Can I Sue for Insurance Bad Faith or Breach of Contract?

What the law says for Maryland policyholders who feel wronged

By S.M. Oliva | Reviewed by Canaan Suitt, J.D. | Last updated on October 27, 2023 Featuring practical insights from contributing attorney Donna E. McBride

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Maryland requires all drivers to insure their vehicles. In the event of an accident, the insurer is expected to pay for any bodily injury sustained by third parties up to the limits of the policy. But what happens when an insurance company refuses to pay or settle a personal injury claim? Does the insured driver have any legal recourse?

The good news: Yes, they do in the form of bad faith cases. The bad news: “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.”

Insurers Have a Duty of Good Faith

Insurance companies have a legal duty to act in “good faith” towards their policyholders. Maryland insurance law defines good faith as making “an informed judgment based on honesty and diligence supported by evidence the insurer knew or should have known at the time the insurer made a decision on a claim.”

When an insurer fails to uphold this duty (that is, it failed to act in good faith), the policyholder may have a claim for damages under Maryland law. To illustrate this, consider the following scenario:

Frank is an insured Maryland driver. Frank gets into an accident. The other driver is injured and makes a claim against Frank for his medical expenses. The driver’s attorney demands that Frank’s insurance company pay up to the limit of the insurance policy as compensation. Frank’s insurer denies the claim outright without conducting an investigation or offering any explanation for its decision. The other driver then files a personal injury lawsuit against Frank and obtains a civil judgment that is far more than the limits of Frank’s insurance policy.

In this situation, Frank could sue his insurance company for denying the injured driver’s claim. (Such “first party” claims are expressly recognized in Maryland statutory law.) If Frank can prove a lack of good faith, he is entitled to the following damages:

  1. The actual damages arising from the other driver’s claim, up to the limits of the original insurance policy;
  2. Expenses and litigation costs incurred in pursuing the bad faith claim; and
  3. Interest on all actual damages, expenses, and litigation costs.

They’re very difficult cases. Very few result in a decision in favor of the insured. In my view, it’s weighted heavily in favor of the insurer.

Donna E. McBride

First-Party Insurance Claims in Maryland

First-party claims are often filed with the Maryland Insurance Administration (MIA). The MIA reviews documents submitted by both the insured party and the insurance company and renders a decision.

It has a consumer division, but McBride recommends reaching out to an insurance lawyer rather than trying to navigate it on your own. “It’s not an easy process,” she says. “If you’re pretty savvy and can read the statute and understand how to do it, MIA has a website that can assist you, but it might not save you because it’s easy to make a mistake or do something incorrect.”

As noted above, an attorney’s fees should be covered by your insurance company should you win the case. Another compelling reason to call a lawyer, McBride notes, is that insurers are often willing to settle cases, and having someone in your corner to negotiate those terms can be helpful.

If the MIA decides the insurer acted in good faith, the insured party may then appeal through the Office of Administrative Hearings or file a lawsuit in the appropriate circuit court, “but that can be a very long process,” McBride says.

Third-Party Insurance Claims in Maryland

Maryland’s bad faith statute only applies to first-party claims (those brought by policyholders or other persons insured by the policy). But third parties—the accident victims seeking damages—may also pursue common law claims for bad faith against insurance companies that wrongly refuse to settle for the policy limits.

A first party can also “assign” its own statutory 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, which are not available in first-party actions.

Find an Experienced Insurance Coverage Attorney

If you have any additional questions about the bad faith law and how it affects a particular insurance claim, use the Super Lawyers directory to find a qualified Maryland insurance coverage lawyer in your area. 

For more information on this area of law, see our bad faith insurance overview.

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