Proving Bad Faith in Homeowners' Insurance Denial

Homeowners insurance typically provides two types of coverage: the first is for damages to your home and any personal property. The second is for liability to third parties who are injured on your property. In either case, your insurance company has a legal obligation to act in good faith when paying out a claim.

So what happens when the insurer does not uphold its duty of good faith and acts in bad faith? Under state law, you may be able to sue the insurer for damages. In some cases, you can also recover attorney’s fees and damages for the emotional distress caused by the insurer’s actions.

Insurance laws vary by state. To understand your legal options after your insurance company denies your claim, contact a bad faith insurance attorney.

Homeowners Insurance Company and Good Faith Obligations

Many homeowners are surprised to find that when they file a claim, the home insurance company refuses to pay or offers to settle for less than the full measure of their property damage. “Their job is to resolve that claim for the smallest amount possible,” says Thomas W. Henderson, an insurance coverage attorney at Burg Simpson in Englewood, Colorado. “Often that means it’s not fully compensating policyholders for their loss.”

Determine Why Your Insurance Claim Was Denied

Insurance policies are contracts, and insurance providers are experts when it comes to drafting their contracts to minimize their own liability. All homeowners’ insurance policies contain certain exclusions and conditions of coverage that the insurer will strictly construe against the policyholder. Some of the more common reasons for home insurance claim denial include:

• The damage to the property is of a type not covered by the policy. For example, a natural disaster policy may cover rain damage from a storm but exclude wind damage.
• The policyholder failed to timely notify the insurer of the damage or otherwise failed to meet a precondition of coverage.
• The damage occurred after the term of the policy expired.

Whatever the reason, make sure the insurance company gives you a written explanation of its reasons for denying your claim. The insurance company cannot simply reject your claim without giving its reasons. In many cases, the insurance company denies a claim based on an incorrect understanding of the facts that you can rebut.

“It’s really important that the policyholder understand if the denial was proper,” Henderson says. “There are many instances where I review a denial letter and say to a client, ‘Didn’t you tell me A, B, and C?’, and they say, ‘Yeah.’ ‘Well, the insurance company isn’t addressing that. That would be very important information.’ Sometimes they say, ‘Well, I told them,’ to which I say, ‘Let’s tell them again.’ Other times it’s, ‘I haven’t told them,’ so I say, ‘Let’s tell them because it might change the frame of analysis.'”

Examples of Bad Faith Insurance Practices

It is important to understand that an insurer does not act in bad faith simply because it denies a payout, even if you insist it was a legitimate claim. This is a common misconception, according to California insurance coverage attorney Richard T. Collins.

“Only if the insurance company acts unreasonably, without justification, in bad faith may you recover tort damages — emotional distress, financial distress, attorney’s fees to recover the policy benefits, or punitive damages,” he says.

Remember, homeowners’ insurance policies are complex contracts. Insurance companies draft these insurance contracts in such a way as to protect themselves as much as possible. Yet it is possible to go too far and stray into bad faith territory. While not an exhaustive list, here are just some examples of the types of insurance behaviors that constitute bad faith practices:

• The insurer unreasonably delays or refuses to pay a valid claim.
• The insurance provider fails to promptly investigate a claim.
• The insurer fails to maintain or follow a reasonable basis when investigating a claim.
• The insurer fails to communicate with you, as the claimant, with respect to the status of a claim.
• The insurance adjuster intentionally misrepresents basic facts about a homeowner’s insurance policy, including the available benefits or policy limits.
• The insurer refuses to settle a valid claim with a third party or engages in unreasonable delays during settlement negotiations.
• The insurer fails to properly explain a valid reason for denying a claim.

“The biggest bad faith tactic when it comes to property claims — apart from wrongful coverage denials due to an overly restrictive interpretation of a coverage grant or an expansive interpretation of an exclusion — is the oppressive delay in resolution of a claim,” says Collins.

“Insurers will often make a quick inspection, determination, and payment of an undisputed amount that is usually far less than what is necessary to repair the damage. This forces the insured to fight for supplemental payments that may drip, drip, drip from the insurer’s spigot—or result in countless inspections by contractors, engineers, and other experts, bid comparisons, depreciation holdbacks, and arm wrestling for further payments of additional living expenses as the battle drags on.”

How Can a Policyholder Prove a Bad Faith Insurance Claim?

If you know or suspect that your insurance company has denied a homeowners policy claim in bad faith, what should you do? First, contact an experienced insurance attorney who can review the particular facts of your case and give you specific legal guidance for the claims process. Many attorneys will provide free consultations to learn about your case and give legal advice.

But in general, you should know that proving bad faith basically requires you to establish two things:

1. The insurer has withheld a benefit provided for in your policy language.
2. This decision to withhold was unreasonable or otherwise lacked proper cause under the policy terms.

Gather and Preserve Evidence

If you anticipate filing a bad faith insurance lawsuit, you should document any and all evidence of your dealings with your insurance company.

Ideally, you need to do this before you even call the insurance company or file an online claim form. You should always carefully document the damage to your property. Take pictures of any damaged areas. Obtain written estimates of repair costs from trusted contractors. And above all, document all contacts between you and the insurance company.

That can help in reconstructing an accurate timeline of events. “There are so many verbal communications, from the report of the loss to the inspection of damage to the seemingly hundreds of phone calls with adjusters and vendors,” Collins says. “All of those communications should be recorded in a diary or calendar that will allow the attorney to begin piecing together the most important document in a bad faith case.”

Find an Experienced Bad Faith Insurance Lawyer

“It’s important to have a lawyer who has experience with bad faith claims and a deep understanding of the insurance industry — how insurance companies operate, the industry guidelines, statutes and regulations that govern their conduct, and the vast body of insurance law,” Collins continues.

“A qualified insurance bad faith attorney can help the insured investigate the claim, evaluate and calculate the benefits owed, and determine whether the insurer has fulfilled its duties imposed by good faith and fair dealing. This way, the insured can make a fully informed decision about suing a multibillion-dollar insurance company.”

“From a denial standpoint, a knowledgeable lawyer knows the insurance company’s duties and responsibilities, how they interpret policies, and can put the best argument forward to get the insurance company to change their mind,” Henderson says. “My M.O. is to try to get the insurance company to do the right thing — I call it ‘writing the do-the-right-thing letter.'” This letter intends to show why the claim should be covered and why an exclusion isn’t applicable, but doesn’t threaten legal action until it’s absolutely necessary.

Insurance companies may use internal appeals to “run out the clock” on potential litigation. There is a statute of limitations for breach of contract claims. That amount of time runs from the breach.

Visit the Super Lawyers directory to find an experienced bad faith insurance lawyer in your area.