress of a complex lawsuit off of your plate.  

Find an Experienced Bad Faith Insurance Attorney

Visit the Super Lawyers directory to find an experienced insurance law attorney in your area. Many bad faith insurance lawyers offer free initial consultations or will count consultation fees towards their legal services, and you can discuss fees in the consultation. Initial consultations allow you to get legal advice and consider your next steps in the insurance claims process.

For more information about this legal area, see our overview of bad faith insurance law and related content.